When a stock’s price dips it’s always essential to know the reason why. But it’s equally important to realize that 99 percent of the time the move is meaningless to anyone but a day trader.

That should prove to be the case for the recent dip in share prices of this month’s Best Buy recommendations Bird Construction Inc (TSX: BDT, OTC: BIRDF) and Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF).

Bird Construction has emerged as a leader in major project development and construction following its successful merger with HJ O’Connell in mid-2011. The CAD77.5 million deal added heavy construction, civil construction and contract surface mining expertise primarily in eastern Canada to Bird’s legacy operations in the west.

The result is a diversified company serving mining, energy, industrial and infrastructure construction with an unmatched base of both public- and private-sector clients.

O’Connell added approximately 600 employees to Bird’s 700, and the focus since has been on using that enhanced scale to win new jobs. The company has consistently enjoyed strong growth across Canada, including winning a major contract at the giant Muskrat Falls Hydroelectric Generating Station project in Labrador.

In January Bird added Nason Contracting Group’s revenue and 65 employees at a cost of CAD13.3 million, adding expertise in water and wastewater facilities, primarily in western Canada.

As with O’Connell, the deal added wholly complementary businesses and should dramatically enhance the company’s ability to win business in the water and wastewater market.

It should show an immediate impact on first-quarter results, though not as much as the O’Connell deal did.

As I reported in the March 14 Flash Alert Steady Numbers in the Headwinds, Bird’s fourth-quarter and full-year 2012 were solid, despite competition to snare new contracts in industries where major players are pulling in their horns.

Dividend coverage with earnings increased to nearly 2-to-1, even after the recent payout increase.

Management cautioned that 2013 results would not likely replicate 2012, owing to weakened market conditions and the “level of profitability for current backlog.”

Private-sector activity, for example, depends to a large extent on contracts in the energy sector, which will remain restrained at least until price differentials improve.

Importantly, however, the company’s expansion of geographic range and expertise has put it in prime position to benefit when conditions do improve. Gross profit margin rose to 9.8 percent of revenue from 8.2 percent in 2011, in large part reflecting a larger and more diverse organization.

Fourth-quarter results also came in ahead of what management had guided to during its third-quarter conference call. That, according to Vice Chairman Tim Talbott’s fourth-quarter call remarks, was due to turning around “a bunch of projects a lot more expeditiously and successfully than we had anticipated.”

And it belies a conservative guidance strategy that’s cause for optimism in 2013, particularly in the second half of the year, when management expects to report signing substantial new contracts currently in discussion.

The 2012 revenue mix was approximately 43 percent industrial and 20 percent commercial, bringing the private sector up to 63 percent from 42 percent in 2011. And it takes public-sector work down to 37 percent from roughly two thirds in 2009.

Private-sector work is in general higher-margin than public-sector work, so this is a positive shift for Bird.

This trend toward the private sector indicates both a more positive environment since 2008-09 and the company’s success expanding its capability.

And it bodes very well for 2013 results and beyond.

The upshot is, despite current headwinds at its business, Bird is in better shape to build wealth for its shareholders than ever.

Buy Bird Construction up to USD14.50 if you haven’t yet.

Innergex is a classic invest-to-grow story, with every new hydroelectric, solar and wind power plant adding to cash flows that are locked in for decades by contracts at premium prices.

And because customers are primarily government entities and regulated entities, there’s no risk of default no matter how bad times get.

The key variable to profitability is how quickly new projects can be brought on stream, keeping them under budget and financing them favorably.

Here too, however, there’s been little or no slippage, with the company boosting its generating capacity by 25 percent last year while keeping costs in line.

Highlights included bringing a major wind plant and its first solar farm into commercial operation on time and with costs in line. Innergex also acquired two hydro plants in British Columbia and kept all of its other construction projects on track.

In contrast to more than a few Canadian energy companies, the company has consistently enjoyed support of First Nations representatives for its projects. That’s been invaluable avoiding construction delays and keeping costs down and allowing it to add scale in key regions. And it’s given the company a leg up in negotiations with such entities as Hydro Quebec.

As I reported in a March 22 Flash Alert, Innergex’ fourth-quarter numbers were extremely solid, highlighted by a payout ratio of just 38 percent for the quarter and 45 percent for 2012. That was primarily keyed by asset additions, which offset the weather’s slightly negative impact on returns.

If there was bad news in the report, it’s that the revival of the provincial sales tax in British Columbia will raise costs by roughly CAD30 million company-wide. This will be at least partly offset by an increase in expected output at certain projects, which have contracts that extend for 40 years.

As was made clear during the company’s fourth-quarter and full-year 2012 conference call, management invests on the premise that the supply and demand curves don’t move in tandem. As a result, Innergex plans most projects to be scalable, making it able to ramp up production when contracts are available.

Capacity additions in 2013 are expected to be somewhat less than in 2012 at roughly 12 percent, excluding any acquisitions that are announced. That includes the commissioning of three new wind farms in the fourth quarter that will add a collective 9 percent.

Based on what was added in 2012, however, operating revenue and cash flow adjusted for items will rise another 10 percent.

Capital raises, meanwhile, will require CAD775 million of new debt, either at the parent or project level.

The company is also contemplating a move to raise CAD125 million in new equity to cover acquisitions and new construction.

It’s also looking to refinance some project-level debt at better rates.

Some CAD75 million of that is slated to be a share exchange for the acquisition of an operating hydro facility and six potential sites in Quebec currently owned by the financially distressed Hydromega Group of Companies.

Management’s current target is a return on equity of 8 percent for new operating assets. That’s a return it can now finance profitably, and has been able to raise routinely when projects are brought on stream.

First-quarter generation was about 89 percent of long-term averages at the facilities, with weaker hydro in the west offsetting generally strong conditions for wind and water in the east.

