In the past few weeks, I’ve written multiple articles about Stella-Jones Inc. (TSX:SJ) indicating that it was priced at a decent valuation. On Monday the stock popped 5%. Is more upside coming?

First, here’s an overview of the business for you to determine if it’s a company you’d like to own.

The business

Stella-Jones has a leading position in producing and selling pressure-treated wood products and related services in North America. Last year almost 80% of its sales were railway ties and utility poles. Its main clients are railway companies, electrical utilities, and telecoms, which provide necessary infrastructure for the economy and stable business for Stella-Jones. One of Stella-Jones’s growth areas is residential lumber, which contributed 27% of its total sales in the second quarter.

Why did its share price pop 5%?

Stella-Jones didn’t release any material news that could have caused the pop. However, the consensus analyst opines and fundamental data indicates that the stock is priced at a decent value.

For example, on Monday Desjardins upgraded Stella-Jones from a “hold” to a “buy.”

Across seven analysts, Thomson Reuters rates Stella-Jones as a “buy” and has a mean 12-month price target of $54.80 per share. This indicates the shares are still discounted by 16% despite of Monday’s 5% pop. More importantly, Reuters rates Stella-Jones to have strong earnings and fundamental with a history of low volatility.

Some analysts even believe Stella-Jones will grow at an average rate of 25% per year in the near term. That’s not farfetched given that even in 2008 during the last recession, in which many companies posted negative earnings, Stella-Jones still managed to grow its earnings per share by 10%.

At $46 Stella-Jones trades at about 18.3 times its estimated 2016 earnings, which puts the stock in a fair to discounted valuation depending on if you use a more conservative growth rate in the teens or the 25% growth rate mentioned earlier.

Great performance

In the past five years, Stella-Jones has appreciated 400%, which greatly outperforms the market, which returned over 20% in that period.

In the past year, Stella-Jones has matched market returns in terms of price appreciation. Both Stella-Jones and the market have returned 5% in capital appreciation. However, the market beat Stella-Jones in the other returns component: the dividend. As a result, the market’s total returns were about 8%, while Stella-Jones’s were below 6%.

However, as mentioned in the previous section, Stella-Jones’s sideways action in the past year brought the shares to decent valuations, which is an opportunity to buy for a long-term investment.

Stella-Jones has had a track record of successful acquisitions. In the last five years it has posted a return on equity (ROE) of 16-18% every year. And in the past 10 years its ROE was between 14% and 24%.

The ROE calculates how many dollars of profit a company generates with each dollar of shareholders’ equity. The fact that Stella-Jones has consistently maintained a high ROE in the past decade indicates it’s an excellent capital allocator.

Stella-Jones has paid a growing dividend for 11 years. Although it yields less than 1% today, in the past five years the company managed to grow its dividend per share at a compound annual growth rate of 27.5%, which is a rare achievement.

Currently, Stella-Jones maintains a low payout ratio of about 16%. However, the company is likely to keep its payout ratio low if it continues to find excellent acquisition opportunities to grow the business.


At $46, Stella-Jones trades in a fair to moderately undervalued territory. So, the shares are likely to be higher a year from now barring macro events such as a recession coming into play.

However, given Stella-Jones’s quality and stability, it should really be a company to buy at decent valuations and hold for a very long time.

If you’re looking for above-average returns with most returns coming from capital appreciation, Stella-Jones is a great option for long-term investors. And it will be an even stronger buy on any dips.

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Fool contributor Kay Ng owns shares of STELLA JONES INC.