Why North West Company Inc. Fell 5.49% on Friday

North West Company Inc. (TSX:NWC) dropped 5.49% on Friday following its Q2 earnings release. Is now the time to buy? Let’s find out.

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North West Company Inc. (TSX:NWC), one of the leading retailers to rural communities and urban neighbourhood markets in Canada, Alaska, the South Pacific, and the Caribbean, announced its second-quarter earnings results after the market closed on Thursday, and its stock responded by falling 5.49% in Friday’s trading session. The stock now sits more than 11% below its 52-week high of $33.74 reached back in May, so let’s take a closer look at the quarterly results and its fundamentals to determine if now is the time to buy.

Breaking down the Q2 results

Here’s a quick breakdown of 10 of the most notable financial statistics from North West’s three-month period ended on July 31, 2017, compared with the same period in 2016:

Metric Q3 2017 Q3 2016 Change
Sales – Canada $293.67 million $283.47 million 3.6%
Sales – International $214.20 million $177.10 million 20.9%
Total sales $507.87 million $460.57 million 10.3%
Gross profit $152.56 million $136.69 million 11.6%
Adjusted EBITDA $46.92 million $42.04 million 11.6%
Adjusted EBITDA margin 9.2% 9.1% 10 basis points
Net earnings $23.26 million $16.42 million 41.6%
Net earnings per diluted share $0.46 $0.34 35.3%
Adjusted net earnings $22.72 million $19.61 million 15.9%
Cash flows provided by operating activities $41.81 million $43.40 million (3.7%)

Should you buy on the dip?

It was a great quarter overall for North West, and it capped off a very strong first half of the year for the company, in which its sales increased 9.5% to $984.70 million, its adjusted EBITDA increased 11.1% to $87.11 million, and its adjusted net earnings increased 15.9% to $41.87 million. However, its second-quarter results came in mixed compared with analysts’ expectations, with its EPS matching estimates and its sales falling short of the $512.48 million estimate, so I think that is what caused its stock to sell off.

With all of this being said, I think the decline in North West’s stock was warranted, but I also think it represents a very attractive entry point for long-term investors for two fundamental reasons.

First, it’s undervalued. North West’s stock now trades at just 16.4 times fiscal 2017’s estimated EPS of $1.82 and only 15.1 times fiscal 2018’s estimated EPS of $1.98, both of which are inexpensive compared with its five-year average price-to-earnings multiple of 19.2. These multiples are also inexpensive given its current double-digit percentage earnings-growth rate and its estimated 8.6% long-term earnings-growth rate.

Second, it has a great dividend. North West currently pays a quarterly dividend of $0.32 per share, equal to $1.28 per share annually, which gives it a lavish 4.3% yield. Investors must also note that the company’s 3.2% dividend hike in March has it on track for 2017 to mark the sixth consecutive year in which it has raised its annual dividend payment, making it both a high-yield and dividend-growth play today.

With all of the information provided above in mind, I think all Foolish investors should strongly consider beginning to scale in to long-term positions in North West Company today.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor has no position in any of the stocks mentioned.

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