Stantec is updated and rated (lower) Buy at $31.01.
I was tempted to rate it higher due to a potential turn-around in 20019 but the numbers don’t support that just yet.
The story of Stantec is that it has been a successful growth-by-acquisition company for many years. As is often the case, the stock price did not always track the earnings per share progress.
The stock price had reached a then high in 2007. The stock then fell with the financial crisis and then bumped along and did not surpass the 2007 high until 2012. The price then rose rapidly until 2014. The price then fell with the energy recession conditions in Alberta. Since 2016 earnings and the stock price have been hampered by problems in its Construction Services division which it acquired in mid-2016 and which was known to be a riskier operation. Stantec also has reported increased price competition in its core consulting business as well as project execution difficulties.
Now, Stantec has sold the problematic Construction services division (at a loss) in early Q4. This should lead to strong earnings growth in 2019, certainly on a GAAP basis and probably also on an adjusted earnings basis.
I had expected a material increase in earnings per share due to the acquisition of MWH in 2016 which was a very large acquisition. Clearly the Construction Services division is a large part of the reason that the expected earnings growth did not happen. It may be too, that the remainder of the MWH acquisition has been difficult to integrate or not as profitable. Or it may be that the profits from MWH will begin to show up more strongly in 2019.
Meanwhile Stantec is in a cyclic business and the recent lower oil prices, especially in Alberta, are a headwind.
There has been some insider buying as recently as this past week which is a positive indicator.
Overall, there are always uncertainties. Stantec may be about to achieve strong earnings per share growth after four years of difficulties. Certainly if it can achieve the 15% annual revenue growth that ti targets the stock price should do well.
Its financial picture may look brighter when it reports its Q4 numbers early next year because the losses in Consulting Services will then be classified as discontinued operations and the achieved 2018 profit of its ongoing businesses will be more visible.