Tuesday’s TSX breakouts: Analysts upgrade this dividend stock given its earnings beat

On Monday, major U.S. equity markets, the Dow Jones Industrial Average, S&P 500 Index, and Nasdaq composite all closed at record levels. The Dow advanced 0.32 per cent, the S&P 500 Index climbed 0.28 per cent, and the Nasdaq composite gained 0.56 per cent.

In Canada, the S&P/TSX composite index rallied 30 points, or 0.20 per cent to 14,777. Within the S&P/TSX composite index, there were 142 stocks that advanced, 92 stocks declined, and six securities closed the day unchanged.

The TSX Index is up 1.33 per cent month to date, up 5.07 per cent quarter to date, and higher by 13.58 per cent year to date.

Turning to today's Breakouts Report, there are 45 securities on the positive breakouts list (stocks with positive price momentum), while the number of stocks on the negative breakouts list (stocks with negative price momentum) has expanded to 21 securities.

Discussed today is a small cap industrial stock that recently made its debut on the positive breakouts list, Badger Daylighting Ltd. (BAD-T). The stock's market capitalization is just below the $1-billion mark at $972-million.

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

The company

Badger is the country's largest provider of non-destructive excavating services. Its systems use water and vacuum technology to remove dirt and debris.

Before the market opened on August 12, the company reported better-than-expected second quarter financial results. Revenue came in at $92-million, well above the consensus estimate of $81-million. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was $23-million, surpassing the Street's forecast of $18.6-million. Adjusted EBITDA margins rose to 25 per cent from 22 per cent during the same period last year. Earnings per share (EPS) was 16 cents per share, ahead of the consensus estimate of 11 cents per share. The stock price soared 17 per cent that trading session, and climbed another 6 per cent on Monday. Over a million shares traded on Friday, well above its two-month historical daily average volume of approximately 227,000 shares.

Management's outlook was positive. As indicated in their earnings press release, they expect, "[C]ontinued improvement in financial results and growth for the remainder of the year. The challenging oil and natural gas market will drag less on overall business growth as this market segment will become less of a factor due to the non-oil and gas sectors continued growth. The CEO transition between Tor Wilson and Paul Vanderberg is progressing well with very minimal distraction in the business. As always Badger manages for long term success and the market for Badger services remains very attractive." Over time, management believes adjusted EBITDA margins will return to roughly between 28 and 29 per cent.

Dividend policy

In May, management announced a 10 per cent increase to its monthly dividend, raising it to 3.3 cents per share from 3 cents per share. Management indicated in the first-quarter 2016 earnings news release that, "Given the strength of its balance sheet, reduced capital required to support the current Badger build rate and our expectation for continued growth of Badger's business, that a dividend increase is justified and timely."

The company's monthly dividend of 3.3 cents per share, or 39.6 cents per share yearly, equates to an annualized dividend yield of 1.5 per cent.

Valuation

According to Bloomberg, the stock is trading at a price-to-earnings multiple of 18.9 times the 2017 consensus estimate, which is just above its 3-year average of 17.6 times. On an enterprise value-to-EBITDA basis, the stock is trading at a multiple of 8.4 times the 2017 consensus estimate, above its 3-year average of 7.3 times.

Analysts' recommendations

According to Bloomberg, the one-year target price is $28.96, which is based on five 'buy' recommendations. This target price suggests there is over 10 per cent upside potential in the share price over the next 12 months. Target prices range from a low of $27.30 to a high of $31. Individual target prices are as follows: $27.30, $28, $28.50, $30, and $31 .

After the company reported its second quarter financial results, several analysts on the Street raised their recommendations and target prices. The analyst at BMO Capital Markets lifted his recommendation to an "outperform" from "market perform", and his target price increased to $30 from $22.50. In addition, the analyst at Canaccord Genuity raised his recommendation on the stock to a "buy" from a "hold", and his target price jumped to $28 from $23.

Given the better-than-expected second-quarter financial results, the consensus earnings forecasts have increased. For instance, on August 11, before the release of its financial results, the consensus EPS estimate was 90 cents for 2016 and $1.27 for 2017. Now, the consensus EPS estimate is 98 cents 2016, rising over 40 per cent to $1.38 in 2017.

The Street is currently forecasting revenue of $397-million in 2016, increasing 10 per cent to $435-million in 2017, and the consensus EBITDA forecast is $102-million in 2016, rising 20 per cent to $122.5-million in 2017.

Chart watch

Year to date, the stock price is up 7 per cent yet that positive return has been realized over the past few trading sessions.

The share price has been in a downtrend since the first-half of 2014. However, over the past year, the stock price has been stabilizing in the low to mid-$20 range, consolidating or trading sideways, largely between $20 and $25.

The stock price faces overhead resistance at $28, and after that at $30. There is downside support around $23, close to its 200-day moving average (at $22.87), and failing that, around $21.50, which is near its 50-day moving average (at $21.64). There is further support in the $19 to $20 range.

The relative strength index is at 82, suggesting the shares are in overbought territory. Generally, a reading at or above 70 indicates an overbought condition.

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.