May 27, 2012 Comments

Stantec Inc. is updated and rated (lower) Strong Buy at CAN $31.25 or U.S. $30.15

Stantec has been growing its earnings per share relatively steadily for many many years and appears set to continue to do so, although probably at a somewhat lower rate than in the past. It seems like a good bet to forecast that the share price will be double in ten years.

Stantec’s history can be used to dispel several stock market myths.

Note that Stantec’s stock price has risen 1,150% from $2.50 to $31.25 over the 13 years since it was first added to this web-site in September of 1999 (This web-site was started in June of 1999). At that time, Stantec’s earnings per share were about 25 cents per share (split adjusted) and now are $2.46 per share (on an adjusted basis where a recent goodwill impairment is added back and a small amount of amortization of customer lists and purchased backlog is also added back).

Myth one: It is popular among relatively uninformed investors to proclaim that only dividends matter. This is patently false. It is true that a strategy of investing only in dividend stocks can be a very good strategy. But it is completely wrong to suggest that there can be no return without a dividend. In fact a dividend is neither a necessary nor a sufficient condition to insure a good return. Stantec rose 1150% in 13 years before only recently implementing a small dividend. Any suggest that the returns from the capital gain are some how “paper” or not real until an investor sells is completely bonkers and shows a lack of knowledge. Even more dramatically Warren Buffett has taken Berkshire shares from $15 in 1965 to $120,000 today and no dividend has been paid (actually there was a single dividend of 10 cents in 1967 when Buffett controlled the company but was not acting as CEO). To suggest that Buffett and the other Berkshire shareholders have only made “paper” gains is sheer madness.  On the other side of the ledger, the fact that Yellow (pages) media was paying a hefty dividend not so long ago did not stop that entity from being an abysmal investment.

Myth two: In order to really prosper a company has to have some competitive advantage. Stantec does not appear to have enjoyed any particular inherent competitive advantage over the years. It was basically management skill that led to its success.

Myth three: Organic growth is what really counts, growth by acquisition is not as valuable. Well it is certainly true that often growth by acquisition does not work out well. (See Nortel). It is easy to destroy value by over-paying in acquisitions. But Stantec has grown largely by acquisition and has achieved exceptional success. Not only has it grown net income hugely, but much more importantly it has gown net income per share hugely.

I suspect that this is a company that Warren Buffett would look upon with favor.


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