Stantec – Growth Fuelled By Acquisitions

STN - Stantec

Stantec is a top-tier global design and consulting firm ranking third in North America and 10th globally. The company provides professional services throughout the entire project lifecycle ranging from planning, design, construction administration, commissioning, maintenance, decommissioning, and remediation. It serves a wide range of markets such as civic, educational, industrial, health, mining, power, transportation, oil & gas, water, etc. and caters to both public as well as private clients.

From humble beginnings as a one-person firm in 1954, Stantec today has a huge geographic presence extending to 400 locations in six continents. By revenues, the US is its largest market accounting for more than 50% of total sales, followed by Canada (30%) and other global markets. Stantec primarily earns revenues from consulting services under fee-for-service agreements. The company operates through five business units namely infrastructure (accounting for 29% of 2019 revenue), buildings (22%), water (20%), environmental services (15%), and energy & resources (14%).

Investment Data

Revenue Growth & Market Exposure

Stantec is highly diversified by client type, business line, and geography, which reduces its dependency on any particular industry or geography. Its local strength, expertise, and relationships have enabled it to meet its clients’ needs in more effective ways over the last 65 years. It has built strong expertise across the buildings, energy, and infrastructure sectors and serves the design phase of projects in these sectors that offers high margin opportunities. The company focuses on organic growth, strategic acquisitions, and providing innovative service offerings and has a strong track record of building successful business platforms. Acquisitions and organic growth contributed to more than 10% revenue growth in the last year. Stantec has successfully completed more than 130 acquisitions since 1994.

Stantec is in a good position to leverage its leading position and benefit from growth opportunities in industrial sectors in Canada and the US. Growing global demand in environmental services and infrastructure will act as a strong tailwind for Stantec. A client-centric framework, timely project execution, and efficient operations have led to sticky client relations. It continued to win major government projects in the last year. Stantec recently won a contract for upcoming military projects by the US Army Corps of Engineers.

Stantec has a target to grow revenues at a rate of 10% CAGR by 2022. The company has grown its revenues at 12% CAGR over the last decade. It offers a good mix of local expertise and global reach, consulting services and project execution, and an integrated business model which makes it a clear industry winner. Prior to the lockdown, Stantec was expecting organic net revenue growth to be in the 2%-5% range.

Dividends

Stantec is a Canadian Dividend Aristocrat and has grown its dividends at over 10% CAGR in the last five years. It last raised its dividend by 6.9% and has a current annual yield of 1.6% and a payout ratio of 35%. Stantec returned $105 million to shareholders through dividends and share repurchases in the last year. It is targeting a 25%-30% payout ratio which will grant it enough room for future expansion. Stantec generated more than 10% growth in 2019 EPS. It is targeting an EPS growth of more than 11% CAGR by 2022. 

Stantec has a good experience of identifying and acquiring firms that complement its business model. Strategic acquisitions have resulted in expanding the company’s offerings, geographic footprint, and client base. The company has a well-defined plan for growth in North America, Australia, and New Zealand, and diversification in the European market. It is also growing across various verticals and is focusing on maintaining a weightage of 85% or more in non-cyclical industries to achieve higher earnings stability. 

Stantec’s three-year strategic plan aims at maximizing long-term value. Its organizational reshaping efforts have delivered annualized cost savings of nearly $40 million to $45 million in the last year. It also registered improved operating cash flows from continuing operations which increased 119% in the last year. The company had a solid contract backlog of $4.3 billion at the end of last year. With Stantec’s position as a top ten global design firm, it stands a good chance to work with the world’s leading clients on innovative and world-changing projects.

Competition

Stantec competes with the likes of SNC - Lavalin Group Inc., which is Canada’s largest engineering and construction company by revenue. It also competes with WSP Global, Aecon Group, Dirtt Environmental Solutions, etc.

Stantec’s integrated platform provides an operational advantage when compared to its peers. One of the key differentiators for Stantec is the fact that the company does not rely on a few large projects for its revenue. It is open to working with both large and small contractors for varying fee rates.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
TSE:WSPWSPWSP Global Inc.IndustrialsEngineering & Construction0.3684.118.9437.4920.232.240.01781.780.669641.500.017833DurableNONONONOCanada1
TSE:SNCSNCSNC - LAVALIN GROUP INC.IndustrialsEngineering & Construction0.3021.253.731.6320.2313.020.00380.380.006140.080.003813DurableNONONONOCanada1
TSE:STNSTNStantec Inc.IndustrialsEngineering & Construction0.4843.113.5825.4220.231.700.01441.440.364740.620.102756DurableNONOYESNOCanada1
TSE:BADBADBadger Daylighting LtdIndustrialsEngineering & Construction0.5028.971.0117.3020.231.670.02072.070.3593120.600.051745DurableNONONONOCanada1
TSE:AREAREAecon Group IncIndustrialsEngineering & Construction0.5014.060.8422.5320.230.620.04554.551.032340.640.125834DurableNONOYESNOCanada1
TSE:BDTBDTBird Construction Inc.IndustrialsEngineering & Construction0.356.860.2917.0820.230.400.05695.690.9750120.390.056914DurableNONONONOCanada1

Bottom Line

Stantec is well-positioned to address new opportunities that are emerging as a result of climate change, urbanization, geopolitics, and technology. It should continue its growth on the back of global developments and increasing infrastructure spending. It is true that the firm’s growth has been tied to acquisitions but Stantec has taken several steps in the last year to improve its operational performance and position its global platform for the future. The company might witness temporary weakness as a result of the global outbreak of coronavirus pandemic.

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
Join 8,400+ Investors & Build a Winning Portfolio