The Canadian small caps we’ve identified would be regarded as a good buy for value investors
SmallCapPower | April 3, 2018: The price-to-book ratio is a common metric used by value investors to determine whether a stock is relatively overvalued or undervalued. It is calculated by taking a stock’s market cap and dividing it by its book value, where book value is calculated as assets minus liabilities. Typically, a ratio under one implies that a stock is undervalued as the stock is trading on the market for less than its intrinsic value. For example, if a stock has a price-to-book of 0.5x, it means that the stock is trading at 50 cents on the dollar. Thus, if the company were to liquidate of all its assets, it would be worth double what it is trading at. Today we have discovered four Canadian small caps with market caps under $2B and revenues above $500M trading with a price-to-book ratio under 1.0x. For reference, the average price-to-book of our sample of 163 TSX-listed stocks is 2.0x.
*Share prices as at April 1, 2019, data obtained from S&P Capital IQ
Resolute Forest Products Inc. (TSX:RFP) – $10.78
Paper and Forest Products
Resolute Forest Products offers a range of forest products, including market pulp, tissue, wood products, newsprint, and specialty papers. The Company owns or operates 40 pulp, paper, tissue, and wood products facilities in the U.S. and Canada. Its business segments include Market Pulp, Tissue, Wood Products, Newsprint, and Specialty Papers. On March 8, 2019, the Company reported Q4/18 results: EPS was $0.04 on revenues of $932M, which both fell short of the Street consensus of $0.58 and $932M, respectively. EPS missed due to lower-than-expected operating margins as well as a higher-than-expected effective tax rate.
- Market Cap: $984.3 Million
- Book Value: $1,535.0 Million
- Price-to-Book Ratio: 0.64x
- YTD-Return: -0.4%
Indigo Books & Music Inc. (TSX:IDG) -$10.10
Specialty Retail
Indigo Books & Music is a Canada-based book, gift, and toy retailer that operates stores in all 10 provinces and also has an online sales channel via its website. The Company owns 90 superstores under Chapters and Indigo brand names, and another 120 small format stores under the Coles, Indigospirit, SmithBooks and The Book Company brands. On February 5, 2019, Indigo reported Q3/18 results: EPS was $1.56 on revenues of $433.3M, above the consensus estimates of $1.44 and $411.8M, respectively. Management has been renovating stores in FY2018 and plans to continue for FY2019, and, as a result, CAPEX requirements have been putting a damper on profitability and free cash flow. Indigo is expected to complete the renovations by F2020 and should return to significant profitability.
- Market Cap: $274.1 Million
- Book Value: $396.7 Million
- Price-to-Book Ratio: 0.69x
- YTD-Return: -10.5%
Laurentian Bank of Canada (TSX:LB) -$41.35
Banks
Laurentian Bank is a Canada-based chartered bank that provides banking services to individuals, and small and medium-sized enterprises, as well as to independent advisors across the country and operates as a full-service brokerage firm. The Bank’s loan portfolio consists of personal loans, residential mortgage loans, commercial mortgage loans, and commercial loans, and finance lease receivables. Laurentian also offers financing products, such as credit cards, lines of credit, and student loans. On February 27, 2019, the Bank reported Q1/19 results: EPS was $0.98 on topline of $242.2M, which missed consensus estimates of $1.29 and $259.6M. The Q1 miss was driven primarily by less than robust non-interest revenues and an increase in non-interest expenses. Consolidated loan book remained stable, and credit quality improved on a sequential basis. Laurentian has committed to transforming its remaining branches into an advice-only model, meaning they would shift away from teller services toward in-branch financial advisors, which is expected to reduce the Bank’s headcount by 10%.
- Market Cap: $1,744.6 Million
- Book Value: $2,510.4 Million
- Price-to-Book Ratio: 0.70x
- YTD-Return: +8.6%
Cascades Inc. (TSX:CAS) -$8.38
Paper Packaging
Cascades is the sixth largest producer of containerboard in North America and the fifth largest tissue producer on the continent. The Company offers products such as paperboards for the food packaging and furniture backing industries, honeycomb paperboards, and uncoated paperboard partitions for the beer, wine, and spirits industry. Also, CAS provides egg filler flats for egg processors and four-cup carriers for the quick-service restaurant industry, as well as polystyrene foam trays, plates, and bowls for processors and retailers in the food industry. The Company also produces bathroom and facial tissues, paper towels, paper hand towels and napkins, parent rolls, industrial wipes, and other products under the Cascades brand name. On February 28, 2019, Cascades reported Q4/18 results: EPS was $0.0 on revenues of $1.2B. EPS was lower than consensus estimates of $0.28, while revenues matched estimates. Elevated CAPEX requirements kept profitability depressed for the Company, however lower prices for old corrugated cardboard (OCC), a key input cost for CAS, could lead to healthier implied margin profitability on a go-forward basis.
- Market Cap: $785.6 Million
- Book Value: $1,688.0 Million
- Price-to-Book Ratio: 0.47x
- YTD-Return: -18.1%
Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.
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