Pat McKeough recently replied to a member of his Inner Circle looking for his opinion on WSP Global Inc. The engineering consultant doubled its earnings for 2015 with the purchase of rival firm MMM. But growth by acquisition carries risk, says Pat.
Q: Pat: What’s your recommendation on WSP Global? Thank you.
A:WSP GLOBAL INC. (symbol WSP on Toronto; www.wspgroup.com) is a consultant on engineering projects for public-and private-sector clients around the world. It employs about 34,000 people, mainly engineers, technicians, scientists, environmental experts and architects. It has more than 500 offices across 40 countries.
WSP has a long history of using acquisitions to expand. As a result, its revenue soared from $651.0 million in 2011 to $6.1 billion in 2015.
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Mainly due to the costs of integrating these new businesses, the company’s earnings fell from $1.91 a share (or a total of $50.1 million) in 2011 to $1.15 a share (or $46.3 million) in 2012. Earnings then rose to $1.38 a share (or $71.7 million) in 2013. They then dropped again to $0.98 a share (or $62.8 million) in 2014.
In October 2015, WSP completed its acquisition of rival engineering company MMM Group for $425 million in cash and shares. That helped lift the company’s earnings for 2015 to $2.05 a share (or $188.8 million). If you factor out unusual items, it earned $1.87 a share (or $172.8 million).
Going forward, the MMM purchase will add $264 million to WSP’s annual revenue, and expand its presence in the Greater Toronto Area. That will help the company profit as Canadian provincial and municipal governments increase spending on new public transportation and other infrastructure projects over the next few years.
To help pay for MMM, the company raised $201 million through a public share offering at $42.25 a share. It also sold $144 million of new shares to its two main shareholders: the Canada Pension Plan and the Caisse de dépôt et placement du Québec.
WSP’s sound balance sheet should let it keep making acquisitions. Its long-term debt, as of December 31, 2015, was $851.6 million, or 22% of its market cap. It also held cash of $204.1 million, or $2.06 a share. However, goodwill and intangible assets now total $3.1 billion. That’s a high 78% of WSP’s market cap.
WSP operates in the same business as Stantec (symbol STN on Toronto), which is a hold recommendation of Stock Pickers Digest. However, WSP has a broader international presence—markets outside of Canada supplied 82% of its 2015 revenue.
Like Stantec, WSP cuts its costs by dividing administrative expenses, financing and employee benefits among its businesses. WSP’s outlook is positive, but also like Stantec, it continually buys and integrates new companies. That adds risk, including the risk of writedowns.
The stock trades at 16.1 times its projected 2016 earnings of $2.48 a share. The $1.50 dividend yields 3.8%.
I am presently retired and always wonder what’s good for Growth investor is it applicable to retiree investment plan. Presently I have 4 separate plans: RIFF,TSFA,CDN stocks and USA stocks. In other words, do you apply different rules for those who are now retired.
There are a number of difficulties with recommending a model portfolio for all investors. The main one is that each individual has different objectives, acceptable risk levels and so on.
For example, conservative or income-seeking investors–and that includes many retirees–may want to emphasize utilities and banks for their high and generally secure dividends. More aggressive investors might want to increase their portfolio weightings in resources or manufacturing stocks.
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I am presently retired and always wonder what’s good for Growth investor is it applicable to retiree investment plan. Presently I have 4 separate plans: RIFF,TSFA,CDN stocks and USA stocks. In other words, do you apply different rules for those who are now retired.
Thanks for your question.
There are a number of difficulties with recommending a model portfolio for all investors. The main one is that each individual has different objectives, acceptable risk levels and so on.
For example, conservative or income-seeking investors–and that includes many retirees–may want to emphasize utilities and banks for their high and generally secure dividends. More aggressive investors might want to increase their portfolio weightings in resources or manufacturing stocks.