On today's TSX Breakouts report, there are 25 stocks on the positive breakouts list (stocks with positive price momentum), and 23 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is the top performing financial stock in the S&P/TSX composite index year-to-date. The share price has been steadily rising and is just $1 away from setting a new record closing high. If the positive price momentum continues, the stock may appear on the positive breakouts list in the near-future. The security highlighted today is TMX Group Ltd. (X-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
On Feb. 12, the company reported fourth-quarter financial results that were ahead of the Street's expectations. Adjusted earnings per share was $1.22, up 3 per cent year-over-year, exceeding the consensus estimate of $1.18. The share price rallied 1 per cent on high volume with over 400,000 shares traded, well above the three-month historical daily average trading volume of approximately 167,000 shares.
Looking forward, Chief Executive Officer Lou Eccleston emphasized on the earnings call the growth potential with their recent acquisition of Trayport and indicated that he would communicate his business strategy for Trayport later this year, "For TMX, 2017 will, indeed, be remembered as the year we acquired Trayport, a London-based world leading provider of technology and software solutions for energy traders, brokers and exchanges. With Trayport, we have added a proven and profitable technology-driven data and analytics business as well as a very talented team of people to our TMX roster. As we continue to dive deeper into their business, we get more excited about how our combined assets and expertise can drive growth. This is a key priority for 2018 and a big win for TMX on many levels, both strategic and financial. We look forward to exploring all the ways we can leverage Trayport expertise to drive innovation across the markets we serve as well as into new geographies. Trayport immediately bolsters our Global Solutions, Insights and Analytics business. In fact, with the inclusion of Trayport on a pro forma basis, the 2017 revenue from this business increased from 26 per cent to 36 per cent of TMX Group's revenue. As you can see from our financial disclosures, we have significantly diversified our revenue base with the recurring non-transactional revenue streams, which now account for 52 per cent of our revenue on a pro forma basis for 2017, and that's up from 40 per cent in 2016."
Another positive, Chief Financial Officer John McKenzie commented on higher listing fees, "There was an increase in additional listing fee structure for the Toronto Stock Exchange effective January 1, 2018. Based on historical data from 2017, we estimate that the revised fees can result in an increase in revenue of approximately $5 million to $7 million on an annual basis starting this year."
When asked on the call about a potential earnings impact due to higher market volatility and if this volatility may lead to higher trading volumes but lower financing activity, Mr. McKenzie said, "We've seen, I think, two of the four highest trading and clearing days in the Canadian market in the last two weeks…you'll see significantly higher trading activity now, although I will caution you that trading revenues are roughly only 9 per cent of our revenue base. So it's not a huge component of our revenue base anymore, but it also impacts our clearing fees. It also impacts potentially our derivative areas as well in terms of how that translates into liquidity there. Whether or not that'll have an impact on the ability of folks to raise capital, we're yet to see that yet. It's certainly in historical experiences we've seen time frames where high volatility has left some issuers kind of holding back for a bit in terms of when they do their issuance but it's too early to tell for that whether or not this impact will have that this year."
Dividend policy
The company pays its shareholders a quarterly dividend of 50 cents per share or $2.00 per share yearly. This equates to an annualized dividend yield of 2.5 per cent. The last dividend increase was announced in May 2017, a 11 per cent bump that increased the dividend to 50 cents per share from 45 cents. Perhaps management will announce a dividend hike in May of this year, as well.
Analysts’ recommendations
There are six analysts that cover this company, of which three analysts have buy recommendations and three analysts have hold recommendations.
The six firms providing research coverage on the stock are as follows in alphabetical order: BMO Capital Markets, CIBC Capital Markets, National Bank Financial, RBC Capital Markets, Scotia Capital, and TD Securities.
Revised recommendations
Every single analysts increased their expectations last month.
In February, Geoffrey Kwan, the analyst from RBC Capital Markets, lifted his target price to $81 from $80. Paul Holden from CIBC Capital Markets raised his target price by $3 to $87 (the high on the Street). Graham Ryding from TD Securities raised his target price by $3 to $85. Phil Hardie from Scotia Capital tweaked his target price $2 higher to $81. Nickolaus Priebe from BMO Capital Markets bumped his target price to $80 from $70. Jaeme Gloyn from National Bank Financial increased his target price to $84 from $83.
Financial forecasts
The consensus EBITDA estimates are $462-million in 2018, rising nearly 5 per cent to $484-million in 2019. The Street is forecasting earnings per share of $5.38 in 2018, rising 6 per cent to $5.69 in 2019.
Earnings estimates have been rising. For instance, three months ago, the consensus EBITDA estimates were $451-million for 2018 and $471-million for 2019, and the earnings per share estimates were $5.23 for 2018 and $5.49 for 2019.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 11.3 times the 2019 consensus estimate, above its three-year average of 9.9 times and approaching its peak multiple of just under 12 times.
The consensus one-year target price is $82.20, implying the share price has just 4 per cent upside potential over the next 12 months. Individual target prices are as follows in numerical order: $80, two at $81, $84, $85, and $87.
Insider transaction activity
On Feb. 21, Mr. McKenzie exercised his options and sold the corresponding number of shares (3,253), at an average price per share above the $77 level, eliminating his portfolio’s position.
On Feb. 14, Mary Lou Hukezalie, Senior Vice-President – Group Head of Human Resources, exercised her options and sold the corresponding number of shares (6,814) at an average price per share of $75, leaving 1,350 shares in her portfolio.
Chart watch
Year-to-date, this is the number one performing stock in the S&P/TSX composite financial sector with a price return of nearly 12 per cent, handily outperforming the financial sector return, which is down 1.7 per cent, as well as the broader index, the S&P/TSX composite index, which is down 3.9 per cent.
In terms of key support and resistance levels, the stock price has initial downside support around $75, near its 50-day moving average (at $75.14). Failing that, there is support at $70, close to its 200-day moving average (at $70.36). In terms of upside resistance, there is a major ceiling of resistance at $80. Should the share price be able to break and hold above this level, the stock price could rally to around $85.
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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, financial forecasts, 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 indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.