With a new CEO at the helm, investors should consider this beaten-down TSX growth stock

Open this photo in gallery:

Stella-Jones Inc. appointed Eric Vachon as its new chief executive on Thursday, removing some uncertainty that had been weighing on the stock over the past two months when the previous CEO announced he was stepping down.

The best part of this leadership transition for investors: After a recent sell-off, the stock looks cheap.

The Montreal-based company makes pressure-treated wood products largely used for railway ties and utility poles. While the business might not sound terribly exciting, Stella-Jones is a growth stock that has been turning heads for years.

It has been a steady acquirer, completing 19 takeovers in Canada and the United States since 2003, driving up annual sales fivefold since 2009. Perhaps more important to the company’s profile, its shares have delivered a total return (with dividends) of 718 per cent over the past decade, outpacing the S&P/TSX Composite Index by a factor of seven.

But the stock (symbol SJ), which closed Thursday at $39.56, has been zigzagging for more than five years because of inconsistent profit, stagnating cash flow and volatile lumber prices. And the news in July that Brian McManus was stepping down only added to concerns, given that the long-serving CEO had been closely associated with Stella-Jones’s acquisition strategy over his 18 years at the helm.

On July 15, the day that Mr. McManus announced his decision to leave, the stock fell 6.1 per cent. The sell-off didn’t end there: The stock was down nearly 20 per cent by Aug. 7.

Now, with Mr. Vachon – currently the chief financial officer at Stella-Jones after serving a number of roles at the company since his arrival in 2007 – set to replace Mr. McManus on Oct. 11, how should investors approach the stock?

The company is telling investors what they want to hear: It is business as usual under new leadership. At least for now.

In a phone interview with The Globe and Mail, Mr. Vachon outlined his plans in broad strokes, saying that the first couple of years will hew closely to the company’s deal-driven strategy under Mr. McManus.

“After working 12 years with Brian, we’ve come up with a common way of managing things, so obviously there will be some similarities. We do have a plan for the next 24 months, in terms of [mergers and acquisitions], growth and strategic [capital expenditures] we would like to do,” Mr. Vachon said.

Even after this settling-in period, expect only subtle adjustments related to how the company develops. Mr. Vachon believes acquisitions remain an important part of the strategy, along with organic growth and the prospect of returning money to shareholders in the form of dividends or buybacks.

As for the recent sell-off in the share price – which has left the stock trading at just 18.4 times trailing earnings, or well below the stock’s average price-to-earnings ratio of 21.5 – he thinks the downturn was overdone.

“The market needs to realize that there is a strong team in place. The strategy has not changed, and the company’s fundamentals have not changed,” Mr. Vachon said. “Delivering a few acquisitions will convey the message that Brian has left behind him a very strong team of talented folks, and we will continue to execute on a well-established plan.”

Analysts who have commented on the new leadership remain upbeat on Stella-Jones.

Benoit Poirier, an analyst at Desjardins Securities, pointed out that Mr. Vachon offers continuity: He has extensive first-hand experience with the company over the past 12 years and has participated in 15 of the acquisitions completed by Stella Jones.

“Overall, we do not expect a material reaction to this announcement, as we believe Mr. Vachon’s appointment had been expected by the Street. That being said, we appreciate that he intends to continue SJ’s strategy to pursue continental expansion across all three segments [railway ties, utility poles and residential lumber] through acquisitions,” Mr. Poirier said in a note.

But the long-term argument in favour of Stella-Jones rests on its fundamentals, which look solid.

Mr. Poirier expects railways will maintain their spending through 2021 (at high levels), which bodes well for the market for rail ties. Even better, he expects that North American utilities will increase their spending to improve aging infrastructure, which should support demand for transmission poles and underscore Stella-Jones’ attractive valuation.

If he’s right, then new leadership is a bonus to a strong investment case.