This engineering firm is now up roughly 200% since we promoted the company to our Successful Investor Aggressive Growth Portfolio (in the April 2020 issue) from our Power Growth Investor newsletter. In fact, we caught the growth trend well as the shares are up 250.7% over the last five years as compared to 101.2% for the S&P 500.
All those gains are mainly because higher government spending on new infrastructure projects is spurring demand for its services. The company’s new growth strategy and better efficiency should also continue to push the stock higher. It’s a top pick for the long run.
Meanwhile, the shares remain attractively priced at 25.9 times the company’s 2024 earnings forecast. We feel this multiple is reasonable considering the firm’s forecasted earnings growth.
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STANTEC INC. (Toronto symbol STN; www.stantec.com) is a leading seller of consulting, project-delivery, design and technology services.
The U.S. supplied 53% of Stantec’s 2023 revenue, followed by Canada (25%) and other countries (22%).
Stantec tends to use acquisitions to spur its growth. It nonetheless cuts related risk by targeting smaller firms that are easy to absorb. Moreover, sharing administrative expenses, financing and employee benefits among its businesses helps to cut costs overall.
For example, in June 2023, Stantec paid $75.6 million for Environmental Systems Design, Inc. Based in Chicago, that firm specializes in the design of datacentres.
Thanks to that purchase, as well as new contracts, the company’s revenue in the quarter ended December 31, 2023, rose 9.9%, to $1.24 billion from $1.13 billion a year earlier. If you factor out acquisitions and currency rates, revenue still improved 7.5%.
Earnings before acquisition-related costs and other unusual items gained just 0.3%, to $91.4 million from $91.1 million; due to more shares outstanding, per-share earnings were unchanged at $0.82. The slower earnings growth was mainly due to a re-evaluation of Stantec’s long-term incentive plan, which awards shares to employees if they meet certain financial targets. Without that added cost, Stantec would have earned $0.90 a share in the latest quarter.
The company’s backlog at the end of 2023 was $6.3 billion, up 6.8% from the end of 2022. It expects to complete those jobs over the next 12 months. As well, Stantec’s long-term debt of $982.3 million is just 8% of its market cap, and it held cash of $352.9 million.
Growth Stocks: Focus on key areas should boost contract wins and earnings
Under its new strategy, Stantec is narrowing its focus to three main areas: climate solutions (helping clients mitigate the impact of climate change); infrastructure projects; and greater use of digital technologies, including artificial intelligence, to improve its efficiency.
The company expects the plan will increase its annual revenue (excluding acquisitions) by roughly 7% a year, to $7.5 billion by the end of 2026. Stantec also expects its earnings per share will rise 15% to 18% annually between 2024 and 2026.
The company’s strong reputation continues to help it win new contracts.
For example, Canada Nickel Co. has hired Stantec to prepare an environmental impact report for its proposed Crawford Nickel Project, located north of Timmins, Ontario. That mine will be one of the largest nickel sulfide operations in the world, supplying critical minerals like nickel and cobalt for electric vehicle batteries.
Thanks to deals like this and a solid backlog of $6.3 billion at the end of 2023, Stantec’s shares have gained over 38% in the past year as compared to 28.3% for the S&P 500.
Stantec’s plan and higher infrastructure spending should lift its earnings in 2024 by about 16% to $4.25 a share. The stock trades at a still-reasonable 25.9 times that forecast. As well, with the April 2024 payment, Stantec raises your quarterly dividend by 7.7%. Investors will then receive $0.21 a share instead of $0.195. The new annual rate of $0.84 yields 0.8%.
Recommendation in Dividend Advisor: Stantec Inc. is a buy.
