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This Growth Stock Is up 40% Year to Date … and the Best Is Yet to Come

Avigilon Corp. (TSX:AVO) has continued to outperform as of late, and, in my view, this will increasingly prompt investors to revisit this name and become aware of its value proposition.

Share price action

After a fast rise to highs of $34 in the beginning of 2014, the shares then proceeded to fall, and fall, and then fall some more, as the company began to sacrifice margins in the name of sales and market share growth.

But this year has been different, as the shares have risen 40% year to date, and the stock is now trading at $18.72 as of yesterday’s close, almost at 52-week highs.

So, what’s happened?

A bargain

What we are left with, three years later, is a stock that has become fairly (dare I say, attractively?) valued in an environment where the company is beating expectations.

The last four quarters easily beat expectations, which are now on the rise. In fact, the latest quarter saw the company post EPS of $0.21 versus expectations of $0.14 — a full 50% beat.

It’s a sharp turn from the situation three years ago, when expectations were being revised downward, and the stock price followed. So, now expectations are on the rise, and we can expect to see the stock follow.

At this point in time, we see the stock trading at valuations of 19 times 2017 consensus expected EPS and 15 times 2018 expected EPS, with an expected earnings-growth rate of 25% in 2017 and 28% in 2018.

Increasing profitability

This valuation, combined with increasing profitability, a strong balance sheet, and multiple opportunities, makes the stock a real bargain.

After a couple of years of downward pressure on margins, they are finally showing signs of strengthening. In the second quarter of 2017, the company achieved an adjusted EBITDA margin of 17.9% — well above levels achieved in the same quarter last year (9.3%) and in the first quarter (11.8%).

The bulk of the margin improvement came from reduced operating expenses, as management has continued to work on improving efficiency. Operating expense as a percentage of revenue was 41.9% this quarter compared to 51% in the same quarter last year.

And revenue growth was pretty healthy too, with the company posting a 17% revenue growth rate.

Another really interesting opportunity for Avigilon is the company’s extensive portfolio of patents related to its video analytics technology. The company is pursuing the licensing of these patents and currently has a licensing revenue stream, but it is not significant as of yet.

Management believes that licensing revenue will be more meaningful to Avigilon in 2017 and beyond, and this will drive margins higher.

Avigilon reports third-quarter results on November 7.

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Fool contributor Karen Thomas owns shares of Avigilon Corp. Avigilon Corp. is a recommendation of Stock Advisor Canada.

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