An update on Stella Jones (SJ)
A great return on investment
Disclaimer
Black Opal Research is a financial newsletter that provides our take on different publicly traded businesses in order to obtain feedback and test our own thesis. We find this process keeps us accountable to make educated investment decisions with our own money and no one else's. Nothing in our articles should be taken as financial advice. We will always ask our readers to seek qualified financial advice before investing in any of the companies that we complete analysis on. Do your own research, fact check, and evaluate.
Stella Jones
Preamble
The goal of this newsletter was to obtain feedback from our readers and possibly identify flaws in our thought process, allowing us to test our conviction in our investments. Additionally, we aimed to ensure that we weren't taking shortcuts when making long-term investment decisions. We believe we have achieved that and more.
Throughout the year, we conducted research on several businesses (PYPL, PRPL, JHX, etc.), wrote articles, reviewed, revised, and researched further, only to discover that some of these businesses were duds, had management that didn't meet our standards, or were overly complicated. The act of publishing our findings has made us more patient with the businesses we want to own and has improved our capital allocation skills.
A year ago, we initiated this publication with a thesis on Stella Jones. Although a relatively short period has passed, Stella Jones has performed exactly as we anticipated. While we expect further growth from them, we have positioned ourselves defensively and exited our position. Here is a summary of the past year.
In 2022, Stella Jones acquired two businesses, following their growth-through-acquisition approach. One business was a trucking outfit specialized in hauling utility poles in Alberta and Ontario, while the other was a pole treatment business in Texas. Additionally, their 2021 acquisition increased profitability in their lumber segment.
Throughout 2022, Stella Jones experienced growth in both revenue and earnings. This growth was primarily driven by the utility pole business. The annual report states the reasons behind this growth as follows:
"For utility poles, we are witnessing significant investments by utility companies to ensure their infrastructure can support North America's future needs. These companies are investing in the regular maintenance of their current networks, committing to build newer and stronger lines to support heavier loads and resist more frequent weather events, as well as investing to facilitate increased broadband network use."
This increased demand aligns perfectly with our long-term foresight, as mentioned in our initial article. We expect similar results from this segment in 2023 and beyond. Furthermore, Stella Jones anticipates further growth through acquisitions in this segment, which should further enhance its long-term organic growth.
Lastly, the management team has proven to be exceptional capital allocators with a long-term mindset. This is most evident in their use of share buybacks in 2022. The management team repurchased approximately 5 million shares for cancellation, amounting to $181 million. While it is common for cash flow positive businesses to repurchase shares, it is rare for them to continue doing so when share prices significantly decline. Moreover, Stella Jones' management team repurchased shares at an average around intrinsic value, which is not often the case for most management teams.
One-year results:
Previous stock price (Initial article launch): $35.64
Current stock price: $68.39
Return: ~92%
Updated IVs
IV Ten Cap Entry point: $41.10
DCF entry point (Same assumptions as the previous article): $30.34
IV DCF: $60.68
Summary:
We believe Stella Jones is fully priced at this point in time. Our return was approximately 85%, which has had a significant impact on our concentrated portfolio of fewer than 10 positions. We hope for more successes like this and better in the future.