CIBCEQUITY RESEARCH
May 12, 2022 Earnings Update
STELLA-JONES INC.
In Pole Position As EV Infrastructure Grows
Our Conclusion
We reiterate our Outperformer rating on Stella-Jones but trim our price target
to $45 (from $47) on somewhat more conservative valuation parameters
given the deteriorating macro backdrop. SJ remains one of the most
defensive names in our coverage universe, with nearly two-thirds of its
revenues typically derived from poles and railway ties (largely tied to
maintenance spending). Over the next few years, we expect the company to
also benefit from an emerging replacement cycle in poles augmented by
federal infrastructure spending, electrification of mobility and 5G roll-out.
Key Points
Raising Near-term Estimates: We are increasing our EBITDA forecast for
the second quarter by 2% to $125MM on higher pole pricing assumptions
and a stronger sequential margin improvement than previously forecast. The
stronger H1 outlook increases our full-year estimate to $406MM. Our 2023
estimate remains largely unchanged at $412MM on moderately higher
pricing assumptions for ties/poles and stronger overall margins, partially
offset by an expected normalization in treated lumber prices.
For 2022, our forecast assumes organic sales growth in poles of 13% (vs.
+9% in 2021), 2% growth in ties (all pricing given raw material inflation), and
a 5% decrease in res lumber sales (embeds mid-single-digit volume decline
this year). While we assume volumes moderate further this year given less
robust DIY demand (~20% of R&R mix in lumber), our sales forecast for the
category may be overly conservative on realizations. Store pricing we track
indicates retail prices for treated lumber at SJ’s big box retailer (~70% of
category sales) are up 7% YTD.
Similarly, our estimates for ties conservatively assumes only modest sales
growth for the year despite strong untreated crosstie prices (up 15%-30%
Y/Y in mid-May) given tight supply. Higher untreated crosstie prices should
be beneficial for SJ relatively quickly on short line business and positive for
Class 1 sales once raw materials stabilize (given existing quarterly and/or
semi-annual cost pass-through arrangements).
More Than Just A Pole Replacement Cycle: According to the Edison
Electric Institute’s (EEI) latest forecast, transmission investment in the U.S. is
expected to average 9% higher over 2022E-2024E than 2020 levels. We
continue to see upside risks to our longer-term demand forecast for poles
from federal infrastructure spending, electrification of mobility and 5G
infrastructure roll-out over the coming decade. Quanta Services (NA’s largest
utility and electrical contractor) has previously highlighted that the growth of
EVs and renewables is going to necessitate more large transmission line
connectivity across the North American grid. The contractor has highlighted
that the European grids have three to five times greater connectivity than
U.S. corridors