1 Undervalued TSX Gem That Can Surge 25% According to Bay Street

Redwood trees stretch up to the sunlight.

Undervalued stocks are defined as companies trading below their intrinsic value. It suggests the market is not valuing the company efficiently, providing investors an opportunity to benefit from outsized gains.

One such undervalued TSX stock is Stella-Jones (TSX:SJ). Valued at a market cap of $3.64 billion, Stella-Jones stock is down 10% from all-time highs, allowing you to buy the dip.

Despite the recent pullback, the TSX stock has returned 185% to shareholders since September 2013, outpacing the broader index, which is up 123% in this period.

Let’s see why you should invest in this company at its current price.

The bull case for Stella-Jones stock

Stella Jones is a leading producer of pressure-treated wood products in North America. It supplies electrical utilities and telecom companies with wood utility poles and commercial railroad operators with railway ties and timbers.

Additionally, the company provides industrial products such as wood for railway bridges and crossings, marine and foundation pilings, construction timbers, and coal tar-based products.

With 16 pole-peeling facilities and 43 wood-treating facilities, Stella Jones generates over 70% of its revenue from the U.S.

Stella Jones has increased sales from $2.16 billion in 2019 to $3.06 billion in 2022. There are significant growth catalysts for Stella-Jones, allowing it to fuel top-line growth. For instance, significant investments by utility companies to build the required infrastructure in North America is a secular tailwind for Stella-Jones. It is also well positioned to support North America’s rail infrastructure.

Stella-Jones is a market leader

Its utility poles business enjoys an industry-leading position in the maintenance-driven market, where demand is estimated to remain strong in the near term. Moreover, customers seek long-term agreements to secure supply, resulting in steady cash flows across market cycles. This business segment accounts for 40% of sales.

The second-largest business segment is Railway Tiles, which generates around 24% of sales for Stella-Jones. It has the treating capacity, sources of supply, and purchasing power to meet the demands of short-line railroads and commercial operators from coast to coast. Around 90% of rail infrastructure in North America is built using wooden crossties.

The third major business segment for Stella-Jones is residential lumber, which generated 24% of sales in 2022. This product category has a dedicated customer base that values premium lumber, and demand is expected to grow above pre-pandemic levels.

Does Stella-Jones stock pay shareholders a dividend?

In the last five years, Stella-Jones has increased adjusted earnings by 17% annually. This expansion in profit margins has allowed the company to increase its dividends by 17% each year for the last two decades.

Currently, the TSX stock pays shareholders a quarterly dividend of $0.23 per share, translating to a yield of 1.5%. Between 2020 and 2022, Stella-Jones returned $485 million to shareholders via dividends and buybacks, much higher than the $180 million it returned in the period between 2017 and 2019.

Priced at 13 times 2023 earnings, Stella-Jones is quite cheap, given earnings per share are forecast to rise from $3.93 per share in 2022 to $5.25 per share in 2024. Analysts remain bullish on SJ stock and expect shares to surge 25% in the next 12 months.

The post 1 Undervalued TSX Gem That Can Surge 25% According to Bay Street appeared first on The Motley Fool Canada.

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* Returns as of 8/16/23

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Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool recommends Stella-Jones. The Motley Fool has a disclosure policy.