As the U.S. and China continue to negotiate on trade, another major deal between the U.S., Mexico and Canada is still waiting to be ratified.
The trade agreement, called the United States-Mexico-Canada Agreement, or USMCA, was signed by President Donald Trump, Mexican President Enrique Peña Nieto and Canadian Prime Minister Justin Trudeau in November 2018 at the G20 Summit in Buenos Aires, Argentina. The deal not only raises labor standards in Mexico, but tightens rules for auto industry trade in an effort to increase wages. While it has been officially ratified by the Mexican government, the agreement has yet to receive seals of approval from Canada and U.S. Congress.
The Wall Street Journal’s Natalie Andrews reported earlier this week that support from labor groups will be a deciding factor in whether or not the deal, which is replacing the North American Free Trade Agreement, will be voted on in the House of Representatives anytime soon. While labor groups have said the deal is an improvement from NAFTA, they are calling for changes that will implement stronger enforcement provisions that will prevent U.S. companies from moving across the border in order to cut costs.
As a result of these developments, investors may be interested in looking for value opportunities among Canadian companies that are trading below Peter Lynch value.
A legendary investor, Lynch developed this strategy in order to simplify his stock-picking process. With the belief good, stable companies eventually trade at 15 times their annual earnings, he set the standard at a price-earnings ratio of 15. Stocks trading below this level are often considered good investments since their share prices are likely to appreciate over time, creating value for shareholders. The GuruFocus All-in-One Screener, a Premium feature, also looked for companies with a business predictability rank of at least two out of five stars and a 10-year revenue per share growth rate of at least 6%.
The screener found industrial companies that met these criteria as of Sept. 25 were Cervus Equipment Corp. (TSX:CERV, Financial) and TFI International Inc. (TSX:TFII, Financial).
Cervus Equipment
The Calgary, Alberta-based company, which sells farm and construction equipment, has a market cap of 136.58 million Canadian dollars ($102.8 million); its shares closed at CA$8.91 on Tuesday with a price-earnings ratio of 8.49, a price-book ratio of 0.62 and a price-sales ratio of 0.11.
The Peter Lynch chart shows the stock is trading below its fair value, suggesting it is undervalued.
Weighed down by poor interest coverage, GuruFocus rated Cervus’ financial strength 4.7 out of 10. The Altman Z-Score of 2.82 indicates the company is under some financial pressure as its revenue per share growth has slowed down over the last 12 months.
The company’s profitability and growth did not fare much better, scoring a 5 out of 10 rating on the back of declining margins, returns that underperform over half of its competitors and a low Piotroski F-Score of 3, which implies poor operating conditions. Cervus also has a two-star business predictability rank. According to GuruFocus, companies with this rank typically see their stocks gain an average of 6% per annum over a 10-year period.
According to the GuruFocus Industry Overview page, Cervus is the second-largest player in the farm and construction machinery space, behind Ag Growth International Inc. (TSX:AFN, Financial).
TFI International
The transportation and logistics company, which is headquartered in Montreal, Quebec, has a CA$3.23 billion market cap; its shares closed at CA$38.80 on Tuesday with a price-earnings ratio of 10.9, a price-book ratio of 2.28 and a price-sales ratio of 0.66.
According to the Peter Lynch chart, the stock is undervalued.
TFI’s financial strength was rated 4.6 out of 10 by GuruFocus. Despite issuing approximately CA$777.7 million in new long-term debt over the past three years, it is at a manageable level due to adequate interest coverage. The Altman Z-Score of 2.37, however, suggests the company is under some financial stress.
The company’s profitability and growth scored an 8 out of 10 rating, driven by operating margin expansion, strong returns that outperform a majority of industry peers and steady earnings and revenue growth. It also has a moderate Piotroski F-Score of 6, which indicates operations are stable, and a 3.5-star business predictability rank. GuruFocus says companies with this rank typically see their stocks gain an average of 9.3% per year.
The Industry Overview page shows TFI International is the third-largest company operating in the transportation and logistics sector, behind Canadian National Railway Co. (TSX:CNR, Financial) and Canadian Pacific Railway Ltd. (TSX:CP, Financial).
Disclosure: No positions.
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