What are we looking for?
MacDonald’s CEO recently said he sees consumers being more discriminating with every dollar they spend. The Canadian consumer confidence index stood at 48 in April, up slightly from March but below the 2010-2024 average of 52.1 and in the United States, consumer sentiment fell to its lowest level in six months. Let’s look at stocks that fall into the consumer discretionary sector and the valuations we see for companies this group.
The screen
We used StockCalc’s screener to select the top 10 listed consumer discretionary stocks by market capitalization on the TSX. We then used StockCalc’s valuation tools to calculate fundamental (or intrinsic) valuation for each stock to see if it is undervalued or overvalued compared with its price.
Overview of the techniques used:
- Discounted cash flow (DCF value) is a valuation technique in which cash-flow projections are discounted back to the present to calculate value per share;
- A price comparables (price comps) technique values the company on the basis of ratios from selected comparable companies;
- An adjusted book value (ABV) is calculated by multiplying book value per share by its 10-year average price-to-book ratio.
- If we have analyst coverage, we may consider the consensus target price in our modelling.
More about StockCalc
StockCalc is a fundamental valuation platform with tools to calculate and report on value per share for thousands of public companies listed on major North American stock exchanges. StockCalc also contains numerous tools to understand what the stocks you are investing in are worth. Globe Unlimited subscribers can subscribe to StockCalc using the promo code “Globe30,″ which offers a 30-day free trial and special pricing for the second month.
What we found
The names on the list are ones we are generally familiar with. This sector is comprised of companies that are in auto and recreational vehicles, general and specialty retail, personal services, household or home improvement, restaurants, gambling, leisure and travel. Year to date this sector on the TSX is up 2 per cent. Nine of the 10 stocks listed pay a dividend with dividends ranging up to 4.8 per cent.
Let’s look at a few of these companies:
Restaurant Brands International QSR-T is one of the largest restaurant companies in the world, with approximately $43-billion in 2023 system wide sales across more than 31,000 restaurants and 100 countries. The firm generates revenue primarily from retail sales at its company-owned restaurants (Burger King, Tim Hortons, Popeyes Louisiana Kitchen), royalty fees and lease income from franchised stores, and from its Tim Hortons supply chain operations. Our models are generally below current price but we see analyst consensus significantly higher. Our overall valuation is in line with current price.
Canadian Tire CTC-A-T is a leading general merchandise retailer with over 1,400 affiliated stores across Canada. The firm operates around 650 stores, with the remaining operated by franchisees or third-party dealers. The retailer includes Mark’s, Sport Chek, Sports Experts, PartSource, Party City, and Helly Hansen. Its wide product assortment includes automotive parts, appliances, sporting goods, home improvement items, and apparel. Our models are both above and below current price and our overall valuation is in line with current price and similar to analyst consensus.
Magna International’s MG-T product groups include body and chassis, powertrain, electronic systems, interior and exterior and contract vehicle assembly. Magna’s revenue is generated in North America (48 per cent) Europe (38 per cent) and Asia (14 per cent). The firm’s top three customers are General Motors, Mercedes and BMW. Our models and analyst consensus are showing Magna International as undervalued here and it has the lowest price to book value (not shown) for the group listed.
You can see in the accompanying table the percentage difference between each stock’s recent closing price and its intrinsic value. The “StockCalc Valuation” column is a weighted calculation derived from the models and Analyst target data if used.
Investing involves risk. StockCalc accepts no liability whatsoever for any loss or damage arising from the use of this analysis.
Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.