Desjardins’ top stock picks for 2024 in Diversified Industries

How have your 2023 returns been? Perhaps not as good as analysts from Desjardins.

On December 14, Desjardins analysts Frederic Tremblay, Gary Ho, Chi Le and Liam Bergevin released their top picks for 2024 in Diversified Industries. With a couple weeks to go, they summed up their performance in 2023.

“In 2023, the companies in our coverage universe delivered a market cap–weighted return of 7.6% as at December 11 vs 4.9% for the S&P/TSX Composite Index and -1.4% for the S&P/TSX SmallCap Index,” they wrote. “Our top performers based on price returns were HEO (return of 65.4%), CAS (45.6%), PMET (43.8%) and GSY (41.4%). While we have a Hold rating on BYD, which generated a strong return of 26.7%, recall that we downgraded the stock to Hold (from Buy) in May 2023 when it had already returned ~17% ytd.”

Many have noted the crushingly low valuations that smallcap stocks fell to in 2023 and Desjardins says they expect that to be remedied, to a degree.

“As we look to 2024, we believe that the recent widening of the small caps’ valuation discount, the likelihood of interest rate cuts and M&A/takeout activity provide a constructive backdrop for small caps, especially those with resilient businesses, solid cash flow generation and alignment with global trends,” the analysts argued. “Our top picks for 2024 are Ag Growth (AFN, TSX, Buy–Above-average Risk, C$82.00 target), Brookfield Business Partners (BBU/BBU.UN, NYSE/TSX, Buy–Above-average Risk, US$29.00 target), Savaria (SIS, TSX, Buy–Above-average Risk, C$20.50 target) and Lithium Ionic (LTH, TSX-V, Buy–Speculative, C$4.50 target (was C$5.25).

Regarding AG Growth International, (AG Growth International Stock Quote, Chart, News, Analysts, Financials TSX:AFN)  the analysts say things are looking up.

“Management delivering on its three strategic initiatives. (1) Operational excellence. AFN has made substantial progress around its structured process, operational excellence and manufacturing efficiencies,” they wrote.  “These initiatives are the main contributor to EBITDA margin expanding to 18.5%+ in 2023 from ~16% in 2022. In 2024, AFN will look to build specific measures around operational excellence (tied to executive compensation), better pricing segmentation (customer buying patterns/behaviours) and streamlining the customer experience by consolidating order intake and investing in tools for dealer partners to handle preliminary order quoting. (2) Product transfers. Management is confident product transfers will reap tangible benefits in 2024. It has completed engineering/manufacturing work across five transfers in 2023, with sales/marketing currently pushing these products. Management will look to provide targets at some point on product transfers as a percentage of revenue or order book. Medium-term, this initiative could grow toward a ~20% share of the ~C$4b in additional TAM. (3) Aftermarket parts and services. Management is laying the groundwork today (hiring talent, scoping out facility/warehousing footprint) to reap the benefits starting in 2025–26. India, where parts/services represent 9–10% vs <4% of AFN’s consolidated revenue, serves as a good case study. AFN could optimize its manufacturing and sales footprint across finished goods vs parts and services.”

The analysts say the stock is attractively valued.

“Our C$82.00 target is based on 8.25x EV/4QF EBITDA. AFN trades at an attractive multiple of 6.0x its 2024 EBITDA vs its historical range of 6.8–9.1x (±1sd). Despite having been up ~20% this year, the stock is even cheaper than a year ago (was trading at ~6.8x EBITDA last December).

Brookfield Business Partners (Brookfield Business Partners Stock Quote, Chart, News, Analysts, Financials TSX:BBU.UN) is Desjardins’ top pick for the diversified financials sector and the analysts highlighted the company’s a 28% stake in Clarios.

“Clarios is the world’s largest vehicle battery manufacturer, with its batteries installed in one out of three vehicles globally,” they explained. “It is ~5–6x larger than its next competitor, selling >150m batteries annually. On average, batteries are usually replaced 2–4 times over a vehicle’s life; hence, 80% of Clarios’ volumes are highly repeatable aftermarket sales. Unlike 5–10 years ago when the majority of its sales were through internal combustion engine (ICE) vehicles, Clarios’ advanced batteries, which also power EV and start/stop engines, represent a growing part of the business today. In 2023, advanced batteries account for 28% of sales vs 10% back in 2015. By channel, advanced batteries represent 68% of its OE sales but only 17% of aftermarket; however, as these EV/start-stop vehicles age and go through the normal replacement cycle, advanced battery penetration into the aftermarket channel should stand to benefit. By 2027, Clarios management expects 36% of its total battery volume to be advanced batteries. This tailwind will continue to be a source of revenue and margin expansion for Clarios—advanced batteries drive 50–80% higher revenue and double the profitability dollars of a standard low-voltage battery.”

The authors like the valuation on Brookfield, too.

“BBU units currently trade at 8.7x EBITDA vs ~13x for the S&P 500, while businesses that generate similar EBITDA margins as BBU are trading at ~15x. We continue to favour the name given its ~57% discount to NAV.

Savaria Corporation (Savaria Stock Quote, Chart, News, Analysts, Financials TSX:SIS) is Desjardins’ Top Pick in Diversified Industries.

“We expect 2024 to be a pivotal year for SIS,” they said.  “It starts on January 1 with Sebastien Bourassa becoming president and CEO (from COO) and Marcel Bourassa moving to the executive chairman role (from president, CEO and chairman). We have long viewed Sebastien Bourassa as one of the key contributors to SIS’s evolution to a global leader in the accessibility industry and, in our opinion, 2024 is the right time for this logical CEO transition as the entire company becomes more intensely involved with the implementation of the Savaria One program in collaboration with consultants. While details on Savaria One initiatives are scarce at the moment, we believe that initial benefits in areas such as pricing, productivity and procurement should be progressively felt in 2024 and beyond. We look forward to SIS’s first-ever investor day in 1Q24 or 2Q24, which should be packed with information on Savaria One and key priorities/goals for each business segment.”

“SIS trades at a large discount to its average at 8.8x EV/EBITDA on 2024 estimates vs the average of 10.7x. Our C$20.50 target is based on 11x estimated 2024 adjusted EBITDA. Furthermore, we note that the stock trades at 7.8x our 2025 adjusted EBITDA forecast of C$168.4m (17.5% margin). If management’s 2025 goals of C$1b revenue and 20% margin are reached, the stock would be trading at an astonishing 6.6x,” the analysts added.

Finally, Lithium Ionic (Lithium Ionic Stock Quote, Chart, News, Analysts, Financials TSX:LTH) is Desjardins’ top pick in the lithium sector.

“Within what could remain a volatile lithium market in 2024, we believe the company stands out from hard rock peers, based in part on a high number of important catalysts and milestones that are expected to emerge from its two lithium projects in Brazil,” the analysts said. “In our opinion, both of LTH’s projects have the potential for positive resource updates in 2024. At Itinga, after the resource estimate for the Bandeira deposit was increased to 29.5mt (1.37% Li2O) in October 2023, we believe that ongoing drilling activity could fuel a resource upgrade (along with a DFS) around 1Q24. In addition to the growing Bandeira deposit, Itinga comprises Outro Lado (3.4mt at 1.46% Li2O currently) and other regional targets. At the Salinas project, where LTH recently drilled its best intercept to date, a maiden resource estimate is expected in 2024 (likely early in the year) and we believe ~10mt looks achievable.”

The analysts say the stock is cheap compared to its peers.

“LTH trades at 0.27x P/NAV, which is a discount to peers (0.32x average). With several potential near-term catalysts and rapid project development, we believe LTH should trade at a premium multiple,” they concluded.