On today’s TSX Breakouts report, there are 26 stocks on the positive breakouts list (stocks with positive price momentum), and 19 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is stock that is on the positive breakouts list - Stantec Inc. (STN-T). On Friday, the share price closed at a record high. Over 2 million shares were traded that day, according to Bloomberg, well above the three-month historical daily average trading volume of approximately 446,000 shares.
A brief outline on Stantec is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Edmonton-based Stantec is a consulting, design, and engineering company with five core operating segments: infrastructure, environmental services, water, buildings, and energy and resources. As a design and engineering firm, Stantec does not face construction risks. The company has over 26,000 employees worldwide.
In terms of its net revenue breakdown, in 2022, 29 per cent of revenue stemmed from infrastructure, 20 per cent from environmental services, 20 per cent from water, 18 per cent from buildings and 13 per cent from energy and resources.
The terms of its 2022 geographical net revenue breakdown,51 per cent was from the United States, 26 per cent from Canada, and 23 per cent from international regions.
In November of 2022, the company filed a shelf prospectus enabling the company to quickly raise money over the next two years (perhaps to fund potential future acquisitions).
The stock is dual-listed, trading on the Toronto Stock Exchange and the New York Stock Exchange under the ticker, STN.
Investment thesis
- Record earnings. In 2022, adjusted earnings per share came in at a record $3.13, up from $2.42 reported in 2021 and $2.22 in 2020.
- Steady growth. In 2023, management targets net revenue growth of between 7 per cent and 11 per cent, not including any potential future acquisitions. In 2022, net revenue expanded over 22 per cent, of which 9.4 per cent was organic, or internal, growth, and 12.3 per cent was acquisition growth.
- Solid backlog, near record levels, reflecting 12 months of work.
- Healthy balance sheet to fund the company’s growth. Net debt-to-adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) stood at 1.6 times as of Dec. 31.. Management targets a leverage ratio of between 1 and 2 times.
- Government infrastructure spending commitments.
- Diversified operations.
- Reasonable valuation.
Quarterly earnings results
After the market closed on Feb. 22, the company reported better-than-expected fourth-quarter financial results.
Adjusted EBITDA was $191.7-million, surpassing the consensus estimate of $172-million and up 35 per cent year-over-year. The adjusted EBITDA margin stood at 17 per cent. Adjusted earnings per share came in at 82 cents, above the Street’s forecast of 70 cents and up 44 per cent year-over-year. On Dec. 31, backlog, a reflection of future revenue, was $5.9-billion, down sequentially from a record $6.2-billion on Sept. 30 but up 15 per cent year-over-year. As year-end, the net debt-to-adjusted EBITDA ratio stood at 1.6 times.
The share price rallied 9 per cent the following day on high volume.
In 2023, management anticipates the company will realize high single-digit to low double-digit organic revenue growth in the U.S., low single-digit organic revenue growth in Canada and mid-to-high single digit organic revenue growth in global markets.
On the earnings call, president and chief executive officer Gord Johnston noted management’s objectives for the upcoming year, “In 2023, we’re targeting an adjusted EBITDA margin between 16 per cent and 17 per cent [reported record adjusted EBITDA margin of 16.2 per cent in 2022], and our goal is to deliver adjusted EPS [earnings per share] growth between 9 per cent and 13 per cent over 2022. Further gains may come from M&A [mergers and acquisitions] as our M&A pipeline remains full, and we have the balance sheet strength to capitalize on opportunities that fit strategically for Stantec. With a favorable market backdrop and engaged workforce, a full M&A pipeline and a healthy balance sheet, we’re very optimistic for 2023 and the years ahead.”
After the market closes on May 10, the company will be releasing its first-quarter 2023 financial results. The consensus EBITDA and earnings per share estimate are currently $176-million and 72 cents, respectively.
Dividend policy
The company pays its shareholders a quarterly dividend of 19.5 cents per share or 76 cents per share yearly, equating to a current dividend yield of 0.9 per cent.
Management has announced a dividend increase in the first quarter of each calendar year annually since 2013. In Feb. 2023, the company announced an 8.3 per cent dividend increase, raising its quarterly dividend to its current level of 19.5 cents per share.
Analysts’ recommendations
The stock has a unanimous buy recommendation from 10 analysts.
The 10 firms providing research on the company are: ATB Capital Markets, BMO Nesbitt Burns, Canaccord Genuity, CIBC World Markets, Desjardins Securities, National Bank Financial, Raymond James, RBC Dominion Securities, Stifel Canada and TD Cowen.
Revised recommendations
After the company released its fourth-quarter earnings results in February, every analyst revised their expectations. That includes:
- CIBC’s Jacob Bout revised his target price to $86 from $79.
- Desjardins Securities’ Benoit Poirier increased his target price to $87 from $76.
- National Bank Financial’s Maxim Sytchev raised his target price to $89 from $78.
- RBC’s Sabahat Khan upgraded his recommendation to an “outperform” from a “sector perform” and lifted his target price to $84 (the low on the Street) from $71.
- Stifel’s Ian Gillies raised his target price to $86 from $76.
- TD’s Mike Tupholme hiked his target price to $93 (the high on the Street) from $79.
Financial forecasts
The consensus EBITDA estimates are $801-million in 2023, up from $724-million reported in 2022, and $861-million in 2024. The consensus earnings per share estimates are $3.50 in 2023, up from $3.13 reported in 2022, and $3.91 in 2024.
Earnings estimates have been rising. Three months ago, the Street was expecting EBITDA of $757-million in 2023 and $792-million in 2024. The consensus earnings per share estimates were $3.42 in 2023 and $3.74 in 2024.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 13.6 times the 2023 consensus estimate, above its five-year historical average of 11.5 times but below its peak multiple of roughly 16 times during this time period. The stock is trading at a price-to-earnings multiple of 23.4 times the 2023 consensus estimate, above its five-year historical average of 20 times but below its peak multiple of approximately 30 times during this time period.
The average one-year target price is $87.30, suggesting the stock is nearly fully valued with just over 6-per-cent upside potential over the next year. Individual target prices are: $84 (from RBC’s Sabahat Khan), three at $85, $86, $87, $88, $89, $90, and $93 (from TD’s Mike Tupholme).
Insider transaction activity
Between Feb. 27 and March 7, executive vice-president, regional operating unit leader for Canada and the U.S., Mike Kennedy sold a total of 8,894 shares at an average price per share of approximately US$58.15 with just two shares remaining in this particular account. Proceeds exceeded US$517,000, excluding trading fees.
On March 3, executive vice-president, corporate development Bjorn Morisbak exercised his options, receiving 4,537 shares at a cost per share of $32.98, and sold 4,537 shares at a price per share of $79.7548 with 6,999 shares remaining in this specific account. Net proceeds totaled over $212,000, not including any associated transaction fees.
Chart watch
On April 21, shares of Stantec closed at a record high of $81.93 on high volume with over 2 million shares traded that day. This is well above the three-month historical daily average trading volume of approximately 446,000 shares.
Year-to-date, the share price is up 26 per cent, making it the fifth-best performing stock in the S&P/TSX industrials index, which is up 9.6 per cent.
In terms of key technical resistance and support levels, the next major resistance level is around $90. Looking at the downside, there is initial technical support between $76 and $77, near its 50-day moving average (at $77.43). Failing that there is strong technical support around $70.
ESG Risk Rating
According to Sustainalytics, Stantec has an environmental, social and governance (ESG) risk rating of 14.5 as of April 13, 2023. A rating of between 10 and 20 reflects “low” risk.
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
This report should not be considered an investment recommendation.
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Jennifer Dowty