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On today’s Breakouts report, there are 33 stocks on the positive breakouts list (stocks with positive price momentum), and 17 stocks are on the negative breakouts list (stocks with negative price momentum).

Discussed today is a stock that recently surfaced on the positive breakouts list - Element Fleet Management Corp. (EFN-T).

Last week, its share price advanced 14 per cent on high volume ahead of the company’s earnings announcement. The company will be releasing its third-quarter financial results after the markets close on Tuesday.

This positive price momentum may continue after the company releases its earnings results. A potential near-term catalyst is news surrounding the company’s plans on returning capital to its shareholders, including a potential significant dividend increase.

A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.

The company

Toronto-based Element Fleet Management is a leading fleet management company with operations in North America, Mexico, Australia and New Zealand. Its fleet of vehicles includes cars and trucks, as well as equipment such has forklifts and scissor lifts.

In terms of its revenue breakdown, for the first six months of 2020, 51 per cent of total net revenue was from servicing income, 41 per cent was from net financing, and 8 per cent stemmed from syndication.

The company has a diversified client base serving blue-chip customers across different industries and geographies. Roughly two-thirds of its customers are investment grade clients including Amazon. The company has a high client retention rate.

Management is successfully executing on its transformation program, providing a foundation for revenue growth going forward.

Key objectives of its transformation plan include: 1) $180-million of pre-tax annual run-rate profit improvements by the end of 2020 (at the end of the second quarter, management achieved $166-million in profitability improvements) 2) sell non-core assets (completed on May 1 with the sale of 19th Capital) 3) strengthen its balance sheet, reducing its tangible leverage to below 6 times. (the tangible leverage ratio stood at 6.8 times at the end of the second quarter, nearing the target).

Investment thesis highlights

  • Industry leadership. Element is the world’s largest pure-play commercial vehicle fleet management company.
  • High barriers to entry.
  • Management team with a proven track record. Successfully executing on objectives.
  • Strong customer base.
  • Revenue growth. Management targets achieving net revenue growth of between 4 per cent and 6 per cent, under normal market conditions.
  • Free cash flow generation. As of June 30, free cash flow exceeded $480-million over the past 12 months.
  • Double-digit return on equity. Reported ROE of 10.2 per cent last quarter.
  • Potential near-term catalysts. 1) News surrounding the company’s plans on returning capital to its shareholders – perhaps, a significant dividend increase 2) Future contract wins, potentially mega-fleets.

Quarterly earnings

After the markets closed on July 28, the company reported better-than-expected second-quarter financial results.

Adjusted earnings per share came in at 19 cents, down from 21 cents reported during the same period last year, and above the Street’s forecast of 15 cents per share. Free cash flow per share was 25 cents, unchanged from last year. Assets under management totaled $17-billion, up 10 per cent year-over-year.

Originations, reflecting future revenues, totaled $1.3-million, down sequentially from $2-million reported last quarter due to closures and postponed orders in response to COVID-19. The share price advanced 12 per cent the following day on high volume with over 8.5-million shares traded, well above the three-month historical daily average trading volume of approximately 2-million shares.

On the earnings call, President and Chief Executive Officer Jay Forbes commented on management’s shifting focus to growth as the transformation plan nears completion, “Looking at the next two quarters from a narrative perspective, Element’s story is going to be in transition. We’re moving from a state of an especially rapid and frequent internal change to one of a more predictable pace and focus. Again, that immediate focus will be on organic profitable revenue growth. We expect to generate excess free cash flow from that growth, and we expect to be able to share more with you in the second half of this year about our Board’s thinking on allocating that capital. We look forward to updating you on that front and all others.”

The company will be releasing its third-quarter financial results after the markets close on Tuesday. The consensus earnings per share estimate is 19 cents.

Dividend policy

The company pays its shareholders a quarterly dividend of 4.5 cents per share or 18 cents per share yearly, equating to a current annualized yield of 1.35 per cent.

In 2018, the company cut its quarterly dividend by 40 per cent to its current level of 4.5 cents per share from 7.5 cents per share per quarter, retaining this capital in order to execute its transformation program. However, with the transformational plan nearing completion and with the company’s strong free cash flow generation, the dividend could be increased.

Analysts' recommendations

This financials stock with a market capitalization of $5.8-billion is actively covered by ten analysts, of which nine analyst have buy recommendations and one analyst (Jeff Fenwick from Cormark Securities) has a “market perform” recommendation.

The ten firms providing recent analyst coverage on the company are: Barclays, BMO Nesbitt Burns, CIBC WorldMarkets, Cormark Securities, Credit Suisse, National Bank Financial, Raymond James, RBC Dominion Securities, Scotia Capital and TD Securities.

Revised recommendations

Month-to-date, five analysts have revised their target prices higher.

  • National Bank Financial’s Jaeme Gloyn to $18 from $14.
  • RBC Capital Markets' Geoffrey Kwan to $17 from $15.
  • Scotia Capital’s Phil Hardie to $13.50 from $12.
  • CIBC’s Paul Holden by $1 to $14.
  • TD Securities' Mario Mendonca to $13.50 from $12.

