Gold stocks dominate the positive breakouts list.
On today's TSX Breakouts report, there are 36 stocks on the positive breakouts list (stocks with positive price momentum), and 27 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a security that appeared on the positive breakouts list on Tuesday. Several of its positive attributes include an attractive 6.3 per cent yield with a sustainable monthly distribution, a reasonable valuation, a recent positive earnings beat, and a strong earnings outlook for the next quarter. The security discussed today is Chemtrade Logistics Income Fund (CHE.UN-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Ontario-based Chemtrade provides industrial chemicals and services across its three main operating segments: Sulphur Products and Performance Chemicals (SPPC), Water Solutions and Specialty Chemicals (WSSC), and Electrochemicals (EC). Chemtrade has a diversified revenue profile, which improved with the recent acquisition of Canexus Corporation. Its customers operate in diversified industries such as industrial and manufacturing, pulp and paper, refineries, and water treatment.
After the market closed on Aug. 10, Chemtrade reported better-than-expected second quarter financial results sending the unit price soaring over 5 per cent the following trading day on high volume. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) came in at $95-million, handily exceeding the consensus estimate of $81-million. This was the first quarter that fully reflected the acquisition of Canexus, which was completed in March. Management anticipates realizing $10-million in synergies from the Canexus acquisition with the majority of these benefits captured by the end of the third quarter. There is seasonality in its earnings; historically, the second and third quarters are the highest.
On the conference call, the chief executive officer Mark Davis highlighted several tailwinds supportive of solid future earnings. Caustic soda price are high and Mr. Davis said he sees, "No signs that caustic pricing is going to abate. Although we do not generally forecast price movements, industry publications are indicating that the outlook for continued strength in caustic pricing as global demand stays healthy." Management also indicated that demand for hydrochloric acid has improved due to an increase in fracking activity.
Distribution policy
Chemtrade pays its unitholders a monthly distribution of 10 cents per unit, or $1.20 per unit yearly. This equates to an annualized yield of 6.3 per cent. Looking back over the past decade, the distribution has been maintained at 10 cents per unit.
The distribution appears sustainable. The Street is forecasting distributable cash per unit to come in at $1.74 in 2017 and climb to $2.06 in 2018, well above its annual distribution of $1.20 per unit.
Analysts' recommendations
According to Bloomberg, there are nine analysts who cover the Fund, of which seven analysts have buy recommendations, one analyst has a 'sector perform' recommendation (from RBC Capital Markets), and one analyst has an 'underweight' recommendation (from EVA Dimensions).
The nine firms providing research coverage on Chemtrade are as follows in alphabetical order: BMO Capital Markets, CIBC World Markets, EVA Dimensions, GMP, National Bank Financial, Raymond James, RBC Capital Markets, Scotia Capital, and TD Securities.
Financial forecasts
The consensus EBITDA estimate is $321-million in 2017, rising nearly 14 per cent to $365-million in 2018.
Earnings estimates have been rising. For instance, three months ago, the Street was forecasting EBITDA of $307-million for 2017 and $357-million for 2018.
Valuation
According to Bloomberg, Chemtrade is trading at an enterprise value-to-EBITDA multiple of 8.5 times the 2018 consensus estimate, which is in-line with its historical three-year average multiple of 8.3 times.
The one-year consensus target price is $21.19, suggesting there is 12 per cent upside in the unit price over the next 12 months, or a total return (including the distribution) of 18 per cent. Target prices are quite concentrated, ranging from a low of $20 to a high of $23. Individual target prices provided by eight firms are as follows in numerical order: two at $20, $20.50, three at $21, and two at $23.
Revised recommendations
Last month, four analysts revised their expectations – all higher.
Trevor Johnson, the analyst from National Bank Financial, upgraded his recommendation to an 'outperform' from 'sector perform' and lifted his target price to $20.50 from $19.50. Anoop Prihar from GMP raised his target price to $21 from $20. Jacob Bout from CIBC World Markets increased his target price by $1 to $23. Lastly, Damir Gunja from TD Securities bumped his target price to $23 from $22.
Insider transactions
Management executives have accumulated units in the market around the $18 price level.
The most recent insider transaction in the market was reported several months ago. On June 21, Michael St. Pierre, group vice-president – global services, purchased 6,400 units at an average price per unit of $17.99, increasing his portfolio's holdings to 21,792 units.
The prior month, on May 18, the president and chief executive officer Mark Davis bought 5,000 units at an average price per unit of $17.84, raising his portfolio's position to 19,400 units. Furthermore, on May 12, the chief financial officer Rohit Bhardwaj acquired 10,000 units for an account that he has control or direction over at an average price per unit of $18.24. After this transaction, the portfolio held 60,000 units.
Chart watch
The unit price is in a holding pattern. Since the beginning of the second quarter in 2016, the unit price has been trading sideways in a range primarily between $17 and $19. Year-to-date, the unit price is relatively unchanged, up by less than half a per cent.
In terms of key resistance and support levels, there is initial overhead resistance just above $19, around $19.25. After that, there is a ceiling of resistance around $20, and then around $22. Looking at the downside, there is strong support around $18, near its 200-day moving average (at $18.23) and 50-day moving average (at $17.97).
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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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