Manufacturing stock Stella-Jones will earn record profits again. It keeps raising your dividends. The shares remain a buy for further long-term price gains and small, but rising, dividends.
We regularly review Montreal-based manufacturing stock Stella-Jones Inc. (TSX─SJ) in The Investment Reporter. Since we published our March 13 issue, its shares have risen by 8.4 per cent. The company is expected to earn record profits again. It builds its business and raises its dividends. It remains a buy, mostly for further long-term gains.
In the three months to March 31, Stella-Jones earned $30.1 million, or 43 cents a share. This was up by over 30 per cent from $22.5 million, or 33 cents a share, a year earlier. President and chief executive officer Brian McManus said “these results . . . show healthy demand in our core markets as well as the strong contribution of our recent acquisition.”
In the first quarter, Stella-Jones’ sales jumped by 32 per cent, to $341 million. Two factors added to the fast growth: the acquisition of Boatright Railroad Products on May 22, 2014, generated sales of $21.1 million; and the strong U.S. dollar raised first-quarter sales by $29.4 million. Exclude both factors and Stella-Jones’ sales climbed by 12.7 per cent.
Growing sales are raising its earnings
Railway tie sales jumped by 54 per cent, to $167 million (49 per cent of Stella-Jones’ sales). Exclude the acquisition of Boatright and the stronger U.S. dollar and railway tie sales rose by an impressive 21.7 per cent—mostly thanks to higher selling prices.
Utility pole sales rose by 10.9 per cent, to $119 million (35 per cent of sales). Exclude the high U.S. dollar and sales inched up by 1.9 per cent. Stella-Jones writes “a steady rise in sales of distribution poles stemming from regular maintenance projects was partially offset by slightly lower sales of transmission poles due to the timing of orders for special projects.” These orders should rise later on. It made an acquisition in this industry.
Sales of residential lumber jumped by 64 per cent, to $28.4 million (eight per cent of sales). This partly reflected higher sales in the U.S., which turned into more Canadian dollars. Also, Stella-Jones raised its sales in B.C. It plans to expand in this industry by acquiring Ram Forest Group.
Industrial product sales jumped by 26 per cent, to $19.9 million (six per cent of sales). This was due to the acquisition of Boatright and the higher U.S. dollar. Non-pole-quality log sales fell by 23 per cent, to $6.4 million (two per cent of sales).
Manufacturing stock maintains healthy balance sheet
Despite making acquisitions, Stella-Jones has a healthy balance sheet. Its net debt-to-cash-flow ratio is 1.9 times. That’s within our preferred range of two times or less. And given the company’ excess cash flow, its balance sheet should remain healthy. A 47 per cent jump in first-quarter cash flow, to $43.3 million, confirms the higher earnings.
Mr. McManus is optimistic about Stella-Jones’ outlook. He said “demand for our core products should remain solid in 2015. Stella-Jones remains focused on enhancing shareholder value by optimizing the efficiency of the continental network, while seeking selective and accretive opportunities.”
Stella-Jones’ earnings are expected to hit a record $2.06 a share this year and $2.39 a share next. This growth can justify the manufacturing stock’s hefty forward price-to-earnings ratios. The dividend is up to 32 cents.
Stella-Jones Inc. remains a buy for further long-term gains and small, but rising, dividends.
The Investment Reporter, MPL Communications Inc.
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