Why Stella-Jones Inc. Shares Fell 7.5% on Monday
The huge price drop of Stella-Jones Inc. (TSX:SJ) shares on Monday shows that even great companies can experience bumps along the way. Stella-Jones shares fell nearly 13% to its 52-week low at the $37 level.
At times like this, shareholders shouldn?t panic; instead, look at why the shares are down and perhaps even buy more at a lower price.
Evidently, some investors thought the manufacturer and supplier of railway ties and utility poles was a good deal, as the shares bounced from the low and closed higher at $39.50.
Is Stella-Jones really a good value right now? First, let?s explore the reason for its drop.
Why Stella-Jones shares fell more than 7%
Stella-Jones gave preliminary results for 2016 and indicated that it had a weaker fourth quarter than in 2015. Particularly, Stella-Jones expects its Q4 2016 revenue to be $340-342 million (about 4.6% lower) and its operating income in the same period to be $27-29 million (about 42% lower).
However, that?s not the whole picture. On a full-year basis, Stella-Jones still expects revenue and net income growth for 2016, which will mark its 16th consecutive year of growth!
Specifically, the company anticipates sales growth of nearly 18% to almost $1.84 billion and operating income growth of about 5.8% to $232-234 million.
Moreover, the issue, which caused lower sales and profitability in Q4 2016, has already been discussed by management before.
In Q3 2016, management mentioned lower railroad-tie demand at the end of 2016 and potentially in early 2017.
Come to think of it, Stella-Jones had a stellar year in 2015, in which its earnings per share were 36% higher than in 2014. So, naturally, it was more difficult to beat that growth rate last year.
Valuation
Stella-Jones won?t report the financial results for Q4 2016 and the fiscal year 2016 until March. If we assume a very conservative earnings-per-share growth of 6% for the year, then the 7.5% drop brings the shares to a price-to-earnings ratio of about 18.3.
A great long-term performer
Despite the 7.5% drop on Monday, Stella-Jones has still appreciated more than 350% since 2011, which equates to an annualized appreciation of 28.8%.
From 2011 to 2016, its earnings per share increased by 137%, equating an annualized growth rate of 15.5% (again, assuming a 6% growth for 2016), and its dividend per share tripled, equating an annualized growth rate of a little more than 20%.
Yet its payout ratio remains less than 17%. So, there?s lots of room for it to grow its dividend.
Conclusion
If anything, Stella-Jones?s +7% drop to below $40 is a good opportunity to buy a great long-term performer at a lower price.
Analysts at Thomson Reuters have a low 12-month price target of $50 and a mean target of $52.90 on the stock. This implies the shares have upside potential of at least 26% from current levels.
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Fool contributor Kay Ng owns shares of STELLA JONES INC.
How 1 Man Made 100X His Money After 50
Billionaire investor Warren Buffett made over 99% of his fortune after he blew out the candles on his 50th birthday cake. That's why when we attended an exclusive event - where we had front-row seats to the legend himself - we felt compelled to put together an exclusive report that details the strategies we learned from him, "Wealth for a Lifetime: 11 Lessons We Learned from Warren Buffett".
Simply click here to gain access to this eye-opening 200 page report!
Fool contributor Kay Ng owns shares of STELLA JONES INC.