Globe article Three high-quality companies with growth prospects to watch in 2018
Monday, February 26, 2018
JENNIFER DOWTY
During this time of market volatility, price stability is highly prized by nervous investors. Holding a portfolio of quality stocks - those delivering solid financial results and led by proven management teams - can provide downside protection.
Leon Aghazarian, special situations analyst from National Bank Financial, stresses the importance of owning high-quality companies. In a recent conversation with The Globe and Mail, he discussed three such companies he believes will deliver attractive returns in 2018.
Your first stock pick is Stella-Jones Inc., a producer of pressure-treated wood products serving the railway and utility markets.
It's one of the best-run companies. It is a market leader in the two major businesses that it operates: railway ties and utility poles. It's a well-managed market leader in a defensive sector and it has a pretty amazing growth track record.
There were issues that plagued them in 2017 on the railway-ties side. There was a lot of inventory in the marketplace and demand from the Class 1 rails [the major railways] was down. This created some pressure on their top line, but, more importantly, on their profitability.
What is going on this year is the complete opposite. The highercost inventory is out of the marketplace and the demand, particularly on the Class 1 rail side, has actually gone up.
The other thing we like is on the delevering side. In 2016, they were quite active in terms of M&A [mergers and acquisitions]. In 2017, they didn't buy anything.
Their leverage actually decreased from about 3.2 times [debt-toEBITDA] all the way down to 1.8 times right now. That delevering, I think, is going to help them, they are going to get back on the acquisition front in 2018. [EBITDA refers to earnings before interest, taxes, depreciation and amortization.] You have a target price of $55.
How do you arrive at that valuation?
Yes, I have an "outperform" recommendation and a $55 target. I value it at 13.5 times 2019 EV/ EBITDA [enterprise value to EBITDA], at the five-year [historical] average.
STELLA-JONES (SJ) CLOSE: $48.20, UP 3¢ PREMIUM BRANDS (PBH) CLOSE: $104.57, UP 63¢ PARK LAWN (PLC) CLOSE: $23.03, UP 13¢
