On today's TSX Breakouts report, there are 53 stocks on the positive breakouts list (stocks with positive price momentum), and 10 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that appears on the positive breakouts list, which offers investors an attractive yield of over 5 per cent. The stock has a unanimous buy recommendation. The security highlighted below is Russel Metals Inc. (RUS-T).
Russel Metals is one of North America's largest metals distribution companies.
The company's has three core business segments: metals service centers, energy products, and steel distributors.
During the first nine months of the year, metals service centers represented 49 per cent of total revenue, and energy products accounted for 39 per cent of sales. In terms of geographical exposures, Russel Metals has 52 locations in Canada and 14 sites in the United States. During the first nine months of the year, 31 per cent of the company's total revenues came from its U.S. operations.
After the market closed on Nov. 8, the company reported better-than-expected third-quarter financial results that sent the share price rallying nearly 6 per cent on very high volume with over 1.3-million shares traded, well above the three-month historical daily average trading volume of approximately 262,000 shares. The company reported revenues of $851-million, up from $639-mililon reported during the same period last year. Higher steel price and volumes boosted the company's profitability. Earnings per share came in at 55 cents, handily exceeding the Street's expectations of 45 cents.
Management continues to actively look at acquisition growth opportunities across North America. On the earnings call, Chief Executive Officer Brian Hedges stated, "There's a fair amount of activity out there right now. We're seeing a lot of product, a lot of companies for sale…. There's certainly more activity right now than there has been in the small to medium-size service centers."
Management also announced that John Reid, the President and Chief Operating Officer, will assume the role of Chief Executive Officer in May 2018 with Mr. Hedges planning to retire.
Investors should monitor U.S. President Donald Trump's Section 232 investigation – a review of the U. S. steel industry aimed at protecting U.S. steelmakers with possible steel tariffs imposed on imports. China is the world's largest producer and exporter of steel.
Mr. Reid mentioned on the call, "Obviously, there is the January deadline that's out there … It definitely should not impact the Q4 [fourth-quarter] materially, and maybe in December we'll see some impact if we started gaining some clarity. I would guess the decision will go right up the 11th hour and could even be postponed. As far as the pent-up demand, I think you may have seen that the 232 and the anticipation of the June, July announcement may have created some buying habits that went out when people took longer positions at both the end user and service center levels. So that created the downward pressure in Q3, because the people had bought ahead. I think we're going through that cycle now and the inventory levels are coming back into more a normal pattern."
Russel Metals pays its shareholders a quarterly dividend of 38 cents per share, or $1.52 on a yearly basis. This equates to an annualized dividend yield of 5.2 per cent. Management has maintained its dividend at this level since 2014.
There are four analysts covering this mid-cap stock with a market capitalization of $1.8-billion, and all four analysts have buy recommendations.
The firms providing research coverage are as follows in alphabetical order: GMP, Raymond James, Scotia Capital, and TD Securities.
Interestingly, the metals equity research analyst Phil Gibbs from KeyBanc Capital Markets was on the recent earnings conference call. Consequently, I would not be surprised to see him initiate coverage on the company in the near future.
Earlier this month, three analysts revised their target prices – all higher.
Mike Tupholme from TD Securities increased his target price to $34 from $32. Frederic Bastien from Raymond James lifted his target price by $1 to $32. Anoop Prihar from GMP took his target price up to $33.50 from $32.75.
The consensus EBITDA estimates are $239-million in 2017, rising 2.5 per cent to $245-million in 2018. The Street is forecasting earnings per share of $2.00 in 2017, climbing over 5 per cent to $2.11 in 2018.
Earnings expectations have been increasing. To illustrate, five months ago, the consensus EBITDA estimates for 2017 and 2018 were $196-million and $220-million, respectively. The Street was forecasting earnings per share of $1.60 in 2017 and $1.84 in 2018.
According to Bloomberg, the stock is trading at a price-to-earnings (P/E) multiple of 13.8 times the 2018 consensus estimate, in-line with its five-year historical average of 13.9 times. On an enterprise value-to-EBITDA basis, the stock is trading at a multiple of 8.7 times the 2018 consensus estimate, close to its five-year historical average of 8.3 times.
The average one-year target price is $32.88, implying the stock price may have 13 per cent upside potential. Individual target prices provided by four analysts are as follows in numerical order: two at $32, $33.50, and $34.
Insider transaction activity
There has been little insider trading activity in the market, and those transactions reported have been quite small.
The most recent trade in the public market reported by an insider occurred on Nov. 15, William O'Reilly, who sits on the board of directors, purchased 200 shares at an average price per share of $27.70 for an account that he has control or direction over.
Prior to that, Mr. O'Reilly bought 400 shares at an average price per share of $23.77 for this account on June 6.
On May 15, James Dinning, director and chair of the board, purchased 1,500 shares at an average price per share of $25.89, for an account in which he has indirect ownership.
Year-to-date, the share price is up 13 per cent.
In terms of key resistance and support levels, the stock price has initial overhead resistance between $30 and $31. After that, there is a ceiling of resistance around $34.
Looking at downside support, shares of Russel Metals have initial technical support around $28, close to its 50-day moving average (at $27.94). Failing that, there is solid support around $25.
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 indices 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.
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