Stantec: Industry Tailwinds Vs. Valuation Headwinds

Core Viewpoint - Stantec is identified as a hidden gem in the Industrials sector, specializing in sustainable infrastructure and building projects, with strong growth in revenue, earnings per share, and EBITDA, alongside consistent dividend increases [1][10] Business Performance - Stantec has achieved double-digit growth in revenue, EPS, and EBITDA over recent years, with a revenue increase of 12% year-over-year in Q1 2024 and a 17% increase in Q2 2024 [5][6] - The company reported its largest project backlog in its history at $7.2 billion, indicating strong future demand for its services [4][10] - Strategic acquisitions have contributed significantly to growth, including ZETCON in Germany and Morrison Hershfield in Canada, which have helped mitigate labor shortages [5][6] Financial Metrics - The forward P/E ratio is currently at 26x, which is higher than the sector median of around 22x, but is expected to revert to historical averages if growth targets are met [1][7] - Stantec's market capitalization has increased from $2.4 billion to approximately $9.5 billion over the past five years, reflecting a 275% increase in share price [10] - The company has raised its net revenue guidance for 2024 to a low end of 12% and increased its EBITDA margin target to 16.5% [6] Business Model - Stantec operates across five core segments: integrated building/architectural solutions, energy solutions, environmental services, infrastructure solutions, and sustainable water resources, allowing comprehensive project management [3] - The company serves both public and private sector clients across North America and has a presence in international markets including the UK, Australia, Saudi Arabia, and the UAE [3] Investment Outlook - Analysts project strong EPS growth of around 15% annually through FY2026, with an average price target of $91.50, suggesting the stock is undervalued by approximately 14% [7][10] - Despite strong growth, the elevated valuation metrics keep Stantec on the watchlist for potential future investment opportunities [10]