During this period of unsteady global economic growth, where corporate executives are slashing spending and reducing costs, and many stocks are trading at valuation multiples that are relatively fully valued given their lack of growth – what stocks are analysts bullish on?
Our screen looked for Canadian stocks for which at least five analysts covered the stock; all analysts have buy recommendations; year-to-date returns are 5 per cent or higher; and the minimum market capitalization is at least $100-million. We excluded stocks in the energy and materials sectors because of weakness in underlying commodity prices, which will present challenges for resource companies. The accompanying table shows the 13 stocks that made the screen. One of the companies, Espial, is discussed below.
The company
Headquartered in Ottawa, Espial has a global reach with research and development offices in Silicon Valley in the United States and in Britain, as well as sales/support offices in the United States, Europe and Asia.
Espial develops and markets software products to video-services providers typically cable, telecom and satellite network operators, and smart TV manufacturers. For instance, Espial's Set-Top Box enables users the ability to create personalized viewing experiences, and Espial's TV Browser product allows smart TV manufacturers to provide Web capabilities on connected TVs.
Strengthening fundamentals
In 2014, Espial reported revenue of $20-million, gross margins were 79 per cent, and the company became profitable – reporting positive earnings before interest, taxes, depreciation and amortization (EBITDA) and earnings per share. The overall profitability is improving and the outlook is strong.
Solid balance sheet
The company raised $35-million in a recent bought-deal financing. Consequently, at the end of the second quarter, the company had over $48-million of cash on its balance sheet, equating to cash per share of about $1.47.
Contract wins
Earlier this year, management announced two deals with major European cable operators. One of which is Tele Columbus, the third-largest cable operator in Germany with more than 2.8 million subscribers. These contract wins, in addition to revenue from its North American Tier 1 cable customer, are anticipated to contribute to solid revenue growth in 2016.
New potential wins
Management is currently focused on growth in North American and Europe, and is in discussions at various levels with 30 of the top 60 global operators. Of these 30, management indicated that they are in "deeper engagements" with six operators. In addition, in the second quarter, management signed a Master Service Agreement with a major U.S. cable operator and now has two such deals.
Strong customer base
Espial has relationships with companies such as Vodafone in Britain and Telenor in Norway. Espial has relationships with smart TV manufacturers such as Hitachi, Philips, Toshiba and Sharp.
Board membership strengthened
Mike Hayashi, the former executive vice-president of architecture, development and engineering at Time Warner Cable, recently joined the board.
Valuation
The stock trades at an enterprise value to EBITDA multiple of 6.6 times 2016 consensus estimates, relatively in-line with its one-year average. Analysts forecast the multiple will expand to the low double-digits.
Chart watch
The stock price can be extremely volatile and, as such, is suited toward investors with a high risk tolerance within a well-diversified portfolio. Year-to-date, the stock has surged by 82 per cent. However, it is off 26 per cent from its April 14 peak of $4.19.
The stock has technical support at $3, near its 200-day moving average. Failing that, there is technical support around $2.70, then at $2.40. There is technical resistance around $3.50 to $3.55, then at $4. The relative strength index is at 50, suggesting that the stock is in neutral territory, neither oversold nor overbought.
Analysts' recommendations
This stock, with a market cap of just over $100-million, has six buy recommendations. One-year price targets range from $5 to $5.50. The consensus revenue estimate is $24.3-million in 2015, rising to $37.9-million in 2016. The consensus earnings per share estimate is 6 cents a share in 2015, climbing to 23 cents a share in 2016.
The bottom line
This is a company with a solid growth potential. However, given current investor risk aversion and market weakness, the stock price could come under near-term pressure. If the stock price dips below $3, this would be an attractive entry point.
Jennifer Dowty, CFA, Globe Investor's in-house equities analyst, writes exclusively for our subscribers at Inside the Market. E-mail any stock suggestions that you want profiled to jdowty@globeandmail.com.