On today's TSX Breakouts report, there are 18 stocks on the positive breakouts list (stocks with positive price momentum), and 48 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a company that has made frequent appearances on the positive breakouts list with its share price continuing to rise to new record highs. The stock was last profiled in the TSX Breakouts report in March 2016, and since then, just 15 months later, the share price has rallied 35 per cent.
While the company appears to be on solid footing from a fundamental perspective, the stock's rising valuation suggest the share price may be due for a pause before continuing to track higher. The security highlighted below is Canadian National Railway Company (CNR-T).
The company
CN Rail is an industry leader, operating a rail network across the country and down to the Gulf coast of the United States.
Last week, management provided a positive outlook for the company at its investor day held in Montreal. Ghislain Houle, the chief financial officer, stated, "We believe that this backdrop and our consistent philosophy provide scope to aspire to 10 per cent average annual EPS (earnings per share) growth over the next five years. This should also translate in solid free cash flow generation." Mr. Houle believes the company can "sustain our operating ratio to roughly mid-50 per cent for the next five years, assuming fuel prices remain at current levels".
The company is dual listed, trading on the Toronto Stock Exchange under the ticker CNR, and on the New York Stock Exchange under the ticker CNI.
Returning capital to shareholders
Management remains committed to its dividend and has raised its dividend every year since 1995. In January, the company announced a 10 per cent dividend hike, raising the quarterly dividend to 41.25 cents per share from 37.5 cents per share. On a yearly basis, this amounts to $1.65 per share, equating to an annualized yield of 1.5 per cent.
In 2016, the payout ratio was conservative at 32 per cent, providing room for future dividend growth. Management targets a future payout ratio of 35 per cent. At the investor day, the chief financial officer indicated that the company's dividend growth "will be in line with our earnings growth".
During the first quarter, the company repurchased 5.4-million shares under its share buyback program at a weighted average price per share of $90.73.
Analysts' recommendations
According to Bloomberg, 31 analysts have issued recent research reports on the company, of which, 7 have buy recommendations, 23 have hold recommendations and one analyst (from EVA Dimensions) has an 'underweight' recommendation.
Financial forecasts
The consensus earnings per share estimates are $5.12 in 2017, rising 9 per cent to $5.60 in 2018. Management is forecasting adjusted earnings per share of between $4.95 and $5.10 in 2017.
Earnings expectations have been steadily increasing. To illustrate, three months ago, the consensus earnings per share estimates for 2017 and 2018 were $4.99 and $5.44, respectively.
Valuation
According to Bloomberg, the stock is trading at a price-to-earnings (P/E) multiple of 19.2 times the 2018 consensus estimate, approaching its peak multiple of just over 20 times looking back over the past three years, and well above the three-year historical forward P/E multiple of 17.1 times.
The consensus one-year target price is $106.64, implying the stock price is fully valued.
Revised recommendations
Analysts have been raising their target prices in recent weeks. Here are a few of the largest changes. Analyst Cameron Doerksen from National Bank Financial took his target price up by $7 to $108. Turan Quettawala from Scotia Capital lifted his target price to $115 from $110. Kevin Chiang from CIBC World Markets raised his target price to $111 from $105. Ravi Shanker, the analyst from Morgan Stanley, took his target price up to $110 from $105. David Tyerman, the analyst from Cormark Securities, took his target price up by $10 to $108, and Thomas Wadewitz from UBS increased his target price to $107 from $102.
Insider transaction activities
In recent weeks, several members of the company's executive management team sold shares in the market.
On June 15, Kimberly Madigan, vice-president of human resources, sold 6,028 shares, trimming her ownership position to 23,386 shares.
On June 2, Sean Finn, executive vice-president of corporate services and the chief legal officer, exercised his options and the same day sold the corresponding number of shares (12,885) at an average price of $106.0717 per share, leaving a remaining balance of 14,973 shares.
On May 25, Jean-Jacques Ruest, the company's chief marketing officer, sold 15,655 shares from his portfolio at an average price per share of $103.40, reducing his portfolio's holdings to 108,641 shares.
The same day, Mike Cory, chief operating officer, sold 2,000 shares at an average price per share of $103.371, leaving a remaining portfolio balance of 15,740 shares.
Chart watch
Year-to-date, the share price has rallied nearly 19 per cent, making the stock one of the top performers in the S&P/TSX composite industrials sector index. This stock has been in an uptrend for the past year making higher highs and higher lows.
Looking at key resistance and support levels. The stock price has initial overhead resistance around $110. On a pause in the positive price momentum, the share price has initial downside support between $100 and $102, close to its 50-day moving average (at $102.20).
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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.
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