Augusta Industries Inc (TSXV:AAO), a CAD$10.24M small-cap, is a trading and distribution company operating in an industry which is facing massive upheavals from industry convergence, and new forms of competition and business models. Capital goods analysts are forecasting for the entire industry, a strong double-digit growth of 11.76% in the upcoming year, and Today, I’ll take you through the sector growth expectations, as well as evaluate whether AAO is lagging or leading in the industry. View our latest analysis for Augusta Industries
What’s the catalyst for AAO's sector growth?
Distributors are increasingly focusing on improving efficiency and cost-cutting as new forces continue to disrupt traditional distribution models. Technological advances have brought about new competitors, such as Amazon, and while some distributors feel that e-tailers can’t match their personal approach, many customers may feel differently as buying online becomes cheaper and more efficient. In the previous year, the industry endured negative growth of -17.77%, underperforming the Canadian market growth of -19.21%. AAO lags the pack with its negative growth rate of -37.82% over the past year, which indicates the company will be growing at a slower pace than its distribution peers. As the company trails the rest of the industry in terms of growth, AAO may also be a cheaper stock relative to its peers.
Is AAO and the sector relatively cheap?
The distribution sector's PE is currently hovering around 14x, in-line with the Canadian stock market PE of 17x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. Furthermore, the industry returned a similar 11.10% on equities compared to the market’s 9.49%. Since AAO’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge AAO’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? AAO has been a distribution industry laggard in the past year. If your initial investment thesis is around the growth prospects of AAO, there are other distribution companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how AAO fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If AAO has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although its growth has delivered lower growth relative to its distribution peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. Before you make a decision on the stock, I suggest you look at AAO’s future cash flows in order to assess whether the stock is trading at a reasonable price.
For a deeper dive into Augusta Industries's stock, take a look at the company's latest free analysis report to find out more on its financial health and other fundamentals. Interested in other capital goods stocks instead? Use our free playform to see my list of over 100 other distribution companies trading on the market.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.