Investing in quality growth stocks trading at a reasonable valuation can help you generate outsized gains over time. Over the years, several growth-oriented TSX stocks have helped shareholders derive market-beating returns.
One such TSX stock that went public in May 2015 is FirstService (TSX:FSV). Valued at $9.5 billion by market cap, FirstService has surged over 500% since its IPO, or initial public offering.
So, an investment of $10,000 in FSV stock soon after it went public would be worth around $67,000 today. A similar investment in the TSX index would have turned $10,000 into “just” 18,000 in this period after adjusting for dividends.
As historical returns don’t matter much to future investors, let’s see if the TSX growth stock remains a compelling investment for long-term investors today.
Is FirstService stock a good buy right now?
FirstService provides essential property services through its business segments, such as FirstService Residential and FirstService Brands. It manages 8,700 properties, making FirstService the largest manager of residential communities in North America.
The company enjoys leading market positions with recognized brands across service lines. However, FirstService’s market share remains modest, as it operates in a largely fragmented industry, providing it with enough opportunities to keep growing revenue and profit margins.
FirstService’s scale advantage, national coverage, and portfolio of proprietary services create a competitive moat that is difficult to replicate. Additionally, the property services business is generally outsourced, allowing FirstService to enjoy a steady stream of predictable and recurring revenue.
FirstService is an asset-light company that generates robust cash flows, enabling it to pay shareholders an annual dividend of $1.22 per share, translating to a dividend yield of 0.6%. While the dividend yield is not too attractive, these payouts have more than doubled in the last six years.
Moreover, a conservative balance sheet and strong liquidity position allow FirstService to fund future growth and drive cash flows higher.
What is the target price for FSV stock?
Priced at 31 times forward earnings, FSV stock trades at a premium. But most growth stocks command an expensive valuation. Moreover, analysts forecast FSV to grow adjusted earnings by almost 18% annually in the next five years.
So, FSV is priced at 25 times forward earnings; the TSX stock should trade around $325 by the end of 2027, indicating an upside potential of over 50% from current levels.
FirstService has enjoyed three decades of stellar revenue growth, allowing it to increase sales from US$37 million in 1995 to US$3.75 billion in 2022 on the back of accretive acquisitions and organic expansion.
Moreover, the Canadian company generates over 80% of its sales from the U.S., which is also the largest economy in the world. A diversified base of clients and properties with a sticky customer base should enable FirstService to thrive across business cycles.
FirstService ended the third quarter with net debt to earnings before interest, tax, depreciation, and amortization of 1.5 times and $445 million in total liquidity. Its strong historical performance, a significant runway for growth, widening cash flow profile, and increasing market share make FirstService one of the most enticing stocks on the TSX today.
