Monday’s TSX breakouts: This stock has a rising dividend, reasonable valuation

Friday was a relatively quiet day. There were 90 stocks in the S&P/TSX composite index that advanced, while 141 securities declined. The Index was down, but modestly, falling just over a quarter per cent.

Consequently, the TSX Breakouts report experienced a decline in stocks with positive momentum. There are 32 securities on the positive breakouts list (securities with positive price momentum), down from 49 names the previous day, while the number of stocks on the negative breakouts list (stocks with negative price momentum) was relatively steady at 13, up from 11 the prior day.

Discussed today is a consumer staples stock that offers shareholders a reasonable 3-per-cent dividend yield. The stock has appreciated a respectable 11 per cent year to date, and the stock just experienced a positive technical signal, a golden cross, suggesting the stock's uptrend may continue. The stock featured today is High Liner Foods Inc. (HLF-T).

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

The company

The company is a North American processor and distributor of frozen seafood products with brand names such as High Liner, Fisher Boy, Mirabel, Sea Cuisine, and C.S Wirthy, which are sold in stores across Canada, the United States, and Mexico. The company also sell its products to restaurants and is a private-label supplier.

On May 11, High Liner Foods reported first-quarter results relatively in-line with the Street's expectations. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was $29.4-million (U.S.), down 4 per cent year-over year from $30.7-million, and slightly below the consensus estimate of $30-million. However, most of this decline was due to the weaker Canadian dollar. A lower Canadian dollar negatively impacts the company's financial results, which are reported in U.S. dollars. Adjusted earnings per share (EPS) was 49 cents, relatively unchanged from last year. The company reported EPS of 50 cents in the first quarter of 2015.

The stock closed higher by almost 1 per cent on the day it reported earnings. Investors were encouraged by the company's ability to work down its debt. The debt-to-adjusted EBITDA ratio is high at 3.7 times but declined from 4 times at the end of fiscal 2015.

In addition, management's outlook suggested continued operational improvements with the company's near-term objectives of increasing sales volumes, organically, and trimming costs. The company's goal is to realize a minimum of $20-million in annual cost savings by the end of this year. Keith Decker, the chief executive officer, stated in the first-quarter financial results press release that, "While we are encouraged with the progress made in the first quarter, there is still work we need to do in 2016 to improve performance going forward. We will continue to focus on improving earnings through stabilizing sales volume and managing costs. Our raw material prices are expected to be relatively stable for the remainder of this year and completing outstanding supply chain optimization activities remains a priority, including the transfer of New Bedford's value-added fish production to our other facilities which is on track to be completed by the end of the third quarter of this year."

There is seasonality in the business. Historically, the first quarter is the strongest with the highest EPS, while the second quarter is the weakest.

The company has a large major shareholder, Thornridge Holdings Ltd., owning over 37 per cent of the shares outstanding.

Dividend policy

The company pays shareholders a quarterly distribution of 13 cents per share, or 52 cents on a yearly basis. This equates to an annualized yield of 3 per cent.

Management has been firmly committed to returning capital to its shareholders, announcing a dividend increase last week of 8 per cent. The company increased its dividend in 2015, 2014, along with three hikes announced in 2013.

Valuation

On an enterprise value-to-EBITDA basis, the stock is trading at a multiple of just under 8 times the consensus 2017 estimate, below its three-year historical average of 8.3 times and off from its peak of approximately 10 times over the past three years.

Analysts' recommendations

According to Bloomberg, the one year price target is $18.33 (Canadian), which is based on two buy recommendations, and two hold recommendations. This implies the share price can potentially increase 6 per cent. However, analysts have differing opinions on the potential upside. Two analysts see the stock as fully valued as their target prices are $17, one analyst sees 4 per cent upside with a target price of $18, while another analyst sees 9 per cent upside, with his target price set at $20.

The consensus EBITDA estimate is $84.2-million (U.S.) in 2016, climbing 9 per cent to $91.9-million in 2017. The Street is forecasting EPS of $1.25 (U.S.) in 2016, rising 18 per cent to $1.47 in 2017.

Chart watch

Year to date, the share price has appreciated over 11 per cent, outperforming the returns of the S&P/TSX composite index as well as the consumer staples sector in the Index.

The positive price momentum may continue to build with the stock recently experiencing a positive technical indicator called a golden cross, with the 50-day moving average (at $15.64) crossing above the 200-day moving average (at $15.43).

There is overhead resistance around $19, and then at $20. There is downside support between $15 and $15.65, close to its 50-day and 200-day moving average. Failing that, there is support at $14, and then at $12.

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.