DA Davidson Upgrades Stantec To Buy On Growth Record, Consolidation Strategy

In a report published Wednesday, DA Davidson analyst John B Rogers upgraded the rating on Stantec Inc. (USA) (NYSE: STN), while raising the price target from $29 to $35, based on expectations of the company's "exceptional" growth record to be sustained going forward.

"Stantec has delivered the best returns in the industry among major engineering firms over both the long and short-term. This reflects the company's successful combination of low cost operations, organic growth, and a successful acquisition/integrations strategy," Rogers explained.

The analyst believes that Stantec's growth profile helps its stand apart from its peers and is indicative of a superior operating model. While the company's upfront services allows its high margins at relatively modest risk, its diversified customer base offers growth opportunities across a wide range of market environments.

According to the DA Davidson report, "Stantec has invested in acquisitions of smaller independent engineering/consulting firms as a means of expanding geography and adding capabilities. While other firms have pursued a similar strategy, Stantec's acquisitions are notable for the success of its integration process and subsequent growth. Approximately 35 percent of growth is derived from organic gains."

Stantec has been able to fund almost all of its growth via internal cash flow, while sustaining stable margins. Although the recent weakness in oil prices and associated capital investments are expected to impact the company's Natural Resource business during 2015, the analyst expects overall growth to be supported by improvements in the Buildings and Infrastructure businesses.

The analyst also expects the company to undertake additional acquisitions to fuel growth over the next several years. The stock is likely to benefit from any improvement in earnings.