Stantec Inc. (TSX:STN) is a top-tier global design firm that provides professional consulting services for infrastructure and facilities projects. This is an industry that typically has volatile growth rates. Stantec has posted lacklustre and even negative growth rates since 2018. But in 2022, things changed. Stantec’s revenue increased 20% and its stock price has been on fire.
Let’s take a look at the reasons for Stantec stock’s outperformance.
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Major infrastructure trends create strong market fundamentals for Stantec
Actually, Stantec’s stock price has been on fire for more than three years now. Up 144% since the end of 2019, Stantec stock has been benefitting from some major secular trends well before its financials did.
You see, Stantec provides infrastructure-related services, which include engineering, technological know-how, and innovation, all with the goal of helping clients address the major infrastructure issues that they face. These issues include aging infrastructure, demographic and population changes, climate change, water scarcity, and much more. Unfortunately, each one of these problematic issues has been building up over the years.
Today, governments cannot ignore them any longer. There is a sense of urgency, and Stantec is feeling it.
Stantec’s Q2 results break records
On the company’s second-quarter conference call, management characterized the state of the business today. According to the CEO, Stantec is “delivering some of the highest organic growth rates ever with market fundamentals and demand as strong as I’ve ever seen them in my 35-year career”.
This can be seen in Stantec’s backlog, which came in at $6.6 billion, or 11.4% higher, than December 2022. It can also be seen in the 14.5% increase in net revenue to $1.3 billion, and the 19.3% increase in adjusted EPS. With this, management is very optimistic about the second half of 2023 and has raised its full-year guidance.
It’s worth noting that this strong momentum has resulted in double-digit growth rates that management feels are unlikely to be maintained, as growth is now measured off of a higher base. Yet, management maintains that they see three to five years of solid fundamentals for the business.
Valuation
Let’s take a look at Stantec stock’s valuation. Trading at 25 times this year’s expected earnings and 22 times next year’s, Stantec stock is clearly not as attractively valued as it used to be. However, the business is stronger than ever, and there are many opportunities ahead.
For example, sustainability is one area where a lot of money is being put to work. Simply put, sustainability targets are becoming increasingly ambitious as the world comes to terms with the realities of climate change. As a result, infrastructure must be retrofitted in order to meet these targets. Stantec operates in more than 15 different industry verticals all over the world. These industries, such as the oil and gas industry and mining industry, have to put a lot of thought and money behind their new sustainability goals. This will support growth at Stantec for years to come.
Also, Stantec’s growth strategy is one of organic growth as well as growth through acquisitions. This has played out very well for Stantec, as the company has a good track record of successfully integrating its acquisitions, driving efficiencies and returns. Today, the M&A market is very robust, with thousands of firms on the market. Thus, it’s likely that Stantec will complete yet another acquisition in the near future, further driving growth.
The bottom line
In closing, I still have a positive view on Stantec stock. I think that the driving fundamentals for its business will continue to be strong for years to come. I also think that the company’s operational, strategic, and financial expertise will continue to be evident in its results in the coming years.
