In order to evaluate your understanding of the use of financial statement in dec
ID: 2798477 • Letter: I
Question
In order to evaluate your understanding of the use of financial statement in decision making, you are asked to assume the role of a financial analyst. In this role, you will review the profitability, stability, solvency, and potential for growth of a publicly held company listed on the NYSE or NASDAQ. Your analysis and research can be viewed as a form of storytelling. What you will may want to research Industry information A company profile Any update news that impact's your company, industry etc. Historical stock price information Annual reports of 10-K filings for the last three years Rivalry among existing firms Threat of new entrants Threat of substitute products Bargaining power of customers Bargaining power of suppliers Overall evaluation of industry You are to provide a short report on the company. In the report you will provide some background information on the company of your choice. You will also focus in on why you would like to invest in the company and identify/explain your reasons whyExplanation / Answer
Stantec, Inc. (STN)
RECOMMENDATION: BUY | TARGET PRICE: $38.00 | CURRENT PRICE: $34.15
STN, formerly known as Stanley Technology Group Inc., was founded in 1954 and changed its name to Stantec, Inc. in October 1998. Through 60 years of operations principally in Canada, and after more than 100 acquisitions, STN has become one of the largest companies in the North American design, architectural and engineering markets. The MWH Global acquisition in 2016 was the largest in STN’s history and will move it toward its goal of being a top 10 global design firm. Despite strong 5-year CAGR of 18% in net revenue and 12% in EBITDA, STN still has strong drivers of long-lasting growth in the future. Currently, the stock is trading in the C$30 range and we think that it is an attractive growth opportunity with more than 10% upside potential. On a discounted cash flow basis, we recommend the STN stock with a BUY rating and a target price of $38.00.
Key Investment Rationale:
Strong top-line growth. STN has grown its business aggressively through M&A - completed five acquisitions in 2016 and six in 2015, strengthening its domestic presence while expanding its global reach. The acquisitions boosted gross revenue – posted a total increase of 49.5% in FY16 (out of which, 53.4% was through acquisitions). Additionally, the MWH acquisition expanded many areas of its legacy Consulting Services business and positioned it as a global leader in the Water sector. A strong top-line growth ensures good prospects for margins expansion and cash flow improvement.
Solid outlook. In its recent 2Q17 conference call, management remained bullish on the future outlook. Some of the key highlights: long-term target of 15% gross revenue CAGR which will come through a combination of acquisition growth and organic growth, strong gross revenue backlog of $3.9 billion, etc.
Expanding global footprint. STN has a great acquisition and full integration strategy over the past few years. Though management acknowledged that the U.S. still represents a big opportunity for STN as they continue to infill its presence there but also stated that they will start to identify targets in Australia, New Zealand, and the UK.
Favorable macro environment. Management as well as market anticipates continued economic improvement in infrastructure spending in Canada and the United States. Additionally, they continue to see spending in water and wastewater and strong spending growth in the U.S. transportation sector. All these factors will be plus points for the company’s performance going forward.
Stock Details
Market cap
:
$3.89 billion
Stantec 52-week chg
:
14.28%
S&P500 52-week chg
:
16.66%
Stantec 52-week range
:
$28.74-$36.85
Source: Yahoo Finance
Financial Summary (C$ millions)
FY16
FY17E
FY18E
Sales
3,098
3,560
4,110
Growth (%)
30.5%
14.9%
15.4%
EBITDA
352
463
529
Margin (%)
11.4%
13.0%
12.9%
Net income
181
214
245
EPS (C$)
1.69
1.99
2.29
ROE (%)
9.2%
9.9%
10.4%
ROCE (%)
6.0%
7.2%
7.8%
FCF
227
190
189
Net Debt
810
673
538
Net Leverage (x)
2.3
1.5
1.0
EV / Sales (x)
1.5
1.3
1.1
EV / EBITDA (x)
13.3
9.8
8.4
P / E (x)
21.5
18.2
15.9
Source: Company reports and estimates
Performance – STN vs. S&P 500
14%
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
Sep-16
Oct-16
Oct-16
Nov-16
Dec-16
Dec-16
Jan-17
Feb-17
Mar -17
Mar-17
Apr-17
May-17
May-17
Jun-17
Jul-17
Jul-17
Aug-17
Sep-17
STN
S&P 500
Source: Yahoo Finance
Financial Overview of company:
Solid financial performance. Over the past few years, STN has showed continued profitability and growth. In 2016 – net revenues increased 20%, EBITDA increased 15% and adj. net income increased 4%. In 1H17 also, revenues increased 26% and EBITDA increased 25%.
Net Revenue
Adj. EBITDA
3,500
3,098
400
352
3,000
350
305
296
300
2,500
2,374
261
millions)
1,554
2,075
millions)
200
250
221
2,000
1,832
in
1,500
in
150
(C$
(C$
1,000
100
500
50
0
0
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
Source: Company reports
Positive cash flows. Free cash flow (FCF) has grown from $164.5 million in FY14 to $227.4 million in FY16. Additionally, the company generated positive OCF in all recent years. STN has been using a mix of cash flows and financing activity to cover the gaps for investment activities (i.e. acquisitions & capex plans). Going forward, management is confident that internally generated cash flows, supplemented by borrowings if necessary, will be sufficient to cover its normal operating and capital expenditures.
Net leverage under control. STN’s financial covenant allows a maximum net leverage of 3.00x (as per annual report 2016). Net leverage for FY12-16 has been below this range. Additionally, STN has always maintained a balanced capital structure by issuing common shares to facilitate acquisition growth or to reduce borrowings. This was the case for the MWH acquisition, where it financed the acquisition through a mix of debt and equity.
Risk factors:
STN does have risk factors which include – Economic pressures and uncertainties, volatility in foreign exchange rates, volatility in energy and commodity prices, changes in private industry spending, and changes in public infrastructure funding. Additionally, there can be integration risks as the company follows acquisitive growth strategy.
Key highlights - Consulting Services gross revenue
Source: Company report
SWOT Analysis
Strengths:
Weakness:
Opportunities:
Threats:
Porter Five Forces Analysis
Threats of New Entrants: LOW
Bargaining Power of Suppliers: MEDIUM to
HIGH
Bargaining Power of Buyers: LOW
Threats of Substitutes: LOW to MEDIUM
technological advances, aging infrastructure, etc
Rivalry among Competitors: HIGH
consulting, boutique consulting, engineering, public agency, research, and other professional services firms
Market cap
:
$3.89 billion
Stantec 52-week chg
:
14.28%
S&P500 52-week chg
:
16.66%
Stantec 52-week range
:
$28.74-$36.85
Source: Yahoo Finance
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