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analysis

On today’s Breakouts report, there are 61 stocks on the positive breakouts list (stocks with positive price momentum), and eight securities are on the negative breakouts list (stocks with negative price momentum).

Discussed today is a forest products stock that surfaced on the positive breakouts list - Stella-Jones Inc. (SJ- T).

A brief outline on Stella-Jones is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.

The company

Quebec-based Stella-Jones produces pressure-treated wood products.

Stella-Jones operates in relatively defensive industries serving the railroad and utility market segments. Railroad operators need to perform regular maintenance and upgrades to their railway ties. Meanwhile, utility poles have to be maintained, replaced and installed in new development projects. Utility poles are used by telecommunications and electrical utilities companies.

The company has operations in six Canadian provinces and south of the border in 17 states. In the second-quarter, 63 per cent of sales came from the U.S. with the balance stemming from Canada.

In terms of the company’s business mix, 34 per cent of sales were from utility poles in 2021. Residential lumber accounted for 28 per cent of sales. The railway ties segment represented 25 per cent of total sales. Logs and lumber represented 8 per cent of total sales. Lastly, industrial products accounted for 5 per cent of total sales.

According to Bloomberg, the Caisse de dépột et placement du Québec, a longer-term shareholder, owns over 12 per cent of the shares outstanding.

Investment thesis

  • Steady earnings growth. Over the years, earnings before interest, taxes, depreciation and amortization (EBITDA) has steadily climbed: $244-million in 2018, $313-million in 2019, $385-million in 2020 and $400-million in 2021. Between 2022 and 2024, management anticipates high single-digit sales growth from utility poles and low single-digit growth from railway ties.
  • Acquisition growth. Quarter-to-date, the company has completed the roughly $9-million acquisition of Dinsmore Trucking group, which transports specialty poles and logs.
  • Healthy balance sheet to fund future growth. Net debt-to-EBITDA ratio stands at 2.7 times at the end of the second quarter. Management targets a leverage ratio of between 2 and 2.5 times.
  • Dividend growth. The company has raised its dividend for 18 consecutive years.
  • Ability to pass cost increases through to its customers of utility poles and railway ties.
  • Valuation: The stock is trading at a discount relative to historical levels.
  • Key potential risks to consider: 1) lower lumber prices/demand; and 2) potential recession.

Quarterly earnings and outlook

Before the market opened on Aug. 10, the company announced better-than-expected second quarter earnings results. EBITDA came in at $154-million, down from $180-million last yearbut well above the Street’s forecast of $129-million. The company reported earnings per share of $1.51, down from $1.76 reported last year but surpassing the consensus estimate of $1.19. That day, the share price rallied 3.9 per cent on high volume with over 442,000 shares traded. The three-month historical daily average trading volume is approximately 212,000 shares.

On Aug. 4, industry peer Koppers Holdings Inc. (KOP-N) provided a positive outlook for the Koppers’ Railroad and Utility Products and Services segment. The president and chief executive officer Leroy Ball stated, “According to the Railway Tie Association, 2023 should bring modest increases in class one and commercial cross high demand, towing 18.8 million cross ties, or 1.1 per cent increase.”

Returning capital to shareholders

The company pays its shareholders a quarterly dividend of 20 cents per share or 80 cents per share on a yearly basis. This equates to a current annualized yield of 1.95 per cent.

Since 2013, management has announced a dividend increase each year during the month of March, even during the pandemic.

Management targets a payout ratio of between 20 per cent and 30 per cent of the previous year’s earnings per share. In 2021, the payout ratio was 23 per cent.

In the second quarter, the company repurchased over 1.2-million shares. In the first half of 2022, the company repurchased over 2.2 million shares.

Analysts’ recommendations

There are eight analysts that actively cover this mid-cap stock with a market capitalization of $2.5-billion, of which seven analysts have buy recommendations and one analyst has a ‘sector perform’ recommendation.

The firms providing research coverage on the company are: Acumen Capital, CIBC World Markets, Desjardins Securities, Laurentian Bank, National Bank Financial, RBC Dominion Securities, Scotia Capital and TD Securities.

Revised recommendations

Month-to-date, six analysts have revised their expectations.

  • Acumen’s Jim Byrne to $46 from $44.
  • CIBC’s Hamir Patel to $46 from $41.
  • Desjardins’ Benoit Poirier to $61 (the high on the Street) from $59.
  • RBC’s Walter Spracklin to $41 from $40 (the low on the Street).
  • Scotia’s Benoit Laprade to $50 from $56.
  • TD’s Mike Tupholme to $48 from $45.

Financial forecasts

Earnings are forecast to remain relative unchanged over the next year. The consensus EBITDA estimate is $418-million in 2022, up from $400-million reported in 2021, with EBITDA forecast to remain relatively flat at $417-million in 2023. The Street is forecasting earnings per share to come in at $3.73 in 2022, up from $3.49 reported in 2021, and expected to inch up 2 per cent to $3.81 in 2023.

Consensus earnings per share forecasts have been rising. Four months ago, the Street was forecasting EBITDA of $304-million for 2022 and $320-million for 2023 and earnings per share of $3.41 for 2022 and $3.68 for the following year.

