Pat McKeough responds to many requests from members of his Inner Circle for specific advice on stocks to buy as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions. While we reserve our buy-hold-sell advice for Inner Circle members, these excerpts provide a great deal of information and analysis on stocks we’ve covered for members of Pat’s Inner Circle.

This week an Inner Circle member asked about a Canadian company that is a leader in its niche markets. Stella-Jones makes utility poles and railway ties. Pat looks at how power company projects and railway usage will affect Stella-Jones’ growth prospects and examines the risks and rewards of the company’s growth-by-acquisition strategy.

Q: Hi: What is your current recommendation for Stella-Jones? Thanks.

A: Stella-Jones Inc., (symbol SJ on Toronto; www.stella-jones.com) makes pressure-treated wood products, including railway ties (44% of sales), utility poles (35%), treated lumber for residential uses (15%) and treated lumber products for the industrial market, such as marine and foundation pilings and highway guardrails (6%).

The company gets most of its utility poles from timberlands it leases in Quebec, B.C. and Alberta. It also buys wood for railway ties and other products from sawmills in Canada and the U.S.

Stella-Jones continues to expand in the U.S., which now provides three-quarters of its sales. In April 2010, it purchased Tangent Rail Corp. for $170 million U.S. Tangent makes railway ties at plants in Alabama, Indiana, Louisiana and Pennsylvania.

In December 2011, the company paid $34.9 million U.S. for Thompson Industries, an Arkansas-based company that makes treated railway ties and other products.

In addition, in November 2012, Stella-Jones bought McFarland Cascade Holdings for $250 million U.S. Washington State-based McFarland makes utility poles and treated lumber for decks, railings and other residential uses.

Company funds acquisitions by issuing more shares

In the three months ended June 30, 2013, Stella-Jones’s sales rose 34.0%, to $273.2 million from $203.9 million a year earlier. McFarland added $75.0 million to the company’s sales in the latest quarter, and favourable foreign exchange rates boosted sales by $1.8 million. Excluding these factors, sales fell 7.5%, partly because flooding in southern Alberta reduced railcar availability in Western Canada.

Earnings gained 26.8%, to $26.4 million from $20.8 million. Per-share earnings rose 18.5%, to $1.54 from $1.30, as the company issued more shares to fund its acquisitions.

Stella-Jones has no cash, but its long-term debt of $372.8 million is a moderate 21.9% of its market cap.

Stella-Jones is an established leader in its niche markets of utility poles and railway ties. It looks to gain as North American power companies upgrade their transmission and distribution grids, and as railway usage expands.

The shares are up 74% over the last year. The stock yields 0.8%.

In the Inner Circle Q&A, Pat looks at the added risk of Stella-Jones’ growth-by-acquisition strategy. He also examines the company’s financial outlook and whether the stock can keep rising. He concludes with his clear buy-hold-sell advice on this stock.

(Note: If you are a current member of the Inner Circle, please click here to view Pat’s recommendation. Be sure to log in first.)

COMMENTS PLEASE—Share your investment experience and opinions with fellow TSINetwork.ca members

Do you look for stocks like Stella-Jones that have little or no competition in their fields? Do you have examples of niche stocks that have done particularly well for you?