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This Grossly Undervalued Stock Soared Almost 10% Yesterday — and There’s More to Come

Transcontinental Inc. (TSX:TCL.A) has not been your fast-growing company that will shoot the lights out.

But the stock is grossly undervalued, trading at 10 times this year’s expected earnings and just under six times cash flow with a dividend yield of 3%.

It’s currently at an inflection point.

This is reflected in the stock’s almost 10% rise in yesterday’s trading, as the company is implementing its plan to transform itself by investing in the packaging industry.

While we acknowledge that earnings have been at risk, as the company has been facing headwinds in its printing and publishing businesses, the stock’s valuation more than reflects this.

However, it doesn’t reflect the fact that Transcontinental has consolidated the printing industry in Canada, and that the printing market is more stable as it enters the packaging industry in a more substantial way.

The company has been generating very healthy cash flows and EBITDA margins, and we expect this to continue.

In fact, in the first quarter of 2018, the company reported an EBITDA margin of 19.7% compared to 17.5% the prior year, and cash flow per share of $1.41 versus $0.90 last year for a 57% increase.

Free cash flows have also been increasing accordingly. Indeed, we’re witnessing a company that’s been in an increasingly favourable position, with impressive free cash flow margins well north of 10%.

With $2 billion in annual revenue, rising EBITDA margins and strong free cash flow generation, Transcontinental has not only secured its status as Canada’s largest printer, but is also becoming a leader in flexible packaging.

What does this look like?

Well, the company announced the US$1.3 billion acquisition of Coveris Americas, a leading, integrated flexible packaging manufacturer, to be financed with cash on hand plus debt.

With this acquisition, Transcontinental’s presence in the packaging industry is becoming more meaningful, as it will represent almost 50% of the company’s revenue going forward.

Management expects that the acquisition will be accretive to earnings per share and cash flow per share even before cost savings synergies, which are expected to total US$20 million.

It will also enhance the company’s relationship with large, multinational companies, which will serve to drive additional opportunities in the future.

In summary, I believe that Transcontinental is at a point of inflection and that the acquisition of Coveris will serve to open up new avenues of growth.

Finally, the company’s ample free cash flow generation will enable it to support future growth and drive shareholder value.

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

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