Update: Stantec's Q2 Earnings - Strong Sales And EPS Growth Continues, Guidance Confirmed

| About: Stantec Inc. (STN)


Revenue increased 11.8% Y/Y, of which 3.7% was organic, mainly on continued oil & gas sector strength. Diluted EPS rose 20.5% Y/Y, dividend unchanged sequentially but up 7% Y/Y.

My thesis is only one month long but already shows signs of strength as STN posted very solid quarterly results and its stock gained over 2% in a month.

I confirm my long STN thesis and see it reaching a target price of $76.5 within a year, proving an ~18% upside and further 10% to 15% per year afterwards.

Stantec, Inc. (NYSE:STN) reported solid Q2 2014 earnings results (press release, earnings call). Gross revenue increased 11.8% Y/Y to C$633.8M. Of that, just 3.7% was organic growth. I would like to see a bit higher organic growth as I target a 5% organic Y/Y improvement in the long run. However, the organic growth is 4.7% year-to-date, which is much more positive. The oil & gas sector continued to be the growth driver, along with community development and water sectors. EBITDA jumped 18.1% to C$78.2M on slightly higher gross margins in the buildings and infrastructure business as well as lower SG&A costs. Diluted EPS increased 20.5% to C$0.94 from C$0.78 a year ago. Backlog grew 12.5% on project wins but was helped by the recent acquisitions. The backlog looks strong and promises continued solid performance for the second half of 2014. STN also declared a quarterly dividend of C$0.185, unchanged from the previous quarter, but up 7% Y/Y. Stantec continued acquiring companies at a rapid clip, as expected by my thesis, and closed 4 acquisitions in Q2, JBR Environmental Consultants, Inc.; SHW Group; Wiley Engineering, Inc.; and USKH Inc.

Segment breakdown shows that buildings business operating unit continued to secure projects and grow backlog. Energy & resources unit experienced growth in all sectors Y/Y, notably in oil & gas, although the pace of organic growth in this sector has tempered, as expected, but still providing opportunities for future growth. Within the infrastructure unit, water sector remains strong. In the U.S., the aging infrastructure and regulatory requirements drive increased demand. Transportation sector in Canada remains stable but the U.S. growth slowed down in this sector. The management's outlook is a moderate to strong increase in organic revenue, with a target of approximately 5%. The outlook for the Canadian operations is moderate to strong organic growth, mainly based on private sector strength, stable public sector and continued activity in the energy market. Moderate growth is expected in the U.S. market on strengthening private sector. The U.S. market remains the top expansion opportunity for STN and the company plans to continue its acquisition strategy and organic growth. The international operations are a small segment but it is expected to grow strongly on higher activity in the Middle East.

My long STN thesis is less than one month old but the company is performing as expected and reported very solid results. The stock gained over 2% in less than a month in an environment of heightened volatility and small-cap weakness. I confirm my long thesis and the target price of $76.5 per share within a year, offering an ~18% upside from the current price of $64.5. I also see STN as a long-term holding with further 10% to 15% annual stock price upside potential going forward.

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