Acquisitions And Utility Pole Demand Will Strengthen Future Performance

Key Takeaways

• Strategic acquisitions and sustained demand for utility poles are expected to drive higher sales and profitability for Stella-Jones.
  
• Expanded EBITDA margin and share repurchases could improve net margins and boost earnings per share.
  
• Delayed utility pole spending and declining sales across all products threaten revenue, margins, cash flow, and investor sentiment amidst increasing competition.

Catalysts

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

• Stella-Jones is actively pursuing accretive acquisitions, which the company believes will drive higher sales and profitability. This strategic focus could enhance revenue and earnings.
  
• The company expects sustained demand for utility poles, supported by forecasts for increased transmission and distribution capital expenditures, which are projected to grow at a historic rate of 6% to 7%. This could positively impact revenue growth.
  
• Stella-Jones has expanded its EBITDA margin by over 300 basis points since 2022 and confidently expects to maintain this expanded margin at over 17%, up from their historical target of 16%. This could improve net margins and earnings.
  
• The introduction of a new normal course issuer bid allowing for share repurchases up to 2.5 million shares could enhance earnings per share via reduced outstanding share count.
  
• The expectation of higher sales from residential lumber due to rising lumber prices and a forecasted reversal of the remodeling downturn by mid-2025 could positively affect revenue and potentially improve net margins as demand increases.

Stella-Jones Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Stella-Jones's revenue will grow by 4.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 9.4% today to 8.0% in 3 years time.
• Analysts expect earnings to reach CA$309.5 million (and earnings per share of CA$6.73) by about February 2028, down from CA$323.0 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 19.2x on those 2028 earnings, up from 11.8x today. This future PE is greater than the current PE for the CA Forestry industry at 11.8x.
• Analysts expect the number of shares outstanding to decline by 1.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.03%, as per the Simply Wall St company report.

Stella-Jones Future Earnings Per Share Growth

Risks

• The company is experiencing delayed spending on utility pole maintenance and projects due to challenges like inflation, supply chain constraints, and funding timing issues, potentially impacting future revenues and net margins.
  
• There is an observed decline in sales volumes across all product categories, including utility poles and railway ties, which could pressure revenue growth and operating income.
  
• Increased competition and new capacity in the utility pole market may lead to pricing pressures, impacting EBITDA margins and future earnings.
  
• There is a risk of higher inventory levels due to lower-than-expected sales, tying up capital that could be used elsewhere, and potentially affecting cash flow and profitability.
  
• The company's revised sales target indicates a tempered growth outlook, reflecting industry growth expectations rather than surpassing them, which could affect investor sentiment and share price performance.

Valuation

• The analysts have a consensus price target of CA$86.375 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$95.0, 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$3.9 billion, earnings will come to CA$309.5 million, and it would be trading on a PE ratio of 19.2x, assuming you use a discount rate of 9.0%.
  
• Given the current share price of CA$68.43, the analyst price target of CA$86.38 is 20.8% 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.