Thursday’s TSX breakouts: This undervalued 4.7% yielding stock requires patience

On Wednesday, major North American equity markets were relatively unchanged.

In the U.S., the Dow Jones Industrial Average declined 0.18 per cent, the S&P 500 Index fell 0.06 per cent, and the Nasdaq composite rallied 0.36 per cent thanks to shares of Apple (AAPL-Q) which have gained momentum after the announcement of the soon to be released new iPhone 7.

In Canada, the S&P/TSX composite index added 17 points, or 0.12 per cent to close at 14,366. There were 127 securities in the TSX Index that advanced, 103 securities declined in value, and 10 stocks closed the day unchanged.

The S&P/TSX composite index is down 1.59 per cent month to date, up 2.15 per cent quarter to date, and has a gain of 10.43 per cent year to date.

On today's TSX Breakouts report, there are just 13 securities on the positive breakouts list (stocks with positive price momentum), and 31 securities appear on the negative breakouts list (stocks with negative price momentum).

Discussed today is a stock that appeared on the negative positive breakouts list – until yesterday. The stock reported disappointing second quarter financial results that sent the stock price plunging 12 per cent over the following two trading sessions. However, on Wednesday, the stock price finally stabilized and actually ticked higher on solid volume. That being said, this stock may require patience to recover as the company faces several upcoming challenges. The security highlighted today is North West Co. Inc. (NWC-T).

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

The company

North West Company is a retailer that sells food and general merchandise to customers in northern and western Canada, rural Alaska, the South Pacific islands, and the Caribbean through its network of 229 stores under banners such as Giant Tiger, Northern, NorthMart, AC Value Center, and Cost-U-Less. North West Company focuses on servicing customers in rural areas.

In terms of sales mix, in fiscal 2016, food represented 79.3 per cent of the company's total sales, general merchandise represented 17.6 per cent of sales, and the balance was from miscellaneous items. In fiscal 2016, return on average equity was 20.6 per cent.

On Sept. 8, the company reported a shortfall in earnings relative to the Street's expectations. Revenue in the second quarter of fiscal 2017 came in at $460.6-million, up 2.6 per cent year over year, but below the consensus estimate of $473.5-million. Earnings before interest, taxes, depreciation and amortization (EBITDA) was $38.9-million, well below the Street's forecast of $42.35-million. Earnings per share (EPS) was 34 cents, down from 37 cents last year and below the consensus estimate of 40 cents per share. The stock price collapsed 7 per cent that day, and fell another 5 per cent the following trading day.

The company faced a number of challenges during the quarter including competitive pricing activity and reduced consumer spending in Alaska in anticipation of a lower permanent fund dividend to be paid on October 6. Furthermore, looking forward, reported cases of the Zika virus may impact the company's Caribbean operations during the upcoming winter tourist season.

North West is a small-cap consumer staples stock, with a market capitalization of over $1.2-billion.

Dividend policy

North West pays shareholders a quarterly dividend of 31 cents per share, or $1.24 per year, equating to an annualized dividend yield of 4.7 per cent.

The company has announced a dividend increase each calendar year since 2012.

Valuation

Shares of North West Company are trading at a forward enterprise value-to-EBITDA multiple of 8.4 times consensus 2018 estimate. This is at a discount to its three-year historical average multiple of 8.9 times. Over the past three years, the stock has predominately traded at a forward EV/EBITDA multiple of between 8.3 times and 9.7 times, and is therefore, trading near its historical low.

Analysts' recommendations

According to Bloomberg, six analysts have issued research reports on the company since the start of the year, five of which are 'hold' recommendations, and just one analyst has a 'buy' recommendation. Firms issuing reports this year include Barclays, BMO Capital Markets, CIBC World Markets, Industrial Alliance Securities, RBC Capital Markets, and TD Securities.

Analysts' target prices range from a low of $27 to a high of $33. The average one-year price target is $30, suggesting the stock price could appreciate approximately 14 per cent over the next 12 months. Individual target prices in numerical order are as follows: $27, $28, two at $30, $32, and $33.

The consensus revenue estimate is $1.85-billion in fiscal 2017, and forecast to rise to $1.92-billion in fiscal 2018 (the company's fiscal year end is January 31). The Street is forecasting EBITDA of $159-million in fiscal 2017, which is anticipated to rise 10 per cent to $175-million in fiscal 2018. The consensus EPS estimate is $1.49 in fiscal 2017, and forecast to rise 10 per cent to $1.64 in fiscal 2018.

After the company reported weaker-than-expected second quarter financial results, analysts revised their forecasts down. Prior to reporting, on September 1, the consensus EBITDA estimate was $169.60-million for fiscal 2017 and $183-million for fiscal 2018. The Street's EPS forecast was $1.63 for fiscal 2017 and $1.76 for fiscal 2018.

Chart watch

Year to date, the stock is the second lowest performer in the S&P/TSX composite index consumer staples sector with a loss of 8 per cent, only shares of Empire Company Ltd (EMP.A-T) have a lower price return.

The share price seems to have stabilized. There is initial downside support at $26, and failing that, at $24. There is initial overhead resistance at $28, and after that between $29 and $30.

The shares of North West are in oversold territory with the relative strength index at 28. Generally, a reading at or below 30 indicates an oversold condition.

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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.

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 indices that have a minimum market capitalization of $200-million. Securities appearing on the list 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.

A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.