Key insights
- The author analyzes Canadian engineering firms WSP Global and Stantec, noting a ~30% drop from highs, potentially due to AI disruption fears. The author argues against this, citing liability, labor shortages, and value-based pricing as mitigating factors. Both companies show strong EPS growth targets and reasonable forward P/E ratios, suggesting they may be undervalued despite high leverage. The direct US market influence is limited as the focus is on Canadian firms, but sector trends can have spillover effects.
Recently, I've been looking into WSP Global (WSP) and Stantec (STN). These are two Canadian-based engineering and design firms with a great track record of compound growth. I think they're screaming buys, but I wanted to get this subreddit's opinion to see if I'm missing anything...
Both have recently dropped from their all-time highs by ~30%. This looks like a sector trend to me, with the market penalizing firms that are asset-light or pivoting to asset-light models (i.e. non-construction). Other examples in the sector with trading red or sideways include Jacobs (J), TetraTech (TTEK), Atkins Realis fka SNC Lavalin (ATRL).
My assumption is that this sector rotation is primarily being driven by fears of AI disruption impacting Professional Services at large, but I don't think it's likely that this is actually going to impact the sector like people think. Three reasons:
- Liability and Certification: For construction, sanitation, infrastructure, energy, etc; you need an actual certified engineer's approval and stamp to get insurance, regulatory approval and actually proceed. 2. Labour Shortage: Firms in the industry are actually highlighting that there's a labour shortage for experienced Engineers. If AI helps create efficiencies - it seems like a tailwind to me. Besides, I don't see civil engineers / electrical engineers worried about losing their jobs like software engineers are. 3. Value-Based Pricing: Firms are moving towards value-based pricing instead of T&M. This means even if there is a substantial reduction in hours needed, these firms should be insulated.
Some quick facts about the two companies specifically:
- STN: PE Ratio: ~24; Forward PE Ratio: ~15; EPS ~20% higher Y/Y for FY2025; EPS CAGR Targets of 15-18%. * WSP: PE Ratio: ~26; Forward PE Ratio: ~17; EPS ~19% higher Y/Y for FY2025; EPS CAGR Targets of 15-20%. One thing to be aware of is their leverage ratio is somewhat high (2.3x), but their business model is to expand through roll-ups and this isn't something they haven't done before. Historically, they've had great success with integrating acquired companies.
Thoughts? Am I missing something?