Intrinsic value of Stella-Jones Inc. - SJ

Previous Close

$50.81

  Intrinsic Value

$22.31

stock screener

  Rating & Target

str. sell

-56%

Previous close

$50.81

 
Intrinsic value

$22.31

 
Up/down potential

-56%

 
Rating

str. sell

We calculate the intrinsic value of SJ stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 3.5

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  17.90
  5.50
  5.45
  5.40
  5.36
  5.33
  5.30
  5.27
  5.24
  5.22
  5.19
  5.17
  5.16
  5.14
  5.13
  5.11
  5.10
  5.09
  5.08
  5.08
  5.07
  5.06
  5.05
  5.05
  5.04
  5.04
  5.04
  5.03
  5.03
  5.03
  5.02
Revenue, $m
  1,838
  1,939
  2,045
  2,155
  2,271
  2,392
  2,519
  2,651
  2,790
  2,936
  3,088
  3,248
  3,415
  3,591
  3,775
  3,968
  4,171
  4,383
  4,606
  4,840
  5,085
  5,342
  5,612
  5,896
  6,193
  6,505
  6,833
  7,176
  7,537
  7,916
  8,314
Variable operating expenses, $m
 
  1,664
  1,753
  1,846
  1,944
  2,046
  2,153
  2,265
  2,382
  2,505
  2,633
  2,739
  2,881
  3,029
  3,184
  3,347
  3,518
  3,697
  3,885
  4,082
  4,289
  4,506
  4,734
  4,973
  5,223
  5,487
  5,763
  6,053
  6,357
  6,677
  7,012
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  1,605
  1,664
  1,753
  1,846
  1,944
  2,046
  2,153
  2,265
  2,382
  2,505
  2,633
  2,739
  2,881
  3,029
  3,184
  3,347
  3,518
  3,697
  3,885
  4,082
  4,289
  4,506
  4,734
  4,973
  5,223
  5,487
  5,763
  6,053
  6,357
  6,677
  7,012
Operating income, $m
  233
  275
  292
  309
  327
  346
  366
  386
  408
  431
  455
  508
  535
  562
  591
  621
  653
  686
  721
  758
  796
  836
  879
  923
  970
  1,018
  1,070
  1,124
  1,180
  1,239
  1,302
EBITDA, $m
  265
  326
  344
  363
  382
  403
  424
  446
  470
  494
  520
  547
  575
  605
  636
  668
  702
  738
  775
  815
  856
  899
  945
  993
  1,043
  1,095
  1,150
  1,208
  1,269
  1,333
  1,400
Interest expense (income), $m
  19
  24
  26
  28
  30
  32
  34
  36
  39
  41
  44
  46
  49
  52
  55
  59
  62
  66
  70
  74
  78
  82
  87
  91
  96
  102
  107
  113
  119
  126
  132
Earnings before tax, $m
  215
  251
  265
  281
  297
  314
  332
  350
  369
  390
  411
  462
  485
  510
  536
  563
  591
  620
  652
  684
  718
  754
  792
  832
  873
  917
  962
  1,010
  1,061
  1,114
  1,169
Tax expense, $m
  61
  68
  72
  76
  80
  85
  90
  95
  100
  105
  111
  125
  131
  138
  145
  152
  160
  168
  176
  185
  194
  204
  214
  225
  236
  248
  260
  273
  286
  301
  316
Net income, $m
  154
  183
  194
  205
  217
  229
  242
  256
  270
  285
  300
  337
  354
  372
  391
  411
  431
  453
  476
  499
  524
  551
  578
  607
  637
  669
  703
  738
  774
  813
  854

