A Government Spending Opportunity

06/06/2013 9:00 am EST


Tom Slee

Retired- Financial Advisor, Money Manager, Gordon Pape Enterprises LTD

With government spending ramping up in both the US and Canada, this company stands to reap a windfall, says Tom Slee of The Canada Report.

Founded in Edmonton in 1954, Stantec (STN) provides professional design and consulting services in planning, engineering, architecture, surveying, and project management. With approximately 12,700 employees, the firm services a wide range of public and private clients in diverse markets.

This is a company with immediate access to the various Canadian and US government projects being brought on stream. Stantec is especially well positioned to benefit from the new Canadian and US government spending.

STN is focused in North America where it has over 200 locations. With only four international operations, it has limited exposure to all the political and economic uncertainty in Europe and Asia. Equally important, the company has not been tainted by the Quebec construction industry corruption scandal that has tainted such major players as SNC-Lavalin (Toronto: SNC).

Even without the new government stimulus, STN is generating strong organic growth. Gross revenues of C$1.56 billion were booked in 2012, and we could see $1.75 billion this year. Fourth-quarter 2012 earnings came in at 67 cents a share, well above the 61 cents analysts were expecting, thanks to impressive sales performance in the Industrial and Transportation divisions. For the first quarter of 2013, revenue was up 17.7% to $513.2 million, while diluted earnings per share increased 10.9% to 61 cents.

The big question mark is a possible slowdown in Canadian mining projects, but Stantec is well diversified and should be able to offset this in other areas—even without the new government spending.

A recent 10% increase in the dividend indicates confidence in the cash flow. The stock now pays 16.5 cents per quarter (66 cents a year) to yield 1.5%.

We recommend the common shares of Stantec, which trade on both the Toronto and New York Stock Exchanges under the symbol STN. If possible, buy the shares on the TSX, where they trade actively. The average daily volume on the NYSE is only about 7,100, so if you buy there, enter a limit order and be patient.

This is a conservatively managed company that is expected to rack up strong earnings growth over the next few years. A major acquisition is a possibility, but even without this, earnings of about $3 a share are expected in 2013, with an increase to the $3.50 range next year.

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