Earlier this year, I wrote a couple of articles pondering the question of whether or not Uni Select Inc. (TSX: UNS) was overvalued, as the stock had been a massive outperformer and valuations seemed to be getting richer. After the company reported first-quarter 2017 results that were disappointing, as organic growth was a negative 5%, the stock got hit hard and went down 10% that day.
In the end though, I concluded that the shares were not overvalued and that the company deserved a premium valuation. Well, they have come down 18%, and at this point, it looks like an even better time to get exposure to this well-run company with a good management team, an exceptional track record, and that still has room to grow.
So, although the most recent quarter was a disappointment, the prior three quarters saw the company reporting better-than-expected results.
Here’s why I believe this weakness in the share price has made it an attractive bargain.
First off, the company is achieving strong underlying organic growth of 3.4% at the Canadian Automotive Group (33% of sales). This comes after a stalling of organic growth in 2016. While the company has been very acquisitive recently, and this has been adding to its growth profile, it is important to note that the underlying organic growth trend is positive.
Secondly, the company has room to grow in the paint and material market, which remains highly fragmented and ripe for consolidation, as three quarters of the market is made up of very small competitors. I take comfort in the fact that the company has made over 70 acquisitions of various sizes over the last 10 years and has been very successful in the integration of these acquisitions.
Longer term, I am bullish on the company as, in my view, the automotive aftermarket and the automotive paint and materials industries have good growth in front of them due to the fact that consumers are holding on to their cars longer. U.S. and Canadian household and consumer debt levels are unsustainably high, and so consumers will increasingly need to hold on to their cars longer rather than buy new ones.
The stock is now trading at a P/E ratio of 16.3 times this year’s earnings and 13.4 times next year’s expected consensus earnings. The company’s ROE stands at 12.5% and it trades at a P/B of two times. These are very attractive valuation levels, especially for a company such Uni-Select which has been increasing its market share, margins, and financial strength.