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  2
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  1,962
  2,067
  2,180
  2,298
  2,421
  2,550
  2,685
  2,826
  2,975
  3,130
  3,292
  3,463
  3,641
  3,828
  4,025
  4,230
  4,446
  4,673
  4,910
  5,159
  5,421
  5,695
  5,983
  6,285
  6,602
  6,935
  7,284
  7,651
  8,036
  8,439
  8,863
Adjusted assets (=assets-cash), $m
  1,960
  2,067
  2,180
  2,298
  2,421
  2,550
  2,685
  2,826
  2,975
  3,130
  3,292
  3,463
  3,641
  3,828
  4,025
  4,230
  4,446
  4,673
  4,910
  5,159
  5,421
  5,695
  5,983
  6,285
  6,602
  6,935
  7,284
  7,651
  8,036
  8,439
  8,863
Revenue / Adjusted assets
  0.938
  0.938
  0.938
  0.938
  0.938
  0.938
  0.938
  0.938
  0.938
  0.938
  0.938
  0.938
  0.938
  0.938
  0.938
  0.938
  0.938
  0.938
  0.938
  0.938
  0.938
  0.938
  0.938
  0.938
  0.938
  0.938
  0.938
  0.938
  0.938
  0.938
  0.938
Average production assets, $m
  565
  595
  628
  662
  697
  734
  773
  814
  857
  901
  948
  997
  1,049
  1,102
  1,159
  1,218
  1,280
  1,346
  1,414
  1,486
  1,561
  1,640
  1,723
  1,810
  1,901
  1,997
  2,098
  2,203
  2,314
  2,430
  2,552
Working capital, $m
  928
  970
  1,022
  1,078
  1,135
  1,196
  1,259
  1,326
  1,395
  1,468
  1,544
  1,624
  1,708
  1,795
  1,888
  1,984
  2,085
  2,191
  2,303
  2,420
  2,542
  2,671
  2,806
  2,948
  3,096
  3,253
  3,416
  3,588
  3,769
  3,958
  4,157
Total debt, $m
  694
  744
  798
  854
  913
  974
  1,039
  1,106
  1,177
  1,251
  1,328
  1,410
  1,495
  1,584
  1,678
  1,776
  1,879
  1,987
  2,100
  2,219
  2,344
  2,475
  2,612
  2,756
  2,907
  3,066
  3,233
  3,407
  3,591
  3,784
  3,986
Total liabilities, $m
  936
  986
  1,040
  1,096
  1,155
  1,216
  1,281
  1,348
  1,419
  1,493
  1,570
  1,652
  1,737
  1,826
  1,920
  2,018
  2,121
  2,229
  2,342
  2,461
  2,586
  2,717
  2,854
  2,998
  3,149
  3,308
  3,475
  3,649
  3,833
  4,026
  4,228
Total equity, $m
  1,026
  1,081
  1,140
  1,202
  1,266
  1,334
  1,404
  1,478
  1,556
  1,637
  1,722
  1,811
  1,904
  2,002
  2,105
  2,212
  2,325
  2,444
  2,568
  2,698
  2,835
  2,979
  3,129
  3,287
  3,453
  3,627
  3,810
  4,001
  4,203
  4,414
  4,636
Total liabilities and equity, $m
  1,962
  2,067
  2,180
  2,298
  2,421
  2,550
  2,685
  2,826
  2,975
  3,130
  3,292
  3,463
  3,641
  3,828
  4,025
  4,230
  4,446
  4,673
  4,910
  5,159
  5,421
  5,696
  5,983
  6,285
  6,602
  6,935
  7,285
  7,650
  8,036
  8,440
  8,864
Debt-to-equity ratio
  0.676
  0.690
  0.700
  0.710
  0.720
  0.730
  0.740
  0.750
  0.760
  0.760
  0.770
  0.780
  0.780
  0.790
  0.800
  0.800
  0.810
  0.810
  0.820
  0.820
  0.830
  0.830
  0.830
  0.840
  0.840
  0.850
  0.850
  0.850
  0.850
  0.860
  0.860
Adjusted equity ratio
  0.522
  0.523
  0.523
  0.523
  0.523
  0.523
  0.523
  0.523
  0.523
  0.523
  0.523
  0.523
  0.523
  0.523
  0.523
  0.523
  0.523
  0.523
  0.523
  0.523
  0.523
  0.523
  0.523
  0.523
  0.523
  0.523
  0.523
  0.523
  0.523
  0.523
  0.523

