Here’s a Value Stock That’s up 19% in 2019 With More Explosive Growth to Come

Heroux-Devtek Inc. (TSX:HRX) is seeing strong revenue growth accompanied by even stronger EBITDA growth as margins improve. This, coupled with an attractive valuation, makes Heroux a top value stock.

Karen Thomas, MSc, CFA

Karen is a stock market enthusiast focused on uncovering those stocks that she believes the market has mispriced. She does this through fundamental and quantitative analysis of companies and their industries, as well as a study of future opportunities and trends. She holds a Masters degree in Finance, the CFA designation, and has over 20 years of experience in the investment management industry. Having worked at a major pension fund, as well as two leading mutual fund firms as an analyst and portfolio manager, she has solid investing expertise which she aims to share with her readers.

Published February 8, 2019 8:00 am EST

If you’re looking to invest in the aerospace industry — what can be a very lucrative business — and you are constantly disappointed with Bombardier (TSX: BBD.B), you are not alone. Choppy orders, massive overspending, delays, and disappointments are what have characterized this company.

Bombardier is using cash at a feverish pace, has introduced disappointing guidance, is seeing continued high capital investment, and is facing a seemingly never-ending struggle with lacklustre demand.

Capital spending will remain elevated over the next year or so, debt levels are still high, and management and the company still need to prove themselves.

This leads me to move on, in search for an aerospace stock that is showing more positive fundamentals.

Heroux-Devtek (TSX: HRX), the third-largest landing gear supplier to the aerospace and defence sector, is such a stock.

Up 19% year to date, Heroux is experiencing operational momentum, while still trading at very attractive valuations.

Heroux’s relationship with Boeing, the world’s largest aerospace company and leading manufacturer of commercial jetliners, defence aircraft, and space and security systems, is key to my positive view of this stock.

I mean, Boeing has delivered 3,644 commercial airplanes and 1,000 military aircraft and satellites over the last five years, showing us the amount of business that this company generates and how significant this relationship is to Heroux.

And unlike Bombardier, Heroux is fulfilling its orders in a way that is enhancing its reputation. For example, Heroux has delivered 777 landing gear systems to Boeing ahead of schedule, which increases the likelihood that the company will see strong growth in orders from Boeing going forward.

Heroux has the ability to produce 125 landing gear systems.

businessman pointing at graph — Image source: Getty Images

CESA acquisition

Heroux’s acquisition of CESA, a leading manufacturer of landing gear, actuation, and hydraulic systems in October 2017 (completion date was October 2018), expanded the company’s international presence, effectively diversifying its customer base and its geographic exposure and increased its relationship with Airbus.

This transaction is highly accretive to earnings, as synergies and cross-selling opportunities take hold, and we have seen this with Heroux’s latest earnings release, which showed a 49% increase in revenue, a 68% increase in EBITDA, and an EBITDA margin of 15.8%, which is 185 basis points higher than last year.

This is a $450 million stock trading at 21 times fiscal 2019 earnings and 16 times fiscal 2020 consensus estimates, with an expected 30% earnings growth rate expected for 2020.

It’s a great value stock with operational and financial momentum, with accelerating growth in the business expected to drive explosive growth in the stock price.