2 blue chip global engineering stocks to buy

SNC-Lavalin earned far more than expected in 2017. Its forecast 2018 profits greatly exceed the former consensus estimate. The company raised its dividend for the 17th year in a row. Stantec’s earnings per share growth was lackluster in 2017, but should rebound in 2018 and beyond. It too has raised its dividend again.

Global_Engineering_StocksWe regularly review Montreal-based SNC-Lavalin Group (TSX—SNC). Since we published our September 22 issue, its shares have risen by 6.1 per cent. That’s because this company earned much more than expected in 2017. It forecasts that it will earn significantly more than expected in 2018. We’ve raised SNC’s quality rating by one notch to ‘Very Conservative’. It remains a global fully-integrated professional services and project management company as well as an owner of infrastructure.

Given its strong outlook, SNC has raised its dividend by five per cent, to nearly $1.15 a share. It writes: “This represents the 17th consecutive year that the Company’s dividend per share has been increased.” SNC’s shares remain a buy for further long-term price gains as well as decent and growing dividends. Its dividend yields two per cent.

SNC’s earnings are up more than expected

In 2017, SNC earned adjusted earnings of $522 million, or $3.20 a share. This was up by a healthy 24 per cent from adjusted earnings of $387 million, or $2.58 a share, the year before. It also greatly exceeded the analyst consensus estimate of $2.07 a share.

This year, SNC expects to earn from $3.60 to $3.85 a share. This is far above the former analyst consensus estimate of $2.64 a share. Based on the midpoint of the company’s forecast range, the shares trade at a reasonable price-to-earnings ratio of 15.4 times.

SNC’s revenue is well-diversified

SNC’s solid results partly reflect its successful integration of British engineering company, WS Atkins. SNC writes that it “delivered cost synergies of approximately $40 million related to the acquisition of Atkins in 2017 and remains on track to deliver cost synergies of $120 million by the end of $2018”. That’s an improvement of $80 million this year. SNC also expects to benefit from restructuring charges.

SNC is profiting from the synchronized global economic expansion (major economies growing at the same time). This is in contrast to earlier years when Europe’s economy stagnated and Brazil and Russia, among others, were in deep recessions. SNC maintains an office network in more than 50 countries. This assists it in working on projects worldwide. This geographical diversification reduces SNC’s exposure to the fortunes of any one country, of course.

SNC is also diversified by industry. In 2017, for instance, its Mining & Metallurgy segment generated revenue of $433 million. More important, its Oil & Gas segment delivered revenue of $3.393 billion; Power, revenue of $1.335 billion; Infrastructure, revenue of $2.138 billion; Atkins, revenue of $1.799 billion. Its Capital segment generated revenue of $238 million. This reduces the company’s exposure to any one sector. Total revenue climbed by 10.2 per cent last year, to $9.335 billion. This raised its earnings.

Stantec’s EPS expected to accelerate this year

Since we published our September 22 issue, Edmonton-based Stantec Inc.’s shares (TSX—STN; NYSE—STN) have slipped by 6.9 per cent. This engineering company’s earnings per share growth was lackluster in 2017. On the positive side, its earnings per share growth is expected to accelerate this year—particularly if the US rebuilds infrastructure. Stantec increased its dividend, cementing its status as a ‘dividend aristocrat’. We’ve upgraded its quality rating to ‘Very Conservative’. Stantec remains a buy for a share price recovery and growing dividends.

Stantec’s earnings should grow in 2018

In 2017, Stantec earned adjusted net income of $202 million, or $1.77 a share. This was up by a lackluster 4.7 per cent, from $181 million, or $1.69 a share, the year before. Earnings per share increased by less than total earnings. That’s partly because the company issued 119,000 common shares last year.

The downturn in the oil and gas industry has held back revenue from its Energy & Resources unit in recent years. Also, Stantec’s acquisition of MWH Global, a global water and natural resources firm, in 2016 saddled it with “some legacy project issues”. Then again, MWH’s integration has already cut costs by $15 million and added revenue of $10 million. Stantec expects to proceed with MWH’s integration in 2018.

Long-range revenue growth is favourable

Management is optimistic about Stantec’s prospects in 2018 and beyond. President and chief executive officer Gord Johnston said: “We look to expand into new regions, and we see positive momentum in our end markets into 2018.” Executive vice president and chief financial officer Dan Lefaivre said: “In 2018, we expect to generate organic revenue in the low- to mid-single digits. We continue to target a long-range average compound gross revenue growth rate of 15% through a combination of organic and acquisition growth.”

In 2018, Stantec is expected to earn $2.15 a share. That represents faster earnings per share growth of more than 21 per cent. Based on this estimate, the shares trade at a reasonable forward price-to-earnings ratio of 14.9 times.

Thanks to this favourable outlook, Stantec raised its dividend by 10 per cent, to 55 cents a share. It has raised its dividend every year since it first began paying them in 2012. The shares yield 1.7 per cent.

We’ve also raised Stantec’s quality rating by one notch, to ‘Very Conservative’. Stantec has assets of $3.881 billion. Subtract goodwill of $1.557 billion and intangible assets of $262 million and Stantec’s tangible assets total $2.062 billion. Since this exceeds $1.5 billion, the stock has a stage one rating of ‘Very Conservative’.

The consensus recommendation of four analysts is that Stantec is a ‘Buy’. We agree.

This is an edited version of an article that was originally published for subscribers in the March 9, 2018, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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