Stantec CEO Bob Gomes at Stantec in Edmonton.Jason Franson for The Globe and Mail
There's a big difference between doing deals and doing deals that create sustainable value. Which category does engineering specialist Stantec Inc. fall into?
As my colleague Tim Kiladze wrote earlier, Stantec's stock is hot and acquisitions are a big reason. Investors like the growth.
But is it real? Growing by acquisition can make a company look good for a while, but if the buyer is consistently overpaying, the reckoning is usually painful. The worst case is a big writedown (see most any big miner) but it might just be in the form of weak returns.
One measure of who is good at doing deals is to look at return on invested capital. This, in essence, gives a measure of how much return the company gets on each dollar of capital it has. A company with a high ROIC is one you want investing money on your behalf, because the management team can compound it fast. If there's a consistently low ROIC, management are not making the right capital allocation decisions, and they should probably stop whatever they are doing and just give the money to shareholders.
The best acquirers can drive ROIC into double digits – well into double digits in some cases – as Constellation Software has done by averaging about 21 per cent in the past 11 years.
When it comes to ROIC, the verdict on Stantec is this is a team that does a pretty good job of putting shareholders' money to work. Stantec makes multiple purchases most every year, and has an average ROIC of close to 12 per cent over the past five years. Last year, the number wasn't as big, at just under 8 per cent.
That's nowhere near Constellation, but Stantec's number is definitely in the upper echelons of large Canadian companies. Running a screen of the companies in the TSX Composite Index on a Bloomberg terminal, the machine spits out 5-year average ROIC numbers for 81 companies. Stantec ranks No. 28 on that list.
If Stantec's management can continue to compound capital at a double digit rate, shareholders should be more than happy to watch the company keep growing by acquisition.
(Boyd Erman is a Globe and Mail Capital Markets Reporter & Streetwise Columnist.)
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