That will be offset by the increase in generating capacity, which is further ensured by the generally small-scale nature of company projects. The result should be more solid numbers when Innergex reports them on or about May 14.

Innergex Renewable Energy is a buy up to USD10 for those who don’t already own it.

The Risks

What could go wrong at these companies?

In Bird’s case it’s a general slide of the Canadian economy into recession, which would result in reduced new business and potentially in cancellation of existing contracts.

In early January the stock backed off from a 52-week high after an oil sands project was cancelled. The price rebounded a bit following the fourth-quarter earnings release and 5.5 percent dividend increase.

But over the past week it’s begun to back off again in anticipation of a continued weak operating environment.

Bird has regularly increased its dividend at a robust rate since it went public in February 2006. That includes the 2008-09 market crash/credit crunch/recession, when private-sector work all but dried up and the company’s dependence on the public sector mushroomed. And it encompasses the Jan. 1, 2011 imposition of the tax on income trusts, which Bird marked with yet another dividend increase.

That should provide some comfort to Bird investors and would-be buyers. So should the fact that construction companies like Bird carry no debt, but rather hold large cash balances to ensure the execution of projects.

A slide into recession could hurt this company’s growth and possibly stall future dividend increases.

But the fear level in this stock at this point appears more a function of broader worries than anything to do at Bird.

Ditto the recent backing off of Innergex stock.

The company had consistently traded above my buy target of USD10 for many months.

Then, in late March, credit rater DBRS cut its rating of the company’s debt from investment-grade BBB (low) to junk-level BB (high).

Not known for taking aggressive stands, DBRS was nonetheless fairly strident in this opinion, stating “Innergex’ aggressive financing strategy will result in weaker balance sheet strength driven by high dividend payouts and ongoing growth plans.”

The analyst also pronounced “the high level of dividends” as “unsustainable” given “construction of seven projects with a total of approximately CAD812 million in spending expected for the next few years.”

Immediately following DBRS’ release, an analyst from Canaccord Genuity pronounced the stock at an “attractive entry point” and stated the “dividend appears sustainable” despite “high payout ratios through 2015.”

Further, the Canaccord analyst forecast the payout ratio will continue to decline as additional projects are commissioned in 2015 and 2016.

That’s also my opinion, for several reasons.

First, Innergex’ exclusive focus on renewable energy in Canada means it can book cash flows for projects long before they enter operations. It doesn’t build unless it has a contract for the project, and those contracts span decades at prices that guarantee profits no matter what happens to wholesale power prices.

Second, the fact that cash flow from these projects is locked in makes it easy to sell project level debt to finance them. That gives Innergex flexibility to avoid taking on parent-level debt at a bad time. And there’s no evidence banks are restricting access to credit either.

It’s certainly possible that Canadian regulation will become less favorable to renewable power development in the future. That, however, will affect future growth, not current contracts or projects under development.

So long as management can execute development on time and budget–as it has in the past–the existing pipeline will produce expected cash flow needed to fund the future dividend.

Share-price weakness now likely reflects management’s previous statement that it intends to issue equity in the near future.

But here too the company has a great deal of flexibility. If the price is too low, credit lines should be sufficient. And, as CEO Michel Letellier pointed out during the company’s fourth-quarter conference call, the company is well aware of the impact of uncertainty on the stock.

The deal has yet to close, due in part of ongoing negotiations with Hydromega’s creditors. Management still expects the purchase to close later this year, according to its quarterly management discussion and analysis (MD&A) statement.

It has, however, proven its ability to walk away from souring deals, for example the Oct. 1, 2012, decision to terminate the purchase of a 77 megawatt project in British Columbia.

It’s never a positive when a credit rating is cut, especially when it involves losing investment-grade status. We’ll need to watch future numbers to determine if DBRS’ move has increased finance costs, which could indeed affect the economics of certain projects.

But at this point that doesn’t appear to be the case, and the company does continue to bring new projects on stream profitably, including a major wind farm in Quebec in November 2012 that’s already adding to first-quarter earnings.

For more information on Bird Construction, go to How They Rate under Business Trusts. Innergex Renewable Energy is tracked under Electric Power.

Click on their US symbols to see all previous writeups in Canadian Edge and CE Weekly. Click on the Toronto Stock Exchange (TSX) symbol to go to their Google Finance pages for a wealth of information, ranging from news releases to price charts. Click on their names to go directly to company websites.

Both companies are on the smaller side. Innergex is slightly larger with a market capitalization of CAD895 million. Bird comes in at CADD555 million. But both stocks have been recommended by Canadian Edge for some time and should have plenty of liquidity.

Both Bird and Innergex are listed on the US over-the-counter (OTC) market under the symbols BIRDF and INGXF, respectively.

Both companies have decent coverage on Bay Street and Wall Street. Bird has six analysts tracking it, with one “buy,” five “hold” and one “sell” recommendation. Innergex is covered by 11 analysts, with six “buys” versus four “holds” and one “sell.”

Both stocks have seen net insider buying over the past six months.

As is the case with all stocks in the How They Rate coverage universe, you get the same ownership whether you buy in the US or Canada. These stocks are priced in and pay dividends in Canadian dollars. Appreciation in the loonie will raise dividends as well as the value of your shares.

Dividends paid by both companies are 100 percent qualified for US income tax purposes. Both stocks’ dividends are taxed at the now permanent Bush-era rates of 5 percent to 15 percent for investors’ first USD450,000 a year of income for couples (USD400,000 for singles). Above that the maximum tax rate is 20 percent.

Canadian investors enjoy favorable tax status for both companies. For US investors, dividends paid into IRAs aren’t subject to 15 percent Canadian withholding tax, though they are withheld at a 15 percent rate if held outside of an IRA.