On Wednesday, major North American stock markets were mixed.
In the U.S., the Dow Jones Industrial Average lost 0.16 per cent, the S&P 500 index increased 0.11 per cent, and the Nasdaq composite index advanced 0.14 per cent.
In Canada, the S&P/TSX composite index climbed by 64 points, or 0.41 per cent, with energy stocks surging as the price of oil bounced back by over 3 per cent . There were 158 securities in the TSX Index that advanced, 82 securities declined in value, and 10 stocks closed the day unchanged.
Year-to-date, the TSX Index is up 2.26 per cent year. In the U.S., the Dow Jones Industrial Average is up 5.97 per cent year to date, the S&P500 index is up 7.18 per cent, and the Nasdaq composite has rallied 13.86 per cent.
On today's TSX Breakouts report, there are 45 stocks on the positive breakouts list (stocks with positive price momentum), and 23 stocks are on the negative breakouts list (stocks with negative price momentum).
Featured today is a security from the positive breakouts list. The stock has been a strong performer for investors, rising over 31 per cent year-to-date. In fact, it is the top performing stock in the S&P/TSX composite consumer discretionary sector, which is the best performing sector in the TSX Index so far this year. The stock has sharply outperformed its peers given its operational improvements, and insiders are scooping up shares. The security I am referring to is Martinrea International Inc. (MRE-T).
The macro environment is a risk for investors to consider for auto stocks with the risk of accelerating declining auto sales or unfavourable changes to NAFTA.
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Vaughan, Ont.-based Martinrea is an automotive parts supplier with operations worldwide. The company operates 44 facilities in eight countries. Amongst its top platforms are Ford Escape/Focus, GM Equinox/Terrain, Ford Fusion/Edge, GM Malibu/Impala, Jeep Commander/Grand Cherokee, Jeep Wrangler, and Dodge Ram.
On May 1, the company reported first-quarter financial results that were slightly better-than-expected. In addition, management provided positive guidance for the second quarter. The share price rallied over 5 per cent during the trading session.
The company reported adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $94.5-million, above the consensus estimate of $93.2-million, and adjusted earnings per share of 45 cents, a penny above expectations.
In the earnings release, Pat D'Eramo, the president and chief executive officer, emphasized management's focus to execute on operational improvements and deleverage its balance sheet stating, "Our margin improvement plan continues to be on track and our leverage ratio continues to improve."
Fred Di Tosto, the chief financial officer, elaborated, "We continue to expect operating margins to improve to over 6 per cent by the end of 2017. Our net debt-to-adjusted EBITDA ratio ended the quarter at 1.78 times, a nice improvement from the end of the previous quarter and this time last year as we continue to look to a ratio of 1.5 times by the end of 2017."
Rob Wildeboer, the executive chairman of the board of directors provided a positive outlook for the company saying, "The year continues to trend nicely, and we expect second quarter sales, excluding tooling sales, of $920-million to $960-million, and adjusted earnings per share in the range of 49 cents to 53 cents per share, which would be our best quarter ever from a financial perspective."
Dividend policy
The company pays its shareholders a quarterly dividend of 3 cents per share, or 12 cents per share yearly. This equates to an annualized dividend yield of 1.1 per cent.
Looking back over several years to 2013, management has maintained the dividend at this level.
Analysts' recommendations
The stock has mixed expectations by analysts. The small-cap stock, with a market capitalization just under the $1-billion mark, at $977-million, is covered by 11 analysts on the Street, six analysts have buy recommendations, four have hold recommendations, and one analyst (at Veritas Investment Research) has a sell recommendation.
The 11 firms providing research coverage on the company are as follows in alphabetical order: BMO Capital Markets, CIBC World Markets, Cormark Securities, EVA Dimensions, GMP, Macquarie, Paradigm Capital, RBC Capital Markets, Scotia Capital, TD Securities and Veritas Investment Research.
Revised recommendations
This month, several analysts revised their expectations higher. Mark Neville, the analyst at Scotia Capital, increased his target price to $15 from $13.50. Todd Coupland from CIBC World Markets raised his target price to $11.50 from $9. Brian Morrison from TD Securities lifted his target price by $1.50 to $13.50. Ben Jekic from GMP lifted his target price by $2 to $15. Peter Sklar, the analyst from BMO Capital Markets, raised his target price by $1 to $11. Michael Glen from Macquarie bumped his target price to $11 from $10. Dan Fong, the analyst from Veritas Investment Research increased his target price to $8.75 from $7.75. Neil Fonseca, the analyst at EVA Dimensions, raised his recommendation to a 'buy' from a 'hold' (but does not provide a target price).
Last month, Steven Arthur from RBC Capital Markets raised his target price to $16 from $15.
Financial forecasts
The Street is forecasting EBITDA of $379-million in 2017, rising to $400-million the following year. The consensus earnings per share estimates are $1.82 in 2017, and forecast to increase to $1.99 in 2018.
Earnings revisions have been relatively minor but positive. For instance, four months ago, the consensus EBITDA estimates were $366-million for 2017 and $395-million for 2018. The consensus earnings per share estimates were $1.77 for 2017 and $1.95 cents for 2018.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 4.0 times the 2018 consensus estimate, below with its five-year historical average of 4.5 times.
The average 12-month target price is $13.18, implying the share price has approximately 17 per cent upside potential over the next year. Individual target prices provided by 10 firms are as follows in numerical order: $8.75, two at $11, $11.50, $13.50, $14, $15, and two at $16.
Insider transaction activity
In recent months, several insiders have reported purchases in the public market.
The president and chief executive officer Pat D'Eramo bought 11,900 shares on March 30 and purchased 16,200 shares on March 7. Fred Di Tosto, the chief financial officer, purchased 2,900 shares on March 10 and bought 17,065 shares the prior day. The executive vice-president of fluids operations David Rashid bought 9,000 shares on March 31 at an average price of $10.32 per share. Rocco Marinaccio, the vice-president of the flexible manufacturing group purchased 10,150 shares on March 20.
Chart watch
Year to date, the stock price has rallied over 31 per cent making Martinrea the top performing stock in the S&P/TSX composite consumer discretionary sector index (out of 22 members).
Given its parabolic move with the stock price rising 17 per cent over the past seven weeks, the share price may be due for a pause in order to digest these gains.
On continued positive price momentum, the share price has overhead resistance around $12.50 and after that around $14.50.
Should the share price retreat, there is strong support around $10, which is close to its 50-day moving average (at $9.89).
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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 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.