Pressure-treated wood fanatics know all about Stella-Jones (TSE: SJ) (STLJF).
By putting lumber in a watery solution full of preservatives for an extended period of time, you’re left with a product fit for use on docks, decks, utility poles, railways, and anywhere where moisture and rotting can be an issue.
Incorporated in 1992, Stella-Jones has become a powerful figure in this niche, boasting over 2,400 employees and 42 plants scattered across the United States and Canada.
The company is a favored supplier of treated lumber to North America’s largest electrical and telecommunications businesses, along with railway operators. Its wood is also used on a large scale by those who build homes.
SJ released its Q4 and full-year 2021 results on March 9, with some big wins and some mitigated losses, as the company has had to navigate lumber costs that have fluctuated greatly over the past couple of years.
I’m bullish on the stock going forward, as it’s a prominent figure in a perhaps underappreciated industry.
Strengths
Stella-Jones is a dominant figure in Canada for railway ties and utility poles and has acquired its way into a leading position in the U.S.
The result is a stable company with further room to grow as it expands its market share across the continent, finding efficiencies through its purchases.
A large chunk of the company’s revenue comes from government contracts, providing it with reliable income that is often tied to infrastructure spending. Due to the specific nature of its work and the lack of competition in a highly regulated industry, SJ’s customers face high switching costs should they look elsewhere.
As well, treated wood needs to be replaced every so often, giving Stella-Jones a predictable long-term revenue stream from its customers.
Recent Stock Performance, Lumber Prices
Stella-Jones stock peaked around April and May 2021, a time when lumber prices were at their highest. Back then, lumber cost about $1,700 per 1,000 board feet. A big part of this was due to sawmills cutting production ahead of an expected housing crash caused by COVID-19. The crash never came, and demand for wood actually increased, leading to supply shortages.
Lumber prices eventually fell, and so too did SJ stock, which is currently trading near 52-week lows. Lumber currently sells for about $920 per 1,000 board feet.
Curiously, lumber costs were rather elevated in March of this year, while SJ stock continued its slow descent.
This is likely because those higher lumber costs were due to flooding in British Columbia and increased tariffs from the U.S. government on Canadian lumber, rather than any demand explosion, as seen in 2021.
In all, lumber prices are still elevated compared to the past decade, and the commodity is still likely to remain in good standing going forward.
Whether SJ stock can catch up remains to be seen, but the company has enough going for it in other areas to make it look promising over the long term.
Stella-Jones’ 2021 Results
Full-year 2021 revenue was C$2.75 billion for Stella-Jones, an 8% year-over-year increase. Q4 sales of C$545 million was a less impressive 2.3% increase.
Full-year gross profit was C$456 million, a 2.2% year-over-year improvement, while the company’s EBITDA of C$400 million was a new record, beating full-year 2020’s EBITDA of C$385 million.
According to Stella-Jones, it was able to achieve this record EBITDA by improving its pricing for residential lumber and utility poles.
However, its EBITDA margin decreased from 15.1% to 14.5% due to “a decrease in residential lumber demand, lower railway ties pricing, and the unfavorable impact of the depreciation of the U.S. dollar.”
Dividend
Stella-Jones’ quarterly dividend was recently bumped to C$0.2 per share. It yields 2.1%, a chunk higher than the Basic Materials industry average of 1.45%.
The dividend has been raised in 18 consecutive years, albeit very slowly, and is likely to continue seeing minuscule bumps every year or so.
Éric Vachon, president and CEO of Stella-Jones, revealed in the most recent earnings report that his company plans to spend C$500 million to C$600 million returning cash to shareholders over the next three years. This would be a 50% increase compared to SJ’s previous three years.
Wall Street’s Take
Stella-Jones has a Strong Buy rating consensus on TipRanks, due to four Buys and one Hold assigned over the past three months.
The average Stella-Jones price target of C$52.61 suggests 40.1% upside potential. Price targets range from a low of C$43 to a high of C$58.
Conclusion
Rising interest rates, a dipping U.S. dollar, and the unpredictability of lumber prices can all poorly affect the financials of Stella-Jones.
Nevertheless, the company still maintains an enviable position in an industry that’s hard to break into and has enough use cases to keep the company alive long term should one of its segments falter due to a recession.
The stock’s performance has sagged over the past year, which could provide an opportunity for upside in the short term as well.
Download the TipRanks mobile app now
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Read full Disclaimer & Disclosure
