Trying to find undervalued growth companies in today’s frothy market is quite a task, and investors are forced to search high and low for such businesses; today, I’m going to dig deep and take a look at a relatively lesser-known name on the TSX, ZCL Composites Inc. (TSX:ZCL): a company which has seen its stock price appreciate more than 50% over the past year and more than 240% over the past five years.
What does ZCL do?
ZCL manufactures and installs composite fiberglass storage tanks primarily used by gas stations. Fiberglass storage tanks are generally considered to be much better for the environment than metal tanks as they do not corrode and have a much longer lifespan than traditional steel tanks.
While the gas station business is one which has become diminished in recent years due to the price of real estate skyrocketing in many urban centres and long-term trends in the automotive industry moving away from gasoline and towards electric vehicles, relatively limited demand for new storage tanks has ultimately led to a situation in which the market has not priced in a very high growth threshold for ZCL.
In recent years, a number of analysts have begun to pick up on the fact that while new storage tanks for gas stations are unlikely to be in high demand, water storage and wastewater storage will continue to be in high demand. Also, replacement tank demand for existing steel/metal tanks remains significant and will be the catalyst that will propel the company forward for at least a few decades.
ZCL has proven to be a highly cyclical stock, peaking before the recession 10 years ago and only now returning to the peak seen in 2007. The business remains extremely profitable. With a current dividend yield of approximately 3.6%, investors receive a very reasonable dividend alongside capital appreciation potential.
ZCL stands to benefit from changing water storage and wastewater management regulations and initiatives with the more traditional storage tank replacement business providing a solid path to long-term growth. Estimates for the runway ZCL has left with storage tanks in North America is approximately 30 years’ worth of demand. Water storage and wastewater management will eventually make up a larger portion of the pie long term.
Bottom line
ZCL is an interesting company to consider in a profitable industry with relatively high barriers to entry. Currently trading at a reasonable multiple compared to the company’s long-term growth potential, I see significant upside with ZCL from current levels.
Stay Foolish, my friends.
