Stantec Inc.
Moat: 2/5
Understandability: 2/5
Balance Sheet Health: 4/5
Stantec is a global professional services company specializing in planning, engineering, architecture, interior design, landscape architecture, surveying, environmental sciences, project management, and project economics for infrastructure and facilities projects.
Investor Relations Previous Earnings Calls
The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.
Stantec does not possess a wide or strong moat, and it earns a rating of 2/5 due to the limited durability of its competitive advantages and the low barriers to entry. While the firm’s size and geographic diversity offer some advantages, they are not enough to classify it as a business with a sustainable long-term advantage over its peers.
Business Overview
Stantec is a global company that operates in the professional services industry, specializing in planning, engineering, architecture, interior design, landscape architecture, surveying, environmental sciences, project management and project economics, spanning from infrastructure to facilities.
Revenue Distribution
Stantec’s revenue is diverse, but it is primarily generated by project-based services that can span multiple years.
The company’s revenue streams can be broken down into:
- United States: generates roughly 59% of revenue
- Canada: generates roughly 27% of revenue
- Global: generates roughly 14% of revenue
Industry Trends
- Increased infrastructure spending: Governments worldwide are investing in infrastructure projects, creating a significant demand for Stantec’s services.
- Sustainability focus: There’s an increasing demand for sustainable and environmentally friendly solutions, driving the need for specialized expertise in engineering and environmental sciences.
- Technological advancements: The use of technology, such as Building Information Modeling (BIM) and remote sensing, is growing, changing the ways projects are designed and managed.
- Consolidation: In an increasingly competitive market, a lot of smaller firms are getting acquired, creating fewer, but larger competitors.
Margins
- Stantec maintains a gross margin of approximately 39-40% and they expect to continue in that range going forward.
- Operating margins are relatively stable, usually around 11% of revenues but vary depending on project profitability and the mix of business.
- They had a relatively low net profit margin of around 4% in 2022 as there were some one-time expenses for acquisitions. But this is starting to improve.
Competitive Landscape
The professional services industry is very competitive and includes:
- Large engineering and construction firms: such as AECOM and Jacobs, who have a broader geographical range, but similar core competencies.
- Specialized engineering firms: like Tetra Tech and WSP, focusing on particular engineering fields (environmental, infrastructure, or others).
- Local and regional firms: Many small businesses and consulting groups with strong local relationships and specific areas of expertise.
What makes Stantec different?
- Geographic Diversity: Stantec has operations in many countries all over the world which brings both challenges in management, but also opportunities in growth and mitigating risks.
- Breadth of Services: Stantec is able to offer more services under one umbrella, which can appeal to some clients.
- Focus on Integration: The company is putting more emphasis on integrating different practices to better serve clients. This is intended to differentiate it from competitors, who focus on their specific specialties.
- ESG Expertise: The company has also been increasing its efforts in more sustainable practices, which can generate more revenue from the shift in customer requirements.
Financials
Income Statement
- Revenues: Stantec’s revenues have been steadily growing, increasing from $3.7B in 2018, to $5.1B in 2022. This indicates healthy organic growth and acquisitions.
- Profitability: Gross profit margins have remained consistent at around 39-40% over the last few years. Operating margins have fluctuated between 10 and 12%. Net profit margin for 2022 was quite low due to several acquisitions, but it is expected to increase.
- Expenses: Their selling, general and administrative expenses have remained mostly flat as a percent of revenue, around 28-30%. The company has been growing at a decent clip without significant increases in overhead.
- Acquisition Impacts: As mentioned, one time acquisition costs can materially hurt the bottom line, with them dropping to a 4% net margin in 2022. They do, however, expect this to recover to the 8-9% range going forward.
Balance Sheet
- Cash and cash equivalents: The company has an adequate but not great liquidity, with $359 million in cash and cash equivalents.
