Canadian investors looking for ‘the next big thing’ may be pushed into considering companies that otherwise are higher-risk than most may be comfortable with. Indeed, there are plenty of small cap companies in the metals and mining sectors, and a range of early-stage companies in a variety of sectors to choose from. But finding quality growth stocks such as TMX Group (TSX:X) is easier said than done, as I think many investors will appreciate.
This is a company that’s been on my radar for quite some time. The Toronto Stock Exchange (TSX) operator provides a range of services essential to the well functioning of the most important Canadian equities exchange. From clearing services to trading services, capital formation, market data and analytics solutions, the company has a range of revenue drivers, but a booming stock market certainly has helped TMX’s valuation, as seen above.
Let’s dive into some price predictions for where this top TSX growth stock may be headed over the near to medium-term.
Strong financials
From a fundamentals perspective, there’s certainly a lot to like about TMX’s recent rally.
The company’s most recent results for its fiscal second quarter showed strong revenue growth of 20% year-over-year, driving modest earnings per share growth of $0.36, up from $0.35 during the same quarter the year prior. Notably, TMX issued $300 million of Series J Debentures due May 2026 as part of its disclosures, allowing the company to essentially pay off its existing short-term facilities.
So, over the near-term, funding risks for the overall business remain minute, and the company continues to produce strong cash flow. Over the past three years, TMX has grown its EPS by nearly 10% per year, so this past quarter was a bit of an anomaly. Thus, over the next three to five years, one could make the argument that a more open capital market and increased listing activity could drive further upside in the stock (beyond what’s baked in today).
Let’s get out our crystal ball
Of course, making predictions for any single stock is a game that I don’t particularly like to play. I’m not going to put exact numbers on where I see TMX headed over any period of time, at least suggesting any precision.
But if we assume that the company’s current multiple of just under 30 times earnings holds up and TMX is able to grow its earnings per share by around 10% per year for the next five years, this is a stock I can certainly see moving roughly 50% higher over such a timeframe. That would be a conservative estimate (rounding out the effects of compounding over time), as anything can happen.
Indeed, most investors are well aware of recessionary headwinds that are starting to blow. This makes shorter-term predictions more difficult. However, I will say this stock looks fairly valued for its growth potential, so as far as growth stocks are concerned, I think this is one that still warrants shorter-term ownership as well, particularly for those who believe this bull market can continue over the next few years.
