On today's TSX Breakouts report, there are 32 stocks on the positive breakouts list (stocks with positive price momentum), with an equal number of stocks on the negative breakouts list (stocks with negative price momentum). The negative breakouts list is dominated by gold stocks.
Discussed today is a security whose share price has retreated 4 per cent over the past eight days.
While the company does not appear on the negative breakouts list, it is a stock to watch. Historically, pullbacks in the share price have represented a buying opportunity for this stock.
The company is led by a strong management team, continues to deliver solid growth, and has a strong balance sheet to fund its growth. The security highlighted below is Richelieu Hardware Ltd. (RCH-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Quebec-based Richelieu Hardware manufactures and distributes specialty hardware and complementary products, such as kitchen and bathroom cabinets, servicing the residential and commercial renovation industry.
It has more than 80,000 customers through its 37 distribution centres in Canada, 31 distribution centres in the U.S. and two Canadian manufacturing plants. The company has been steadily expanding and growing sales with management's prudent and disciplined acquisition strategy. In terms of geographical revenue breakdown, during the first nine months of 2017, sales in Canada represented approximately 67 per cent with the balance coming from the United States. The company supplies large, well-known retailers such as Home Depot, Lowe's, and Costco.
On Oct. 5, the company reported solid third-quarter financial results, despite reporting bottom-line results that were shy of the Street's expectations.
Top line results were strong sending the share price higher by over 2 per cent that day. Sales increased to $253.2-million, up 15 per cent year-over-year, of which 6.9 per cent of the growth was organic, or internal, and 8.1 per cent was acquisition growth. Sales to hardware and renovation retailers rose 20 per cent year-over-year. The company recently began selling its hardware products in Lowe's Canada stores. The company beat expectations on the top line; the consensus revenue estimate was $248-million.
Richelieu is experiencing strong growth in both Canada and the U.S. Sales increased 17.5 per cent year-over-year in Canada and climbed 11.2 per cent year-over-year in the U.S. The company reported EBITDA (earnings before interest, taxes, depreciation and amortization) of $27.9-million, up 7.6 per cent compared to the same period last year. However, EBITDA margins declined to 11 per cent from 11.8 per cent last year due to factors such as lower margins from recent acquisitions and the rapid depreciation of the U.S. dollar. Earnings per share came in at 31 cents, below the consensus estimate of 34.5 cents.
The company has a strong balance sheet, with almost no debt, to support further acquisition growth. Management has a history of making small, tuck-in acquisitions.
Richelieu's fiscal year end is at the end of November. The company is expected to report its year-end results next month.
Returning capital to shareholders
Management remains as been firmly committed to returning capital to its shareholders, announcing a dividend increase in January of each year since 2010. If history repeats itself, investors may be told about a dividend increase next month.
The company pays shareholders a quarterly dividend of 5.67 cents per share, or over 22 cents on a yearly basis. This equates to an annualized yield of 0.67 per cent.
The company has been actively repurchasing shares as part of its share buyback program. During the first nine months of the year, the company repurchased $4.1-million worth of shares, down from a year ago when Richelieu repurchased $23.1-million worth of shares.
Analysts' recommendations
There are only two analysts that cover this small-cap stock with a market capitalization approaching the $2-billion mark. Anthony Zicha, the analyst at Scotia Capital, has an "sector perform" recommendation, while Leon Aghazarian, the analyst from National Bank Financial, has an "outperform" recommendation.
Revised recommendations
In October, both analysts revised their expectations higher to target prices of $36.
Anthony Zicha from Scotia Capital took his target price up to $36 from $30, and Leon Aghazarian from National Bank Financial lifted his target price to $36 from $33.50.
Financial forecasts
Steady earnings growth is forecast to persist. The consensus sales estimate is $938-million for fiscal 2017, and forecast to increase 8 per cent, passing the $1-billion mark ($1.016-billion) in fiscal 2018. The Street is forecasting EBITDA of $105-million in fiscal 2017, $117-million in fiscal 2018, and $126-million in fiscal 2019. The consensus earnings per share estimates are $1.18 in fiscal 2017, rising to $1.33 in fiscal 2018 and $1.43 in fiscal 2019.
Earnings expectations have moderated in recent months. To illustrate, three months ago, the consensus EBITDA estimates were $108.5-million for fiscal 2017 and $118.5-million for fiscal 2018. The consensus earnings per share estimates for fiscal 2017 and fiscal 2018 were $1.23 and $1.34, respectively.
Valuation
According to Bloomberg, the stock is trading at a price-to-earnings multiple of 23.7 times the fiscal 2019 consensus estimate, which is above its three-year historical average of 21 times but below its peak multiple of approximately 25 times during this period. If the stock were to return to its peak multiple of 25 times, this would equate to a target price of just below $36.
The two analysts covering the company both have target prices of $36, implying the stock price has 6 per cent upside potential.
Insider transaction activities
The most recent sizeable transaction in the public market reported by an insider occurred in July.
On July 28, Guy Grenier, Vice-President of Sales and Marketing – Industrial, exercised his options and sold the corresponding number of shares (12,700) at an average price per share of $32.1726.
Chart watch
Pull up a long-term chart and you will see that the share price has been in a multi-year uptrend. Year-to-date, the share price is up 32 per cent.
In terms of key resistance and support levels, the stock has a ceiling of resistance around its record closing high of $35.25, reached last month. On a pullback, the share price has support around $33.50, close to its 50-day moving average (at $33.57). Failing that, there is strong technical support around $30.
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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.