- Total assets: Their total assets are at $5.7B with the majority being Property, Plant & Equipment and Intangible Assets
- Debt: Stantec does have a reasonable amount of long-term debt, at $1.4B, which they have been actively working to pay down. This debt is spread over a variety of time maturities so they have minimal risk of large, unanticipated capital calls.
- Shareholders Equity: The equity position is solid at around $1.6B. They have been consistently building equity, which is a great sign of the company’s stability.
Cash Flow
- Operating cash flow: The company consistently generates cash through operating activities.
- Free cash flow: The company generates a good free cash flow, which they have used to make investments and acquisitions.
- Capex: Investment in property and plant and equipment has been roughly flat for the past few years at $100 to $150 million per year.
Moat Rating Justification
- Intangible Assets: While Stantec has a well-known brand and a reputation for its work, it doesn’t possess significant brand recognition with strong pricing power. Their patents are limited to process-based advantages, and aren’t strong enough to create a wide moat. They might be able to leverage those in the long run.
- Switching Costs: Stantec does not benefit from strong switching costs, which means their clients have no significant downside if they switch to a competitor.
- Network Economics: There is no evidence that network effects give Stantec an advantage.
- Cost Advantages: Though Stantec’s low-cost operations are important, they aren’t unique in the industry and it could be quickly replicated by a competitor.
Risks To The Moat & Business Resilience
- Competition: This industry is incredibly competitive and has lots of alternatives for customers.
- Economic Downturn: As professional services are highly susceptible to economic slowdowns, any recession might hurt their performance.
- Project Delays and Budget Overruns: Delays and cost overruns on large projects can reduce their revenues and cash flows.
- Dependence on Key Employees: Senior level employees are important for the firm, and any major staff turnover could impact the business.
- Integration Risks: The company has been using acquisition as a primary means of growing its business. The challenges associated with that can be harmful, especially as smaller companies can be hard to integrate into a larger one.
Understandability: 2/5
Stantec’s business is complex. Its operations are highly diverse, and they span many different industries and locations. Understanding their financial statements also requires technical expertise. The details behind the company’s acquisitions and their impacts on their earnings is not transparent.
Balance Sheet Health: 4/5
Stantec has a very healthy balance sheet. It has a good liquidity, a large tangible asset base, and it has been rapidly decreasing the amount of debt. It’s financial stability is great and it has ample funding for future acquisitions and operations.
Recent Concerns/Controversies/Problems
- Acquisition Costs: Several acquisitions in the latest few years have lowered the net profit margins of the company, which have negatively affected share price performance. Management stated this is due to one-time costs and it is expecting it to pick up again in the upcoming quarters.
- Project Delays: Stantec has noted some difficulties related to delays and price increases on their projects due to inflation and market conditions. They will have to manage these risks and adjust to changing market conditions, and continue to provide proper value for investors.
- Underperformance: Stantec has had a few quarters that have underperformed against market and analysts’ expectations. This is likely due to aforementioned challenges, but investors will want to see consistency in performance over the next quarters.
Other Relevant Facts
- International Reporting Standards: Stantec has shifted to IFRS standards, similar to most other publicly traded companies from Europe, this can be a challenge for American investors to understand the financial results of the company.
- Long Term Goals: The company has a strong focus on growth through acquisitions and organic strategies. It has set out a strategic plan for the upcoming years to increase profitability and revenue.
- ESG: Stantec has recently set out goals for more sustainable practices. This may generate new types of revenue.
- Technology: The company has been focusing on integration and technology to better serve their clients. This will help them gain an advantage as technology becomes more present in the sector.
Conclusion
Stantec is a solid company with good growth prospects, but its lack of a wider moat makes it less compelling for investors looking for companies that can provide long-term sustainability. Its geographic diversity does provide some risk mitigation in various economic climates, and their increasing ESG and integration might be a key growth area in the future, but at the current moment the business isn’t protected by insurmountable moats and can be easily disrupted.