Stella Jones (TSX : SJ) is a publicly-listed lumber and wood production company based in Saint-Laurent, Quebec. But this isn’t your average lumber company, it has key footholds in important sub-industries of the classic wood cutting business, making comparisons to other lumber and wood companies hard to make.
Utility poles (40% of sales) increased to $1,227m in 2022 up from $741m in 2018, growth of approximately 65%. Maintenance and innovations in fire-resistant utility poles are key drivers of growth. More frequent natural disasters or extreme weather could boost demand.
Railway ties (24% of sales) increased to $750m in 2022 up from 666 in 2018, growth of 12% over the 5 year period. According to an investor presentation from Stella-Jones, 90% of North American rail infrastructure is built on wooden cross ties. Deepening rail links across the US from recent infrastructure legislation could boost demand.
Residential lumber (24% of sales) increased to $774m in 2022 from $475m in 2018, growth of 62% over the period. Products ranging from treated lumber and wood accessories to composite decking. 70% of customers are Big Box retailers and the other 30% through a dealer network. Premium-quality as well as inventory stocking and speed to market are Stella-Jones’ strengths.
Logs and lumber (4% of sales) and industrial products (4% of sales) make up the rest of sales.
Guidance:
Improvements in EBITDA margins from 14.3% in 2019 to 15.7% ttm Q2 2023 have brought in more earnings for Stella-Jones. Its target for 2023-2025 is 16%
Sales are forecasted to be $3,600m in 2023-2025 up from $3,189m ttm Q2 2023
Projected compound annual growth rate (CAGR) for utility poles is estimated at 15% over 2023-2025.
$500m returned to shareholders through dividends and share buybacks.
Market Cap of $3.75b, a reasonably sized company with room to grow.
Trailing P/E ratio: 14.6. According to Simply Wall St. the average Price to Earnings ratio for the lumber and paper industry is 13, up from 6 in first quarter.
A look at competitors (West Fraser Timber, Interfor, Canfor, Western Forest Products), 3 out of 4 have negative earnings, of the outlier who is still profitable it has a P/E ratio of 76. 4 out of 4 have had negative returns from 52-weeks ago (ranging from -8% to -42%) compared to Stella’s 61%. 4 out of 4 have more attractive Price to Book and Price to Sales ratios than Stella-Jones but lack its strengths outside the classic lumber products these competitors offer.
SJ’s core areas of business are stable even through negative outlook scenarios. I suggest keeping tabs on this one and waiting for its share price to soften. It is trading near a 52-week high and its valuation looks a little frothy compared to industry peers.
*I own and recommend shares of Stella-Jones*
Devlin Demontigny 