A Fresh Take on Value Investing: 3 Undervalued Industrial Stocks to Watch

Undervalued stocks don’t always trade at rock-bottom valuations. Sometimes, they’re just undervalued relative to their strong business.

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Value investing focuses on companies that are usually out of favour but always trading at overly depressed multiples relative to their growth rates and operating performance. These companies usually suffer from investors’ focus on the short term while ignoring the big, or long-term, picture.

In this article, I will discuss three undervalued industrial stocks that I think you should pay attention to.

Aecon Group: Undervalued with a 5.4% dividend yield

Aecon Group (TSX:ARE) is one of Canada’s largest publicly traded construction and infrastructure development companies. Its revenue comes from infrastructure projects from a wide variety of areas, such as utilities, roads and highways, and nuclear power.

North America’s infrastructure is aging. It simply needs to be upgraded and/or replaced. Also, new industries such as renewable energy are creating demand for new infrastructure. This demand is obvious in Aecon’s rising backlog and pipeline of opportunities.

But things are rarely that easy. In Aecon’s case, cost overruns, inflation, and rising interest rates have hit the company’s bottom line and stock price. As you can see from Aecon’s stock price chart, the last two years have been difficult.

Looking at 2023, however, we can see that Aecon’s stock price has increased 55%. Revenue grew 13% in the first quarter (Q1) of 2023, and the company swung back to an operating profit of $5.6 million. Over the next two years, revenue growth will be fueled by a focus on sustainability projects and upgrades. Beyond this, there are projects such as Ontario’s $10 billion GO expansion that will fuel backlog and revenue growth.

CCL Industries

CCL Industries (TSX:CCL.B) is an $11 billion company that provides specialty label, security, and packaging solutions. It’s also a company that has enjoyed consistent growth, high margins, and strong returns. Its latest results, Q1 2023, included an 8.6% revenue-growth rate, and a 12.7% increase in operating income, all while maintaining a strong balance sheet.

The stock trades at 17 times earnings and 2.5 times book value. Considering the company’s consistently strong performance, its recent earnings beats, and recent analyst upgrades, it looks like this stock is undervalued. Also, considering its long-term performance, it’s easy to conclude that this stock should be trading at higher multiples. For example, the company has grown from revenue of $1.2 billion in 2009 to revenue of $6.4 billion in 2022 for a compound annual growth rate of 13.7%. Investing in this value stock has its clear advantages.

The company continues to pursue high-growth opportunities in new high-value areas like “intelligent” packing, such as radio-frequency identification labels, which use electromagnetic fields to transfer data and can store information. Labels featuring time/temperature as well as track and trace, anti-counterfeiting, and tamper evident features are growth areas.

Toromont Industries: Value investing made easy

Toromont industries (TSX:TIH) is a $9 billion company that provides equipment and product support for customers in a diverse range of industries such as roadbuilding, mining, and telecom. The company has also been doing really well recently, with earnings that are beating expectations, strong revenue growth, and dividend increases.

In fact, in 2022, revenue increased 20% to $1.15 billion and earnings per share (EPS) increased 52% to $1.94. Also, the company has 34 consecutive years of dividend increases under its belt. The latest increase was a 10.3% increase to its quarterly dividend, which currently stands at $0.43 per share.

High returns, a strong balance sheet, and continued momentum characterize Toromont’s business. In Q1 2023, revenue increased 23%, with EPS increasing 63%, and the backlog remaining strong at $1.2 billion.

The stock trades at 18 times earnings, which I feel makes it an undervalued stock, considering the growth rates, margins, and returns that the company is posting.

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 Karen Thomas has a position in Aecon. The Motley Fool recommends CCL Industries. The Motley Fool has a disclosure policy.

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