The Motley Fool

TFSA Stock: This Growth Stock Is an Early Christmas Gift From the Market

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Stella-Jones (TSX:SJ) stock is once again trading at a wonderful valuation after falling from its mid-year high of $48 per share to less than $37 per share at writing. This is a price-to-earnings ratio of roughly 15.7. Consider it an early Christmas gift from the market!

Recent results were good. Year to date, sales increased 2% to $1.7 billion, EBITDA increased 25% to $254 million, the EBITDA margin improved 2.7% to 14.7%, net income increased 16% to $135 million, and earnings per share climbed 16% to $1.96 against the comparable period in the prior year.

To make things even better, management forecast the full year with higher year-over-year sales and margins. For 2020, it expects continued overall growth in sales and profitability driven by its three core product categories.

A steady business

Stella-Jones primarily provides pressure-treated wood products to railroad operators (with railway ties and timbers) and electrical utilities and telecom companies (with utility poles) in North America. These businesses made up 64% of its Q3 sales.

For safety reasons, railroad, utility, and telecom companies must replace railway ties and utility poles periodically. So, Stella-Jones will get repeat business from these customers.

Residential lumber is Stella-Jones’s third core business that contributed 25% of Q3 sales.

A “show-me” story

Stella-Jones stock has been an absolutely amazing growth stock. From 2001 to 2019, a $10,000 investment in the stock would have transformed to an eye-popping $729,344!

You read that right. The stock went up 7,193% in the period — a nearly 73-bagger.

Why did I choose this 18-year period? It was during the tenure of the previous CEO, Brian McManus, who led the many M&As in the time frame. He retired from the position earlier this year.

And Éric Vachon, a veteran of 12 years at the company and previously senior vice president and CFO, stepped up to the roles of new president and CEO in September. So, now, Stella-Jones is a “show-me” story, as the new CEO has got to prove himself.

Vachon has already been thrown a problem. Cabot Microelectronics, one of Stella-Jones’s suppliers, announced that it will no longer make future investments in its wood-treatment business, which includes not building a pentachlorophenol (“Penta”) production facility to replace its operations in Matamoros, Mexico, and Tuscaloosa, Alabama.

This could potentially lead to a supply issue in 2021. Stella-Jones had been aware of the Penta supply issue for some time and has already been taking active steps to be ready to produce the preservative internally.

The team has been performing research and development as well as testing so that it can seek regulatory approvals and licences and have the necessary infrastructure ready.

At the moment, this isn’t too much of a worry, because

  • Stella-Jones’s network offers alternative preservatives that are suitable for the treatment of wood utility poles throughout North America; and
  • It also has a reserve of Penta and will receive supplies of Penta for another 25 months.

Investor takeaway

At the current depressed price, Stella-Jones, a Dividend Aristocrat with 14 consecutive years of dividend growth (with a five-year dividend-growth rate of 19% per year) is a great candidate as a TFSA stock.

If things go smoothly, investors can very well pocket tax-free gains of 18-35% within the next 12 months. The 1.5% yield the stock offers will be icing on the cake.

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Fool contributor Kay Ng owns shares of STELLA JONES INC.

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