Look for slower growth but higher equity valuations in the year ahead, say investment bankers GMP Securities, who on Tuesday released their Best Ideas for the upcoming 12 months, including tech sector names ATS Automation (ATS Automation Stock Quote, Chart TSX:ATA), Descartes Systems (Descartes Systems Stock Quote, Chart TSX:DSG), Enghouse Systems (Enghouse Systems Stock Quote, Chart TSX:ENGH) and Stingray Group (Stingray Group Stock Quote, Chart TSX:RAY.A).
With 2019’s first quarter rounding out, investors are concerned about slowing global growth, but GMP says there’s room for optimism.
“We continue to think the market will climb a wall of worry and new highs are likely this year in both Canada and the US. A slowing of growth in the US towards 2 per cent supports our scenario of monetary policy stability, an extended slow growth cycle, and higher equity valuations,” GMP says.
“In Canada, the political pendulum is starting to swing towards a more pro-business outlook with right-of-centre governments now elected in five of ten provinces (up from two in early 2016), with further movement possible or even likely in the Alberta provincial election in April and the federal election in October. Any progress towards an improved investment climate generally and pipeline construction in particular should prompt a catch up rally in the S&P/TSX, which has badly lagged the S&P 500 in recent years,” they write.
Analyst Justin Keywood reiterates his “Buy” recommendation and $27.00 target price for ATS Automation, saying the factory automation company should do well in a climate of increasing pricing pressure, rising wages and low unemployment, all of which are drivers for greater automation.
“We see ATS as entering a new phase of evolution as it approaches $1 billion in backlog and integrates recent acquisitions. This is not without challenges but as a whole, we see ATS as executing well on the secular strength of automation, leading to a much greater share price this year,” says Keywood.
The analyst notes that ATS could be in for some M&A activity as it has a balance sheet with over $600 million to support new deals. His $27.00 target represents a projected return of 37 per cent. (All return rates are as of time of publication.)
Logistics and supply-chain management company Descartes gets the nod from analyst Deepak Kaushal, who sees good growth opportunity and higher relative profitability coming from Descartes new data content services and analytics. DSG has climbed a long way over the past three months but Kaushal says there’s room for more upside.
“While the steady rise in share price has increased valuation risk, we are comfortable with Descartes’ growth prospects and the strength of the company’s proven growth-by-acquisition business model,” says Kaushal.
The analyst is maintaining his “Buy” rating with the raised target of $59.00 (previously $52.00), which represents a projected 12-month return of 21 per cent.
Enghouse Systems made headlines last week with an announced agreement to buy Espial Group in an all-cash offer of $56.5 million, a deal which Kaushal says gives ENGH a strong fourth pillar to its current markets.
Kaushal rates Enghouse a “Buy” with a $43.00 target, representing a projected return of 28 per cent.
“ENGH stock has pulled back from recent highs and so too has valuation. We believe this offers an attractive entry point. Our $43.00 target is based on 18x F2020 EBITDA vs peers at 20x. We continue to believe ENGH can maintain a high multiple given its track record for cash-accretive M&A,” says Kaushal.
Finally, media and entertainment company Stingray Digital gets the nod, with Kaushal pointing to the more than 35 acquisitions and 33 per cent annual growth rate since 2007 as proof of Stingray’s ability to drive growth both organically and accretively.
“We see Stingray as a successful growth-by-acquisition company that is rolling up the long tail of the music industry to drive accretive cash flow growth. We believe Stingray can sustain high growth, profitability and shareholder returns via continued acquisitions and strong organic growth,” says Kaushal.
The analyst reiterates his “Buy” rating and $14.50 target, which represents a projected return of 111 per cent.