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Stantec: An insatiable appetite for M&A deals

Stantec chief executive Bob Gomes

Jason Franson/The Globe and Mail

"If you build it, they will come," appears to be the latest mantra for investors in acquisition-hungry Stantec Inc.

Shares in the Edmonton-based engineering and design company are trading near record highs following a buying binge over the past two years.

While some caution the stock is getting expensive, many analysts are forecasting further growth through mergers and acquisitions and recently hiked their price targets to make room.

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"In our view, Stantec should remain a core holding," Canaccord Genuity analyst Sara Elford said in a recent note, citing the company's "clear and consistent" game plan to drive near-term revenue and earnings growth by about 15 per cent through existing operations and acquisitions.

She has raised her price target to $74 from $69.

Ms. Elford is one of eight analysts with a "buy" on the stock, while seven have a "hold" recommendation and there are no calls to sell, according to S&P Capital IQ.

The stock hit an all-time high of $72.34 on the Toronto Stock Exchange in early December, up significantly from its 52-week low of $40.90 six months earlier. The stock has pulled back in recent weeks, closing at $67.82 on Monday.

The analyst consensus price target for Stantec over the next year is $72.32.

Analysts have been increasing their price targets since the company confirmed in late February that it's eyeing more M&A deals this year.

"We're always willing to close acquisitions if they fit into what we're doing and if it's for the right price, and we feel we've got a lot of those opportunities in front of us," Stantec chief executive Bob Gomes told investors during a recent conference call.

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Stantec has acquired more than 65 companies since 2000, including 14 since 2012. Mr. Gomes said the company didn't close as many deals as management had hoped in 2013, which has heightened expectations of many counting on more M&A action to come.

"We believe acquisitions will help drive growth and value for the company," GMP Securities analyst Greg McLeish said in a note, while increasing his target price to $70 from $66.

Stantec's latest deal, announced in February, is to buy California-based competitor Processes Unlimited International Inc. to expand its oil and gas and industrial business in the United States.

About 58 per cent of the company's revenues are in Canada, 39 per cent in the U.S. and 3 per cent elsewhere. Stantec said it expects to see growth in all its locations and across all business segments.

About 43 per cent of its revenues come from the energy and resources sector, 35 per cent from infrastructure projects, such as roads and bridges, and the rest from buildings, such as office towers.

While there are concerns the company is being overly acquisitive with the risk the North American economy could fumble, GMP's Mr. McLeish believes Stantec has been careful with its M&A to date. "We believe Stantec will continue to make prudent acquisitions in high-growth markets that will create value for shareholders," he said.

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Dundee Capital Markets analyst Maxim Sytchev says Stantec is one of the best executing engineering firms worldwide. Still, he says investors shouldn't expect too much right now given the recent runup in the share price.

The stock is trading at about 20 times earnings, which is near its 2007 valuation just before the global financial crisis hit. "It's certainly not cheap," said Mr. Sytchev, who has a "hold" on the stock and a $67 price target. "The easy money, from our perspective, has been made."

Michael Sprung, president of Sprung Investment Management Inc., said his firm was a long-time holder of Stantec, but recently sold its shares. "Our feeling was that it had become somewhat overvalued," he said. "Like all of these companies, there will be opportunities in the future to own it at a much more reasonable multiple."

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About the Author
Contributor

Brenda Bouw is a freelance writer and editor based in Vancouver. She has more than 20 years of experience as a business reporter, including at The Globe and Mail, The Canadian Press, the Financial Post and was executive producer at BNN (formerly ROBTv). Brenda was also part of the Globe and Mail reporting team that won the 2010 National Newspaper Award for business journalism. More

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