Stock Market Smarts: An Industrial Success Story

This little-known Montreal company produces rail ties, utility poles – and profits!

When you look at the top stock holdings in Canadian mutual fund, you’ll usually find the same names: a couple of big banks, our two major railroads, some utilities, and perhaps an insurance company.

You won’t find many manufacturers on those lists, which suggests we don’t have much to offer in that sector. But in fact Canada has a number of small to mid-size manufacturing companies that offer profit potential to investors willing to search them out.

One of them is Stella-Jones Ltd., which is based in Montreal. It is a leading producer and marketer of pressure treated wood products. The company supplies North America’s railroad operators with railway ties and timbers, and electrical utilities and telecommunication companies with utility poles. It also provides residential lumber and customized services to retailers and wholesalers for outdoor applications, as well as industrial products that include marine and foundation pilings, construction timbers, wood for bridges, and coal tar based products.

The company operates 27 wood treating plants, 11 pole peeling facilities, and a coal tar distillery. These facilities are located in five Canadian provinces and 16 American states and are complemented by an extensive distribution network across North America. The company’s workforce numbers approximately 1,600 employees.

The company announced record revenue and earnings for 2015 on March 16. For the fourth quarter, Stella Jones posted sales of $357.5 million, up 23.3 per cent from $289.9 million in the same period of 2014. Operating income was $48.3 million, or 13.5 per cent of sales, versus 11.7 per cent of sales a year ago. Net income increased by 43.7 per cent to $33 million ($0.48 per share, fully diluted), compared to $23 million ($0.33 per share) in the fourth quarter of 2014.

Full year results showed sales of $1.56 billion, up 24.8 per cent from $1.25 billion in 2014. Operating income was $220.1 million, or 14.1 per cent of sales, versus 12.5 per cent of sales, in 2014. Net income was up 36.1 per cent to $141.4 million ($2.04 per share), compared to $103.8 million ($1.50 per share) last year.

“In 2015, Stella-Jones earned the highest revenues and net income in its history while continuing to position itself for future growth,” said CEO Brian McManus. “The company’s continental production network once again expanded through strategic acquisitions, thus enhancing its already well-established role as a leading source and reliable supplier of treated wood products. By rigorously adhering to its business model and maintaining a relentless focus on maximizing network efficiency, Stella-Jones continues to create value for its shareholders.”

The acquisition of Ram Forest Group Inc. and Ramfor Lumber Inc. on Oct. 1, 2015 contributed sales of $14.8 million in the fourth quarter. Stella-Jones also benefitted from the weak loonie, with the value of U.S. dollar sales increasing by C$41.6 million compared to 2014. Excluding those factors, fourth-quarter sales would have been up by only 3.9 per cent.

Looking ahead, Mr. McManus described the outlook for 2016 as “healthy”. He added: “In the railway tie market, North American railroads will continue to maintain the continental rail network, as operators constantly seek optimal line efficiency. As for utility poles, lower resource prices continue to create headwinds, mainly through a decrease in demand for special projects, while regular maintenance demand is expected to hold.”

The company announced a 25 per cent increase in the quarterly dividend, bringing it to $0.10 per share ($0.40 per year). The new rate will apply to the payment due on April 29 to shareholders of record on April 1. At the current price, the stock yields 0.9 per cent.

My only concern is that the shares are looking a little expensive right now with a trailing p/e ratio of 22.4. You may want to monitor the stock and buy on a pullback. Ask your financial adviser if it is suitable for your account.

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca.

Follow Gordon Pape on Twitter at twitter.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney