Down 18% From Record Highs, Is Calian Group Stock a Buy Right Now?

Calian Group is an undervalued TSX stock trading at a discount of 30% to consensus price target estimates in 2024.

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Investing in undervalued stocks can help investors outpace the broader markets over the long term. Typically, undervalued or cheap stocks are defined as those trading below their intrinsic value.

One TSX stock that has trailed the index in the past year is Calian Group (TSX:CGY), which has surged just 2% since February 2023.

Valued at $690 million by market cap, Calian Group has doubled investors’ returns in the past five years and is up 193% in the last decade. After adjusting for dividends, total returns have been much higher at 315% since February 2014.

Despite its outsized gains, Calian Group stock trades 18% below all-time highs, allowing you to buy the dip. Let’s see if investing in CGY stock is a good option right now.

An overview of Calian Group

Calian Group provides business services and solutions in Canada and other international markets. It operates through four segments that include advanced technologies, health, learning, and IT and cyber solutions. It offers solutions that include systems engineering, software development, integration design embedded design, operational management, and lifecycle support, among others.

The company has increased sales from $432 million in fiscal 2020 (ending in September) to $658 million in fiscal 2023. In this period, its operating profits have risen from $25.9 million to $37.56 million.

How did Calian Group perform in Q4?

In the fourth quarter (Q4) of 2023, Calian Group increased sales by 10% year over year to $176 million. It ended Q4 with a gross margin of 31.7% and adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of $20 million, up 7%. Calian has now reported gross margins above 30% for the sixth consecutive quarter.

Revenue in the advanced technologies business surged 72% to $53 million, driven by product sales and the acquisition of Hawaii Pacific Teleport, in addition to the unwinding of backlog due to the easing of supply chains.

In the health segment, revenue rose 31% to $52 million, driven by significant demand from long-standing customers, while learning sales grew by 11% to $24 million on the back of demand for military training with existing customers. Moreover, demand for new products and technologies for NATO (North Atlantic Treaty Organization) customers is on the rise due to geopolitical tensions.

Comparatively, top-line growth was offset by a 31% decline in sales in the ITCS business as revenue fell to $48 million due to lower shipments in Calian’s product resale business in the U.S.

Calian pays a dividend

Calian pays shareholders a quarterly dividend of $0.28 per share, translating to a forward yield of almost 2%. In fiscal 2023, it reported a free cash flow of $45 million. Given the number of outstanding shares, Calian paid $13.2 million in the last four quarters, indicating a payout ratio of less than 30%.

This provides Calian with enough room to reinvest in growth projects, target accretive acquisition and reduce balance sheet debt.

Calian has a disciplined capital-allocation strategy. In 2023, it allocated $8 million towards capital expenditures and $2 million to buy back shares. It ended the year with $176 million in net liquidity, positioning the company to pursue growth objectives.

What is the target price for CGY stock?

Analysts tracking CGY stock expect it to increase adjusted earnings per share from $3.45 in 2023 to $5 in 2025. So, the TSX dividend stock is priced at 11.5 times forward earnings, which is very cheap given its growth estimates.

Analysts remain bullish and expect CGY to surge around 30% in the next 12 months.

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 Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool recommends Calian Group. The Motley Fool has a disclosure policy.

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