Don’t Chuck Wood: Why Pole Stocks Are The Next EV Play

The
Quiet
Network
Overhaul

One
could
be
tempted,
as
a
recent


Wall
Street
Journal
article
does,
to
predicate
the
firm’s
rise
upon
the
expected
explosion
of
electric
vehicles
and
accompanying
energy
transition.

The
company’s
recent
visibility
is
certainly
not
foreign
to
this
theme,
observes
Benoît
Poirier,
managing
director,
industrials,
transportation
and
aerospace,
at
Desjardins
Securities,
but
the
real
impetus
behind
the
company
became
manifest
much
earlier.

“We’re
involved
in
a
replacement
cycle
of
infrastructure
poles
that
started
about
eight
ago,”
says
Stella-Jones
president
Eric
Vachon.

“The
simple
truth
is
that
we
are
constantly
demanding
more
from
the
modest
telephone
pole,
which
hasn’t
gotten
stronger
with
age.

“One
of
our
clients
has
a
network
of
three
million
poles
and
he
was
buying
30,000
new
poles
from
us
each
year.
That
implies
a
100-year
life
cycle
when
the
practical
cycle
is
rather
60
years.”

At
one
point,
this
client
started
buying
40,000
poles
rather
than
30,000.
Then
another
did
the
same.
Then
another.
“The
process
has
greatly
accelerated
in
the
last
three
years,
but
I’ve
seen
it
going
on
over
seven
years,”
Vachon
adds.

Utility
Poles
Can’t
Take
it
Anymore

Our
expectations
of
the
humble
pole
have
steadily
increased
since
the
massive
layouts
of
the
1950s
and
1960s.
Today
the
network
simply
can’t
handle
it.
Consider
the
simple
demand
for
electricity,
or
for
air
conditioning.

“When
I
was
a
kid,
air
conditioning
was
a
luxury
few
homes
could
afford,”
Vachon
recalls.
“Today,
practically
every
home
has
it.”

But
that’s
not
all.
Poles
started
out
transporting
only
electricity
and
phone
lines.
Then
came
cable,
and
then
fibre
optic.
Then
higher-performing
transformers
and
heavier-duty
hardware.
Poles
are
cracking
under
the
load.

And
that
was
only
the
beginning.
Now,
utilities
are
all
set
to
increase
their
electricity
capacity
to
meet
the
electric
vehicle
challenge,
like
Hydro-Quebec,
which
has
recently
announced
a
C$150
billion
investment
to
double
its
electricity
production,
of
which
C$40
billion
will
go
to
solidify
its
existing
infrastructure.

“To
incentivise
drivers
to
buy
EVs,
regions
need
fast
chargers
on
highways
and
in
cities.
For
that,
you’ll
need
more
utility
infrastructure,
and
a
part
of
that
will
be
utility
poles,”
explains
Seth
Goldstein,
equity
strategist
at
Morningstar
and
chair
of
the
electric
vehicle
committee
at
Morningstar
Research
Services.

Announcements
like
Hydro-Quebec’s
have
been
repeated
across
Canada
and
the
US.

“Hydro
One
says
it
needs
100,000
more
poles
in
the
next
three
to
four
years
as
part
of
its
broadband
roll-out
plan,”
Poirier
indicates,
while
BC
Hydro’s
new
capital
plan
also
includes
the
replacement
of
100,000
poles.
A
recent

PWC
Canada
study
estimates
that
“generating
electricity
and
producing
the
hydrogen
to
meet
Canada’s
2050
targets
could
require
$1.5
trillion
in
investments,

ignoring
distribution
and
supporting
infrastructure
requirements.”

So
is
Stella-Jones
a
Worthwhile
Buy?

In
this
race
to
re-pole
North
America,
Stella-Jones
is
the
dominant
player,
alongside
smaller
regional
suppliers
like
Koppers
Holdings
(KOP),
which
has
also
seen
its
stock
price
surge
by
65%
over
the
past
year
(as
of
March
27).
Other
firms,
which
are
not
publicly
traded,
include
names
like
Bell
Pole
and
Marwood.
The
landscape
is
quite
thin,
finds
Spencer
Liberman,
equity
analyst,
industrials,
at
Morningstar.

“When
researching
utility
poles,
I
did
not
find
any
indications
that
West
Fraser
or
any
of
the
lumber
companies
I
cover
produce
utility
poles,”
he
recognises.

With
only
a
few
players
in
the
space,
the
“good
old
fashioned”
wood
pole
niche
reins
supreme.
There
is
some
demand
for
poles
made
of
composite,
which
is
sturdier
and
can
age
more,
but
they
are
required
only
in
areas
like
the
Florida
coastm,
which
is
exposed
to
hurricanes.
Composite
poles
are
also
about
twice
as
expensive
as
wood
equivalents.
There
is
some
demand
for
steel
rigs
anchored
in
concrete,
but
that
is
for
even
more
expensive
and
specialised
requirements.
In
short,
for
basic
stuff,
wood
is
best.
“Wood
poles
are
easier
to
escalate
and
to
drill
when
you
need
to
add
hardware,”
Vachon
says.

Still
Room
to
Rise

According
to
Poirier’s
appraisal,
Stella-Jones
stock
has
not
yet
run
its
course.
After
its
mid-January
peak,
the
stock
fell
back
to
around
C$77
following
announcements
that
US
utility
customers
were
softening
their
pace
of
pole
purchases
because
higher
costs
of
capital
are
delaying
certain
projects.
But
that
is
only
a
temporary
setback
that
offers
investors
a
welcome
entry
point,
Poirier
believes.

Poirier
still
considers
Stella-Jones
attractive
for
investors,
projecting
a
price
of
C$92
in
2024.
If
the
company
meets
its
target
revenues
of
$3.9
billion
in
2025
with
an
EBITDA
margin
of
17.3%
(which
stood
at
18%
for
2023),
the
stock
could
land
at
C$102.
If
central
banks
chop
down
interest
rates
(pun
intended),
that
could
increase
Stella-Jones’
cutting
down
of
trees,
Poirier
believes,
as
lower
rates
would
accelerate
deployment
plans
for
utility
companies.

This
article
originally
appeared
on
our
Canada
sister
site
and
is
edited
and
republished
on
Morningstar.co.uk
for
UK
and
European
readers

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