Wednesday’s TSX breakouts: Analysts expect this dividend stock to nearly double

Today, there are 18 securities on the positive breakouts list (stocks with positive price momentum) and there are seven stocks on the negative breakouts list (stocks with negative price momentum).

I am highlighting a dividend stock from the S&P/TSX SmallCap index that is breaking out to the upside with its recent rally. Discussed below is High Arctic Energy Services Inc. (HWO-T).

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

The company

High Arctic operates in the oil and gas industry, providing services such as drilling and specialized well completion services and equipment rentals. The company's main operations are located in Papau New Guinea (PNG); however, it also services western Canada. In 2015, 85 per cent of the company's total revenue was from PNG, with the balance from Canada.

On March 11, High Arctic reported better-than-expected fourth-quarter results. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) came in at $20.8-million, surpassing the consensus estimate of $19.1-million.

In 2015, the company reported record revenue of $209.9-million, up from $171.8-million reported last year, boosted partially by currency tailwinds. On a segmented basis, revenue from PNG increased 44 per cent year-over-year owing to two new drilling rigs in operation for part of the year and the positive impact from the increase in the U.S. dollar. Revenue from Canada declined 34 per cent compared to last year due to lower drilling activity in the industry. Adjusted EBITDA increased to a record $60-million, up 30 per cent year-over-year. Reported adjusted earnings per share in 2015 was 57 cents, up from 53 cents in the previous year.

Management's outlook is optimistic for 2016 indicating in their March 11 earnings press release that PNG is positioned to benefit from low energy prices as PNG is one of the lowest cost LNG sources for Asian markets. A risk to be mindful of is that two of its rigs have contracts that will expire at the end of June, a potential risk if not renewed. However, management is confident these contracts will be renewed due to, "strong demand for top tier drilling services in the country."

Returning capital to shareholders

High Arctic pays shareholders a monthly dividend of 1.65 cents per share, or 19.8 cents a share per year, equating to an annualized yield of 5.625 per cent. Management has maintained the dividend at this level since 2014.

The company has been active in its share buyback program, repurchasing 1,569,983 shares at a cost of $5.7 million in 2015.

Valuation

According to Bloomberg, on a price-to-earnings (P/E) basis, the stock is trading at 6.1 times the consensus 2016 earnings estimate. This is below its historical three-year average of 8 times, given the challenging industry conditions, but up from its recent low when the stock traded at 5 times. Share of High Arctic are trading at a P/E multiple of 5.7 times the consensus 2017 forecast. On an enterprise value-to-EBITDA basis, the stock is trading at a multiple of 2.4 times the consensus 2016 forecast.

Analysts' recommendations

According to Bloomberg, there are four analysts covering this small cap stock, all of whom have buy recommendations. The average one-year price target is $6.38, suggesting the share price may appreciate over 80 per cent. Individual target prices are as follows: $5.50, $5.75, $7, and $7.25.

The consensus revenue estimate is $217.5-million in 2016, up from $209.9-million reported in 2015, and anticipated rise 6 per cent to $231-million in 2017. The Street is forecasting EBITDA of $69-million in 2016, up from $64-million reported in 2015, and forecast to climb to $68.5-million in 2017. The consensus earnings per share estimate is 58 cents in 2016 and forecast to rise to 62 cents in 2017.

Chart watch

The stock chart is yet to look compelling. Year-to-date, the share price is relatively unchanged, up less than 1 per cent. For over a year, the share price has been trading principally between $3 and $4, and is currently at the mid-point of this range, at $3.52.

Looking at technical resistance and support levels, there is large overhead resistance near its present level from its 200-day moving average at $3.51. If the stock price has a meaningful break above this level, the next major resistance level is around $4. There is downside support around $3.20, which is close to the stock's 50-day moving average (at $3.22), and failing that there is strong support around $3.

The relative strength index is at 62, suggesting the shares are in neutral territory, neither overbought nor oversold.

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 in 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.