This Stock Pick Is a Real 'Sleeper'

04/02/2013 9:45 am EST

Focus: GLOBAL

Tyler Laundon

Editor, Cabot Small-Cap Confidential

You don’t have to pump oil to make serious money from that industry, writes Tyler Laundon of Small Cap Investor PRO.

Horizon North Logistics (Toronto: HNL) is an oilfield services company with a significant focus on the Alberta oil sands in Canada, where its primary business is renting beds to oilfield workers.

Alberta's oil reserves help to make Canada the world's third-richest country in terms of proven oil reserves, with a total of 173.6 billion barrels, making up around 75% of Canada’s oil production. Only Saudi Arabia and Venezuela have more.
 
And the sands are fueling a gold mining-like rush to Fort McMurray, where the biggest oil -roducing companies are the likes of Suncor (SU) and Cenovus Energy (CVE).
 
In boomtown Fort McMurray, the average single-family home now costs more than $750,000. For years, Fort McMurray hasn't had enough housing to support the rush of people flooding in to find jobs working the oilfields. The solution: temporary housing in the form of housing camps.

Scattered around the region, these camps are estimated to house 58,000 workers, depending on the day and who's counting. Around 30,000 beds are owned by third-party providers, while the rest are owned by companies producing oil in the area.
 
It's the third-party beds we're interested in today, specifically those owned by Horizon North Logistics. Horizon North has capitalized on this opportunity, growing revenues by 31% in 2012 compared to 2011, in large part because of its bed rental fleet.
 
The company derived 63% of its revenues from Alberta oil sands-related projects in 2012, up from 55% in 2011. The balance of revenues comes from other oil and gas development and pipeline projects.

In addition to temporary housing in its Camps and Catering segment, Horizon also provides marine support services, barge and equipment rental. Horizon now has just one other segment, Matting, which sells and rents supplies to help heavy equipment cross muddy terrain.
 
By far, the Camps and Catering segment is the biggest, generating around 83% of revenues over the last year, as compared to 17% for Matting. It now has 8,500 total beds, after adding more than 2,000 in 2012. It plans to add another 1,000 beds in 2013, which helped grow this segment’s 2012 revenue by 30% YOY.
 
Over the last three months, Horizon has had an average bed utilization rate of 61%, and generated an average of $147 per bed per day. That means over $63 million in revenue from bed rentals in the quarter.

Horizon North has been steadily growing revenues. It's also profitable; earnings per share in 2012 were 61 cents, an increase of 61% over 2011.

While it's a small company, Horizon has a progressive dividend policy. The quarterly dividend grew from 4 cents in 2011 to 5 cents in 2012, and last month management announced that it has raised the dividend by 25% to 6.25 cents. The stock has a forward annual yield above 4%.
 
The stock went on a nice run in the third quarter of 2012, and has now pulled back to a support zone around $6, offering a good entry point for new investors.

There are a few analysts following the company and their average price target is around $8. At that price, the stock would trade at a very reasonable P/E of 12.1 on a trailing-12-month basis. 

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