On Thursday, major U.S. stock markets all finished the trading session higher, while the Canadian benchmark lagged, once again, weighed down by energy stocks.
In the U.S., the Dow Jones Industrial Average advanced 0.34 per cent, the S&P 500 index increased 0.44 per cent, and the Nasdaq composite index rallied 0.69 per cent.
Turning to Canada, the S&P/TSX composite index declined 9 points, or 0.06 per cent. There were 111 securities in the TSX Index that advanced, 133 securities declined in value, and six stocks closed the day unchanged.
Year to date, the TSX Index is up 0.81 per cent. While the Dow Jones Industrial Average is up 6.68 per cent, the S&P 500 index is up 7.87 per cent, and the Nasdaq has rallied 15.27 per cent.
On today's TSX Breakouts report, there are 28 stocks on the positive breakouts list (stocks with positive price momentum), and 31 stocks are on the negative breakouts list (stocks with negative price momentum).
Featured today is a stock that has been consolidating, or trading relatively sideways, digesting its large price move in 2016. The stock is 25 cents away from appearing on the positive breakouts list and positive price momentum may resume in the second half of the year as its earnings growth accelerates. In addition, management is committed to growing its dividend with the stock offering investors an attractive and secure dividend, currently yielding 4.5 per cent. The security I am referred to is Innergex Renewable Energy Inc. (INE-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Quebec-based Innergex is an independent renewable power producer.
Management has been focused on diversifying its energy sources. For 2017, management is forecasting 56 per cent of its production will come from its hydro assets, 40 per cent from wind, and 4 per cent from its solar assets. Management anticipates 42 per cent of its 2017 expected production will come from its facilities in British Columbia, with 37 per cent from Quebec, 15 per cent from France, 5 per cent from Ontario, and 1 per cent from the state of Idaho.
The company operates 30 hydroelectric facilities, 17 wind farms, and one solar farm. Management is also committed to diversifying its geographic exposure, expanding internationally through acquisitions. In February, the company completed the acquisition of a wind farm located in northern France, and earlier this month, the company signed an agreement to purchase three wind projects also located in France.
On May 9, the company reported weaker-than-expected first quarter financial results. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) came in at $50.9-million, below the consensus estimate of $61.2-million. Soft results were due to lower production at its B.C. hydro facilities and Quebec wind farms.
On the earnings conference call, the president and chief executive officer Michel Letellier commented, "We had a low hydrology in BC, not because it didn't rain, it's just that it snowed a lot and that (there was) weak wind in Quebec and weak wind in France… So all in all, I'm happy with the activities that we can control. The weather is something that we're trying to control by diversification and having good assets." Mr. Letellier added that the recent flooding in Québec did not have any impact on the company's facilities.
Dividend policy
Management is firmly committed to its dividend and has announced a dividend increase each February since 2014. Management intends to continue to expand its dividend as its free cash flow rises.
Innergex currently pays shareholders a quarterly dividend of 16.5 cents per share, or roughly 66 cents per share on a yearly basis. This equates to an annualized dividend yield of 4.5 per cent.
In 2016, the free cash flow payout ratio was 91 per cent. Management targets a payout ratio of between 70 per cent and 80 per cent.
Analysts' recommendations
There are nine analysts covering the company, five analysts have buy recommendations and four analysts have hold recommendations.
The nine firms providing research coverage on the company are as follows in alphabetical order: AltaCorp Capital, BMO Capital Markets, CIBC World Markets, Desjardins Securities, Industrial Alliance Securities, National Bank Financial, Raymond James, RBC Capital Markets, and TD Securities.
Financial forecasts
The Street is forecasting EBITDA of $320-million in 2017, rising 10 per cent to $353-million in 2018. Management is forecasting adjusted EBITDA of $339-million in 2017, up 55 per cent from $216-million in 2016, and free cash flow of $113-million in 2017, up from $76-million in the prior year.
Earnings expectations have been rising. For instance, three months ago, the consensus EBITDA estimates were $318-million for 2017 and $328-million for 2018.
Valuation
According to Bloomberg, the stock is trading an enterprise value-to-EBITDA multiple of 12.8 times the 2018 consensus estimate, below its five-year historical average of 13.9 times, suggesting there is room from multiple expansion.
The average one-year target price is $16.61, suggesting the stock price has over 15 per cent upside potential. Target prices range from a low of $15 (at RBC Capital Markets and TD Securities) to a high of $18.50 (at Raymond James), implying upside share price potential of between 3 per cent and 27 per cent. Individual target prices as follows in numerical order: two at $15, two at $15.50, $16, $17.50, $18 and two at $18.50.
Revised recommendations
Earlier this month, four analysts revised their expectations – all higher. Bill Cabel, the analyst from Desjardins Securities lifted his recommendation to a "buy" from a "hold" and raised his target price to $16 from $15.50. Sean Steuart from TD Securities increased his target price by 50 cents to $15. Jeremy Rosenfield from Industrial Alliance Securities bumped his target price to $17.50 from $17, and David Quezada from Raymond James raised his target price to $18.50, the high on the Street, from $17.50.
Insider transaction activity
So far in 2017, there have been no reports of insider buying or selling activities in the public market.
Chart watch
Year to date, the share price is up 3.4 per cent, slightly underperforming the S&P/TSX utilities index that has increased 7.3 per cent. For the past year, the stock price has been trading sideways, principally between $13.75 and $15, digesting its parabolic move to $15.70 in July 2016 from $10 at the beginning of 2016. This sideways action is building a solid base for the stock's next move.
There is initial overhead resistance around $15, and after that just below $16. There is downside support around $14, close to its 50-day moving average (at $14.30) and its 200-day moving average (at $14.23).
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The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company's dividend policy, analysts' recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.