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Topic: Growth Stocks

Growth stocks: SNC-Lavalin Group cements growth with $2.1-billion purchase, stands to win new public works contracts

SNC-Lavalin Group

We look at a stock that stands to benefit from the new Liberal government’s infrastructure investment plans. SNC-Lavalin Group is an engineering and construction firm with contracts for large public infrastructure projects, including a transit line it’s building in Toronto. The firm’s revenue has grown with its recent $2.1-billion purchase of Kentz Corp., an engineering and construction firm that serves the oil and gas industry. SNC’s reputation took a hit several years ago after former executives of the firm allegedly paid bribes to secure contracts in Libya. However, the company has overhauled its management team and is winning new business with its ethical reforms. We view SNC-Lavalin Group as a growth stock to buy for conservative investors.

The new Liberal government in Ottawa plans to spend more on roads, bridges and public transit over the next three years. SNC-Lavalin, below, is already working on big public works projects, including a transit line in Toronto and a bridge in Montreal, so it should gain from this new spending.


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SNC-LAVALIN GROUP INC. (Toronto symbol SNC; www.snclavalin.com) is narrowing its focus to engineering projects in the oil and gas, mining and water-treatment industries.

To that end, it bought U.K.-based Kentz Corp., which sells engineering and construction services to oil and gas firms, for $2.1 billion in August 2014. The deal also increased SNC’s exposure to fast-growing regions like the Middle East and Asia.

Kentz boosted SNC’s revenue by 21.4% in the third quarter of 2015, to $2.4 billion from $2.0 billion a year earlier.

SNC earned $224.2 million, or $1.49 a share, in the latest quarter. However, that includes a $145.7-million gain on the sale of its 5% stake in the Ambatovy nickel mine in Madagascar. A year earlier, it earned $60.0 million, or $0.39 a share.

Growth stocks: Action on ethics concerns wins SNC new clients

The company continues to recover from allegations that former executives used bribes to win construction contracts in Libya between 2001 and 2011. In response, SNC replaced its senior executives in 2012, and brought in a new program to enforce ethical practices. That’s helping it win new orders: its backlog is now $12.7 billion, up 3.2% from the start of 2015.

SNC also aims to improve its efficiency, probably by consolidating offices and cutting jobs. It plans to spend $50 million on this plan in 2015. The company still aims to sell its 16.77% stake in Ontario’s Highway 407 toll road. It could receive $3 billion for this investment, which is equal to roughly half of its market cap.

SNC could use the cash to pay down its long-term debt of $864.7-million, buy back shares or raise its $1.00-a-share dividend, which yields 2.4%.

Without unusual items, SNC will likely earn $2.08 a share for all of 2015, and the stock trades at 20.2 times that figure. However, its 2016 earnings could improve to $2.52 a share, and the shares trade at a more reasonable 16.7 times that estimate.

Recommendation in The Successful Investor: BUY 

For a recent report on how to choose the right growth stocks for your portfolio, read How to make better growth stock picks.

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