On today's TSX Breakouts report, there are 35 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).
Featured today is a stock that appeared on the positive breakouts list earlier this week as its share price climbed to a record high. The stock has been in a long-term uptrend, steadily growing its earnings to record levels through a combination of organic, or internal, growth and acquisition growth. The share price has increased 300 per cent over the past five years. A $10,000 investment made five years ago, not including dividends, would be valued at over $40,000 today. The company's earnings growth appears to be intact, supporting further stock price appreciation. The company is covered by five analysts, and all five analysts have buy recommendations. Furthermore, management has announced a dividend increase every year since 2012 and has a conservative payout ratio to continue to increase its quarterly dividend. The security discussed today is Hardwoods Distribution Inc. (HWD-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Langley, B.C.-based Hardwoods is a distributor of hardwood lumber and wood related products. Management estimates that approximately 50 per cent of its products serves the new residential construction market. Other key markets Hardwoods supplies are the renovation market and the commercial construction sector. As at Aug. 10, Hardwood had 62 distribution centers across North America. In terms of geographical revenue breakdown, in 2016, approximately 84 per cent of the company's sales were in the U.S. with the balance, 16 per cent, in Canada. As such, U.S. housing starts data is a key statistic to monitor and the company benefits from a rising U.S. dollar.
The company has reported steady growth. For instance, revenue was $306-million in 2012, $371-million in 2013, $456-million in 2014, $572-million in 2015, and $789-million in 2016.
After the market closed on Aug. 10, the company reported better-than-expected second quarter financial results that sent the share price soaring 6 per cent the following trading day on high volume with over 250,000 shares traded (well above the three-month historical daily average trading volume of approximately 42,000 shares). Revenue came in at $275-million, up 75 per cent year-over-year. Hardwoods reported record EBITDA (earnings before interest, taxes, depreciation and amortization) of $17.2-million, up 49 per cent year-over-year, beating the consensus estimate of $16-million. Earnings per share came was 45 cents.
Looking out to the second half of the year, management is forecasting mid-single digit organic growth. A key objective for management is acquisition growth and expanding in the U.S. Year-to-date, the company has completed two acquisitions. The company has a solid balance sheet. At the end of the second quarter, net debt-to-EBTIDA stood at 1.9 times providing the company with the financial flexibility to fund future acquisitions.
The company is scheduled to report its third-quarter financial results in November. The Street is forecasting revenue of $270-million, EBITDA of $16-million, and earnings per share of 42 cents.
Dividend policy
The company pay shareholders a quarterly dividend of 7.25 cents per share or 29 cents per share on a yearly basis. This equates to an annualized dividend yield of 1.4 per cent with a conservative payout ratio of approximately 20 per cent.
Management is committed to returning capital to investors. The company has announced a dividend increase each calendar year since 2012. Last month, the company announced a 16 per cent dividend increase, raising the quarterly dividend to 7.25 cents per share from 6.25 cents per share.
Analysts' recommendations
There are five firms that provide research coverage on this small-cap industrials stock with a market capitalization of $428-million, and all five analysts have buy recommendations.
The five firms providing research coverage on the company are as follows in alphabetical order: Acumen Capital, Canaccord Genuity, Cormark Securities, Echelon Wealth Partners, and National Bank Financial.
Financial forecasts
The Street is forecasting EBITDA of $60-million in 2017, rising to $64-million in 2018. The consensus earnings per share estimates are $1.55 for 2017, climbing to $1.65 in 2018.
Forecasts have been rising modestly. To illustrate, three months ago, the consensus EBITDA estimates were $58-million for 2017 and $62-million for 2018. The Street was forecasting earnings per share of $1.54 in 2017 and $1.66 the following year.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 8.3 times the 2018 consensus estimate, slightly above the three-year average multiple of 7.8 times but below its peak multiple of approximately 9.5 times. On a price-to-earnings (P/E) basis, the stock is trading at 12.2 times the 2018 consensus estimate, just above its three-year average of 11.6 times but below its peak P/E multiple of over 14 times.
The one-year consensus target price is $24, suggesting there is 20 per cent upside in the share price over the next 12 months. Target prices are concentrated, ranging from a low of $23 to a high of $25. Individual target prices are as follows in numerical order: two at $23, $24, and two at $25.
Revised recommendations
Last month, after the company reported better-than-expected earnings, three analysts revised their target prices – all higher.
Brian Pow, the analyst from Acumen Capital, lifted his target price by $1 to $24. Maggie MacDougall took her target price up to $25 from $22.50, and Russell Stanley from Echelon Wealth Partners raised his target price to $25 from $23.
Insider transactions
Year-to-date, there have only been two trades in the public market reported by insiders.
The most recent transaction reported by an insider occurred in June. On June 30, management executive John Griffin sold 5,000 shares at an average price per share of $18.41, reducing his portfolio's holdings to 20,567 shares.
Prior to that, on March 29, Lance Blanco, senior vice-president – corporate development, sold 20,000 shares at an average price per share of $16.3508, reducing his portfolio's position to 92,240 shares.
Chart watch
The stock has been in an uptrend since 2009. Year-to-date, the share price is up a respectable 12 per cent. The share price is trading close to record levels (its all-time closing high was $20.40 reached earlier this week on Sept. 25).
In terms of key resistance and support levels, the share price has an initial ceiling of resistance around $22. Should the stock price retreat, there is downside support around $19, close to its 50-day moving average (at $19.25). Failing that, there is support around $18, close to its 200-day moving average (at $17.93).
Liquidity for this small-cap stock can be low. The historical three-month daily average trading volume is approximately 42,000 shares.
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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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