Buy this manufacturing stock for revenue & profit growth

Stella-Jones Inc., headquartered in Montreal, produces pressure-treated wood products, including treated railway ties, wood poles for electrical utilities and telecommunications companies, industrial lumber for marine and construction applications. Two recently-announced acquisitions will drive this growth stock’s performance.

Manufacturing stock Stella-Jones Inc. (TSX─SJ) recently announced the signing of two non-binding letters of intent through its McFarland subsidiary. Both acquisitions are expected to close in April 2016.

SJ will acquire consolidated Kisatchie, a Louisiana-based group of companies that produces treated poles, pilings and timbers in two wood treating facilities. Consolidated Kisatchie sales for the year ended Dec. 31, 2015, totalled US$51.8 million.

The second acquisition involves Texas-based Lufkin Creosoting Co., Inc., a company that produces treated poles and timbers. Consolidated Lufkin sales for the year ended Dec. 31, 2015 totalled US$34.2 million.

The addition of these assets has caused Calgary-based Acumen Capital analysts Brian Pow and Oliver Shao to revise their 12-month target price to $53.50 a share from $52.50. The analysts’ also reiterate their “buy” recommendation.

The new target price is calculated using an average of a historical price-to-earnings (P/E) multiple of 18.7.

Above average growth stock performance

The analysts believe that Stella-Jones merits a premium multiple relative to its peers, based on its marketing positioning, acquisition strategy, and strong business execution, which are driving revenue and profit growth above industry averages.

The analysts comment, “S-J shares have been hit hard by overall stock market conditions, and this created what we believe is a very attractive buying opportunity.” Demand for S-J’s products should remain relatively strong since Class I railways, and utilities are expected to continue maintenance cycles that use the company’s treated wood products, they add.

Messrs. Pow and Shao have estimated the combined price for the acquisitions at between $110 million and $120 million given that SJ has typically bought these types of assets for 0.9 times to 1.0 times annual sales.

The company hasn’t ruled out proceeding with an equity offering in the future, should one be needed for capital requirements related to any future acquisition.

 

Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846