SJ - Stella Jones

[wisowis]

Quickie of an idea, thoughts welcome. Stella-Jones is a Canadian company that has 3 main business segments:

• Residential lumber - 26%
• Railway ties - 29%
• Utility poles - 25%

 

+'s

• Already in their target leverage range (currently net debt to EBITDA ~2.2x, target range 2-2.5). 
• Last 2 years they've spent their capital on buybacks (historically spent on acquisitions), in addition to their dividend. Repurchases will continue.
• Valuation at ~10x EV/EVITDA LTM, ~8.3-8.8 NTM based on guidance. Lower end of historical range. Their guide is $450-480 million in EBITDA, on current EV of ~$4 billion.

 

• Residential lumber sector has been hot of course. Grew >100% yoy in Q1. Increase was 70% pricing/30% volume. Won't argue whether pricing will come down (several threads discuss this point already), but I think demand will remain high for medium-term.
• Sales growth was 20% in 2020, guiding 15-20% this year ex-currency headwinds.
• Railway ties guidance is ~flat y/y, based on announced maintenance programs. This segment is very steady over the long-term. However, there is potentially growth in this sector 12-24 months out. From Q1 call:

 

Quote

"What's encouraging is that the major railroads in North America are posting great results. Traffic is increasing on the rail network, which means more usage. It will lead to more maintenance. Also very much optimistic about infrastructure spend in the next year or 24 months in the U.S. whenever that build comes through. So I think if you look beyond 2021, the future looks relatively encouraging for the railway tie business."

 

• Utility poles guiding to MSD to HSD growth y/y. Potential optionality again if Biden's infrastructure plan gets passed. From Q1 call:

 

Quote

 

"What I've read so far, there's several areas in the current bill that offer opportunities for us to just talk about rail, railtrack maintenance and upgrades. It does talk about construction of new roads and road repair. Often when you roll the highways are fixed, utility poles are either changed out or added in the case of new construction.

There are discussions about bringing broadband to rural areas. There's also a lot of talks or descriptions about encouraging green energy initiatives, which would obviously you would need some sort of electrical grid to bring the power into the network.

So I see multiple aspects in the current bill where we could benefit from. Now we'll have to wait and see what the final bill looks like. I believe there's still a lot to be done until we see a final bill. But I think it is most likely encouraging for our future business given the large presence that we have in both ties and pole. We should at one point benefit from it."

 

 

 

-'s

• Their guidance includes 90 million hit because of USDCAD weakening to 1.27. Well, it's already weakened further than this (currently 1.22). All numbers above are CAD, and 68% of their sales are in the US.
• This company is viewed by many as a broken compounder. Founding owner-operators no longer involved and sold their remaining stake in 2018. Many funds proceeded to sell.

[Xerxes]

I haven't heard of this name in a long time, indeed a broken compounder ...

Thanks for putting it on radar

[DooDiligence]

Overall this call gives a good summary of the business. The only questions asked were by the moderator / Laurentian analyst. Interesting questions & she's pretty easy on the eyes. There was actually one other individual who asked a question, but it was obvious the guy hadn't bothered to read the latest MD&A.

 

The only thing they didn't touch on was currency exchange, which was something I really wanted to hear about.

 

Vachon did talk briefly about the KC Southern + CN deal & mentioned that CN owns a timber treatment plant that they'd be interested in buying if KC deemed it non-core & wanted to sell. Overall, I like the guy, but there again, I wish he would've talked a bit about the $90M hit from currency exchange, especially in light of this statement in the MDA.

 

"The Company is exposed to currency risks due to its export of certain goods manufactured in Canada. The Company strives to mitigate such risks by purchases of raw materials denominated in U.S. dollars for use in its Canadian manufacturing process. The Company may also use foreign exchange forward contracts to hedge contracted net cash inflows and outflows of U.S. dollars. The use of such currency hedges involves specific risks, including the possible default by the other party to the transaction or illiquidity. Given these risks, there is a possibility that the use of hedges may result in losses greater than if hedging had not been used."

 

I'm probably just being cynical but I read the bolded part as "we may experience significant losses because we have a dumbass running our currency hedges."

 

Other than that the video just added color to what @wisowis laid out previously.

 

I like it (despite the sleight problems) & can't understand why there weren't any other analysts on this call.

 

 

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On another note; Brian McManus is now the CEO of Uni-Select .

 

edit: forgot to say thanks to @wisowis for the idea.

Edited June 17, 2021 by DooDiligence
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