There are several undervalued stocks trading at a discount on the TSX. In addition to valuation, you need to identify companies that have the potential to increase earnings and cash flows over time.
Here are two such TSX value stocks to invest $1,000 in right now.
Payfare stock
A small-cap stock valued at $275 million, Payfare (TSX: PAY), is down 57% from all-time highs. Payfare operates in the fintech space and offers digital banking, instant payment, and loyalty-reward solutions to the gig economy workforce.
It generates 80% of sales from network interchange fees from payment networks and the rest from user banking fees such as money transfers, ATM withdrawals, and money transfers.
In the first quarter (Q1) of 2023, Payfare increased sales by 76% year over year to $42.3 million and is on track to end the year with revenue between $185 million and $195 million. In 2022, it reported sales of $130 million.
A rapid increase in top line allowed the company to more than double gross profits while adjusted net income surged 557% to $3.5 million, or $0.07 per share. Unlike other growth stocks, PayFare also reported a free cash flow of $4.1 million, up 561% compared to the year-ago period.
So, PAY stock is priced at less than two times forward sales and 18 times forward earnings, which is very cheap.
The number of users on PayFare has risen from 74,853 to 1.12 million in the last three years. In this period, the total payment volume processed on its platform has surged from $340 million to $2.6 billion.
PayFare aims to launch new private label and embedded finance programs for customers while continuing to integrate with strategic partners on its platform. It is focused on widening its ecosystem, which includes launching credit products for its user base.
Analysts covering Payfare stock remain bullish and expect shares to more than double in the next 12 months.
Magna International stock
An automobile ancillary company, Magna International (TSX: MG) is a TSX giant valued at $22 billion by market cap. It is one of the largest suppliers in the automobile sector and is also a mobility technology company. Its global network includes 341 manufacturing operations and 88 product development, engineering, and sales centres across 29 countries.
Despite a sluggish macro economy, Magna increased sales by 11% year over year to $10.7 billion in Q1 of 2023 due to higher production numbers. Magna also stated higher volumes in its vehicle assembly segment, and the launch of new programs drove sales in the March quarter.
However, due to higher production input costs, operating inefficiencies at a Europe facility, and higher net engineering costs, its adjusted EBIT (earnings before interest and tax) fell to $437 million from $507 million.
Analysts expect adjusted earnings to increase by 34.5% annually in the next five years. Comparatively, the TSX stock is priced at 11.8 times forward earnings making it a top stock for value investors.
In addition to its attractive valuation, Magna International also pays shareholders an annual dividend of $2.47 per share, translating to a yield of 3.2%. Further, these payouts have risen by 9.5% annually.
