Strong Backlog And Upcoming Projects Will Drive Future Opportunities In Water Business

Key Takeaways

• Record backlog growth in Water business and strong AMP8 program positioning drive future revenue and earnings growth.
  
• Robust M&A pipeline and operational efficiency improvements contribute to potential revenue and earnings enhancement.
  
• Seasonality, integration risk, macroeconomic volatility, project delays, and regulatory changes pose threats to consistent revenue and stable margins for Stantec.

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 increase in backlog, reaching a record $7.8 billion, underscores the sustained demand for its services. This backlog growth, particularly in the Water business with 24% organic growth, is expected to drive future revenue.
  
• The anticipated high levels of activity in the U.K.'s AMP8 program, with a 75% increase compared to AMP7, positions Stantec for substantial growth in its Water segment, which should contribute positively to revenue and earnings.
  
• The company's robust M&A pipeline, supported by a strong balance sheet, presents opportunities for acquisition-driven growth, potentially enhancing both revenue and earnings.
  
• Stantec's focus on operational efficiency, as reflected in improved project execution and margin expansion, is expected to further enhance EBITDA margins, positively impacting earnings.
  
• Anticipated continued growth in the Buildings and Water business in North America, driven by public sector and industrial demand, sets the stage for increased net revenue and earnings growth in 2025.

Stantec Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Stantec's revenue will grow by 8.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.2% today to 8.8% in 3 years time.
• Analysts expect earnings to reach CA$663.6 million (and earnings per share of CA$5.91) by about March 2028, up from CA$361.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 30.0x on those 2028 earnings, down from 37.8x today. This future PE is lower than the current PE for the US Construction industry at 37.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.18%, as per the Simply Wall St company report.

Stantec Future Earnings Per Share Growth

Risks

• The risk of seasonality affecting Stantec's backlog can impact the steady flow of revenue, as raised by the mention of typically lower backlog in Q4 due to seasonality.
  
• The integration risk with acquisitions, such as recent purchases of ZETCON and Hydrock, could potentially impact the expected revenue growth and net margins if not effectively managed.
  
• The macroeconomic volatility in various regions mentioned in the call can lead to uncertainties in project funding and execution, potentially affecting revenue consistency and margin stability.
  
• Potential delays or changes in anticipated large-scale projects, such as those mentioned in AMP8, pose a risk to organic revenue growth and could impact earnings if these projects do not proceed as currently expected.
  
• Changes in regulatory environments, particularly in the U.S., could impact project approval processes and the revenue realization timeline, affecting net margins and earnings if new regulatory hurdles arise.

Valuation

• The analysts have a consensus price target of CA$141.75 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 2028, revenues will be CA$7.5 billion, earnings will come to CA$663.6 million, and it would be trading on a PE ratio of 30.0x, assuming you use a discount rate of 7.2%.
• Given the current share price of CA$119.77, the analyst price target of CA$141.75 is 15.5% 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.