Falling ice-laden trees can bring down power lines. So demand for utility poles may slip and hurt the sales of Key stock Stella-Jones ( TSX-SJ). But this would take time and money. The firm sells other products such as railway ties. Buy for gains and dividends that rise every year.
The term ‘global warming’ sounds appealing. Particularly in this very cold and harsh winter. But most scientists believe that it leads to more extreme weather events, not necessarily warmer weather.
One extreme weather event is the ‘Polar Vortex’. It has sent temperatures plunging across most of North America. Even the U.S. South is freezing. Another extreme weather event was the ice storm that knocked out power in parts of Southern Ontario. A third was extreme weather that reduced or cut the delivery of power in Newfoundland.
One proposed potential solution to these problems is to run power lines underground. That way ice-laden falling trees would not bring down the power lines. Indeed, hurricane-prone Florida has no suspended power lines. And underground power lines might sustain less damage in floods-such as those in Alberta and in New York City, when Hurricane Sandy flooded Manhattan.
Solutions will take time and cost a lot
Underground power lines would reduce the demand for the wooden utility poles produced by Key stock Stella-Jones Inc. The thing is, it costs a lot to reconfigure the power grid. So demand should remain steady for the foreseeable future. If power companies do run their power lines underground, we would expect this to happen in new developments first. This would give an early-warning signal.
There’s a more imminent threat to the sales of Stella-Jones’ utility poles: the growth of wireless telecommunications. Many people are disconnecting their land-line telephones. Instead, they receive only wireless calls no matter where they are.
In the nine months to September 30, 2013, Stella-Jones’ sales of utility poles totaled $299 million, or 39.4 per cent of its total sales of $758 million. More important, sales of railway ties came to $316 million, or 41.6 per cent of sales. With new railway tracks and the renovation of existing tracks, Stella-Jones stands to profit from this business. At the same time, residential lumber sales totaled $98.5 million, or 13 per cent of sales. Industrial products’s sales accounted for $45.4 million, or three per cent of total sales.
Railway ties matter more than utility poles
Stella-Jones is putting much effort into expanding its railway tie operations. But at the same time, it’s profiting as a consolidator of the wooden utility pole industry. Given plain inertia, we don’t expect society to ditch utility poles to beat extreme weather.
STELLA-JONES INC, $27.46 (Quality rating: Average; Sector: Manufacturing; TSX-SJ; T: 514-940-3903; www.stella-jones.com) may eventually face lower demand for its utility poles. But this would take time. In the meantime, the shares remain a buy for long-term gains and dividends that rise each year.