Zweig Index: Stantec Company Spotlight

Zweig Group believes that tracking and reporting on the financial standing of some of the industry’s leading firms, publicly traded firms, will allow our readers to have another digestible form of information that will equip them with a greater understanding of the state of the industry. This monthly report, the Zweig Index, will examine 11 of the AEC industry’s leading firms on a monthly basis. This month we're focusing on Stantec.

Stantec, the fourth largest firm on the Zweig Index by market capitalization, is a sustainable engineering, architecture, and environmental consulting company that employs roughly 26,000 people across the globe. The company is geographically diversified in three regional operating units, namely Canada, the United States, and Global, offering similar services across all regions. The company offers services in various sectors across the project life cycle through five business operating units; infrastructure, water, buildings, environmental services, and energy and resources. The company provides professional services in all phases of the project life cycle: planning, design, construction administration, commissioning, maintenance, decommissioning, and remediation.

*Share prices in USD as of March 28, 2023.

Financial highlights as of FYE 2022 ($Canadian):

• Gross revenue increased from $4.6 billion to $5.7 billion (+24 percent). The average 2022 gross revenue growth for firms on the Zweig Index was 10.9 percent.
• Net service revenue increased from $3.6 billion to $4.5 billion (+22.6 percent). The average 2022 NSR growth for firms on the Zweig Index was 10 percent.
• Adjusted EBITDA from continuing operations increased from $574 million to $723 million, which is 16.2 percent of NSR. The average adjusted EBITDA margin of firms on the Zweig Index has been 15.1 percent of NSR in 2022.

• 54 percent of the firm’s FYE 2022 gross revenues were earned in the United States. The remaining 46 percent is split evenly between Canada and the rest of the globe.

• Stantec’s operating segments in order of largest to smallest are as follows: infrastructure (28 percent), environmental (22 percent), water (20 percent), buildings (18 percent), and energy/resources (12 percent).

• As of FYE 2021, environmental services were Stantec’s fourth largest revenue source at $831 million. Environmental services are now Stantec’s second largest revenue source, bringing in $1.3 billion in FYE 2022. This increase was likely fueled by the firm’s recent acquisitions of Cardno and Cox|McLain Environmental Consulting in late 2021.
• The firm currently has $5.9 billion worth of backlog, which equates to roughly 12.5 months’ worth of work for its current labor force. Backlog as of this time last year was $5.1 billion (14.9 percent growth).

Balance sheet ($Canadian):

• The firm’s cash and cash equivalents accounts decreased 23.5 percent, from $194 million to $148 million, though its current ratio is at a healthy 1.37.
• There is a total of $1.3 billion in long-term (and current portion of long-term) debt.
• Quick ratio (cash + receivables / current liabilities) decreased slightly from .86 to .83.
• Debt to equity ratio decreased from .63 in 2021 to .57 in 2022.

Valuation metrics:

Enterprise value measures a company's total value, often used as a more comprehensive alternative to equity market capitalization. EV includes in its calculation the market capitalization of a company but also short-term and long-term debt and any cash or cash equivalents on the company's balance sheet. (Note that all estimated enterprise values are as of December 31.)

• Stantec’s EV decreased from $7.3 billion to $6.5 billion, largely due to the cooling down of equities in the last year.
• EV/NSR decreased from 2.0x to 1.45x.
• EV/adjusted EBITDA decreased from 12.6x to 8.9x.
• EV/backlog decreased from 1.4x to 1.1x.

Risks and opportunities:

Opportunities:

1. Ability to capitalize on key economic imperatives:

• An aging and overloaded U.S. infrastructure.
• Production capacity constraints and re-shoring of domestic production.
• Climate change and sustainability.

2. Strong exposure to U.S. market dynamics:

• Competitive advantage due to Stantec’s multi-sector expertise that enhances the firm’s offering to clients (buildings, water, renewable energy, etc.).
• Situated in key growth areas of the U.S. which are expected to benefit from the Infrastructure Investment and Jobs Act, Chips Act, and the Inflation Reduction Act.

3. Well positioned for the continued growth in Canada with the improvement of the country’s water resources, infrastructure, and energy/resources.
4. Global presence in key growth markets:

• Leading global water firm in the U.K., Australia, and New Zealand where there is expected to be continued strong growth.
• Strong demand for healthcare, science/technology, and commercial mixed-use buildings.
• Need for community development growth in the U.K. and transportation in Australia.
• Energy and resources transition initiatives and mining in Australia.

Risks:

1. A cybersecurity breach may cause loss of critical data, interrupt operations, and cause prejudice to Stantec’s clients.
2. Failure to attract, retain, and mobilize skilled employees could harm Stantec’s ability to execute on its strategy.
3. Geopolitical events may result in additional risks to the business.
4. Climate change creates both risks and opportunities for Stantec.

Acquisitions (2019-2022) ($Canadian):

 Summary:

The average 2022 net revenue growth of firms on the Zweig Index was 10 percent, and Stantec outpaced the industry with 22.6 percent growth. Organically, the firm added approximately 700 people and grew its net revenue by 9.4 percent. Via the tuck-in acquisitions of Barton Willmore and L2P, Stantec added 340 additional staff members and grew net revenue by 12.3 percent. The firm also outperformed in terms of profitability with an adjusted EBITDA margin of 16.2 percent of net revenue. The industry average margin was 15.1 percent of net revenue.

Stantec has been growing very quickly and continues to produce above average profitability. Firm leaders believe that there are some economic headwinds from rising interest rates and a potential recession, but they are confident in the resilience of the firm’s business model and its positioning to address key climate-related and supply chain challenges. In the U.S., significant federal funding is starting to be dispersed from the Infrastructure Investment and Jobs Act, the Inflation Reduction Act, and the CHIPS and Science Act. In Canada, with commitments made on climate change, the need for environmental services and energy transition is expanding at an unprecedented rate. In the firm’s global region, they are seeing continued strong growth through water asset management programs in the U.K., Australia, and New Zealand, along with infrastructure supported by the European CHIPS Act and Australian Infrastructure Investment Program. Leadership expects to be able to capitalize on these strong tailwinds to further drive organic growth, and the firm’s balance sheet strength and pipeline of potential opportunities also positions it well for ongoing M&A growth.

Please feel free to reach out with any thoughts, comments, or questions at achavez@zweiggroup.com. I welcome and encourage open dialogue that will help my team and I elevate the industry.