The Motley Fool

Why Stella-Jones Inc. Shares Fell 7.5% on Monday

The huge price drop of Stella-Jones Inc. (TSX:SJ) shares on Monday shows that even great companies can experience bumps along the way. Stella-Jones shares fell nearly 13% to its 52-week low at the $37 level.

At times like this, shareholders shouldn’t panic; instead, look at why the shares are down and perhaps even buy more at a lower price.

Evidently, some investors thought the manufacturer and supplier of railway ties and utility poles was a good deal, as the shares bounced from the low and closed higher at $39.50.

Is Stella-Jones really a good value right now? First, let’s explore the reason for its drop.

Why Stella-Jones shares fell more than 7%

Stella-Jones gave preliminary results for 2016 and indicated that it had a weaker fourth quarter than in 2015. Particularly, Stella-Jones expects its Q4 2016 revenue to be $340-342 million (about 4.6% lower) and its operating income in the same period to be $27-29 million (about 42% lower).

However, that’s not the whole picture. On a full-year basis, Stella-Jones still expects revenue and net income growth for 2016, which will mark its 16th consecutive year of growth!

Specifically, the company anticipates sales growth of nearly 18% to almost $1.84 billion and operating income growth of about 5.8% to $232-234 million.

railway ties

Moreover, the issue, which caused lower sales and profitability in Q4 2016, has already been discussed by management before.

In Q3 2016, management mentioned lower railroad-tie demand at the end of 2016 and potentially in early 2017.

Come to think of it, Stella-Jones had a stellar year in 2015, in which its earnings per share were 36% higher than in 2014. So, naturally, it was more difficult to beat that growth rate last year.

Valuation

Stella-Jones won’t report the financial results for Q4 2016 and the fiscal year 2016 until March. If we assume a very conservative earnings-per-share growth of 6% for the year, then the 7.5% drop brings the shares to a price-to-earnings ratio of about 18.3.

A great long-term performer

Despite the 7.5% drop on Monday, Stella-Jones has still appreciated more than 350% since 2011, which equates to an annualized appreciation of 28.8%.

From 2011 to 2016, its earnings per share increased by 137%, equating an annualized growth rate of 15.5% (again, assuming a 6% growth for 2016), and its dividend per share tripled, equating an annualized growth rate of a little more than 20%.

Yet its payout ratio remains less than 17%. So, there’s lots of room for it to grow its dividend.

Conclusion

If anything, Stella-Jones’s +7% drop to below $40 is a good opportunity to buy a great long-term performer at a lower price.

Analysts at Thomson Reuters have a low 12-month price target of $50 and a mean target of $52.90 on the stock. This implies the shares have upside potential of at least 26% from current levels.

The 10 Best Stocks to Buy This Month

Renowned Canadian investor Iain Butler just named 10 stocks for Canadians to buy TODAY. So if you’re tired of reading about other people getting rich in the stock market, this might be a good day for you. Because Motley Fool Canada is offering a full 65% off the list price of their top stock-picking service, plus a complete membership fee back guarantee on what you pay for the service. Simply click here to discover how you can take advantage of this.

Click Here to Learn More Today!

Fool contributor Kay Ng owns shares of STELLA JONES INC.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.