Last year, I wrote a couple of articles pondering the question of whether Uni Select Inc. (TSX:UNS) was overvalued, as the stock had been a massive outperformer, and valuations seemed to be getting richer and richer. And after the company reported 2017 results that were disappointing, as organic growth turned negative, the stock got hit hard.
In the end, though, I’d concluded that the shares were not overvalued, and that the company deserved a premium valuation. Well, shares have continued to fall regardless, and year to date they are down a shocking 32%
But I have come to the conclusion that now it looks like an even better time to get exposure to this well-run company with a good management team and an exceptional track record, and that still has room to grow.
Here’s why.
First off, organic growth has returned.
The company is achieving strong underlying organic growth of 3.4%, with the Canadian Automotive Group (33% of sales) achieving a 3.9% organic growth rate. This comes after a stalling of organic growth in 2016 and 2017.
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.
The problem now lies in disappointing margin performance, as margins in Canada are suffering from seasonality and higher fixed-cost levels. Overall margins were 125 basis points below last year’s first quarter.
It’s important to note that management has reiterated their 2018 targets for up to 4% organic growth and EBITDA margins of 7.2-8.2%.
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 because U.S. and Canadian household and consumer debt levels are unsustainably high, and so consumers will increasingly need to keep their cars longer versus buy a new one.
The stock is now trading at a P/E ratio of 14 times this year’s earnings and 13 times next year’s expected consensus earnings. And the company’s ROE stands at 8.5%, and it trades at a P/B of 1.2 times.
These are very attractive valuation levels — especially for a company such as Uni Select, which has been increasing its market share and financial strength.