Financial forecasts

The Street is forecasting revenue of $882-million in 2020, $964-million in 2021 and $1.1-billion in 2022. The consensus earnings per share estimates are 82 cents in 2020, 96 cents in 2021, and $1.12 in 2022.

Earnings expectations for 2020 have increased in recent months and held steady for 2021. To illustrate, three months ago, the consensus earnings per share estimates were 76 cents for 2020 and 97 cents for 2021.

Valuation

According to Bloomberg, the stock is trading at a price-to-earnings multiple of 13.9 times the fiscal 2021 consensus estimate, above its three-year historical average of 9.6 times and at its highest multiple over the past three years.

The average one-year target price is $14.20, implying the share price has 6.5 per cent upside potential over the next 12 months. Expectations vary widely from a potential loss of 19 per cent to a potential gain of 43 per cent. Individual target prices are: $10.75 (from Jeff Fenwick at Cormark Securities), $11, $12.25, $13, two at $13.50, $14, $17, $18, and $19 (from Mike Rizvanovic at Credit Suisse).

Insider transaction activities

In the second-half of 2020, only one insider has reported trading activity in the public market.

On Aug. 4, Chris Gittens, executive vice-president – strategic partnerships, exercised his options, receiving 31,667 shares at a cost per share of $10.05, and sold 31,667 shares at a price per share of $11.4058. Net proceeds totaled over $42,000, not including any associated transaction fees.

Chart watch

Year-to-date, the share price has rallied 20 per cent, outperforming the S&P/TSX composite index, which is down 4.5 per cent. The stock has also outperforming its sector peers with the S&P/TSX financial index down 14 per cent. In fact, Element is the second best performing stock in the S&P/TSX composite financial sector index, behind Sprott Inc. (SII-T).

Last week, Element’s share price climbed 14 per cent on high volume. On Oct. 23, over 4.8-million shares traded, and on Oct. 22 and Oct. 21 over 6-miillion shares traded each day. The three-month historical daily average trading volume is roughly 2-million shares.

In terms of key resistance and support levels, the share price has an initial ceiling of resistance around $14. After that, there is major overhead resistance around $16, near its record closing high of $16.15 reached in 2015. Looking at the downside, there is initial technical support around $12. Failing that, there is strong support around $10, close to its 200-day moving average (at $10.69).

Monday's breakout stocks

POSITIVE BREAKOUTSOct. 23 close
AT-TAcuityAds Holding Inc. $4.65
ALC-TAlgoma Central Corp $10.79
AYA-TAya Gold & Silver Inc. $3.19
AYR-A-CNAYR Strategies Inc. $19.74
BAD-TBadger Daylighting Ltd $41.18
BMO-TBank of Montreal $84.09
BPY-UN-TBrookfield Property Partners LP $18.98
CAE-TCAE Inc $24.01
CTC-A-TCanadian Tire Corp Ltd $154.82
CS-TCapstone Mining Corp $1.71
CCL-B-TCCL Industries Inc $54.75
CDAY-TCeridian HCM Holding Inc. $121.13
CHR-TChorus Aviation Inc $3.18
CTS-TConverge Technology Solutions Corp. $2.69
CJR-B-TCorus Entertainment Inc $3.71
DIR-UN-TDream Industrial REIT $11.87
EFN-TElement Fleet Management Corp. $13.33
FC-TFirm Capital Mortgage Investment Corp $12.64
GWO-TGreat-West Lifeco Inc $28.28
HCG-THome Capital Group Inc $24.88
ITP-TIntertape Polymer Group Inc $16.41
DR-TMedical Facilities Corp $5.20
MX-TMethanex Corp $40.52
NOA-TNorth American Construction Group Ltd. $10.90
ONC-TOncolytics Biotech Inc $3.00
SIA-TSienna Senior Living Inc $12.28
SRU-UN-TSmartCentres Real Estate Investment Trust $21.86
STLC-TStelco Holdings Inc. $14.09
SMU-UN-TSummit Industrial Income REIT $13.37
TFII-TTFI International Inc. $66.05
TCW-TTrican Well Service Ltd $1.28
VCM-TVecima Networks Inc $13.50
Y-TYellow Pages Ltd $13.01
NEGATIVE BREAKOUTS
BBD-B-TBombardier Inc $0.32
CG-TCenterra Gold Inc $12.64
CKG-TChesapeake Gold Corp. $5.18
CCA-TCogeco Communications Inc $96.99
DML-TDenison Mines Corp $0.43
ENB-TEnbridge Inc $37.99
FVL-TFreegold Ventures Limited $0.92
GEI-TGibson Energy Inc $21.27
GSV-TGold Standard Ventures Corp. $0.91
IMV-TIMV Inc. $4.40
KL-TKirkland Lake Gold Inc $61.26
NEPT-TNeptune Wellness Solutions Inc. $2.53
NGT-TNewmont Corp. $79.31
OGC-TOceanaGold Corp $1.97
SSL-TSandstorm Gold Ltd $10.71
TH-TTheratechnologies Inc $2.68
WM-TWallbridge Mining Company Limited $0.88

Source: Bloomberg

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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