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  154
  183
  194
  205
  217
  229
  242
  256
  270
  285
  300
  337
  354
  372
  391
  411
  431
  453
  476
  499
  524
  551
  578
  607
  637
  669
  703
  738
  774
  813
  854
Depreciation, amort., depletion, $m
  32
  51
  53
  54
  55
  57
  58
  60
  62
  63
  65
  38
  40
  42
  45
  47
  49
  52
  54
  57
  60
  63
  66
  70
  73
  77
  81
  85
  89
  93
  98
Funds from operations, $m
  95
  235
  247
  259
  272
  286
  300
  315
  331
  348
  365
  376
  395
  415
  436
  457
  481
  505
  530
  557
  584
  614
  644
  677
  710
  746
  783
  822
  863
  906
  952
Change in working capital, $m
  -87
  51
  53
  55
  58
  60
  63
  66
  69
  73
  76
  80
  84
  88
  92
  97
  101
  106
  111
  117
  123
  129
  135
  142
  149
  156
  164
  172
  180
  189
  199
Cash from operations, $m
  182
  184
  194
  204
  214
  226
  237
  249
  262
  275
  289
  296
  311
  327
  343
  361
  379
  398
  419
  440
  462
  485
  509
  535
  562
  590
  619
  650
  683
  717
  753
Maintenance CAPEX, $m
  0
  -22
  -23
  -24
  -25
  -27
  -28
  -30
  -31
  -33
  -35
  -36
  -38
  -40
  -42
  -45
  -47
  -49
  -52
  -54
  -57
  -60
  -63
  -66
  -70
  -73
  -77
  -81
  -85
  -89
  -93
New CAPEX, $m
  -70
  -30
  -32
  -34
  -35
  -37
  -39
  -41
  -43
  -45
  -47
  -49
  -51
  -54
  -57
  -59
  -62
  -65
  -68
  -72
  -75
  -79
  -83
  -87
  -91
  -96
  -101
  -106
  -111
  -116
  -122
Cash from investing activities, $m
  -176
  -52
  -55
  -58
  -60
  -64
  -67
  -71
  -74
  -78
  -82
  -85
  -89
  -94
  -99
  -104
  -109
  -114
  -120
  -126
  -132
  -139
  -146
  -153
  -161
  -169
  -178
  -187
  -196
  -205
  -215
Free cash flow, $m
  6
  132
  138
  146
  154
  162
  170
  179
  188
  197
  207
  210
  221
  233
  245
  257
  270
  284
  298
  314
  329
  346
  363
  382
  401
  421
  442
  464
  487
  512
  537
Issuance/(repayment) of debt, $m
  12
  52
  54
  56
  59
  62
  64
  67
  71
  74
  78
  81
  85
  89
  94
  98
  103
  108
  113
  119
  125
  131
  137
  144
  151
  159
  167
  175
  184
  193
  202
Issuance/(repurchase) of shares, $m
  2
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  19
  52
  54
  56
  59
  62
  64
  67
  71
  74
  78
  81
  85
  89
  94
  98
  103
  108
  113
  119
  125
  131
  137
  144
  151
  159
  167
  175
  184
  193
  202
Total cash flow (excl. dividends), $m
  25
  184
  192
  202
  212
  223
  234
  246
  259
  271
  285
  291
  306
  322
  338
  355
  373
  392
  412
  432
  454
  477
  501
  526
  552
  580
  609
  639
  671
  704
  740
Retained Cash Flow (-), $m
  -112
  -55
  -59
  -62
  -64
  -67
  -71
  -74
  -77
  -81
  -85
  -89
  -93
  -98
  -103
  -108
  -113
  -118
  -124
  -130
  -137
  -143
  -151
  -158
  -166
  -174
  -183
  -192
  -201
  -211
  -222
Prev. year cash balance distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  129
  133
  140
  148
  156
  164
  172
  181
  190
  200
  202
  213
  224
  236
  248
  260
  274
  288
  302
  317
  333
  350
  368
  386
  406
  426
  447
  470
  493
  518
Discount rate, %
 
