The most successful investors in the world are those who can consistently identify winning bets in the long term. So, it’s imperative for investors to buy and hold shares of companies that will outpace the broader markets and help build wealth over time.
While many TSX stocks are popular among investors, a few quality companies tend to fly under the radar. One such Canadian stock is Softchoice Corp (TSX: SFTC), a company valued at a market cap of $855 million.
Let’s see why this little-known Canadian stock should be part of your equity portfolio right now.
Source: Getty Images
An undervalued TSX stock
Softchoice is an enterprise-facing software-focused IT solutions provider. It enables organizations to deploy solutions that make them more agile and innovative, improving employee productivity rates in the process.
Softchoice operates in a large, fast-growing, but highly fragmented IT solutions market, primarily in North America. Its sales have grown 8 percent to $903 million in 2021. The last 12-month sales of $957.5 million are forecast to grow more than 50 percent, surpassing $1.43 billion in 2023.
Softchoice has estimated its total addressable market at $300 billion, allowing it to easily expand its revenue in the future. Further, despite an inflationary environment, analysts expect the TSX tech stock to expand earnings from $0.87 per share in 2021 to $1.12 per share in 2023.
Valued at 0.7 times forward sales and 13 times forward earnings, Softchoice is among the cheapest growth stocks in Canada.
Down 48% from all-time highs, Softchoice stock is trading at a discount of 60% compared to consensus price target estimates. The recent share price decline has also increased Softchoice’s dividend yield to 2.2%.
Is this Canadian tech stock a buy or sell?
Softchoice designs, procures, implements, and manages multi-vendor IT environments essential to the operations, growth, and digital transformation of its client base.
Additionally, unlike most other tech stocks, Softchoice has managed to maintain profitability while growing its top line in the last two years. Its financial profile is characterized by steady free cash flow generation due to an asset-light model.
Enterprises globally are looking at accelerating their digital transformation goals to realize cost and operational efficiencies. This demand provides Softchoice with the ideal environment to meet revenue and profit margin targets.
Softchoice’s revenue retention rate has increased to 116% in Q3 2022, compared to 94% in 2020. Its widening wallet share indicates the company is successful in building customer relationships by providing vendor-agnostic advice to optimize the performance of IT environments.
Softchoice ended Q3 with a customer base of 4,718, compared to 4,369 in 2017. The company’s growth strategy, which is focused on acquiring new customers and increasing wallet share, has also allowed it to increase gross profit per customer from $48,000 in 2017 to $66,000 in Q3 2022.
Similar to most other tech stocks, Softchoice also enjoys high operating leverage. So, its profit margins will expand at a faster pace than revenue. In the last 12 months, its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) stood at $77 million, compared to $43 million in 2017. Its adjusted free cash flow also grew to $68 million from $34 million in this period, thereby supporting organic growth and value creation for shareholders.
The Foolish takeaway
Softchoice is an undervalued tech stock that is growing at a steady pace and trading at a significant discount to Bay Street consensus price target estimates.
