RAILWAY TIE-MAKER STELLA-JONES DOWNGRADED

Desjardins Capital Markets downgraded Montreal- based railway tie- maker Stella- Jones on Monday on concerns the stock might be running out of steam.

Desjardins now views the stock as a hold, and lowered its target price to $43 from $45.

Analyst Benoit Poirier noted that the company, which makes wood for telephone polls in addition to the wood for railroad tracks, turned in a relatively solid fourth quarter in 2016.

Stella- Jones’ revenue was down four per cent year- over- year for the three months ending December 31 to $342 million, but that was in line with estimates. The company’s sale of railway ties, in fact, exceeded Desjardins forecast, pulling in $113 million versus an $84 million estimate. ( Underperforming sales of residential lumber and telephone pole products were the cause of the quarterly revenue drop.)

In more good news, revenue for the 2016 fiscal year was up 15.2 per cent to $1.83 billion from $1.55 billion the year before.

Estimates for 2017, however, are not looking good. Stella-Jones expects its rail-tie revenues to decline by 10 to 12 per cent year-over-year in 2017, with an especially hard slump in the first six months. The decline is likely to be aided by pricing pressure, with volumes likely to fall two to three per cent year-over-year.

Stella-Jones, which has a market cap of $2.1 billion, could see its shares “trade sideways until the latter part of 2017, pending more visibility on railway tie industry inventory levels or a pickup in tie demand,” according to Poirier. The financial pressures put on the company by a difficult environment the rail-tie industry also mean it is unlikely Stella-Jones will make any significant cash deployments in the short term.

Shares in Stella-Jones closed down 5.24 per cent at $39.39 in trading on Monday.