Kaizen Discovery Inc (TSXV:KZD), a CADCA$29.06M small-cap, operates in the basic materials industry which is sensitive to changes in the business cycle, as it supplies materials for construction activities. Furthermore, the basic materials sector can be affected by shifts in the housing market, as many produced raw materials are components of construction projects. For example, if new housing development slows, the demand for metal products may also decrease. Basic material analysts are forecasting for the entire industry, a strong double-digit growth of 11.63% in the upcoming year , and an overall negative growth rate in the next couple of years. Unsuprisingly, this is below the growth rate of the Canadian stock market as a whole. Is the metals and mining industry an attractive sector-play right now? Today, I will analyse the industry outlook, as well as evaluate whether Kaizen Discovery is lagging or leading its competitors in the industry. See our latest analysis for Kaizen Discovery
What’s the catalyst for Kaizen Discovery’s sector growth?
Overall, the basic materials sector seems to be predominantly mature in terms of its industry life cycle. Companies appear to be highly competitive and consolidation seems to be a common theme. However, the industry is still facing many emerging trends including the reduction of waste, raw material inflation, and innovation in global supply chain management. Over the past year, the industry saw growth in the forties, beating the Canadian market growth of 11.10%. Kaizen Discovery lags the pack with its sustained negative earnings over the past couple of years. The company’s outlook seems uncertain, with a lack of analyst coverage, which doesn’t boost our confidence in the stock. This lack of growth and transparency means Kaizen Discovery may be trading cheaper than its peers.
Is Kaizen Discovery and the sector relatively cheap?
The metals and mining sector’s PE is currently hovering around 12x, below the broader Canadian stock market PE of 17x. This illustrates a somewhat under-priced sector compared to the rest of the market. Though, the industry returned a similar 7.18% on equities compared to the market’s 9.08%. Since Kaizen Discovery’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Kaizen Discovery’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? Kaizen Discovery recently delivered an industry-beating growth rate in earnings, which is a positive for shareholders. If you’re bullish on the stock and well-diversified by industry, you may decide to hold onto Kaizen Discovery as part of your portfolio. However, if you’re relatively concentrated in metals and mining, you may want to value Kaizen Discovery based on its cash flows to determine if it is overpriced based on its current growth outlook.
Are you a potential investor? If Kaizen Discovery has been on your watchlist for a while, now may be the time to enter into the stock, if you like its ability to deliver growth and are not highly concentrated in the metals and mining industry. However, before you make a decision on the stock, I suggest you look at Kaizen Discovery’s future cash flows in order to assess whether the stock is trading at a reasonable price, as well as other important fundamentals such as the company’s financial health in order to build a holistic investment thesis.
For a deeper dive into Kaizen Discovery’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 basic materials stocks instead? Use our free playform to see my list of over 2000 other basic materials companies trading on the market.