Canadians: This 1 Stock Is the Ultimate 2020 Bullish Play!

Pollard Banknote Ltd. is significantly undervalued. Here is why you should buy it for your RRSP or TFSA.

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Pollard (TSX:PBL) is engaged in the manufacturing and selling of lottery and gaming products. It is controlled by Pollard Equities Limited (a privately held company), which owns 67.5% of Pollard’s outstanding shares.

The company reports a market capitalization of $514 million with a 52-week high of $25.08 and a 52-week low of $18.14.

Intrinsic price

Based on my calculations, using a discounted cash flow valuation model, I determined that Pollard has an intrinsic value of $26.22 per share. Assuming less-than-average industry growth, the intrinsic value would be $24.95 per share, and higher-than-average industry growth would result in an intrinsic value of $27.63 per share.

At the current share price of $20.04, I believe Pollard is significantly undervalued. Investors looking to add a lottery ticket manufacturing company to their TFSA or RRSP portfolio should consider buying shares of Pollard.

Pollard has an enterprise value of $788 million, which represents the theoretical price a buyer would pay for all of Pollard’s outstanding shares plus its debt. One of the good things about Pollard is its leverage, with debt at 18.2% of total capital versus equity at 81.8% of total capital.

Financial highlights

For the nine months ended September 30, 2019, the company reported a strong balance sheet with $3 million in retained earnings (up from negative retained earnings of $4 million as at December 31, 2018). This is a good sign for investors as it indicates the company is starting to reinvest its surpluses in itself, which leads to additional growth.

The company reports a cash balance of $7 million. It reports a credit facility totalling $160 million for its Canadian operations and US$12 million for its U.S. operations. An accordion feature can increase the facility by $25 million. Given current outstanding debts of $131 million, the company has 24% unused room in its credit facilities, which gives the company ample liquidity to grow.

Overall revenues are up substantially from $262 million in 2018 to $298 million in 2019 (+14%) resulting in pre-tax income of $23 million for the period, essentially flat from 2018. Given the non-seasonal nature of Pollard’s operations, investors can expect to see consistent top-line growth in the coming years.

The company acquired Fastrak Retail (UK) Limited for $8 million using cash on hand and proceeds from Pollard’s credit facility. The company received $17 million through its credit facilities which was likely used to fund the acquisition.

During this period in 2018, the company raised $35 million through the issuance of shares and subsequently repaid $17 million in subordinated debt. This did not occur again in 2019.

Foolish takeaway

Investors looking to buy shares of a lottery ticket printing company should consider buying shares of Pollard. With positive retained earnings and ample liquidity through cash on hand and credit facilities, Pollard is well-positioned to deliver significant returns to shareholders in the future. The company also has a 0.80% dividend yield, which is not a lot but still provides a passive income stream.

As we enter 2020 with bearish outlooks on the market, I would recommend investors wait for the market to contract so shares can be purchased at a more favourable price. With an intrinsic value of $26.22 and a current share price of $20.04, investors have an opportunity to buy shares of a great company at a discount.

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 Chen Liu has no position in any of the stocks mentioned.

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