Are the Strengths of Stantec Inc. a Sign of Good Times Ahead?

The U.S. market for design services like engineering, architecture, and construction, is huge -- in excess of $90 billion annually. The growth prospects look robust given the desperate need to renew America's aging infrastructure, but the competition is fierce. The industry is highly fragmented with approximately 50,000 firms of all sizes competing for their piece of the pie.

With 13,000 employees in over 200 locations in North America plus a handful of international offices, Stantec (NYSE: STN  ) is one of the largest and most successful design firms. Since this Canadian company became publicly traded in 1994, gross revenue has grown at a compound annual rate of 18.5%. And shareholders have been rewarded. Stantec's stock gained 47% during 2013.

Will Stantec continue to deliver for investors? To answer this question, we've analyzed the firm's strengths, weaknesses, opportunities, and threats, commonly known as a "SWOT" analysis. In this article, we assess Stantec's strengths as a company, and as an investment.

Home ice advantage 
Stantec enjoys a strong position in Canada and is successfully leveraging it to grow its presence in U.S. and international markets.

Stantec generated $2.2 billion in worldwide revenue in 2013, an increase of nearly 20% over 2012. The Canadian market represents 58% of total global revenue. Part of Stantec's success in Canada is due to its capabilities in delivering public private partnership, or P3, projects. A P3 infrastructure project is funded and operated through a joint effort of government and private business.

With the U.S. government's inability to fund much needed infrastructure projects, the P3 delivery model is becoming more prevalent in the United States. Stantec is well positioned to leverage its Canadian P3 expertise to grow U.S. revenues. Though the U.S. accounts for 39% of Stantec's total revenue, they have a lot of opportunities to grow. It's estimated they have just 2% of the U.S. market for architecture, engineering and construction design services.

Rock solid balance sheet
When competing for the largest, highest profile projects, a successful proponent must have a balance sheet that gives a client confidence.

A company's debt-to-capital ratio, a measurement of leverage, is often used to assess its financial strength. The greater the ratio, the more debt the company has relative to equity -- a particularly important consideration in an economic environment where interest rates have nowhere to go but up.

Stantec's debt-to-capital ratio is just 4.86%. For comparison, competitors Fluor (NYSE: FLR  ) and AECOM (NYSE: ACM  ) have much higher debt-to-capital ratios, 11.95% and 36.19%, respectively.

2013 marked Stantec's 60th year of uninterrupted profitability. As a result, the company has been able to primarily fund its growth internally, rely little on external debt, and continue to strengthen its balance sheet.

A model for growth
Stantec has what it calls a "three-dimensional" business model: providing services across multiple geographies, practice disciplines like architecture and engineering, and all phases of a project life cycle, from planning and design to maintenance and decommissioning.

The diversity of their business model provides a natural shock absorber as decreased demand for services in an area of the business is usually offset by increased demand in another area. Stantec is not overly reliant on any single "dimension" of their business model to deliver upon market expectations.

The success Stantec enjoyed in 2013 further reinforces the success of this business approach. Organic revenue grew an impressive 8.8% over 2012, and highlights their ability to grow not just through acquisition, but by leveraging the strength of their business model and cross-selling additional services to existing clients.

Summary
Stantec's recently released 2013 results were very strong, and included a 12% dividend increase. It's evident that their ability to leverage a dominant Canadian market position to grow U.S. revenue, strong balance sheet and growth enhancing business model are strengths that will serve the company, and investors, well over the long term. In our next article, we take a close look at a few Stantec weaknesses.

It's never too early -- or too late -- to begin investing
Millions of Americans have waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest and put their money at further risk. Yet those who've stayed out of the market have missed out on huge gains, like Stantec's 47% gain in 2013, and put their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2862268, ~/Articles/ArticleHandler.aspx, 11/28/2014 5:14:05 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 day ago Sponsored by:
DOW 17,827.75 12.81 0.07%
S&P 500 2,072.83 5.80 0.28%
NASD 4,787.32 0.00 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

11/26/2014 4:07 PM
ACM $33.59 Down -0.32 -0.94%
AECOM Technology C… CAPS Rating: ****
FLR $66.72 Down -1.96 -2.85%
Fluor Corporation CAPS Rating: ****
STN $30.15 Down -0.13 -0.43%
Stantec, Inc. (USA… CAPS Rating: *****

Advertisement