A company trading at a low valuation and that’s well poised to grow earnings and cash flows at an attractive pace should be on the radar of Canadian investors in May 2023. The ongoing stock market volatility has dragged valuations of several companies across sectors significantly lower in the last 18 months, offering you the chance to buy quality value stocks at a discount.
So, here are three cheap stocks I’d buy before the next bull market inevitably arrives.
Dye & Durham stock
Valued at a market cap of $960 million, Dye & Durham (TSX: DND) has increased its sales from $43.8 million in fiscal 2019 to $475 million in fiscal 2022 (ended in June). Its operating income has increased from $16 million to $110 million in this period.
The company provides legal software as well as data and payment technology solutions to improve the efficiency and productivity of legal and business enterprises. Dye & Durham has an enviable track record of successfully pursuing accretive acquisitions allowing it to enhance shareholder wealth.
DND’s practice management solutions allow legal professionals to deliver data-driven insights that power critical corporate transactions. It already helps 50,000 clients in Canada, Ireland, the U.K., and Australia to manage workflows and regulatory requirements.
Due to a fall in enterprise spending, Dye & Durham’s sales are forecast to decline by 4.6% to $453 million in fiscal 2023. However, it’s then estimated to increase by 7.2% to $485 million in 2024.
Dye & Durham’s annual recurring revenue accounted for 18% of sales in the fiscal third quarter (Q3), resulting in more stable cash flows. It also reduced the cost base by $42 million or by 19% on an annualized basis, which is above its initial target of 10%.
Priced at two times forward sales, DND stock is trading at a discount of 47% to consensus price target estimates.
Dentalcorp stock
A company that acquires and partners with dental practices in Canada, Dentalcorp (TSX: DNTL) is valued at a market cap of $1.38 billion. Dentalcorp increased sales by 21.5% year over year to $1.3 billion in 2022. Its adjusted free cash flow stood at $125 million, or 10% of total sales. Dentalcorp increased sales by 28% year over year to $358.3 million in Q1, rising 28% from the year-ago period.
The company acquired six practices in Q1, which should generate $5.4 million in adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization). It also divested 13 standalone orthodontics practices as part of its initiative to rationalize non-core specialty practices. Dentalcorp emphasized these asset sales will positively impact adjusted EBITDA margins while allowing it to allocate resources to other business areas.
Priced at less than one times forward sales, DNTL stock is trading at a discount of almost 100% to consensus price target estimates.
Tecsys stock
The final cheap TSX stock on my list is Tecsys (TSX: TCS), which develops and sells supply chain management software to enterprises. Tecsys continues to grow at a consistent rate and is on track to end fiscal 2023 (ended in April) with $149 million in sales. Valued at less than $400 million, the TSX tech stock is priced at 2.5 times forward sales.
Unlike most other small-cap tech stocks, Tecsys reports stable cash flows, allowing the company to pay shareholders an annual dividend of $0.30 per share. In the last 11 years, these payouts have risen by 9.3% annually. Moreover, Tecsys stock is currently priced at a discount of 73% to consensus price target estimates.
