2020 Stocks: This 1 Stock Could Gain 637%!

Uni-Select Inc is seriously undervalued. Should you add the stock to your TFSA or RRSP in 2020?

Uni-Select (TSX: UNS) is a distributor of automotive products, paint, and related products for motor vehicles. The company’s portfolio includes FinishMaster US, Canadian Automotive Group and The Parts Alliance UK.

The company reports a market capitalization of $450 million with a 52-week high of $20.36 and a 52-week low of $10.06

Intrinsic price

Based on my calculations, using a discounted cash flow (DCF) valuation model, I determined that Uni-Select has an intrinsic value of $77.56 per share. Assuming less-than-average industry growth, the intrinsic value would be $74.12 per share, and higher-than-average industry growth would result in an intrinsic value of $81.39 per share.

At the current share price of $10.62, I believe Uni-Select is significantly undervalued. Investors looking to add an automotive products and services company should consider buying shares of Uni-Select. I would advise investors to follow the stock through 2020 as a recession could lead to purchasing the shares at a more favourable price.

Uni-Select has an enterprise value of $3.7 billion, representing the theoretical price a buyer would pay for all of Uni-Select’s outstanding shares plus its debt. One of the things to note about Uni-Select is its moderate leverage, with debt at 48.9% of total capital versus equity at 51.1% of total capital.

Financial highlights

For the nine months ended September 30, 2019, the company reports a strong balance sheet with retained earnings of US$533 million. As an investor, this is very good news as it indicates the company has reinvested surpluses in itself to grow the business.

The company reports a cash balance of US$21 million compared to current debt obligations of US$29 million. Although I would like to see companies with more cash than current debt obligations, I am not overly concerned about this given the company’s revolving credit facility, which can be drawn to meet these obligations.

Sales have decreased slightly year over year from US$1.333 billion to US$1.327 billion (-0.4%) but management improved the company’s operating efficiency, which has resulted in operating income of US$104 million, up from $92 million in 2018.

Management takes a very proactive approach to debt management as indicated by the issuance and repayment of debt in 2018 and 2019. The company paid down US$204 million and US$252 million of long-term debt in 2019 and 2018, respectively. This is offset by an increase in long-term debt of US$205 million and US$209 million in 2019 and 2018 respectively.

Companies often use this strategy if interest rates become more favourable, to reduce their interest payment obligations.

Foolish takeaway

Investors looking to buy shares of an automotive service and products company should consider buying shares of Uni-Select. The company reports a solid balance sheet with positive retained earnings coupled with a management team committed to managing its long-term debt.

My only concerns with the company are its moderately high leverage and a slight drop in sales that may signal challenging times ahead. That said, investors should add Uni-Select to their watch list and wait for the ideal time to buy in.

I firmly believe that Uni-Select can achieve its intrinsic value of $77.56 per share with a management team that is dedicated to reducing its debt and driving growth.

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

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