On today’s Breakouts report, there are 20 stocks on the positive breakouts list (stocks with positive price momentum), and 39 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is stock that will be reporting its quarterly earnings results on Thursday after the market closes - Stantec Inc. (STN-T). According to Bloomberg, earnings have topped the Street’s expectations in 16 of the past 20 quarters.
Long-term investors have been rewarded with the share price closing at a record high of $91.74 in September. Since then, the share price has retreated 5 per cent. However, given management’s bullish outlook this stock may soon resurface on the positive breakouts list.
On Dec. 5, management will reveal its three-year strategic plan. That day, management will be hosting an Investor Day.
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.
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.
In 2022, 51 per cent of its revenue came from the United States, 26 per cent from Canada, and 23 per cent from other international regions.
The stock is dual-listed, trading on the Toronto Stock Exchange and the New York Stock Exchange under the ticker, STN.
Investment thesis
- Double-digit earnings growth forecast.
- Record backlog, reflecting 13 months of work.
- Healthy balance sheet to fund the company’s growth.
- Government infrastructure spending commitments.
- Diversified operations.
Quarterly earnings results
After the market closed on Aug. 9, the company reported better-than-expected second-quarter financial results and raised its guidance for 2023. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was $216-million, surpassing the consensus estimate of $210-million and up 16 per cent year-over-year. The adjusted EBITDA margin was 17.5 per cent. Adjusted earnings per share came in at 99 cents, above the Street’s forecast of 95 cents, and up 19 per cent year-over-year.
On June 30, backlog, a reflection of future revenue, stood at a record $6.6-billion, representing roughly 13 months of work. The company’s balance sheet is healthy. At quarter-end, the net debt-to-adjusted EBITDA ratio stood at 1.8 times.
For 2023, management anticipates the company will realize net revenue growth of between 10 per cent and 13 per cent, up from its prior outlook of between 7 per cent and 11 per cent. Adjusted earnings per share is expected to come in at between $3.50 and $3.60, representing growth of between 12 per cent and 15 per cent, up from management’s previous guidance of between 9 per cent and 13 per cent.
On the earnings call, president and chief executive officer Gord Johnston provided bullish commentary, “We’re delivering some of our highest organic growth rates ever with market fundamentals and demand for our services as strong as I’ve ever seen them in my 35-year career.”
After the market closes on Thurs. Nov. 9, the company will be releasing its third-quarter 2023 financial results. The consensus EBITDA and earnings per share estimates are $218-million and 98 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
According to Bloomberg, the stock has eight buy recommendations and three neutral recommendations.
The firms providing research on the company are: ATB Capital Markets, BMO Nesbit Burns, Canaccord Genuity, CIBC World Markets, Desjardins Securities, National Bank Financial, Raymond James, RBC Capital Markets, Scotiabank, Stifel Canada, and TD Securities.
Revised recommendations
Since the beginning of October, two analysts have raised their expectations:
- BMO’s Devin Dodge lifted his target price to $100 from $97.
- National Bank Financial’s Maxim Sytchev raised his target price to $105 from $96.
Financial forecasts
The consensus EBITDA estimates are $817-million in 2023, up from $724-million reported in 2022, and $901-million in 2024. The consensus earnings per share estimates are $3.54 in 2023, up from $3.13 reported in 2022, and $4.10 in 2024.
Earnings estimates have been relatively stable in recent months. Three months ago, the Street was expecting EBITDA of $809-million in 2023 and $890-million in 2024. The consensus earnings per share estimates were $3.54 in 2023 and $4.07 in 2024.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 12.9 times the 2024 consensus estimate, above its five-year historical average of 10.8 times but below its peak multiple of just under 14 times during this time period. The stock is trading at a price-to-earnings multiple of 21.2 times the 2024 consensus estimate, above its five-year historical average of 18 times but below its peak multiple of approximately 25 times during this time period.
The average one-year target price is $98.64, suggesting the stock has over 13 per cent upside potential over the next year. Individual target prices are: $90 (from ATB’s Chris Murray), $92, two at $96, $97, $99, two at $100, and three at $105.
Insider transaction activity
Quarter-to-date, one insider has reported a relatively small transaction.
On Oct. 2, chief operating officer of global operations Cath Schefer bought 566 shares increasing her position in this particular account to 20,187 shares.
Chart watch
The stock has been a winner for long-term investors.
On Sept. 5, shares of Stantec closed at a record high of $91.74. Year-to-date, the share price is up 34 per cent, making it the third best performing stock in the S&P/TSX industrials index, behind AtkinsRéalis (ATRL-T) and Badger Infrastructure Solutions Ltd. (BDGI-T), which are up 65 per cent and 47 per cent, respectively.
The share price has retreated in recent weeks and is currently 5 per cent below its all-time high.
In terms of key technical resistance and support levels, the stock faces major resistance level between $90 and $92. After that, there is overhead resistance around $100. Looking at the downside, there is strong technical support around $83, near its 200-day moving average at $82.87.
ESG Risk Rating
According to Sustainalytics, Stantec has an ESG (environmental, social and governance) risk rating of 14.7 as of Oct. 17, 2023. A rating of between 10 and 20 reflects a ‘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.