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Stella-Jones Inc. (TSX:SJ): Is it a Buy, Hold, or Sell?

Stella-Jones Inc. (TSX:SJ) is a well-managed company with consistently high returns. The stock has appreciated about 10% in the last 12 months and is trading near the midpoint of its 52-week trading range. Should investors consider buying the quality stock today?

Let’s first take a look at its business.

A business overview

Stella-Jones is the North American leader in manufacturing pressure-treated wood products. It has 37 wood-treating facilities across 16 U.S. states and five Canadian provinces.

Stella-Jones’s primary products are railway ties and utility poles. So, its key customers include America’s largest railroads, telecom providers, and electrical transmission utilities.

Consistent profitability

Stella-Jones’s returns on equity (ROE) and returns on asset have been at least 14.9% and 7.7%, respectively, every year since 2008. In fact, its 2008 ROE was the highest in the period, which indicates that it is a recession-proof business.

Here’s more evidence that it’s recession-proof. The business increased its earnings per share at a double-digit rate in 2008 and continued growing its earnings per share every year through 2016.

railway ties

Putting price and value in perspective

Stella-Jones had an exceptional year in 2015 with earnings-per-share growth of 36%! So, it was natural when growth tapered off in 2016 and demand tapered off in 2017, which led to earnings decline for that year.

When a stock has an exceptional year, investors should question how much upside is left in the near term and be careful of not getting swept in by the euphoria.

Stella-Jones stock appreciated 33% in 2015. At the start of the year, it traded at a price-to-earnings (P/E) multiple of about 21.8, which wasn’t exactly a bargain. By the end of the year, the stock’s P/E expanded to about 25.7. When growth tapered off, the stock fell as much as 25% from a high in 2015 to a low in 2017.

In early 2017, the stock traded at a P/E of about 18.1 and at about $39 per share, which was a reasonable valuation to pick up some shares.

Is the stock a buy, hold, or sell today?

At about $48 per share, Stella-Jones trades at a P/E of about 22.2, while it’s expected to increase its earnings per share at a rate of 15-17% for the next two years. So, the stock is reasonably valued here and is considered a hold.

In the past, there have been times when Stella-Jones experienced slow, single-digit growth. Those have been good times to buy, though they’re hard to come by.

In the last recession, the stock fell to a low P/E of 6.2, despite business fundamentals remaining strong with earnings growth. That was a rare opportunity to buy the stock, which has delivered annualized returns of 33% since then.

Investor takeaway

Stella-Jones continues to grow the business in a steady-Eddie way. It recently had two tuck-in acquisitions, and management expects that sales and operating margins will improve this year.

The stock is reasonably valued for a hold. Investors looking to buy the stock should consider scaling in at a forward P/E of about 18 or paying a maximum price of about $42 per share for the stock. If the stock trades at a single-digit P/E again (a maximum share price of about $23), it would be the time to back up the truck!

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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 has no position in any of the stocks mentioned.

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