Valuation

According to Bloomberg, the stock is trading an enterprise value-to-EBITDA multiple of 8.4 times the 2023 consensus estimate, below its seven-year historical average of 11 times. On a price-to-earnings basis, the stock is trading at 10.7 times the consensus 2023 estimate, below its seven-year historical average of 15.4 times.

The average one-year target price is $49, suggesting the share price has 20 per cent upside potential over the next year. Individual target prices vary widely and are: $41 (from RBC’s Walter Spracklin), two at $46, $47, $48, $50, $51 and $61 (from Desjardins’ Benoit Poirier).

Insider transactions

Year-to-date, there have only been two transactions in the public market reported by an insider, both relatively small trades.

On May 17, director Karen Laflamme purchased 1,000 shares at a price per share of $35.628, increasing this particular account’s position to 9,000 shares. On March 29, Ms. Laflamme acquired 500 shares at a cost per share of $37.27.

Chart watch

Year-to-date, the share price is relatively unchanged, up 2 per cent, outperforming the S&P/TSX Composite Index, which is down 4.9 per cent and outperforming the S&P/TSX Materials Index, which is down 6.2 per cent.

In terms of key resistance and support levels, the stock has an initial ceiling of resistance around $45. After that, there is major overhead resistance between $50 and $53.50. Looking at the downside, there is strong technical support around $38, near its 200-day moving average at $38.19.

ESG Risk Rating

According to risk provider Sustainalytics, the stock has an ESG risk score of 24.5 as of Feb. 2, 2022. A risk score between 20 and 30 reflects a ‘medium risk’ rating.

POSITIVE BREAKOUTS Aug. 15 close
ALC-TAlgoma Central Corp $17.44
AQN-TAlgonquin Power & Utilities Corp $18.77
ATZ-TAritzia Inc. $44.71
ACO-X-TAtco Ltd $47.63
ATA-TATS Automation Tooling Systems Inc $46.03
ACB-TAurora Cannabis Inc. $2.43
BDGI-TBadger Infrastruture Solution $32.15
BLU-TBELLUS Health Inc. $15.46
BBD-B-TBombardier Inc $33.90
BPF-UN-TBoston Pizza Royalties Income Fund $16.61
BYD-TBoyd Group Services Inc. $194.11
BAM-A-TBrookfield Asset Management Inc $68.58
BBU-UN-TBrookfield Business Partners LP $33.06
BIP-UN-TBrookfield Infrastructure Partners LP $53.18
DOO-TBRP Inc $103.83
CP-TCanadian Pacific Railway Ltd $104.14
CDAY-TCeridian HCM Holding Inc. $90.48
CSU-TConstellation Software Inc $2,189.48
DIV-TDiversified Royalty Corp $2.89
DCBO-TDocebo Inc. $47.03
DOL-TDollarama Inc $81.16
EFN-TElement Fleet Management Corp. $17.39
EIF-TExchange Income Corp $51.47
XTC-TExco Technologies Ltd $8.80
FSV-TFirstService Corp $178.52
GLXY-TGalaxy Digital Holdings Ltd. $8.84
GIL-TGildan Activewear Inc $41.42
GSV-TGold Standard Ventures Corp. $0.56
HEO-TH2O Innovation Inc. $2.23
HLF-THigh Liner Foods Inc $14.03
HIVE-XHIVE Blockchain Technologies Ltd. $9.35
HCG-THome Capital Group Inc $31.28
HUT-THut 8 Mining Corp. $4.55
ISV-TInformation Services Corp $24.60
IFC-TIntact Financial Corp $193.81
GUD-TKnight Therapeutics Inc $6.12
LWRK-TLifeWorks Inc. $32.26
MRE-TMartinrea International Inc $11.12
DR-TMedical Facilities Corp $10.35
MRG-UN-TMorguard North American Residential REIT $18.10
MTY-TMTY Food Group Inc $62.27
MTL-TMullen Group Ltd $14.94
NPI-TNorthland Power Inc $45.75
ONC-TOncolytics Biotech Inc $1.73
OGI-TOrganigram Holdings Inc. $1.58
REAL-TReal Matters Inc. $6.11
RECP-TRecipe Unlimited Corp. $19.80
RFP-TResolute Forest Products Inc. $26.64
QSR-TRestaurant Brands International Inc $78.11
RCH-TRichelieu Hardware Ltd $39.02
SAP-TSaputo Inc $34.11
SW-TSierra Wireless Inc $39.68
SNC-TSNC-Lavalin Group Inc $27.37
SJ-TStella-Jones Inc $40.93
SOY-TSunOpta Inc $14.41
TRI-TThomson Reuters Corp $150.02
TC-TTucows Inc. $67.17
VLNS-TValens Company Inc. $1.58
WCN-TWaste Connections Inc. $182.92
WELL-TWell Health Technologies Corp. $4.11
WSP-TWSP Global Inc $159.42
NEGATIVE BREAKOUTS
DRT-TDIRTT Environmental Solutions $0.90
MMX-TMaverix Metals Inc. $4.91
OGC-TOceanaGold Corp $2.16
PLC-TPark Lawn Corp. $28.96
RCK-XRock Tech Lithium Inc. $3.63
SMT-TSierra Metals Inc $0.67
TER-CNTerrAscend Corp. $2.46
TRQ-TTurquoise Hill Resources Ltd $30.05

Source: Bloomberg and The Globe and Mail

This is not an investment recommendation. 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.

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