It’s becoming increasingly hard to find value plays in 2020 when it comes to Canadian stocks.
As we move forward, markets are touching highs despite a high amount of uncertainty and most investors are left to question whether or not there is any value left on the TSX.
However, those who purchased Intertape Polymer Group (TSE:ITP) in 2020 saw the company’s share price soar after a rock solid earnings report. This was a rare value opportunity on the TSX and has been for some time now.
As with most stocks, now that its value has surged, it has garnered more attention and investors are wondering, are they late to the party? Or is there still more value. Lets take a look.
What exactly does Intertape Polymer (TSE:ITP) do?
Intertape Polymer is one of the world leaders in the development, manufacturing, and sales of paper and film based pressure-sensitive and water-activated tapes. The company also deals with packaging products for both retail and industrial purposes.
The company has operations in North America, Asia, and Europe, although its European exposure is limited with only a single factory out of its 31 total being in the country.
The company does operate in a cyclical industry, but this is somewhat offset by its exposure to a wide variety of industries including food packaging, oil and gas, medical, and aerospace industries.
Intertape Polymer stock may still be trading at a double digit discount
It’s not uncommon for stocks with a “boring” business model like Intertape Polymer to go unnoticed, and as such undervalued.
This was the case for the company over the last 5 years, as it traded relatively flat over that time period up until an excellent earnings report in late 2020.
The company has been relatively inconsistent when it comes to earnings, but there’s no doubt its been able to grow its revenue a pretty decent clip, with a compound annul growth rate of 8% over the last 5 years.
If we look at forward revenue projections, analysts figure that the company will be able to drive double digit top line growth in 2021, and earnings are expected to grow by 9.3%.
Considering the company is only trading at around 11 times forward earnings, this is a reasonable price to pay if it manages to hit those expectations. In fact, the company is actually still trading at a 15% discount to its historical forward price to earnings over the last 5 years.
This makes sense, considering the fact that analysts figure this company is going to be able to increase growth moving forward.
11 times forward earnings is a fair price to pay for Intertape’s growth itself. So, the fact that it pays a solid dividend just makes its price look even more attractive right now.
Market Cap: $1.41 billion
Forward P/E: 11.66
Dividend Growth Streak: 1 year
Payout Ratio (Earnings): 48.73%
Payout Ratio (Free Cash Flows): Premium Members Only
Payout Ratio (Operating Cash Flows): Premium Members Only
1 Yr Div Growth Rate: 6.80%
5 Yr Div Growth Rate: Premium Members Only
Stocktrades Growth Score: Premium Members Only
Stocktrades Dividend Safety Score: Premium Members Only
Intertape Polymer pays a well covered, mid-yield dividend
At the time of writing, Intertape pays a $0.80 annual dividend, good for a yield of around 3.33%.
The company also has plenty of room to grow the dividend, as its payout ratio is around 48% of earnings. This gets even better if we look towards free cash flows, as the company is currently paying out only 27%.
However, Intertape only has a 1 year dividend growth streak. The company is disciplined when it comes to capital allocation, and as such the dividend hasn’t grown much in recent years, and its most recent increase of 6.8% isn’t anything to write home about.
The company does state that strong book orders due to peak e-commerce sales may continue to drive growth for the company. And as such, we could see higher than average dividend growth for Intertape moving forward.
Strong 2020 results make Intertape a stock to watch moving forward
Although revenue remained relatively flat throughout the course of 2020, we’d consider this a bonus in the midst of a global pandemic. Where Intertape thrived was its bottom line.
The company was able to drive 88% earnings growth through the first 9 months of 2020 due to higher margins and less restructuring costs.
Free cash flows through the first 9 months of the year sit at $69.9 million as well, which is a more than 300% increase when we look at the first 9 months of 2019.
This is a company that could benefit significantly from a demand in e-commerce sales. In fact, the company stated that this was one of the driving factors in the rapid bottom line growth it achieved in 2020. Greg Yull, the President and CEO of IPG, stated:
“The pandemic has impacted businesses differently depending on the markets they serve. What is becoming clear to us, is the
structural change underway in e-commerce. Increased demand in e-commerce and building & construction as well as a return to
positive performance in most of our other end markets drove increased growth in both our top and bottom line results and our
ability to generate cash flows”
When people want exposure to e-commerce, they don’t think about boring business models like Intertape, the ones who provide tape and automated packaging solutions.
However, this can make them better opportunities, as other investors flock to overpay for companies like Amazon. In the air travel industry, a company like CAE Inc (TSE:CAE) isn’t necessarily as well known as say Air Canada or West Jet, but they provide a lot of services that help the industry operate, much like Intertape does for the ecommerce industry.
While I don’t see as much upside in Intertape as there was in early 2020, I still see this as a stock that has some upside left in it, along with a strong dividend, one that I think will continue to grow moving forward.
In a stock market as bloated as it is now, it’s rare you’re going to capture a company with the potential to grow its top and bottom lines by double digits and pay a 3%+ yield for only around 11 times forward earnings.