Value investing is a strategy where you buy shares of companies trading below their intrinsic value. Generally, value stocks can help you derive outsized gains over time and beat the broader market returns.
Here are two such undervalued gems I’d buy right now.
EQB stock
Valued at a market cap of $3 billion, EQB (TSX:EQB) serves over 543,000 Canadians through its wholly owned subsidiary Equitable Bank. Additionally, Concentra Bank, which is a subsidiary of Equitable Bank, supports credit unions in Canada that serve six million members.
With $108 billion in combined assets under management, Equitable Bank has two main business segments that include Personal Banking and Commercial Banking. Despite a challenging macro environment, EQB reported record earnings in the first six months of 2023, driven by portfolio growth, margin expansion, higher non-interest revenue, and efficiency improvements.
It also realized cost-saving targets from the acquisition of Concentra Bank well ahead of plan allowing EQB to upgrade earnings growth guidance to between 18% and 22% in 2023, up from 10% to 15%.
EQB reported adjusted earnings of $2.98 per share in the June quarter, an increase of 70 year over year. It also ended the quarter with a CET1 (capital equity tier-one) ratio of 15.4%, which is among the highest compared to other TSX banks. The CET1 ratio showcases the ability of a bank to withstand economic downturns, and a higher ratio is favourable.
Due to its stellar financial performance in the second quarter (Q2), EQB increased dividends by 23% year over year to $0.38 per share, indicating a yield of 1.9%. In the last 13 years, EQB has increased dividends at an annual rate of 17% which is quite exceptional for a cyclical bank stock.
Priced at 7.4 times forward earnings, EQB is really cheap and is forecast to increase the bottom line by 19.5% annually. It also trades at a discount of 25% to consensus price target estimates.
Enerflex stock
The second undervalued TSX stock on my list is Enerflex (TSX:EFX), which designs, manufactures, and provides aftermarket support for equipment, systems, and turnkey facilities used to process and transport natural gas from the wellhead to pipelines.
In Q2 of 2023, Enerflex reported revenue of $777 million and a gross profit of $147 million, indicating a margin of almost 19%. Enerflex aims to focus on expanding gross margins and reducing overall costs. In the last two quarters, its after-market Services gross margin has surged 500 basis points year over year, while Engineered Systems gross margins are up 400 basis points.
The company delivered $142 million of adjusted EBITDA (earnings before interest, tax, depreciation, and amortization), up from $123 million in the year-ago period due to an expanded energy infrastructure portfolio.
It also executed a capital expenditure program totalling $32 million. This includes a growth capital expenditures of $12 million which should drive future cash flows higher. An expansion in profit margins allowed Enerflex to reduce long-term debt by $50 million in Q2, resulting in lower interest expenses. Enerflex’s net debt to EBITDA ratio stands at 2.8 times which is quite acceptable.
Priced at 14.7 times forward earnings, EFX stock trades at a discount of 70% to consensus price targets.
