What are we looking for?
Canada’s economy has stalled after contracting in the prior quarter, with annualized GDP figures pointing to a technical recession. In this type of environment, growth becomes harder to find, and investors need to be more selective about where they allocate capital.
In a slower economy, investors have less room to rely on broad growth to lift all businesses. The stronger candidates are often companies that can keep serving essential or recurring customer needs, reinvest capital at attractive rates and maintain enough financial flexibility to navigate uncertainty. A reasonable valuation also matters, because paying too much for modest growth can reduce the margin of safety if conditions worsen. Therefore, companies that can earn attractive returns, maintain steady revenue and avoid excessive debt may be better positioned to protect profitability through weaker conditions.
The screen
We screened the Canadian universe using the following criteria:
- market capitalization greater than $2 billion;
- enterprise value-to-EBITDA ratio (EV/EBITDA) below 12, to avoid companies trading at excessive valuations;
- standard deviation of 10-year EBITDA growth below 10 per cent, to identify companies with less volatile EBITDA growth;
- positive average net debt-to-EBITDA over the last five years, to focus on companies with manageable leverage;
- average return on capital for the last three years greater than 12 per cent, to identify companies that deploy capital efficiently.
For informational purposes, we also added dividend yield and one-year price return.
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| Symbol | Name | MKT VALUE ($CAD BIL.) | EV/EBITDA | DIV. YLD. (%) | 1Y PRICE RTN (%) | 5Y Debt/EBITDA | 10Y EBITDA GRO. STD DEV(%) | 3Y ROC(%) |
| GIB.A-T | CGI Inc. A | 16.6 | 6.9 | 0.7 | -39.3 | 0.9 | 4.1 | 21 |
| CCL.B-T | CCL Industries Inc. B | 15.1 | 10.1 | 1.5 | 14.3 | 1.1 | 4.6 | 14.9 |
| ATD-T | Alimentn Couche-Tard* | 75.6 | 11.1 | 1 | 16.2 | 1.8 | 4.4 | 15.8 |
| MRU-T | Metro Inc. | 19.3 | 11.3 | 1.7 | -12.1 | 2.3 | 3.5 | 13.7 |
| QBR.B-T | Quebecor Inc. B | 15.2 | 9.5 | 2.1 | 68.7 | 3.5 | 4 | 15.7 |
| NWC-T | North West Company Inc. | 2.3 | 7.9 | 3.3 | -0.2 | 1.1 | 8.6 | 19.3 |
| WN-T | Weston Ltd. George | 38.2 | 8.8 | 1.2 | 13.3 | 2.7 | 7 | 15.5 |
| MFC-T | Manulife Financial Corp | 95 | 10.2 | 3.2 | 35.4 | 1.4 | 8.6 | 15.6 |
| FSV-T | FirstService Corp. * | 8.9 | 11.7 | 0.8 | -20.2 | 2.1 | 9.3 | 17.2 |
| WSP-T | WSP Global Inc. | 23.8 | 11.1 | 0.8 | -34.9 | 1.9 | 9.2 | 14.4 |
| *Reports Company Filings in USD | ||||||||
What we found
CGI Inc. A (GIB.A-T) is a technology and consulting company that provides IT and business consulting services. CGI stands out for investors looking for quality at a reasonable price. Its three-year average return on capital of 21.0 per cent suggests strong capital efficiency, while its EV/EBITDA ratio of 6.9, the lowest in our screen, indicates investors are not paying an excessive multiple for those returns. Despite a weak one-year price return, CGI may appeal to investors who are seeking long-term value and quality.
CCL Industries Inc. B (CCL.B-T) is a packaging and specialty label company serving consumer, healthcare, automotive and industrial markets. Its three-year average return on capital of 14.9 per cent and five-year average net debt-to-EBITDA ratio of 1.1 suggest solid profitability with manageable leverage. The company’s relatively low EBITDA growth volatility of 4.6 per cent also points to a business with less cyclical earnings risk. CCL may appeal to investors who are looking for a balanced compounder with a decent dividend yield of 1.5 per cent.
Alimentation Couche-Tard Inc. (ATD-T) is a global convenience store and fuel retail operator. It has the third highest composite score in our screen with return on capital of 15.8 per cent, and 10-year EBITDA growth volatility of 4.4 per cent suggesting a stable operating profile. Its net debt-to-EBITDA ratio of 1.8 is slightly higher, however, it remains manageable given the company’s scale and stable operating profile. Couche-Tard may appeal to investors who are looking for a defensive large-cap stock with a proven track record of capital efficiency and resilient profitability.
Investors are advised to do further research before investing in any of the companies listed in the accompanying table.
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Anuj Anand, MBA, LLM is an Investment Analyst at Inovestor.