22 December 2024
This is the second edition of the updated free HVG Investment Notes, where I share the most interesting points that caught my attention during the week. This could be one or two interesting stocks, a thought-provoking article, a research paper, an interview, a chart and other points.
I. Stella Jones: wooden poles supporting US infrastructure boom
TSE:SJ
Share price: C$ 71.6
Market Cap: C$4.0bn
Fwd P/E: 12.6x
Fwd EV/EBITDA: 8.9x
LTM Shareholder yield: 4%
Share price: C$ 71.6
Market Cap: C$4.0bn
Fwd P/E: 12.6x
Fwd EV/EBITDA: 8.9x
LTM Shareholder yield: 4%
Stella Jones is a leading North America manufacturer of pressure-treated wood products such as electricity poles (47% of sales), railway ties (25%), residential lumber (19%), industrial products and logs/lumber (9%). Even though the company is listed in Canada, over 70% of its sales come from the US.
Historically, this sector has been a slow grower as demand for core products correlated with the overall GDP. Stella Jones has managed to grow ahead of the industry through consolidation of smaller players.
The company was founded in 1993. It has completed 20 acquisitions over 20 years.
The reason the stock looks interesting today is the rapid shift in energy production coupled with critical state of power infrastructure. In our earlier report on the Electric Power sector we highlighted that the US energy grid is over 40 years old. Moreover, electricity demand has accelerated with the rise of Data Centres, EVs, changing lifestyles and energy transition.
As renewable power replaces traditional fossil fuels, more grid and connections are needed which leads to a much higher demand for all kind of equipment related to power infrastructure (cables, poles etc).
It appears that wooded poles have certain advantages over metal ones as the former maintain its shape during heat. They are also considerably cheaper.
Stella Jones targets over C$3.6bn revenue in 2025 (10% rise over 2023) excluding potential acquisitions and an EBITDA margin of at least 17%, which translates into 11% compound annual growth rate over 2022-25.
Management prioritises shareholder returns, distributing 20-30% of earnings as dividends to shareholders and complements them with regular buybacks.
During 2020-Q3 2024, Stella Jones has spent C$695mn on capex and M&A, while returning C$791mn to shareholders via dividends and buyback.
Historically, this sector has been a slow grower as demand for core products correlated with the overall GDP. Stella Jones has managed to grow ahead of the industry through consolidation of smaller players.
The company was founded in 1993. It has completed 20 acquisitions over 20 years.
The reason the stock looks interesting today is the rapid shift in energy production coupled with critical state of power infrastructure. In our earlier report on the Electric Power sector we highlighted that the US energy grid is over 40 years old. Moreover, electricity demand has accelerated with the rise of Data Centres, EVs, changing lifestyles and energy transition.
As renewable power replaces traditional fossil fuels, more grid and connections are needed which leads to a much higher demand for all kind of equipment related to power infrastructure (cables, poles etc).
It appears that wooded poles have certain advantages over metal ones as the former maintain its shape during heat. They are also considerably cheaper.
Stella Jones targets over C$3.6bn revenue in 2025 (10% rise over 2023) excluding potential acquisitions and an EBITDA margin of at least 17%, which translates into 11% compound annual growth rate over 2022-25.
Management prioritises shareholder returns, distributing 20-30% of earnings as dividends to shareholders and complements them with regular buybacks.
During 2020-Q3 2024, Stella Jones has spent C$695mn on capex and M&A, while returning C$791mn to shareholders via dividends and buyback.
The stock has dropped over 20% over the past three months and is down 5.5% YTD as demand for utility poles has softened. This is likely a temporary factor given the structural drivers of long-term growth.
The stock is now trading at 12.6x forward P/E, based on consensus estimates.
More company info:
II: 2025 Opportunities
I am generally sceptical about year-ahead outlooks. While macro factors can cause short-term stock price fluctuations, long-term stock performance reflects underlying earnings growth.
Having said that, it never hurts to know the market’s current thinking, what may be priced and what could be neglected. Here are a few free market outlooks from the leading investment banks:
My general thinking is that the US market is expensive and has benefited from several factors that cannot support similar appreciation much longer (e.g., lower taxes and interest rates, globalisation, and the tech and energy revolution).
These two charts by Goldman Sachs are particularly telling.
Having said that, it never hurts to know the market’s current thinking, what may be priced and what could be neglected. Here are a few free market outlooks from the leading investment banks:
- Goldman Sachs: The Year of the Alpha Bet
- Goldman Sachs: Trading Tails and Tailwinds
- Goldman Sachs: Asia Views: 2025 Outlook – Positioning for Trade War Two
- Goldman Sachs: UK Outlook 2025 - A Gradual Pace, but More Cuts Than Priced
- Morgan Stanley Investment Management: Outlook for 2025
- Morgan Stanley: US Policies May Temper Global Growth
- Morgan Stanley: Get Ready to Pivot
- JP Morgan: Navigating cross-currents
- Deloitte: 2025 Oil and Gas Industry Outlook
My general thinking is that the US market is expensive and has benefited from several factors that cannot support similar appreciation much longer (e.g., lower taxes and interest rates, globalisation, and the tech and energy revolution).
These two charts by Goldman Sachs are particularly telling.
I am still more comfortable looking for opportunities in the UK and Europe. Not because I expect their regional economies to grow faster but because there is much less enthusiasm among investors; while many of the companies listed in these markets are global players, some operate predominantly in the US, yet because of their listing, they often trade at 50% discounts to US peers.
The future is full of surprises, and the best-performing sectors are often neglected at the bottom. Other than the UK and Europe, it could be worth spending time on the Luxury Goods sector, Healthcare and Emerging Markets. Healthcare, in particular, looks interesting because, from a simplistic point of view, people get sick regardless of the level of interest rates in the economy. Moreover, with the rise of the elderly population and generally higher standards of living, the demand for healthcare products and services will only rise in the future. There are also barriers to entry, as bringing a new drug requires unique expertise, years of research, and an extensive and arduous approval process for new drugs.
The future is full of surprises, and the best-performing sectors are often neglected at the bottom. Other than the UK and Europe, it could be worth spending time on the Luxury Goods sector, Healthcare and Emerging Markets. Healthcare, in particular, looks interesting because, from a simplistic point of view, people get sick regardless of the level of interest rates in the economy. Moreover, with the rise of the elderly population and generally higher standards of living, the demand for healthcare products and services will only rise in the future. There are also barriers to entry, as bringing a new drug requires unique expertise, years of research, and an extensive and arduous approval process for new drugs.
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