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Stantec Inc. (TSX:STN): A Great Value Pick?

The world of architecture and consulting engineering isn’t a familiar one to most people. In light of this, it may seem surprising that Stantec Inc. (TSX:STN)(NYSE:STN) is so well known. But if we peel back the layers and examine the underlying business, we see that Stantec just might be Canada’s best architecture, design and engineering firm. This makes the company worthy of recognition–and equally worthy of consideration as an investment.

Stantec started its history in Edmonton in 1954 as a one-person firm. Since then it’s grown into global powerhouse with over 400 locations and more than 22,000 employees.

That’s impressive growth for a company that started as a sole proprietorship. Just as impressive is the growth in the company’s stock (although less so in recent years). Trading for just 0.64 cents in August of 1996, Stantec currently trades at $33.85. This 22-year return makes the stock a ten bagger many times over. But more stagnant returns in recent years have some wondering whether Stantec has lost its touch.

Is Stantec one of Canada’s best consulting stocks or are its best days behind it?

It helps to start with the company’s valuation.

A solid value

Stantec is a pretty solid value stock by many metrics. It has a decent trailing P/E of 20.11 and a very good forward P/E of 15.46 (based on five-year expected earnings). The price-to-book ratio of 1.99 is a little higher than most value investors would like, but below average for the TSX at the moment.

Most impressive of all is the company’s PEG ratio. Based on five-year expected earnings, it stands at just 0.99. This means that Stantec is priced very low vs. expected earnings in the near-term.

Prospects for expansion

Stantec is a globally diversified firm. It has locations in seven countries worldwide, including Canada, the United States, the United Kingdom, United Arab Emirates and Qatar. Almost half of its revenue comes from south of the border. And recent acquisitions show that the company is looking to expand even more.

ESI Consulting Ltd. is a UK-based environmental engineering company that was recently acquired by Stantec. It mainly works on projects in its country of origin, which means that this acquisition increases Stantec’s presence in the United Kingdom. Occam Engineers Inc., a Southwest U.S. firm, is another recent Stantec acquisition. It has many offices in New Mexico and one in Texas, and works on projects mainly in these areas. The acquisition increases Stantec’s U.S. presence significantly.

All in all, these acquisitions show that Stantec is looking to expand geographically and add to its revenue streams.

Bottom line

By most metrics, Stantec is a decent value pick. It’s priced reasonably low compared to earnings, and is extremely cheap when factoring in both net income and growth. The company’s financial performance metrics aren’t amazing, but that may be acceptable when its stock is priced so low. The company does pay a dividend, which management recently raised by 10%. The dividend yield at the time of this writing was 1.61%.

My advice?

If you own shares in Stantec, hold. But if you have cash you’re eager to invest, it might be wise to look for options with more potential upside.

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Fool contributor Andrew Button has no position in any of the stocks mentioned.

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