A growth stock for aggressive investors

Savaria Corp.’s earnings are growing fast. And this manufacturing stock’s earnings are expected to keep rising quickly for years to come as an aging population needs more accessibility equipment. Aggressive investors might buy this growth stock for large potential share price gains and modest dividends.

manufacturing_stocksGreater Montreal-based Savaria Corp (TSX—SIS) is costly. Then again, this accessibility equipment manufacturing stock stands to profit greatly from demographic trends for years to come. Despite its stock symbol SIS, you can say these shares are unsuitable for ‘sissies’. But aggressive investors who are willing to run risks for large potential profits might consider building a position.

Savaria “designs, manufactures, distributes and installs accessibility equipment, such as stair lifts for straight and curved stairs, vertical and inclined wheelchair lifts, elevators for home and commercial use, as well as patient lifts. In addition, it converts and adapts vehicles to be wheelchair accessible. It also operates a network of franchisees and corporate stores through which new and recycled accessibility equipment is sold and . . . vehicle conversions are performed. Savaria operates a plant . . . in China. Savaria records close to 60% of its revenue outside Canada, primarily in the United States. It operates a sales network of some 400 retailers and affiliates in North America. . . . Its principal places of business are located in Laval, Quebec, Brampton, Ontario and . . . China.”

Growth stock Savaria earned record profits

In the three months to March 31, Savaria earned a record $3.3 million, or nine cents a share. This was up by nearly 29 per cent from $2.4 million, or seven cents a share, a year earlier.

The growth partly reflected an acquisition. President and chief executive officer Marcel Bourassa said: “I am very pleased with the start of activities of our new acquisition, Premier Lifts. The transition is proceeding very well.” Savaria acquired Premier Lift on February 10. It plans to acquire Span-America.

Savaria can afford such acquisitions. Indeed, its cash of $51.7 million exceeds its total debt of $26.7 million. Also, its first-quarter cash flow of $3.4 million exceeded net capital spending of $0.6 million and dividend payment of $2.4 million. The dividend of 26 cents a share yields a modest 1.71 per cent.

In 2017, Savaria is expected to earn 49 cents a share. Based on this estimate, the stock trades at a high price-to-earnings, or P/E, ratio of 31 times. Still, the company’s earnings are expected to grow by 44 per cent, from 34 cents a share last year. This suggests the shares may be undervalued.

Next year, Savaria’s earnings are expect to jump by 30.6 per cent, to 64 cents a share. Based on this estimate, the shares trade at a P/E ratio of 23.7 times. This, too, suggests the shares may be undervalued.

This manufacturing stock’s management is optimistic

If Savaria’s earnings growth falls, its shares would likely fall too. But Mr. Bourassa’s outlook is upbeat. He said “the launch of our portable patient lift is progressing according to plan, this product is part of our new ‘Monarch’ product line which is under development and that will significantly contribute to our revenue in 2018”. He sees “speedy revenue growth over the coming years, either through acquisitions or product development thanks to our two R&D [Research and Development] centres”.

A strong long-term outlook

In Canada, there are now more seniors 65 and up than children under 15. The American population is aging too. Older people need more accessibility equipment to enhance their mobility and independence. What’s more, most seniors want to live in their homes as long as possible. As going up or down stairs becomes more difficult, many seniors will need stair lifts. More will need wheelchair-accessible vehicles.

All this will cost money. But seniors as a group own more wealth than other segments of society. This works to Savaria’s advantage.

The consensus recommendation of three analysts is ‘buy’. We think this manufacturing stock is a ‘buy’ for aggressive growth stock investors willing to run significant risks for large potential profits and modest dividends.

This is an edited version of an article that was originally published for subscribers in the May 26, 2017, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846