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An Attractive Value Investment With 30% Upside

Linamar Corporation (TSX:LNR) manufactures highly engineered products, which power vehicles, motion, work, and lives. The company consists of two operating segments: the Powertrain/Driveline segment and the Industrial segment, which are further divided into four operating groups — Machining and Assembly, Light Metal Casting, Forging, and Skyjack.

Linamar has a strong market position. It’s ranked the top 33rd North American automotive supplier and 65th globally. The company operates in North America, Europe, and Asia and has plans to expand in China, Brazil, and India. It has been experiencing strong content-per-vehicle growth in Asia and Europe since 2011.

What makes Linamar an attractive investment today is that it trades at a value compared to its growth prospects. In 2015, Linamar generated revenue of $5,162 million, and management expects its revenue to grow at a double-digit rate through 2020.

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Linamar is attractive

From 2011 to 2016, Linamar increased its earning per share (EPS) at a double-digit rate. Its shares traded north of $80 in 2015 at about a price-to-earnings ratio (P/E) of 15.

Although Linamar has remained increasingly profitable, analysts expect its EPS growth to slow down to a single-digit rate. That said, as of Q3 2016, Linamar experienced its 21st consecutive quarter of double-digit earnings growth.

The multiple contraction indicates that the market is expecting Linamar’s growth to slow down. Instead of a growth investment, Linamar can be viewed more as a value investment today. At about $60.50 per share, it trades at a P/E of about 7.7.

This is an attractive multiple to pay compared to its growth prospects. Across nine analysts at Reuters, the analyst consensus expects Linamar to grow its EPS by 8.6% per year for the next three to five years.

Moreover, Linamar has been a good capital allocator. Since 2010, it has maintained a return on equity (ROE) of at least 10%. Since 2014, it has maintained a ROE of at least 21%.

What kind of returns can you expect from Linamar?

Linamar’s long-term normal multiple is close to 12. Assuming it trades at a more conservative P/E of 10 in the future and it experiences moderate single-digit EPS growth, Linamar can reach $80 again within the next few years.

In fact, the analyst at Bank of Nova Scotia has an $80 12-month price target on Linamar. If so, Linamar has about 32% of upside from current levels.

On top of the price-appreciation potential, Linamar also offers a yield of 0.7%. Even though it’s a small yield, it still adds to returns.

Investor takeaway

Trading at a P/E of 7.7, Linamar is a value investment that can appreciate to $80 in the next few years for a return north of 32%.

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Fool contributor Kay Ng owns shares of LINAMAR CORP.

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