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Stantec looks to U.S. to extend buying spree

A view of Stantec’s Wellington St. offices in Toronto.

Even after scooping up 97 smaller companies, Stantec Inc. is still intent on striking more deals.

Following a wild run in the markets in 2013, during which the consulting and engineering firm's shares soared more than 70 per cent, Stantec's stock has cooled a bit, and investors have wondered about the company's direction.

To address the uncertainty, management held an investor day, tackling issues such as the firm's recent restructuring into three distinct business lines – buildings, infrastructure, and energy and resources – as well as its acquisition strategy.

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Regarding the realignment, the main focus was to create some sense of unity. "Management felt that rebranding matters not only because it articulates the business's purpose, but unites a fragmented culture which can often plague multi-national firms," Raymond James analyst Ben Cherniavsky wrote in a note to clients.

As for acquisitions, the company made it clear it can easily spend $500-million on deals without having to raise any equity. While Stantec stresses it can still churn out some organic growth, its history is rooted in acquisitions, and that agenda will remain for the foreseeable future.

Stantec has long focused on buying small-to-mid-sized firms that have strong local or regional footprints, and that strategy will continue. But now, the focus is on the U.S. The company has already done a pretty good job of consolidating the Canadian market, and the best expansion opportunities are south of the border.

In energy and resources, for instance, 85 per cent of its business currently comes from Canada. Management believes there's more money to be made in areas such as midstream energy in the U.S.

And it appears that there is a stable roster of firms who are looking to sell. "The good news is that there are many companies approaching Stantec, and with little competition in their 'bread and butter' sweet spot, we believe Stantec is well positioned to deliver commendable growth in revenue and earnings over the long term," Mr. Cherniavsky wrote.

Stantec is also in an enviable financial position, with its debt amounting to just 0.1 times its equity value.

The trouble for investors is that any deals are hard to forecast. "While the company is in an enviable position financially to make acquisitions, the timing and magnitude of transactions are notoriously difficult to forecast," CIBC World Markets analyst Paul Lechem wrote in a note to clients.

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