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Note: I use the Stock Selection Guide Software and its methodologies from the CSA to perform the bulk of my analysis on stocks. This is not a recommendation to buy a stock – it is my analysis only. Please do your own research.
Company Profile:
SNC-LAVALIN GROUP INC. is an engineering and construction company, providing ownership and management of infrastructure, and operations and maintenance.
Revenue Profile and Projection:
Let’s start by examining management’s ability to convert the companies products and services into increased sales on a consistent basis, year after year. To pass the revenue test, the company must possess the following two attributes:
1. a steady and consistent revenue uptrend
2. the ability to continue to grow revenues in the future, giving consideration to such things as demographics and market trends (i.e. the move from film to digital)
The revenue profile:
The revenue profile for SNC is presented below. I would rather see a smooth and consistent revenue profile which indicates that the company has been consistent in improving the top line year after year. SNC has not been able to do that. Revenues decreased in 1999 and 2003 due to decreased construction demand during those periods. This business SNC operates in is cyclical.
Revenue projections:
Being conservative, but not too conservative, a revenue growth rate must be extrapolated to project a revenue number 5 years from now. This will not be an exact science but will provide us with a projection of what revenues you can expect the company to generate in the future. This is important because it is revenues that lead to earnings. One important thing to consider is whether revenue growth is accelerating or decelerating – this helps make a judgment call on what growth rate to apply.
Historical Growth Rates:
| Study Period | Growth |
| 1 – 10 | 15.3% |
| 1 – 5 | 13.1% |
| 1 – 2 | 36.0% |
| Last 2 Quarters | 34.2% |
SNC Lavalin’s revenue growth rates have been very inconsistent over the past 10 years. The good thing is they have been inconsistent to the upside, but this inconsistency makes me cautious. The sales growth over the past 2 years is dramatically higher than the 10 year average and I would not extrapolate this growth rate going forward. I believe that things tend to revert to the mean which would require me to go with a much more conservative growth rate. Although the last 2 quarters in the data I used show that the company is on track for another good year of growth, I have chosen to project revenue to grow at 10% which would mean, at the end of 2011 the revenue for SNC will be approximately $8,295 million per year.
EPS Profile and Projection:
I want to now move onto looking at the company’s earnings per share – how well the company turns those revenues into earnings for shareholders. To pass the EPS test, the company must possess the following two attributes:
1. a steady and consistent EPS uptrend
2. the ability to continue to grow EPS in the future
The EPS profile:
The EPS profile for SNC is presented below and again it shows growth, but with some dramatic bumps along the way. The 1998 to 2001 period saw EPS decline substantially. However, coming out of that period the company saw some remarkable EPS growth. Carrying this forward will be very tough for the company to do – we want steady growth as companies are rarely able to sustain very high levels of EPS growth.
EPS projections:
Just as with the revenue projections, being conservative, but not too conservative, a EPS growth rate must be extrapolated to project a revenue number 5 years from now. This will not be an exact science but will provide us with a projection of what EPS you can expect the company to generate in the future. Again it is important to consider whether EPS growth is accelerating or decelerating – this helps make a judgment call on what growth rate to apply.
Historical Growth Rates:
| Study Period | Growth |
| 1 – 10 | 15.6% |
| 1 – 5 | 34.6% |
| 1 – 2 | 8.2% |
| Last 2 Quarters | N/A |
The revenue growth rates are all over the map. The last 5 years have been spectacular, but as a dividend investor looking for steady performance I want to see more consistent growth. The cooling off in the last 2 years seems more in line with what I believe the company can sustain going forward. As such, I have chosen to apply a growth rate estimate of 8% because I don’t know what the year end numbers are going to look like and I can’t put too much stock in the quarterly numbers. At the end of 2011 the EPS for SNC will be approximately $1.90 per year.
Dividend History:
As a dividend investor, I of course look at dividends. Usually, I already know at this point that the company at least pays a dividend and has a strong history of increasing their dividend payouts on a consistent basis. The only analysis I do on dividends at this point is to quickly look at the dividend history over time. I want to see at least 10 years of uninterrupted and growing dividend payments to shareholders. Here is SNC’s dividend chart:
Dividend growth has been steady but not spectacular. Once again (I sound like a broken record on this company) I would rather see a smooth steady line. Don’t get me wrong, the previous few years of dividend growth has been exceptionally strong, but I do not see a trend and do not have enough data to justify a firm estimate that dividend growth will continue to increase as quickly as it has. If the company sees a revenue and EPS drop like they did from 1998 – 2003 I would suspect that dividend increases would not be as strong. In addition, the company has a low yield (0.70%). It is lower than the yield on the S&P and I would be better off buying a dividend index fund such as the iShares Dow Jones Select Dividend Index (DVY) the yield you would get is 3.28, with less company specific risk.
Share Price Valuation:
I use 2 methods to compare a company’s share price. The first is looking at the dividend yield to see how the current yield compares to the 10 year average yield for the company. The second is determining a buy range for the stock through the analysis of the recent price for $1 of EPS in relation to historical prices. Here is my results of my valuation.
Dividend Yield
Current Dividend Yield: 0.70%
Average Dividend Yield for past 10 Years: 1.40%
Is the current dividend yield higher than the average dividend yield for past 10 years:No
With an average dividend yield over the past 10 years of 1.40%, the current yield of 0.70% the stock is priced high. Typically I look for the current yield to be higher than the average yield.
Buy Range
Recent Price (how is the current price sitting in relation to historical averages):
EPS Projected Growth Rate: 8%
Recent P/E ratio: 44.9 (= current stock price dividend by current year projected EPS of $3.99)
Relative P/E ratio: 1.85 (= recent P/E divided by 10 year average P/E)
Based on a relative P/E of 1.85, buying the company today would indicate that we are buying a price at a significantly premium over the 10 year historical P/E value.
Upside Price (based on the EPS projection, what price might we expect if the growth continues on the trend we saw in our analysis of revenue and EPS):
Upside price: $97.56 (= upside EPS in 5 years X upside P/E ratio in 5 years)
Upside P/E ratio: 27.1 (= 10 year average high P/E ratio)
Downside Price (based on the EPS projection, what price might we expect if the growth continues on the trend we saw in our analysis of revenue and EPS):
Downside price: $38.20 (= current price – (1 – 20% decline))
Buy Range
The buy range for SNC is $38.20 to $40.79
This is calculated by:
(Upside Price minus – Downside Price) divided by 3 = $19.79 which is the size of the buying zones I use (buy/wait/sell). The buy zone is simply the downside price plus the zone size.
Summary
Based on SNC’s current price of $47.83, I would not be buying this stock. Investors have already priced in the recent good performance and dividend increases and as usual have overshot the mark. With the earnings, revenue, and dividend trends all good in the past few years, but inconsitent over longer periods, I want to see a few more years of good performance before I put any money into the company.
Disclosure: The Dividend Guy does not own shares in SNC. This is my analysis of the stock and is not investment advice. Do your own research.
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