  6.00
  6.30
  6.62
  6.95
  7.29
  7.66
  8.04
  8.44
  8.86
  9.31
  9.77
  10.26
  10.78
  11.31
  11.88
  12.47
  13.10
  13.75
  14.44
  15.16
  15.92
  16.72
  17.55
  18.43
  19.35
  20.32
  21.33
  22.40
  23.52
  24.70
PV of cash for distribution, $m
 
  122
  118
  116
  113
  109
  105
  100
  95
  89
  82
  73
  66
  59
  53
  46
  40
  34
  28
  23
  19
  15
  12
  9
  7
  5
  3
  2
  2
  1
  1
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Stella-Jones Inc is a Canada-based company, which is a producer and marketer of pressure treated wood products. The Company supplies North America's railroad operators with railway ties and timbers, and the continent's electrical utilities and telecommunication companies with utility poles. It manufactures and distributes residential lumber and accessories to retailers for outdoor applications, as well as industrial products, which include marine and foundation pilings, construction timbers, wood for bridges and coal tar-based products. It has treating and pole peeling facilities across Canada and the United States, and sells its products primarily in these two countries. The Company operates approximately 35 treating plants, approximately 15 pole-peeling facilities and a coal tar distillery. These facilities are located in approximately five Canadian provinces and approximately 18 American states, and are complemented by an extensive distribution network across North America.

FINANCIAL RATIOS  of  Stella-Jones Inc. (SJ)

Valuation Ratios
P/E Ratio 22.9
Price to Sales 1.9
Price to Book 3.4
Price to Tangible Book
Price to Cash Flow 19.3
Price to Free Cash Flow 31.4
Growth Rates
Sales Growth Rate 17.9%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 79.5%
Cap. Spend. - 3 Yr. Gr. Rate 21%
Financial Strength
Quick Ratio 0
Current Ratio 0
LT Debt to Equity 67%
Total Debt to Equity 67.6%
Interest Coverage 12
Management Effectiveness
Return On Assets 9%
Ret/ On Assets - 3 Yr. Avg. 9.6%
Return On Total Capital 9.3%
Ret/ On T. Cap. - 3 Yr. Avg. 9.9%
Return On Equity 15.9%
Return On Equity - 3 Yr. Avg. 16.6%
Asset Turnover 1
Profitability Ratios
Gross Margin 18.2%
Gross Margin - 3 Yr. Avg. 18.6%
EBITDA Margin 14.5%
EBITDA Margin - 3 Yr. Avg. 14.8%
Operating Margin 12.7%
Oper. Margin - 3 Yr. Avg. 13.1%
Pre-Tax Margin 11.7%
Pre-Tax Margin - 3 Yr. Avg. 12.1%
Net Profit Margin 8.4%
Net Profit Margin - 3 Yr. Avg. 8.6%
Effective Tax Rate 28.4%
Eff/ Tax Rate - 3 Yr. Avg. 28.7%
Payout Ratio 18.2%

SJ stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the SJ stock intrinsic value calculation we used $1838 million for the last fiscal year's total revenue generated by Stella-Jones Inc.. The default revenue input number comes from 2016 income statement of Stella-Jones Inc.. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our SJ stock valuation model: a) initial revenue growth rate of 5.5% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 6%, whose default value for SJ is calculated based on our internal credit rating of Stella-Jones Inc., is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Stella-Jones Inc..
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of SJ stock the variable cost ratio is equal to 85.9%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for SJ stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Stella-Jones Inc..

Corporate tax rate of 27% is the nominal tax rate for Stella-Jones Inc.. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the SJ stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for SJ are equal to 30.7%.

Life of production assets of 26 years is the average useful life of capital assets used in Stella-Jones Inc. operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for SJ is equal to 50%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $1026 million for Stella-Jones Inc. - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 69.311 million for Stella-Jones Inc. is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Stella-Jones Inc. at the current share price and the inputted number of shares is $3.5 billion.

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Financial statements of SJ
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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