Record $73 Billion Backlog And Acquisitions Will Secure Future Earnings Stability

Key Takeaways

• Strong performance in Water and Buildings, along with acquisition growth, drives potential revenue and margin improvements across key regions.
  
• Sustained backlog and disciplined management enhance earnings stability, while sustainability recognition boosts investor confidence and potential stock valuation.
  
• Reliance on acquisitions and integration challenges, alongside cash collection issues, could impact Stantec's revenue growth, financial health, and operational flexibility.

Catalysts

Provides professional services in the areas of infrastructure and facilities to the public and private sectors in Canada, the United States, and internationally.

• Stantec's strong organic and acquisition growth, particularly in its Water and Buildings businesses, suggests potential for continued revenue growth and improved net margins as demand remains robust across key geographies.
  
• The strategic guidance of maintaining strong performance in the U.S. and internationally positions Stantec to capitalize on public and private infrastructure investment, potentially boosting future revenues and earnings.
  
• Stantec’s record-breaking backlog of $7.3 billion, representing around 12 months of work, indicates future revenue streams are secured, enhancing earnings visibility and stability.
  
• Ongoing acquisition opportunities and disciplined capital management promise potential for expansion and increased market share, contributing to long-term revenue and earnings growth.
  
• Recognition for excellence in sustainability governance might improve investor confidence and potentially drive up the stock value through enhanced reputation and possible future earnings growth.

Stantec Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Stantec's revenue will grow by 8.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.2% today to 9.7% in 3 years time.
• Analysts expect earnings to reach CA$693.2 million (and earnings per share of CA$6.16) by about December 2027, up from CA$348.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.2x on those 2027 earnings, down from 39.1x today. This future PE is lower than the current PE for the US Construction industry at 32.4x.
• Analysts expect the number of shares outstanding to decline by 0.46% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.89%, as per the Simply Wall St company report.

Stantec Future Earnings Per Share Growth

Risks

• The Energy & Resources business experienced a continued slight retraction, particularly in the global mining sector. This could hamper revenue growth if these challenges persist.
  
• A potential change in the U.S. administration could affect infrastructure spending under the IIJA, CHIPS Act, and IRA programs, which might impact future revenue growth projections in the U.S. market.
  
• Adjustments resulting from the IFRS Interpretations Committee guidance led to a noncash charge reducing goodwill by approximately $310 million, which may influence investor perception of financial health, potentially affecting net margins.
  
• The company's heavy reliance on acquisitions for growth poses a risk if future acquisitions fail to meet expectations or integration challenges arise, impacting organic growth and operational earnings.
  
• The increase in Days Sales Outstanding (DSO) to 80 days indicates potential issues in cash collection, which could affect cash flow and liquidity if not addressed, impacting net margins and operational flexibility.

Valuation

• The analysts have a consensus price target of CA$132.79 for Stantec based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CA$7.1 billion, earnings will come to CA$693.2 million, and it would be trading on a PE ratio of 26.2x, assuming you use a discount rate of 6.9%.
• Given the current share price of CA$119.68, the analyst's price target of CA$132.79 is 9.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.