Expecting momentum for increased infrastructure spending south of the border to likely be “resilient for longer,” National Bank Financial analyst Maxim Sytchev raised his recommendation Stella-Jones Inc. to “outperform” from “sector perform” on Tuesday, predicting “pole momentum should persist.”
“We were admittedly early to downgrade shares in January this year as they have rallied 33 per cent year-to-date (versus a decline of 1 per cent for the TSX) and 95 per cent since our bullish July 13th, 2022 note (Deep dive on value?) which highlighted the company’s inherent undervaluation when shares were trading at 8.0 times NTM [next 12-month] EV/EBITDA and general expectations were subdued,” he said. “Now the shares are trading at 9.1 times on our new 2025 estimated EBITDA and that excludes any contribution that might arise from the U.S. Infrastructure Bill spending (which is expected to flow through at greater momentum in 2024-25, as per commentary from SJ’s peer Koppers who held its own investor day recently ... - reiterating previously strong growth and highlighted resilient pricing that minimizes our forecasting risk).
“After the incorporation of 2025 guide in our estimates as well as tracking the upside in volume growth from the Bipartisan infrastructure bill (the U.S is racing to fortify its grid infrastructure against extreme weather supporting resilient volume and pricing growth beyond normal maintenance levels), we are likely to see further positive earnings revisions for SJ, pulling shares up in tandem. As such, we are upgrading SJ.”
In a research note released before the bell, Mr. Sytchev increased his financial projections for the Montreal-based manufacturer of pressure treated wood products to better reflect the company’s guidance. He’s now expecting 2023 and 2024 revenue of $3.294-billion and $3.544-billion, respectively, up from $3.269-billion and $3.463-billion previously. His adjusted diluted earnings per share estimates jumped to $4.74 and $5 from $4.64 and $4.86.
“We are imputing 6-per-cent CAGR [compound annual growth rate] from 2022 onwards at 16-per-cent EBITDA margin, in line with guidance (with poles vertical at 15-per-cent CAGR),” he said. “Lumber is another lagging sub-vertical at negative 5-per-cent CAGR (guide of $600-$650-million by 2025; NBF estimate at $637-million). The above dynamics results in 2025 EPS estimate of $5.50 per share (a 16-per-cent increase from 2023E). These numbers do not include any potential M&A although that materiality is lessened by consolidated nature of poles/ties verticals, unless management pushes into adjacencies; hopes for actual extra spending that should drive up volumes (Poles 15-per-cent CAGR guide is pricing-driven) is minimal in our forecasts.”
Also introducing his 2025 projections, Mr. Sytchev raised his target for Stella-Jones shares to $83 from $73. The average target on the Street is $78.14.