Opinions
Alexander MacDonald
Stella-Jones Inc.
SJ-T
DON'T BUY
Nov 14, 2024
Stock price when the opinion was issued
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Owns shares, and will continue to own. Has taken partial profits, but has been considering adding more. Well positioned in utility poll business. Strong brand with excellent prospects. Climate change actually good for the business (replacements with disasters). Strong management tea with excellent return on equity.
EPS was $1.42, missing estimates of $1.75; revenue of $915M missed estimates of $1.01B. EBITDA of $162M missed estimates by 12%. Lower sales of utility poles was the main reason for the miss. Updated 2025 revenue guidance was also below consensus estimates. Margins were weaker as well. Total sales fell 3.6%. Lumber sales fell 19%. Net income fell 27%. It was a big miss from a usually-reliable company. We would not react here, as the utility issue could be temporary. But certainly not a good quarter.
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Tough quarter after 3-4 year run of strong demand, with sales and margins increasing. That's taken some confidence away from management, blurred medium-term outlook. Wait for another quarter to see that there's not another leg down.
When things are going well, investors get excited. But when these semi-commodity names face tough times, the multiple can come way down.
Defensive growth at a reasonable price. He's not a trader, but this is the third time he's owned it. Leading NA producer of railway ties (a duopoly) and utility poles (pretty much an oligopoly). Really improved margins. Very strong balance sheet, buying back lots of shares, increasing dividend every year.
Got hammered recently, as utility pole segment slowed. But there's a huge replacement cycle coming, plus expansion of the electrification grid. Poles will still be the main driver of growth. Great buying opportunity at under 12x earnings. Yield is 2%.
SJ saw its price decline recently on weak earnings, and it has also been seeing some weakness alongside the broader markets. It trades at a decent valuation of 12.9X forward earnings, but forward growth estimates are in the low single digits, and analyst estimates have been trending lower. Regardless, it generates good free cash flow, has a decent debt profile, a growing balance sheet, and historical growth rates have been strong. While it could see further weakness based on tariffs and a weaker growth profile, we would be comfortable slowly averaging in here given its solid valuation, high drawdown (30% in the past few months), and long-term strength in management and fundamentals.
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EPS of 93c beat estimates of 71c; revenue of $730M beat estimates of $693M. EBITDA of $115M beat estimates by 6%. Sales rose 6.1% but EBITDA fell 4.2%. Railway ties showed strength, up 17%. Guidance was affirmed. Commentary was much more positive than we would have expected. The dividend was increased 11%. Things look good here, nothwithstanding current economic and other worries. It remains cheap at 12X earnings.
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Pulled back based on underlying demand. Businesses are pretty steady-eddy. Infrastructure buildout would help, but questions surround new US administration. Interest rates ticking up means home renos have ticked down. Don't step in here.
Hurricanes (needing lumber replacement) can't be predicted from one period to the next. Investors want to see predictable, recurring revenue and cashflow.