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CSR Limited & AV Jennings Ltd: 2 bargain shares built to last

Shares in building products group CSR Limited (ASX: CSR) are 16% below their peak for the year of $5.24. For a variety of reasons, I think that the stock is compelling value at the current price of $4.39.

First and foremost, the shares are cheap on valuation measures. They trade on just 10.7x consensus net profit forecasts, and a yield of 6.1% (50% franked).

Secondly, despite the discount rating, the quality of the business is high. Earnings have grown for the last five years, EBIT margins are in the healthy mid teens, operating cashflow is strong, and CSR has no debt.

Thirdly, I believe that concerns about the one thing that always holds CSR back, the housing market, are overblown.

It’s not about top end property prices, it’s about new build in the residential, commercial, industrial and infrastructure sectors. The first three are forecast to remain strong, while substantial growth is expected in infrastructure.

Dealing specifically with residential housing, the macro-economic indicators are favourable, as is the main micro-economic one, namely the constraints put on supply by planning regulations.

Following this theme, an even cheaper, smaller stock that should be on investors’ radar is AV Jennings Ltd (ASX: AVJ).

This residential housebuilder constantly gets tarred with top end apartment glut/falling prices talk, yet it actually serves the low to mid tier of the East Coast market. Far from a glut, there is actually a shortage of new build in that space.

Like CSR, AV Jennings has delivered for several years now. In fact, over the last three years earnings have grown at 23.8% compound.

Yet despite this record, the group trades on a 31% discount to NAV. This is even more astonishing given that NAV has been steadily rising, not falling. But the main thing that should attract investors here is the fully franked 5c dividend, which grossed up, gives a yield of 10.4%.

Foolish takeaway 

Because of the market’s fixation on house prices, not housing demand, stocks like CSR and AVJ Jennings are very cheap. This despite them having extremely strong franchises. Both stocks are well off their highs, and offer compellingly high yields.

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Motley Fool contributor James Middleweek has no financial interest in any company mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.