Stella-Jones says growing economy, U.S. home market straining lumber supply

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MONTREAL – Stella-Jones says a strengthening North American economy and improving U.S. housing market are putting a strain on the supply of lumber used for its railway tie and utility pole businesses.

However, the Montreal-based company said it can meet the challenge because its strong inventories and procurement network should allow it to meet demand at an optimal cost.

Lumber supply is constrained because many mills closed during the U.S. housing crisis over the last few years, said CEO Brian McManus, who is confident that existing mills will increase capacity or new mills will be started.

“The wood resource is certainly there and so we’re just in a bit of a tight situation. (But) we’re fortunate that we do have a good inventory position and so we feel it can be a competitive advantage for us going forward,” he said Friday during a conference call.

U.S. housing construction rose 17.7 per cent last year to 976,000 units, the best showing since 2007. Analysts expect further gains this year as stronger job growth boosts demand.

McManus said the company has looked at buying sawmills to secure supply but decided instead to support some sawmills with contracts.

“We’re taking some strategic moves that we believe will help us firm up supply,” he told analysts.

Stella-Jones said it will raise its quarterly dividend by 40 per cent amid expectations that demand for its core products will remain healthy in 2014 as railways continue to invest in upgrading their networks and utilities replace aging transmission poles over the next two to five years.

The quarterly dividend will be seven cents per share, payable April 30 to shareholders of record on April 2.

The wood products company’s fourth-quarter profits increased 19 per cent primarily due to acquisitions and a $5.8-million gain from the conversion of U.S.-dominated sales. About 80 per cent of its lumber sales are in the United States.

Stella-Jones (TSX:SJ) earned $19.7 million, or 29 cents per diluted share, for the three-month period ended Dec. 31. This compared to $16.5 million, or 25 cents per share, in the same period a year ago.

Sales increased to $211.9 million, from $159.3 million a year earlier.

The company was expected to earn 30 cents per share on $218 million of revenues, according to analysts polled by Thomson Reuters.

The sales included $49.3 million from McFarland Cascade Holdings acquired in November 2012 and $4.1 million from the Pacific Wood Preserving Companies purchased a year later. Excluding these contributions and the currency gain, sales decreased $6.7 million.

Stella-Jones said organic sales decreased because of timing issues for certain utility pole orders and a lag in shipments to a railway customer. These factors more than offset solid industry demand for railway ties.

Railway tie sales in the quarter were $78.3 million, utility pole sales rose $35.9 million to $107.1 million, residential lumber sales increased by $5.1 million to reach $13.8 million and industrial product sales grew 22 per cent to $12.7 million on increased industrial timber demand for railway bridges.

For the year, Stella-Jones earned $92.5 million, or $1.34 per diluted share, compared with $73.1 million, or $1.13 per diluted share, in 2012. Revenue came in at $970.1 million, versus $717.5 million a year earlier.

McManus said 2013 marked the thirteenth consecutive year of growth for the company, which benefited from its expansion strategy, which has improved the efficiency of its operations.

Sara O’Brien of RBC Capital Markets boosted her target price by $2 to $32 on the expectation of double-digit earnings growth this year and in fiscal 2015.

“We believe Stella-Jones will complement our estimates with new tuck-in acquisitions in poles. Ultimately, we expect it to become a high dividend payout company in a few years,” she wrote.

Although the current payout ratio is low at 20 per cent, the analyst said that, over time, it could increase to about 80 per cent. Excluding additional acquisitions, she foresees the dividend increasing to about $1.50 per year in fiscal 2015 from the new level of 28 cents.

Stella-Jones is a leading producer and marketer of pressure treated wood products. It supplies railway operators with railway ties and timbers, and electrical utilities and telecommunication companies with utility poles. It also sells residential lumber to retailers and wholesalers.

On the Toronto Stock Exchange, Stella-Jones shares closed at $27.60 on Friday, up 56 cents or more than two per cent.

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