Pat McKeough recently replied to a member of his Inner Circle asking for an opinion on the niche lumber specialist. The company’ s seen earnings and sales slip on weak demand, but the it also faces another significant risk, says Pat.

Q: Hello: This is my first inquiry since joining the Inner Circle. What is your advice on Stella-Jones? Thanks and regards.

A: STELLA-JONES INC. (symbol SJ on Toronto (Shares outstanding; www.stella-jones.com) makes pressure-treated wood products. They include: railway ties (36% of sales); utility poles (32%); treated lumber products for the residential market (21%); lumber for industrial uses such as construction timbers and highway guardrails (5%); and logs and lumber (6%).

The company gets most of its utility poles from the timberlands it leases in Quebec and B.C. It also buys wood for railway ties and other products from sawmills in the U.S. and Canada. The U.S. provides 69% of its sales, while Canada supplies the remaining 31%.

Revenue jumped 139.3%, from $651.6 million in 2011 to $1.6 billion in 2015.

The company’s earnings rose 153.9%, from $55.7 million in 2011 to $141.4 million in 2015. Due to more shares outstanding, earnings per share gained 134.5%, from $0.87 to $2.04 (all per-share amounts adjusted for a 4-for-1 stock split in October 2013).

Stella-Jones’s sales in the three months ended December 31, 2016, fell 4.4%, to $341.7 million from $357.2 million a year earlier. The decline was due to lower railway tie demand.

That lower demand offset revenue increases due to positive currency gains and acquisitions. This included Stella-Jones’ $44.9-million purchase of Ram Forest Group Inc. and Ramfor Lumber Inc. in October 2015.

Growth Stocks: Earnings fall due to lower sales

On June 3, 2016, the company also completed its acquisition of Lufkin Creosoting Co., Inc. for $37.5 million U.S. and Kisatchie Treating LLC for $42.5 million U.S.

Earnings fell 43.9% in the latest quarter, to $18.5 million, or $0.27 a share, from $33.0 million, or $0.48 a share. The decrease was largely due to the lower sales.

Stella-Jones’ balance sheet remains sound. The company’s long-term debt of $687.5 million is a moderate 23.7% of its market cap.

Stella-Jones’s growth-by-acquisition strategy adds risk. However, despite weaker demand for railway ties and utility pole, the company remains an established leader in those niche markets. It also stands to gain from infrastructure projects as North American power companies upgrade their transmission and distribution grids.

Stella-Jones shares trade at 17.3 times the company’s forecast 2017 earnings of $2.21 a share. The $0.40 dividend yields 1.2%.

Inner Circle recommendation: Stella-Jones is okay to hold, but only for aggressive investors.

For our recent report on a U.S. growth stock that we rate as a buy, read Earnings soar for Conagra Brands.

For our views on short-term vs. long-term investing, read The best (seemingly) short-term investments still don’t provide the benefits of a long-term strategy.