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

Has Stella-Jones Inc. (TSX:SJ) finally lost its shine? Should you buy, hold, or sell?

| More on:

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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng owns shares of STELLA JONES INC.

More on Dividend Stocks

money cash dividends
Dividend Stocks

Want Passive Income: Hold This Canadian Dividend Growth Stock Forever

Passive income seeking investors can now buy shares of dividend-paying blue-chip companies at a discount, such as Brookfield Infrastructure.

Read more »

Senior Couple Walking With Pet Bulldog In Countryside
Dividend Stocks

Retirees: 2 On-Sale TSX Dividend Stocks to Buy Now for Passive Income

These top TSX dividend stocks now offer 6% yields.

Read more »

Payday ringed on a calendar
Dividend Stocks

New Investors: The 3 Best TSX Dividend Stocks for Monthly Cash

New investors looking for monthly dividend cash are in luck! Here are three attractive Canadian dividend stocks for growth and…

Read more »

A worker gives a business presentation.
Dividend Stocks

3 Dividend Stocks You Can Safely Hold for Decades

Here are three of the safest Canadian dividend stocks you can buy right now to hold for decades.

Read more »

Red siren flashing
Dividend Stocks

Buy Alert: This Energy Stock Is Unstoppable After Strong Results

Tourmaline Oil (TSX:TOU) beat earnings and looks unstoppable.

Read more »

Female hand holding piggy bank. Save money and financial investment
Dividend Stocks

2 Safe Dividend Stocks to Beat Inflation

Canadian investors, young and old alike, can cope with or even beat inflation by owning two safe dividend stocks.

Read more »

Dollar symbol and Canadian flag on keyboard
Dividend Stocks

2 Canadian Dividend Stocks (With +6% Yields) You’ll Regret Not Buying at These Prices

TSX dividend stocks such as TC Energy and TransAlta Renewable are well poised to deliver consistent returns to long-term investors.

Read more »

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

2 TSX Stocks With Market-Beating Potential

Even in the current economic environment, long-term investors have a great chance of beating the market. Stocks like CN Rail…

Read more »