Securing New Long-Term Contracts Will Strengthen Future Revenue Stability

Key Takeaways

• Stella-Jones' expanded customer base and long-term contracts with utilities indicate secure revenue growth and improved operational efficiency through infrastructure enhancements.
  
• Focus on sustainability and strategic acquisitions may boost profitability, enhance market reach, and provide government incentives through emissions reduction and infrastructure expansion.
  
• Supply chain issues and economic challenges could pressure revenue and margins, while currency fluctuations and tariffs risk affecting financial metrics and profitability.

Catalysts

Manufactures and sells industrial pressure-treated wood products in Canada and the United States.

• Stella-Jones has expanded its customer base and secured new long-term contracts with utilities, suggesting a sustained increase in revenue due to secure and repeating business.
  
• The completion of their utility pole growth CapEx program has enhanced their network infrastructure, realistically enabling improved operational efficiency and the capacity to increase output, impacting both net margins and earnings positively.
  
• Raised bar on operational excellence and investment in optimizing production capabilities (e.g., new treating assets and distribution network optimization for railway ties) could lead to better net margins through cost efficiencies and increased production capacity.
  
• The company’s commitment to sustainability through GHG emissions reduction initiatives is not only expected to contribute toward future-proofing operations, but can also potentially lead to preferential contracts or government incentives, impacting future margins and profitability.
  
• The strategic focus on securing acquisitions that expand infrastructure product offerings indicates potential for revenue growth through market and product reach enhancement, which could also drive better earnings growth.

Stella-Jones Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Stella-Jones's revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 9.2% today to 8.2% in 3 years time.
• Analysts expect earnings to reach CA$325.7 million (and earnings per share of CA$6.36) by about March 2028, up from CA$319.0 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 18.2x on those 2028 earnings, up from 11.8x today. This future PE is greater than the current PE for the CA Forestry industry at 14.3x.
• Analysts expect the number of shares outstanding to decline by 1.61% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.6%, as per the Simply Wall St company report.

Stella-Jones Future Earnings Per Share Growth

Risks

• Natural disasters like wildfires can disrupt operations and demand patterns, potentially impacting revenue stability in affected regions.
  
• Supply chain disruptions and industry inventory levels remaining high could pressure spot market pricing, affecting revenue and margins.
  
• Economic uncertainty and macroeconomic headwinds could lead to project deferrals, impacting utility pole volume growth and overall revenue.
  
• Fluctuations in currency exchange rates, such as the appreciation of the U.S. dollar, could affect financial metrics like net debt-to-EBITDA ratio, impacting earnings.
  
• The potential imposition of tariffs on cross-border transactions might increase costs, affecting profitability due to changes in cost structures and margins.

Valuation

• The analysts have a consensus price target of CA$84.875 for Stella-Jones based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$98.0, and the most bearish reporting a price target of just CA$70.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$4.0 billion, earnings will come to CA$325.7 million, and it would be trading on a PE ratio of 18.2x, assuming you use a discount rate of 9.6%.
• Given the current share price of CA$67.69, the analyst price target of CA$84.88 is 20.2% 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.