Stantec Inc (NYSE:STN) Passes Key Quality Investing Screen

Professional services firm Stantec Inc (NYSE:STN) has appeared as a candidate for investors using a quality investing strategy, specifically through a screening method known as the Caviar Cruise. This approach focuses on finding companies with strong historical performance, high profitability, sound financial health, and the possibility for continued growth, characteristics that make them appropriate for long-term, buy-and-hold portfolios. The screen stresses quantifiable metrics that indicate a lasting competitive advantage and efficient capital allocation.

Core Screening Criteria and STN's Performance

The Caviar Cruise screen uses several strict filters to isolate high-quality businesses. Stantec seems to meet or pass many of these key benchmarks, which are important to the quality investing philosophy.

• Exceptional Return on Invested Capital (ROIC): A fundamental part of quality investing, a high ROIC shows how effectively a company generates profits from the capital it has deployed. The screen requires a ROIC (excluding cash, goodwill, and intangibles) above 15%. Stantec greatly exceeds this with a ROICexgc of 31.47%, suggesting the company is very efficient at converting investments into earnings. This metric is important as it points to a possible competitive advantage and superior management.

• Strong and Improving Profitability: The strategy looks for companies where earnings growth is faster than revenue growth, a sign of improving operational efficiency and pricing power. Stantec's 5-year EBIT (Earnings Before Interest and Taxes) compound annual growth rate (CAGR) is 11.52%. While a direct 5-year revenue CAGR was not available in the provided data, the company's solid EBIT growth is a positive sign of increasing profitability from its core operations.

• Solid Financial Health: To ensure a company can endure economic downturns and isn't overleveraged, the screen uses a Debt-to-Free Cash Flow ratio of less than 5. Stantec's ratio of 3.26 is well within this acceptable range, indicating it could theoretically pay off its entire debt burden in just over three years using its current cash flow. This financial discipline is important for quality investors looking for stable, low-risk holdings.

• High Profit Quality: This metric measures the proportion of net income that is converted into free cash flow. The screen targets a 5-year average above 75%. Stantec displays an exceptionally high profit quality of 175.41%, greatly exceeding the requirement. This indicates that the company's accounting profits are being turned into real, spendable cash, providing flexibility for dividends, share buybacks, or strategic acquisitions.

Fundamental Analysis Overview

A detailed fundamental analysis of Stantec gives it a rating of 6 out of 10, highlighting a mixed but generally positive picture when compared to its peers in the Construction & Engineering industry.

• Profitability is a key strength, with the company doing better than a majority of industry competitors in metrics like Return on Equity (14.83%) and Profit Margin (7.10%). Both operating and profit margins have shown improvement in recent years.
• Growth prospects are solid. Although revenue saw a small decrease over the past year, the long-term 5-year revenue CAGR is a good 9.59%. More importantly, analysts project future revenue and EPS growth to increase to 12.52% and 15.68% per year, respectively.
• Valuation presents a detailed picture. The stock's Price-to-Earnings (P/E) ratio of 29.99 seems expensive alone but is actually less expensive than many industry peers. When growth is considered via the PEG ratio, the valuation appears more acceptable, especially given the company's high profitability.
• Financial health is adequate, supported by the strong Debt-to-FCF ratio. The Altman Z-score of 4.10 indicates a low near-term chance of financial distress.

Suitability for Quality Investors

For an investor following the Caviar Cruise method, Stantec presents a strong case. Its notable ROIC and exceptional profit quality are signs of a well-run company that efficiently manages its capital. The strong EBIT growth and manageable debt level further support its quality profile. While the valuation may not be considered a deep value, quality investors often accept higher valuations for companies showing superior financial characteristics and lasting growth prospects, as seems to be the situation with Stantec. The company's global presence and its focus on essential services like infrastructure, water, and environmental management also fit with the quality investing preference for businesses supported by long-term, non-cyclical trends.

To see other companies that pass the Caviar Cruise screen, you can view the full list of results here.

Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer to buy or sell any security. Investors should conduct their own research and consider their individual financial circumstances before making any investment decisions.