A Few Years From Now You’ll Probably Wish You’d Bought This Undervalued Stock

EQB Inc (TSX:EQB) stock has plenty of room to run.

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Looking for undervalued stocks to add some alpha to your portfolio?

It’s a worthy goal, but the pickings in the value space are rather slim these days. After a two-year bull market, almost all categories of equities are costlier now than they were before. That includes even stocks in sectors that were overlooked for most of the last decade, such as financials and energy.

There are very few broad swaths of the market today that are truly cheap. For the most part, everything is priced to perfection. However, you can still find individual undervalued equities if you look hard enough. In this article, I will explore one TSX financial stock that appears to be undervalued at today’s price.

EQB Inc

EQB Inc (TSX:EQB) is a Canadian bank best known as “Canada’s challenger bank.” Its claim to fame is having a 100% branchless model that helps it save on overhead costs. It is also well known for offering guaranteed investment certificates (GICs) with higher yields than those offered by the Big Six banks. Trading at 10.2 times earnings and 1.3 times book value, it is considerably cheaper than the average TSX bank stock.

A cheap valuation

EQB Inc’s main claim to fame is its fairly cheap valuation. At today’s price, it trades at:

  • 10.2 times adjusted earnings.
  • 11 times reported earnings.
  • 3.7 times sales.
  • 1.3 times book value.

This is considerably cheaper than the average large Canadian bank, as the sector trades at about 15 times earnings on average. It is also considerably cheaper than the big US “money centre banks,” although those are so different in terms of size and geography that they aren’t really part of EQB’s peer group. The discount to other Canadian banks is definitely meaningful, however.

High growth and margins

When you see a stock that trades at low multiples, your first instinct is to suspect that it isn’t growing, or isn’t very profitable, or is overly risky. Risk is possibly a concern with EQB, but a lack of growth or profits is not. The company grew its revenues, earnings, and equity at the following rates in the trailing 12-month (TTM) period:

  • Revenue: 22.6%.
  • Earnings: 5.8%.
  • Equity: 17.4%.

These are pretty admirable rates of growth. The growth rates over the last five years were quite high as well. Additionally, EQB is quite profitable, boasting the following margins and returns on equity/capital:

  • Net margin: 35%.
  • Return on equity: 13.5%.
  • Return on assets: 0.75%.

Overall, these are pretty good metrics.

Plenty of room to run

A final factor that EQB Inc has going for it is its relatively small size. EQB’s market capitalization is just $4.4 billion, less than one-twentieth the size of a typical Big Six bank. This means that the bank has plenty of room for growth and many new markets to expand into. The bank has no operations outside of Canada whatsoever, so that is one potential growth opportunity it can tap into. On the whole, EQB Inc is a small, scrappy bank with a lot of room to run.

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 Andrew Button has no position in any of the stocks mentioned. The Motley Fool recommends EQB. The Motley Fool has a disclosure policy.

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