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.

| More on:
Paper airplanes flying on blue sky with form of growing graph

Image source: Getty Images

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.

More on Investing

Happy Retirement” on a road

$100,000 in Savings, and These 2 Stocks Could Help You Retire in 12 Years

Have you started saving for your retirement? If you have $100,000 in savings, this guide can help you retire in…

Read more »

clock time
Bank Stocks

Interest Rates: Is Canada’s Mortgage Debt a Ticking Time Bomb?

If Canada's rising interest rates lead to a wave of defaults, banks like the Toronto-Dominion Bank could be in trouble.

Read more »

Close up shot of senior couple holding hand. Loving couple sitting together and holding hands. Focus on hands.
Dividend Stocks

These 2 Canadian Dividend Stocks Are a Retiree’s Best Friend

These large-cap Canadian dividend stocks can supplement your income post-retirement.

Read more »

edit Balloon shaped as a heart
Dividend Stocks

4 Top Stocks With High Dividend Growth to Buy in 2023 and Hold Forever

Are you looking for stocks you can buy and forget, while they keep giving you returns? Then these high dividend…

Read more »

Businessman holding AI cloud
Tech Stocks

AI Hype Is Picking Up Steam: Should You Buy the Bounce?

AI stocks rallied when NVIDIA (NASDAQ:NVDA) beat earnings. Could Canadian AI stock Kinaxis Inc (TSX:KXS) be next?

Read more »

Oil pumps against sunset
Energy Stocks

The Top TSX Energy Stocks to Buy This Summer

Recession fears have disproportionately weighed on TSX energy stocks lately.

Read more »

money while you sleep
Dividend Stocks

2 “SWAN” Dividend Stocks for Passive Income (AKA “Sleep Well at Night” Stocks)

These SWAN dividend stocks are good buys today for passive income. They would be even better buys on further selloffs,…

Read more »

warning or alert

Income Alert: 2 Top TSX Dividend Stocks With 7% Average Yields

These top TSX dividend stocks now offer attractive yields for investors seeking passive income.

Read more »