SNC-Lavalin Group Inc (TSE:SNC): All You Need Is Growth?

There's no stopping the SNC-Lavalin Group Inc (TSX:SNC) growth train, with analysts forecasting high top-line growth in the near future. However, my main concerns are around how the company is managing its balance sheet, and whether their current financial status is sustainable. Furthermore, I'm not particularly excited about its valuation either, with its current share price of CA$55.23 hovering above its true value. I will conduct a high level fundamental analysis on the company by looking at its past financials and growth prospects moving forward.

SNC-Lavalin Group Inc. provides consulting, design, engineering, construction, and operation and maintenance services worldwide. Founded in 1911, it currently operates in Canada at a market cap of CA$9.72B.

There's no doubt SNC is delivery on its promises, with a soaring annual revenue growth of 10.20% , and a net income growth of 49.50%. Over the past five years, sales has grown 4.10%, lifted by previous years of higher capital expenditure, which most recently reached CA$124.82M. SNC has been reinvesting more into the business, leading to expected return on investment of 12.60% in the next three years, according to the consensus of broker analysts covering the stock. Net income is expected to grow to CA$546.10M in the upcoming year, and over the next five years, earnings are predicted to rise at an annual rate of 16.54% on average, compared to the industry average rate of 16.03%. These numbers tell me that SNC has a robust history of delivering profit to shareholders, with a disciplined approach to reinvesting into the company, and a bright future relative to its competitors in the industry.

Limiting your downside risk is an important part of investing, and financial health is a key determinant on whether SNC is a risky investment or not. Two major red flags for SNC are its high level of debt at 0.6x equity, and its low level of cash generated from its core operating activities, covering a mere -7.53% of debt. Although debt levels have been declining over time, and EBIT is able to amply cover interest payment, there's still a lot of room for improvement on the cash management side. Or the very least, reduce debt to a more prudent level if cash generated from operating activities is insufficient to cushion for potential future headwinds. The current state of SNC's financial health lowers my conviction around the sustainability of the business going forward. SNC has high near term liquidity, with short term assets (cash and other liquid assets) amply covering upcoming one-year liabilities, as well as long-term commitments. One reason I do like SNC as a business is its low level of fixed assets on its balance sheet (3.81% of total assets). When I think about the worst-case scenario in order to assess the downside, such as a downturn or bankruptcy, physical assets and inventory will be hard to liquidate and redistribute back to investors. SNC has virtually no fixed assets, which minimizes its downside risk.

SNC is now trading at CA$55.23 per share. With 175.53 million shares, that's a CA$9.72B market cap - which is expensive for a company that has a 5-year cumulative average growth rate (CAGR) of 2.57% (source: analyst consensus). With an upcoming 2018 free cash flow figure of CA$456.33M, the target price for SNC is CA$31.54. This means the stock is currently trading at a massive premium. But, comparing SNC's current share price to its peers based on its industry and earnings level, it's trading at a fair value, with a PE ratio of 23.55x vs. the industry average of 25.56x.

If you're thinking about buying SNC, you have to believe in its growth story, which is a strong one. However, my main reservation with the company is its financial health, as well as the possibility that it is currently overvalued. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I've taken my data from.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.