This consulting firm beat analysts’ estimates by $0.05 in the past quarter and Wall Street is expecting double-digit growth for the company over the next five years.
Stantec Inc. (STN)
From Internet Wealth Builder
Stantec (STN) is a gigantic Edmonton-headquartered professional consulting firm offering engineering, architecture, and related services. It operates mostly on a fee-for-service basis but more recently it has provided fixed-price construction services. It has about 22,000 employees operating out of about 400 offices worldwide. In 2016, 58% of revenues were from the U.S., 27% from Canada, and 15% international. The proportion of revenues earned in Canada has declined rapidly while the portion of revenues earned internationally has risen quickly. For many years, Stantec has successfully pursued a business model of rapid growth by acquisition.
On May 6, 2016 Stantec closed the purchase of privately held MWH Global for US$793 million. This deal made it a global engineering firm and significantly reduced the company’s reliance on Canada and the energy sector. In the second quarter of this year, Stantec sold a non-core portion of the MWH acquisition for US$270 million, on which it has booked a pre-tax gain of C$55 million.
Certain segments of Stantec’s business related to the energy sector were weak in 2016, particularly in Canada. As a result, overall organic revenue declined 5.6% in 2016 and declined 2.2% in the first quarter this year. Organic revenue growth resumed in the second quarter with an improvement of 4.5% versus the prior year.
In 2016, adjusted earnings per share were down 8% even though revenue per share rose 32% due to the large MWH acquisition. Earnings were lower due to weakness in the energy- and mining-related sectors and the higher administrative costs associated with the large acquisition. In this year’s first quarter, earnings per share were about unchanged versus the prior year. However, in the second quarter adjusted earnings per share rose 37%
Based on Wednesday’s closing price of C$35.38, the trailing adjusted p/e ratio is 19.7, and the price to book ratio is 2.1. Stantec retains most of its earnings and currently has an earnings payout ratio of 28%. The ROE (return on equity) remains good at 10.9%.
The acquisition of MWH should lead to strong double-digit earnings per share growth in 2017. The long-term outlook is also strong as the company continues to target increasing revenues by 15% annually by continuing its growth-by-acquisition (and organic growth) approach. However, the recently sharply higher Canadian dollar will be a drag on earnings growth in the last half of 2017.
Stantec has a long history of being an exceptionally well-managed Canadian company that has aggressively grown by acquisition. The stock is reasonably priced given the outlook for earnings growth.
Buy for medium and long-term capital appreciation.
Shawn Allen in Gordon Pape’s Internet Wealth Builder, www.buildingwealth.ca, 1-888-287-8229, October 16, 2017