Canadian Construction Stocks

Stella-Jones Inc Valuation – July 2018 $TSE-SJ

Company Profile (excerpt from Reuters): Stella-Jones Inc is a Canada-based company, which is a producer and marketer of pressure treated wood products. The Company supplies North America’s railroad operators with railway ties and timbers, and the continent’s electrical utilities and telecommunication companies with utility poles. It manufactures and distributes residential lumber and accessories to retailers for outdoor applications, as well as industrial products, which include marine and foundation pilings, construction timbers, wood for bridges and coal tar-based products. It has treating and pole peeling facilities across Canada and the United States, and sells its products primarily in these two countries. The Company operates approximately 35 treating plants, approximately 15 pole-peeling facilities and a coal tar distillery. These facilities are located in approximately five Canadian provinces and approximately 18 American states, and are complemented by an extensive distribution network across North America.


Downloadable PDF version of this valuation:

ModernGraham Valuation of TSE-SJ – July 2018

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $3,116,609,944 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 6.27 Pass
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 241.72% Pass
6. Moderate PEmg Ratio PEmg < 20 20.27 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 2.71 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 6.27 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.63 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass


Stage 2: Determination of Intrinsic Value

EPSmg $2.22
MG Growth Estimate 11.98%
MG Value $72.20
Opinion Undervalued
MG Grade B-
MG Value based on 3% Growth $32.26
MG Value based on 0% Growth $18.91
Market Implied Growth Rate 5.88%
Current Price $45.09
% of Intrinsic Value 62.45%

Stella-Jones Inc is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the high PEmg and PB ratios. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $1.24 in 2014 to an estimated $2.22 for 2018. This level of demonstrated earnings growth outpaces the market’s implied estimate of 5.88% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into Stella-Jones Inc revealed the company was trading above its Graham Number of $28.79. The company pays a dividend of $0.44 per share, for a yield of 1% Its PEmg (price over earnings per share – ModernGraham) was 20.27, which was below the industry average of 24.98, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $3.39.

Stella-Jones Inc performs fairly well in the ModernGraham grading system, scoring a B-.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) $3.39
Graham Number $28.79
PEmg 20.27
Current Ratio 6.27
PB Ratio 2.71
Current Dividend $0.44
Dividend Yield 0.98%
Number of Consecutive Years of Dividend Growth 12

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Most Recent Balance Sheet Figures

Balance Sheet Information 3/1/2018
Total Current Assets $1,056,037,000
Total Current Liabilities $168,298,000
Long-Term Debt $559,570,000
Total Assets $1,976,668,000
Intangible Assets $411,721,000
Total Liabilities $821,258,000
Shares Outstanding (Diluted Average) 69,351,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $2.29
Dec2017 $2.42
Dec2016 $2.22
Dec2015 $2.04
Dec2014 $1.50
Dec2013 $1.34
Dec2012 $1.13
Dec2011 $0.87
Dec2010 $0.57
Dec2009 $0.59
Dec2008 $0.56
Dec2007 $0.51
Dec2006 $0.44
Dec2005 $0.27
Dec2004 $0.18
Dec2003 $0.10
Dec2002 $0.10
Dec2001 $0.01
Dec2000 $0.09
Dec1999 $0.09
Dec1998 $0.10

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $2.22
Dec2017 $2.10
Dec2016 $1.84
Dec2015 $1.56
Dec2014 $1.24
Dec2013 $1.04
Dec2012 $0.84
Dec2011 $0.67
Dec2010 $0.56
Dec2009 $0.53
Dec2008 $0.46
Dec2007 $0.37
Dec2006 $0.27
Dec2005 $0.17
Dec2004 $0.11
Dec2003 $0.08
Dec2002 $0.07

Recommended Reading:

Other ModernGraham posts about the company

5 Undervalued Canadian Stocks for Intelligent Investors – February 2017
5 Undervalued Companies for Value Investors with a Low Beta – February 2017
5 Companies for Enterprising Investors Near 52 Week Lows – February 2017
15 Best Stocks for Value Investors This Week – 1/14/17
5 Undervalued Companies for Value Investors with a Low Beta – January 2017

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The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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