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.
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.
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.