What are we looking for?
High quality Canadian industrial companies showing positive revenue growth and economic performance.
The screen
We have screened our Canadian industrials universe using the following criteria:
-A minimum market cap of $350-million;
-An economic performance index, or EPI (return on capital divided by cost of capital), of 1.0 or higher. An EPI ratio of 1.0 or more indicates a company's capacity to create wealth for its shareholders (a higher EPI displays a greater rate of wealth creation);
-A return on capital of 8 per cent or higher;
-A positive return on capital change over the past 12 months;
-Future-growth-value-to-market-value ratio – FGV represents, in percentage, the portion of the market value that exceeds the company's current operating value. The higher the number, the higher the baked-in premium for expected growth and the higher the risk. A negative number reflects a discount;
-A positive sales change over the past 12 months;
-The free-cash-flow-to-capital ratio. This ratio gives a sense of how well the company uses the invested capital to generate free cash flow, which could be used to stimulate growth, pay and/or increase dividends, reduce debt, etc. A positive figure is good; 5 per cent and above is excellent;
-All companies must pay a dividend.
More about StockPointer
StockPointer is a fundamental analysis tool based on an EVA (economic value-added) model to quickly and easily identify investment opportunities. In addition to providing detailed reports on more than 7,500 companies (Canadian stocks, U.S. stocks and American depositary receipts), StockPointer also allows investors to create personalized filters and build custom portfolios.
What did we find?
Only 11 companies out of 127 fit our list of criteria.
Magellan Aerospace Corp., the highest wealth creator of the group with an EPI of 2.1, is also the company trading at the most interesting valuation multiples. Its FGV of minus 34.2 per cent means Magellan's profit would have to drop significantly to justify the current valuation, but the company is still growing quickly. It is also well positioned in the aerospace and defence industry, which could benefit from U.S. President Donald Trump's military budget.
Hardwoods Distribution Inc., the smallest company in the group by market cap, also represents an interesting opportunity judging by its FGV valuation and high revenue growth. The company is a wholesale distributor of hardwood lumber, modern decorative surfaces and composite panels for the industrial and retail markets in North America. Hardwoods generates good free cash flow and has almost no long-term debt (not shown in table).
Investors are advised to do additional research prior to investing in any of the companies mentioned.
Jean-Didier Lapointe is a financial analyst at Inovestor Inc.