The primary goal of investing in the equity markets is to generate inflation-beating returns over time. To achieve this goal, it’s essential to consistently identify quality companies positioned to grow revenue and earnings at a steady pace.
In this article, I have identified one such Canadian stock that is flying under the radar in 2025. Valued at a market cap of $762 million, Doman Building Materials (TSX:DBM) is engaged in the wholesale distribution of building materials and home renovation products in the United States and Canada. It sells products to small independent lumber yards, regional building material dealers, home improvement chains, and retailers. The company serves its products to new home construction, home renovation, and industrial markets.
In the last 10 years, the TSX stock has returned close to 290% to shareholders, after accounting for dividend reinvestments. Here’s why it remains a top investment right now.
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Is this TSX stock still a good buy?
Doman Building Materials reported record quarterly revenues of $886.7 million in the second quarter (Q2), despite navigating headwinds such as tariffs and elevated mortgage rates.
The building materials distributor achieved gross margins of 16.1%, generating $142.7 million in gross profit. Adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) stood at $80 million, and net earnings came in just under $28 million. The company paid its 61st consecutive quarterly dividend of $0.14 per share, demonstrating a commitment to shareholder returns.
The strong performance in Q2 reflects contributions from the Doman Tucker Lumber acquisition completed in October 2024, which wasn’t included in prior year comparisons. Management emphasized disciplined inventory management and cost control as key drivers of margin performance amid volatile lumber pricing across different species and geographies.
Western species remained weak throughout the quarter, while Southern Yellow Pine pricing softened in the back half. However, volumes held relatively steady, declining only a few percentage points year over year.
Importantly, management maintains an acquisitive stance, stating they won’t allow leverage targets to prevent executing on compelling acquisition opportunities. The company sees at least five more years of consolidation runway in the pressure-treated lumber space, with potential targets ranging from single locations to multi-site operators.
Doman is implementing freight optimization technology acquired through a 2024 deal across its U.S. operations while transitioning from company-owned fleets to third-party carriers in select locations.
Management expects to benefit from meaningful reductions in costs, insurance, and liability exposure following its optimization efforts. Doman is also converting its Gilmer, Texas, sawmill this fall to automate fence production, with plans to extend upgrades across all sawmills. This positions Doman to capture substantial demand if tariffs on Brazilian imports hold, creating supply shortages in U.S. fencing markets.
Is the Canadian dividend stock undervalued?
Canada showed encouraging late-quarter momentum after a sluggish start, with recovery accelerating in July and August across lumber, plywood, and specialty products.
Management expects a stronger second-half performance could help recover ground lost in the first six months as the late winter finally subsided and trade uncertainty partially stabilized.
Balance sheet optimization remains a top priority with management targeting leverage of less than four times within 18 months through free cash flow generation.
Analysts tracking the TSX stock forecast free cash flow to improve from $93 million in 2024 to $142 million in 2027. Given an annual dividend expense of roughly $49 million, the payout ratio for the dividend stock should fall from almost 50% in 2024 to 34.5% in 2027.
If the TSX stock is priced at 10 times forward FCF, it should more than double within the next 18 months. If we adjust for dividends, cumulative returns could be closer to 110%.
