If you're looking to buy a stock and add it to your portfolio, this would often start with a screen of the overall market. You'll enter specific criteria that meets your needs, and filter out the vast majority of Canadian stocks on the index.
From there, you'll narrow down your search to maybe half a dozen or even a dozen companies. After that, you'll dive deep into every company on your shortlist to come to a conclusion.
In this article I'm going to give you 2 companies that fit 2 key criteria I'm looking for. These characteristics are a respectable price to free cash flow ratio, and a double digit return on invested capital.
Spin Master Corp (TSX:TOY) proving traditional toys still relevant
Spin Master Corp (TSE:TOY) is an entertainment company catering to children and the roughly $100B global toy industry. The company markets, designs, and creates a wide variety of products across 5 key segments, outdoor, remote control, boys action and construction, preschool and girls, and activities games and plush.
The company's most popular brand is likely Paw Patrol, and the company has a global reach with sales in over 100 countries. With revenue of $2.1B in 2020, this is a sizable company, and it currently has a market cap of $4.17B.
Spin Master is currently trading at 11.8 times free cash flow and the company has a 14.5% return on invested capital. This ratio did decrease over the course of the pandemic as COVID-19 had severe impacts, but we're starting to see Spin Master come out of the pandemic in reasonable shape.
Spin Master Corp (TSX:TOY) and the shift to digital entertainment
Many initial investors would be quick to cast Spin Master aside, as traditional toys seem to be a thing of the past with more children preferring digital means of entertainment. However, the company has adapted quite well to the digital scene, whether it be through the adoption of digital games, or presenting a strong digital element to its physical toys.
The company is trading at a respectable 17.9 times forward earnings and 1.69 times forward sales. These are both well below what Spin Master has typically traded at over the last half decade.
Would I be buying Spin Master today? I'd likely be adding it to my watchlist and observing it closely over the holiday season. Another lockdown, or supply chain issues over the Christmas holidays would impact this company severely for the second straight year in a row.
Bird Construction (TSX:BDT)
It's not uncommon for small cap Canadian construction companies to go relatively unnoticed. Bird Construction (TSE:BDT) is certainly one of those companies. With a market cap of $524M and average volume of 158,471, Bird certainly doesn't attract the attention that SNC Lavalin does, or WSP Global. However, it's one company that you might want to keep an eye on.
Bird Construction is a general contractor, primarily operating in the Canadian market. The company avoids residential projects and instead focuses primarily on the industrial, commercial, and institutional sectors. The company not only does raw construction, but also performs maintenance and repair operations.
Increased infrastructure spending could benefit related companies such as Bird Construction (TSX:BDT)
The company has a somewhat spotty history of top and bottom line growth, however with infrastructure spending expected to ramp up with the pandemic nearly in the rear view mirror, investors are likely expecting Bird to benefit.
The company is trading at just shy of 8 times free cash flow and does have a return on invested capital of 16%. Doing a bit more digging, unlike Spin Master which has consistently maintained a double digit ROIC, Bird's seems to be a one-off. It has struggled post financial crisis, and this is certainly something investors are going to need to be aware of.
Forward looking valuation metrics attractive compared to peers
However, there is no question forward looking valuations are cheap. The company is trading at only 9.7 times forward earnings and 0.2 times sales, both of which are significantly below the sector averages. The company also does have a double digit earnings yield, which is essentially the inverse of the price to earnings ratio.
As mentioned, infrastructure spending is no doubt going to help Bird Construction, and it seems analysts feel the same way. Analysts are expecting 21% EBITDA growth and 50% revenue growth in 2021, with momentum continuing into 2022 with double digit growth on both accounts as well.
If you look Bird up in the news, you'll see a plethora of new project awards, and it seems the next few years are going to be strong for the company. The cherry on top? The company pays a 3.94% dividend, one that makes up only 31% of trailing free cash flow.
Would I be a long term holder of Bird Construction? It's unlikely. I tend to avoid cyclical options and stick to long term holds. However, there is no questioning the company could go on a roll over the next few years. And if you're willing to buy for a short to mid-term hold, I could see the potential here.