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Stella Jones (TSX:SJ) manufacturers and sells pressure-treated wood products in North America. It offers railway ties and timbers for railroad operators and utility poles for electrical utilities. The company was incorporated in 1992 and is headquartered in Saint-Laurent, Quebec.

The company has a price-to-earnings ratio of 17.02, a price-to-book ratio of 1.98, and market capitalization of $2.62 billion. Debt is very sparingly used at Stella-Jones, as evidenced by a debt-to-equity ratio of just 0.51. The company has excellent performance metrics with an operating margin of 10.8% and a return on equity of 12.18%.

The company has benefited from a strong North American economy, and demand has been solid for Stella-Jones’s pressure-treated wood railway ties, utility poles, and residential lumber. Total sales in 2018 surpassed $2 billion for the first time in the company’s history, reaching $2.1 billion, and rose by a 10.1%, primarily driven by pricing.

Railway tie sales grew modestly, as the company progressively passed on price increases to customers. Utility pole sales increased over 10%, driven by both strong demand and price increases, and residential lumber sales increased by 30%, driven primarily by pricing.

However, despite higher sales prices, the company’s increasing exposure to lumber costs has put downward pressure on margins as a percentage of sales, as price increases are passed through to customers. Lumber prices hit an all-time high in May 2018, followed by a sharp drop.

Management are excellent capital allocators. The company deployed cash flow primarily for acquisitions and capital expenditures and provided a return to shareholders in the form of dividends and share buybacks. Stella-Jones completed two acquisitions totaling $54.5 million to expand the company’s network.

The company acquired Prairie Forest Products in Manitoba, which manufactures treated wood utility poles and treated residential lumber, and Wood Preservers Incorporated in Virginia, a producer of marine and foundation pilings and treated utility poles. With these two additions, the company now operates 39 wood-treating plants and 12 pole-peeling facilities.

Over the past year, Stella-Jones has also invested $51.6 million to increase the capacity and efficiency of the company’s network. Capital deployed in Stella-Jones’s facilities in the United States has already started to bear fruit in the form of improved efficiencies.

The company also increased the dividend for a 14th consecutive year to $0.48 per share, returning $33.3 million to shareholders, and repurchased common shares for approximately $4 million.

As a manufacturer of basic components of North American industrial infrastructure, Stella-Jones succeeds in sync with the success of the continental economy. In 2020, it appears that there is ongoing robust demand for Stella-Jones’s core products. Based on current market expectations and lumber prices, the company expects to generate higher year-over-year sales and improved margins.

The company has also been very successful in diversifying the product mix. Residential lumber has climbed from 10% of the overall product mix in 2014 to 22% of total sales in 2018, gaining momentum through a dedicated market focus. The company regards residential lumber as an essential component of the core product mix.

Stella-Jones’s solid financial position will allow the company to quickly expand the company’s presence in core markets. This company is very attractively valued.

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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 Nikhil Kumar has no position in any of the stocks mentioned.

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