Pat McKeough recently replied to a member of his Inner Circle asking for an opinion on Stella-Jones Inc. The niche lumber specialist has seen its sales, earnings and share price jump over the last four years. But acquisitions have driven that growth, says Pat.
Q: Pat: Could I please have your recommendation on Stella-Jones? Thank you.
A: STELLA-JONES INC. (symbol SJ on Toronto; www.stella-jones.com) makes pressure-treated wood products. They include: railway ties (45% of sales); utility poles (34%); treated lumber products for the residential market (12%); lumber for industrial uses such as construction timbers and highway guardrails (6%); and logs and lumber (3%).
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The company gets most of its utility poles from timberlands that it leases in Quebec and B.C. It also buys wood for railway ties and other products from sawmills in the U.S. and Canada.
The U.S. also provides 82% of its sales, while Canada supplies the remaining 18%.
Stella-Jones’s sales jumped 139.3%, from $651.6 million in 2011 to $1.6 billion in 2015. Earnings soared 153.9%, from $55.7 million to $141.4 million. Due to more shares outstanding, earnings per share rose at the slower pace of 134.5%, from $0.87 to $2.04 (all per-share amounts adjusted for a 4-for-1 stock split in October 2013).
The gains are mainly due to acquisitions. In 2015, Stella-Jones spent over $62.6 million buying related businesses. The biggest was its $44.9-million purchase of Ram Forest Group Inc. and Ramfor Lumber Inc. Together, they operate wood treatment facilities in Ontario. The purchases expanded the company’s presence in the residential lumber market.
Growth Stocks: Long-term debt 17% of market cap
In the three months ended March 31, 2016, Stella-Jones’ sales jumped 23.6%, to $421.0 million from $340.7 million a year earlier. The Ram Forest purchase contributed $9.3 million to those recent sales. Overall earnings gained 16.3%, to $35.0 million from $30.1 million; fewer shares outstanding meant per-share earnings rose 18.6%, to $0.51 from $0.43.
Even after its recent acquisitions, the company’s balance sheet remains sound. It has no cash, but its long-term debt of $571.4 million is a moderate 17% of its market cap.
A growth-by-acquisition strategy adds risk for Stella-Jones. However, it’s an established leader in the niche markets of utility poles and railway ties. The company also stands to gain as North American power companies upgrade their transmission and distribution grids.
The shares are up almost 400% over the last five years. They trade at 19.1 times the company’s forecast 2016 earnings of $2.56 a share. The $0.40 dividend yields 0.8%.
Stella-Jones is okay to hold, but only for aggressive investors.
Inner Circle recommendation: HOLD for aggressive investors
For our advice on getting the most out of growth stocks, read 23 smart tips for investing in growth stocks.
For our recent report on how a tech giant maintains its growth, read Microsoft focuses on cloud services.
