On today's TSX Breakouts report, there are 47 stocks on the positive breakouts list (stocks with positive price momentum), and 12 stocks are on the negative breakouts list (stocks with negative price momentum).
Shares of auto parts companies are gaining price momentum with three stocks from this industry on the positive breakouts list – Magna International Inc. (MG-T), Linamar Corp. (LNR-T) and featured today, Martinrea International Inc. (MRE-T). Last quarter, the company reported record earnings and management believes its solid operational results will continue to improve. The share price is up 30 per cent so far this year, and the consensus target price implies there is another 30 per cent upside potential.
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: 13 plants in Canada, 13 in the United States, 10 plants in Mexico, one plant in Brazil, two plants in Germany, one site in Slovakia, two plants in Spain and two facilities in China. Amongst its top platforms are Ford Escape, GM Equinox/Terrain, Ford Fusion/Edge, GM Malibu/Impala, Jeep Commander/Grand Cherokee, Jeep Wrangler, and Dodge Ram. North American sales represents the majority of the company's revenue.
Before the market opened on Aug. 8, the company reported better-than-expected second-quarter financial results that sent the share price soaring 6.8 per cent that day on high volume with over 1-million shares traded, well above its historical daily average trading volume. Production sales came in at $933-million, between management's guidance of between $920-million and $960-million Adjusted earnings per share (EPS) came in at 55 cents, up from 44 cents per share reported last year and above the consensus estimate of 51 cents per share. This was above management's eps guidance of between 49 cents and 53 cents. Adjusted operating income margin reached 6.9 per cent, up from 5.6 per cent reported last year.
On the earnings call, Pat D'Eramo, the president and chief executive officer, acknowledged that management was on track for achieving its objectives of steadily improving its operational results and strengthening its balance sheet saying, "Our Q2 (second quarter) financial performance now makes it 11 consecutive quarters of year-over-year quarterly margin improvement and record quarterly earnings. As a matter of fact, Q2 EPS hit an all-time high of $0.55. Our 6.9 per cent Q2 operating income margin level clearly shows Martinrea's ability to achieve our 50 per cent margin improvement target this year. We are well on our way to achieving this goal. Net debt-to-adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) continues to trend downward, ending the quarter at 1.68 times on a trailing 12-months basis, again showing the glide path to our goal of 1.5 times by the end of 2017." Management believes they can realized an operating margin of 8 per cent or higher by the year 2020.
Management provided guidance for the third quarter, anticipating production revenue of between $810-million and $850-million and adjusted earnings per share of between 40 cents and 44 cents. The consensus EPS estimate is 42 cents. The company is expected to report its third quarter results in November.
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.
Management has maintained the dividend at this level since the dividend was initiated in 2013.
Analysts' recommendations
This small-cap stock, with a market capitalization just under the $1-billion mark, at $964-million, is well covered by the Street with 11 analysts covering the company. There are nine analysts with buy recommendations and two analysts have hold recommendations.
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
Since the beginning of August, seven analysts revised their expectations – all higher.
Peter Sklar from BMO Capital Markets upgraded his recommendation to an "outperform" from "market perform" and bumped his target price up $3 to $14. Steve Arthur, the analyst at RBC Capital Markets, increased his target price to $17 (the high on the Street) from $16. Mark Neville from Scotia Capital took his target price up by 50 cents to $15.50. David Tyerman from Cormark Securities increased his target price by $2 to $16. Michael Glen from Macquarie upgraded the stock to an "outperform" from a "neutral" recommendation and increased his target price by $2 to 13. Ben Jekic from GMP raised his target price by $1 to $16. Dan Fong, the analyst from Veritas Investment Research, raised his recommendation to a "buy" from a "sell" and lifted his target price to $11.75 from $8.75.
Financial forecasts
The Street is forecasting EBITDA of $384-million in 2017, rising 5 per cent to $405-million the following year. The consensus earnings per share estimates are $1.87 in 2017 and forecast to increase to $2.02 in 2018.
Earnings revisions have been positive. For instance, three months ago, the consensus EBITDA estimates were $375-million for 2017 and $400-million for 2018. The consensus earnings per share estimates were $1.83 for 2017 and $1.98 for 2018.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple just under 4 times the 2018 consensus estimate, below with its five-year historical average of 4.5 times.
On a price-to-earnings (P/E) basis, the stock is trading at a multiple of 5.5 times the 2018 consensus estimate, below its five-year historical average of 6 times. In comparison, Magna International and Linamar are trading at forward P/E multiples of 8.3 times and 8 times, respectively.
The average 12-month target price is $14.43, implying the share price has 30 per cent upside potential over the next year. Individual target prices provided by 10 firms are as follows in numerical order: $11.50, $11.75, $13, $13.50, $14, $15.50, three at $16, and $17.
Insider transaction activity
Insiders have been accumulating shares in the market.
On Aug. 11, Kerri Pope, vice-president – legal and corporate secretary, purchased 4,600 shares at an average price per share of $10.6491, raising the portfolio's holdings to 25,079 shares.
On June 27, Bruce Johnson, executive vice-president of metallic operations, acquired 1,865 shares at an average price per share of $10.70. The previous month, on May 17, he purchased 2,000 shares at an average price per share of $11.87. These trades lifted his portfolio's position to 34,571 shares.
On June 15, in a relatively small transaction, Hany Morsy, the company's chief internal auditor, accumulated 1,750 shares at an average price per share of $10.69, and back in March (on March 17), he acquired 2,800 shares at an average price per share of $10. After these transactions, he held 21,750 shares in his portfolio.
On May 5, Frank Macher, who sits on the board of directors, bought 15,000 shares at an average price per share of $7.9358 (U.S.), initiating a portfolio position.
During the first quarter, several management executives were buyers. 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
The stock chart is positive with the 50-day and 200-day moving averages both rising and the share price trading above these moving averages.
In addition, the share price appears to have formed a bullish inverse head and shoulders pattern with an initial target price of $12. After that, the stock price could step up to $13 and then $14.50.
Also positive is the high trading volume. Over the past three trading session, over 1-million shares have traded each day, well above its three-month historical daily average trading volume of approximately 418,000 shares.
Should the share price retreat, there is strong downside support around $10, which is close to its 200-day moving average (at $9.87).
Year-to-date, the stock price has rallied 30 per cent making Martinrea one of the top performing stock in the S&P/TSX composite consumer discretionary sector index (out of 22 members).
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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 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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