Monday's TSX breakouts: Undervalued dividend stock with 4 ‘buy’ calls and 33% upside forecast

On Friday, North American equity markets dipped after Fed Chair Janet Yellen spoke at the Jackson Hole economic symposium. The odds of a potential rate hike announced on September 21 by the U.S. Federal Reserve jumped to 42 per cent from a 32 per cent probability the prior day.

On Friday, in the U.S., the Dow Jones Industrial Average fell 0.29 per cent, the S&P 500 Index declined 0.16 per cent, and Nasdaq composite gained 0.13 per cent.

In Canada, the S&P/TSX composite index closed the day well off its gains from earlier in the morning, rising just 9 points, or 0.06 per cent to close at 14,640. There were 118 securities in the Index that advanced, 116 securities declined, and six stocks closed the day unchanged. The Index is up 0.39 per cent month to date, up 4.09 per cent quarter to date, and has a gain of 12.53 per cent year to date.

The next main event on investors' calendars will be the U.S. August non-farm payrolls data released this Friday at 8:30 a.m. (ET).

On today's Breakouts Report, there are 29 securities on the positive breakouts list (stocks with positive price momentum) and 15 stocks on the negative breakouts list (stocks with negative price momentum). The number of securities on both lists is rather low, and there appears to be no clear leadership at the moment.

Discussed today is a dividend stock from the positive breakouts list. Despite the stock's recent parabolic move, analysts on the Street believe the share price may rise a further 26 per cent to 57 per cent, depending on the analyst. It is a stock to watch and to put on your radar screen, but given the stellar recent rally, I wouldn't be chasing the stock. The security I am referring to is Polaris Infrastructure Inc. (PIF-T).

A brief outline is provided below that may serve as a springboard for further fundamental research.

The Company

Toronto-based Polaris Infrastructure has operations in Latin America, and through its subsidiaries, operates a geothermal plant in northwest Nicaragua with a net production capacity of 72 megawatts (MW). The company was formerly known as Ram Power, Corp. and changed its name to Polaris Infrastructure Inc. in May 2015.

Just days ago, on August 25, the company provided investors with update from its San Jacinto project in Nicaragua. The company indicated that on August 24, production well SJ 9-4 was connected to the San Jacinto-Tizate power plant, contributing approximately 10 MW of power, a significant addition to production. In the second quarter, the average net production at the plant was 46.5 MW.

In last week's news release, Marc Murnaghan, the chief executive officer, stated, "Although I must stress the fact that SJ 9-4 has been connected for less than 24 hours and it is premature to conclude with respect to its long-term contribution, the early results are certainly a positive indication. Along with continued modest contribution from SJ 6-3, our first new production well, we anticipate that SJ 9-4 will become a reliable contributor at the San Jacinto project and leave us well-positioned entering 2017."

Dividend Policy

In March, management announced the initiation of a quarterly dividend. In determining the appropriate dividend level, the company indicated, "Management and the Board of the Company feel that an initial payout ratio of approximately 50% of cash flow available for distribution is prudent and that it reflects confidence in the stability of cash flow generation, while maintaining flexibility to enhance generation at the San Jacinto project towards 72 MW (net)."

The company went on to state, "Given anticipated relatively consistent power and revenue generation from the San Jacinto project, combined with a significant reduction in quarterly debt service as part of the May 2015 credit agreement amendments, management and the Board are confident that the company will continue to generate positive cash flow available for distribution, which is intended to form the basis of a regular quarterly dividend."

The company set the initial quarterly dividend at 10 cents (U.S.) per share, or 40 cents on a yearly basis. This equates to a current annualized dividend yield of approximately 3.5 per cent.

Related: Stock with seven unanimous 'buy' calls and 31% upside forecast

Valuation

According to Bloomberg, the stock is trading at an enterprise value-to-earnings before interest, taxes, depreciation and amoritization (EBITDA) multiple of 5.6 times the 2017 consensus estimate, a discount relative to its peers.

The average one-year target price is $19.50 (Cdn), implying there is 33 per cent upside potential in the share price over the next 12 months. Individual target prices are as follows: $18.50, two at $20, and $23.

Analysts' Recommendations

According to Bloomberg, there are four analysts whom cover this stock, three have 'buy' recommendations and one has a 'speculative buy' recommendation.

In August, all four analysts revised their target prices higher given the company's positive announcement of the well connection. The company has experienced positive estimate revisions, particularly for 2017. At the beginning of this month, the consensus revenue estimate was $50.3-million (U.S.) in 2016 and $55.7-million in 2017. The consensus EBITDA forecast was $40-million in 2016 and $44.6-million in 2017.

The current consensus revenue estimate is $52.7-million in 2016, and forecast to rise 24 per cent to $65.3-million in 2017. Meanwhile, the Street's is currently forecasting EBITDA of $42.7-million in 2016, and is anticipated to rise over 26 per cent to $54-million in 2017.

Chart Watch

Shares of this small cap utility company, with a market capitalization of approximately $227-million (Cdn), have experienced a parabolic move, rising 54 per cent over the past two weeks, and year-to-date, the share price is up over 80 per cent.

Furthermore, the strength in the stock price has been accompanied by high trading volume. For instance, on Friday, over 500,000 shares traded, well above the historical two-month average daily trading volume of approximately 120,000 shares.

In addition, at the start of August, the shares experienced a bullish technical pattern – a "Golden Cross". This occurs when the 50-day moving average crossing above the stock's 200-day moving average.

Given the recent strong rally in the stock price, the shares are currently in overbought territory with a relative strength index reading of 93. Generally, a reading of 70 or higher indicated an overbought condition. As a result, the shares may be due for a pause or pullback.

There is downside support around $12. There is significant support around $9, which is near the stock's 50-day moving average (at $9.15).

In terms of upside resistance, there is initial overhead resistance around $16, and after that, around $18.

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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, 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.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
Below is a list of securities principally from the S&P/TSX composite index and the S&P/TSX Small Cap index that are technically breaking out, reaching new 55-day highs or lows. Securities on the positive breakouts list have displayed positive price momentum during this period. Securities on negative breakouts list have experienced negative price momentum.