What are we looking for?
Companies that have demonstrated leadership in their industry and sustained efficiency, and that have growth and value characteristics.
With unemployment rising and Bank of Canada signalling potential interest rate cuts, a weaker macroeconomic environment will likely benefit resilient industry leaders, particularly those in non-cyclical sectors. By targeting businesses that consistently generate above-average return on capital (ROC) and higher gross margins than their industries, we capture high-quality compounders and efficient capital managers.
The screen
We screened the Canadian stock universe, excluding the energy, consumer discretionary and materials sectors, using the following criteria:
- We ranked companies based on their excess gross margin relative to their industry, three-year average ROC, five-year ROC growth and their enterprise-value-to-EBITDA ratio (EV/earnings before interest, taxes, depreciation and amortization), and retained the top 33 per cent of companies in the universe;
- Positive gross margin relative to the average in their industry;
- Five-year average ROC growth must be positive;
- Market capitalization greater than $5-billion.
For informational purposes, we also added gross margin, industry gross margin, and each company’s price-to-earnings ratio, one-year price return and dividend yield.
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What we found
Industry leaders
| TICKER | NAME | GR. MGN. (%) | IND. GR. MGN (%) | EXCESS GR. MGN. (%) | 3Y AVG. ROC (%) | 5Y ROC GRTH. (%) | MKT CAP (Bil. $) | EV/EBITDA | P/E | 1Y PRICE RTN (%) | DIV. YLD (%) |
| TIH-T | Toromont Industries Ltd | 24.8 | 19.9 | 4.8 | 20.3 | 3.8 | 11.9 | 13.6 | 25.3 | 17.4 | 1.4 |
| STN-T | Stantec Inc. | 54.4 | 15.4 | 39.0 | 16.0 | 9.2 | 17.5 | 16.2 | 29.5 | 44.3 | 0.6 |
| L-T | Loblaw Companies Ltd. | 32.3 | 28.3 | 4.0 | 15.8 | 8.9 | 66.1 | 11.4 | 24.8 | 23.5 | 0.9 |
| WN-T | Weston Ltd. George | 33.3 | 28.3 | 5.0 | 15.1 | 8.4 | 33.4 | 8.2 | 21.1 | 14.3 | 1.3 |
| TA-T | TransAlta Corporation | 61.4 | 56.2 | 5.2 | 14.7 | 32.4 | 5.2 | 10.0 | 124.2 | 41.2 | 1.4 |
| WSP-T | WSP Global Inc. | 20.4 | 15.4 | 4.9 | 14.0 | 7.2 | 37.6 | 16.3 | 33.2 | 23.8 | 0.5 |
| SAP-T | Saputo Inc. | 30.1 | 23.4 | 6.8 | 9.9 | 4.3 | 14.0 | 10.5 | 21.6 | 12.7 | 2.2 |
| ACO.X-T | Atco Ltd. I | 68.1 | 68.0 | 0.1 | 7.5 | 1.3 | 5.5 | 9.3 | 11.0 | 6.6 | 4.1 |
| BYD-T | Boyd Group Services | 46.1 | 40.3 | 5.8 | 7.4 | 3.4 | 5.1 | 14.4 | 163.7 | 8.2 | 0.3 |
| FTS-T | Fortis Inc. | 72.4 | 48.1 | 24.3 | 6.4 | 3.2 | 34.4 | 12.3 | 19.9 | 11.5 | 3.6 |
| BEP-UN-T | Brookfield Renewable | 56.2 | 56.2 | 0.0 | 3.2 | 9.6 | 9.9 | 10.2 | 96.6 | -1.0 | 5.8 |
Toromont Industries Ltd. (TIH-T) provides specialized capital equipment and ranks at the top of our list, with a three-year average ROC of 20.3 per cent. The company maintains a reasonable valuation for an industry leader, with an EV/EBITDA of 13.6 and a P/E of 25.3. Toromont has proven to be a compounder, with growing ROC and a reasonable valuation for an industry leader, making it an attractive blend of growth and reasonable value, particularly in a declining-interest-rate environment that could support increased construction activity.
Stantec Inc. (STN-T) is a professional services firm that specializes in infrastructure, offering evaluation, planning and design solutions. The company reports a gross margin of 54.4 per cent, significantly above the industry median of 15.4 per cent, a 39-point advantage. Stantec also delivers the second-highest ROC in our screen at 16 per cent. Reflecting these strong fundamentals, it trades at the second-highest EV/EBITDA multiple of our screen at 16.2. Overall, Stantec stands out as a leader in the infrastructure engineering sector, and its prospects could be further supported if Prime Minister Mark Carney pushes forward large-scale infrastructure projects.
Loblaw Cos. Ltd. (L-T) is a leading grocery and pharmacy retailer and the largest company by market capitalization in our screen. It has achieved solid ROC growth of 8.9 per cent and maintains a gross profit margin four percentage points above the industry average. With an EV/EBITDA of 11.4, Loblaw offers a compelling entry point into the consumer staples sector, particularly given the current weak macroeconomic environment.
Investors are advised to do further research before investing in any of the companies listed in the accompanying table.
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Anthony Ménard, CFA, is vice-president of data management at Inovestor.
