5i Stock Screener - Opportunity for Industrials Post-NAFTA

Investors following the industrials space in Canada may have noticed that many names have been having difficulty seeing any strength on the upside in the last few months. NAFTA uncertainties have likely played a big role in the industrials sell-off due to high revenue/supply chain exposures to the United States. Companies in the manufacturing and paper and pulp industries are especially exposed. However, now that the new trade agreement (aka USMCA) has been put in place of NAFTA and is not as harsh on Canada as many worried, one would expect the markets to provide some relief to the sector and maybe even a bounce from recent lows.

Broad market declines tend to present an opportunity to find good companies that were caught in a landslide of fear-selling. A share price recovery has not yet occurred for industrials, although it is a sector generally performs well, so it may be a matter of time before some of these companies see a boost. In the meantime, here’s a screener we have developed to help find strong companies within the sector that are poised to benefit the most from a sector recovery if/when it occurs:

Company Name Ticker GICS Sector Name Capital Expenditures  (This Yr/Last Yr) ROE Common Equity % - 5 Yr Avg Oper Profit Margin % 5 Yr Avg Total Debt to Total Equity (%) Price / EPS
(FY1)
Toromont Industries Ltd TIH.TO Industrials 244.1% 19.8% 11.0% 79.6% 19.81
Transcontinental Inc TCLa.TO Industrials 137.8% 14.7% 9.7% 28.6% 7.92
Calian Group Ltd CGY.TO Industrials 95.2% 17.2% 6.8% 0.0% 12.89
Stantec Inc STN.TO Industrials 87.2% 10.5% 8.4% 11.0% 18.66
Exco Technologies Ltd XTC.TO Industrials 64.8% 16.6% 11.7% 15.5% 9.44
Westshore Terminals Investment Corp WTE.TO Industrials 33.8% 24.1% 54.4% 0.0% 14.27
Hardwoods Distribution Inc HDI.TO Industrials 32.9% 13.9% 5.1% 39.1% 7.73
Snc-Lavalin Group Inc SNC.TO Industrials 31.6% 14.4% 8.1% 60.0% 17.72
Canadian National Railway Co CNR.TO Industrials 28.9% 28.8% 40.8% 65.0% 19.76
NFI Group Inc NFI.TO Industrials 28.8% 16.4% 7.6% 78.8% 11.96
CAE Inc CAE.TO Industrials 17.3% 14.2% 14.4% 56.6% 18.79
Badger Daylighting Ltd BAD.TO Industrials 12.6% 17.6% 15.6% 29.5% 15.52

 

We first screened for companies listed in Canada in the industrials sector. We then screened for companies showing a year-over-year increase in the capital expenditure. Screening for an increase in CapEx can indicate plans for future projects to stimulate company growth and management confidence future prospects. However, in order for us to gain confidence that a company deploys capital effectively, we also screened for a minimum 5-year average return on equity (ROE) of 10%. ROE is a measure widely used by companies to evaluate management performance, so it should help filter out companies that have a history of mismanaging capital expenditures.

Since industrials tend to be capital intensive, operational and scale efficiencies are important to maintain. Strong and consistent operating margins are a good indication that companies in this sector are doing their job. For our industrial screener, we wanted to see companies with an average operating margin of at least 3% over the last 5 years. After filtering for sustainable operating margins, we filtered for companies with a market-cap of no less than ~$350M.To avoid companies that are highly leveraged, we imposed a debt/equity requirement of no more than 80% as this is just below the sector average of ~88%.

One notable company is Transcontinental Inc. (TCL.A) which saw a ~35% drop in its share price during the September when trade negotiation tensions were at their peak. However, our metrics show some solid numbers for Transcontinental. The company has a strong management effectiveness record with a 5-year average ROE at 14.7%, low debt concerns with debt to equity at only at 28.6% and expected revenue growth of ~23% (highest among results of our screener).

As always this screener is meant to be for idea generation purposes only and is not an endorsement of any companies shown in our screen result. You can also view our previous screener here.

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