On today’s Breakouts report, there are just six stocks on the positive breakouts list (stocks with positive price momentum), and 77 securities are on the negative breakouts list (stocks with negative price momentum).
On Friday, April 22, the S&P/TSX Composite Index was under pressure with the threat of high inflation and spiking interest rates. The TSX Index plunged 464 points or 2.1 per cent with 217 stocks declining and only 22 stocks closing the day with gains.
Today, there is no relief in sight, with major stock markets once again falling with growing concerns about future global growth. The CBOE Volatility Index has spiked to 30.
Amidst this market meltdown, discussed today is a stock that is nearing oversold territory and approaching strong technical support - Algoma Central Corp. (ALC-T).
Over the past year, Algoma’s share price has largely traded between $16 and $18. On Friday, the share price declined 2.6 per cent, closing at $16.655 and nearing the lower end of this trading range. The relative strength index (RSI) is 39. Generally, a RSI reading at or below 30 reflects an oversold condition.
With a unanimous buy recommendation, the stock offers investors potential total return of over 40 per cent (37 per cent potential price return along with an attractive 4 per cent dividend yield).
A brief outline on Algoma is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
St. Catharines, Ont.-based Algoma operates a fleet of vessels, carriers and tankers travelling through the Great Lakes – St. Lawrence Waterway. Its four main business units include: Domestic Dry-Bulk, Domestic Product Tankers, Ocean Self-Unloaders and Global Short Sea Shipping.
Within the company’s Domestic Dry-Bulk business segment are dry-bulk carriers that transport commodities including iron ore, steel, grain, salt, and construction materials through the Great Lakes, St. Lawrence Seaway and Atlantic region. This is the company’s largest business segment representing 47 per cent of total freight revenue in 2021.
The company’s Domestic Product Tankers segment has a fleet of tankers that transport liquid petroleum products across the Great Lakes, St. Lawrence Waterway and Atlantic Canada. In 2021, this segment accounted for 13 per cent of total freight revenue.
The Ocean Self-Unloaders segment is comprised of eight ocean-going vessels, as well as a 50 per cent interest in a self-unloader vessel, and a 25 per cent interest in a specialized ocean vessel. This business segment represented 22 per cent of total freight revenue in 2021.
Through its joint ventures, the company’s Global Short Sea Shipping business unit offers specialized equipment and services for niche markets such as cement carriers. In 2021, this business unit accounted for 18 per cent of total freight revenue.
The company also has an Investment Properties reporting segment, which includes ownership in a shopping centre, Station Mall, with a waterfront location in Sault Ste. Marie, Ontario.
The company’s contracts are typically over several years providing the company’s with earnings visibility. For instance, within the Domestic Dry-Bulk segment, contracts are typically between three and seven years. Contracts often include price escalations linked to inflation and rising fuel costs are typically passed through to customers.
There is seasonality in the business with Algoma reporting significantly lower revenue in the first quarter. Due to winter weather conditions, most of the company’s Domestic Dry-Bulk fleet is not in operation during the first quarter
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Investment thesis highlights
- Industry leader. Largest operator in the Great Lakes – St. Lawrence Waterway.
- High barriers to entry. Government regulations (e.g. Coasting Trade Act).
- Established, well-known customers with high retention. Customers include well-known companies such as Cargill, Lafarge, United States Steel, ArchelorMittal, Imperial Oil, Irving, Georgia-Pacific, and RioTinto and customer retention is high.
- Fleet renewal: delivery of a dry-bulk vessel expected to arrive in 2024 (currently under construction in China). In addition, on March 10, the company announced the purchase of three cement carriers (all delivered by June) along with two bulk carriers through its joint ventures.
- Trading at a discount. The stock is trading slightly below historical levels.
- Stable and attractive dividend. Yield of over 4 per cent.
- Stabilizing Baltic Dry Index (BDI). The BDI measures freight shipping rates and is a useful barometer of global economic activity. On April 21, the overall index rebounded to 2,239 points, its highest level since April 4, and well below its 2021 peak of approximately 5,650 reached in Oct.
- Potential key risks to consider: 1) global economic slowdown/recession concerns; 2) inflation impacting operating costs; and 3) low liquidity.
Earnings results
Before the market opened on Feb. 28, the company reported record 2021 financial results. Looking at the fourth-quarter results, revenue came in at $178.9-million, up 16 per cent year-over-year. EBITDA (earnings before interest, taxes, depreciation and amortization) was $64.4-million, up 7 per cent year-over-year. Book value as at Dec. 31 was $16.94. Adjusted return on equity stood at 13.7 per cent in 2021.
In the earnings release, management provided a solid outlook for the year, “For 2022, we are expecting the demand for manufacturing and building materials to continue to trend upwards, and steady production and associated demand should result in salt volumes approximating normal levels. The impact of the drought in western Canada will be a significant factor in our domestic trade but we are preparing for lower volumes with plans for strategic capacity deployment and maintaining tight control of operating costs. The demand for petroleum products in 2022 is expected to be similar to 2021 as our customers continue to recover from the impact COVID-19 has had on the demand for wholesale petroleum products. We are ready to deploy additional capacity should restrictions ease and global travel begin to recover. Market trends remain positive in our international segments as we begin 2022 and we are hopeful there will be a return to more normal aggregate volumes following the recent downturn in global infrastructure projects. Freight rates in our Ocean Self-Unloader segment and in our Global Short Sea joint ventures are likely to remain strong as market demand continues to steadily increase after COVID-19 related downturns.”
The company will be hosting its annual general meeting (AGM) of shareholders virtually on May 4 at 11:30 a.m. (ET).
Dividend policy
The company pays its shareholders a quarterly dividend of 17 cents per share, or 68 cents per share yearly, equating to a current annualized yield of 4.1 per cent.
Over the past two years as the coronavirus spread globally and lockdowns were put in place, the company did not cut or suspend its dividend. In fact, the company raised its dividend and paid special cash dividends to its shareholder. In Jan. 2021, the company paid its shareholders a special dividend of $2.65 per share.
Analysts’ recommendations
There are three firms providing recent research coverage on this small-cap stock with a market capitalization of $630-million. All three analysts have buy recommendations.
The firms providing recent research coverage on Algoma are: Cormark Securities, M Partners, and Paradigm Capital.
Revised recommendations
In March, two analysts raised their expectations.
- Paradigm’s Corey Hammill to $25 from $20.
- Cormark’s David Ocampo to $21.50 from $20.50.
Financial forecasts
The Street is forecasting revenue of $606-million in 2022, up marginally from $599-million reported in 2021, with revenue anticipated to increase to $622-million in 2023. The consensus EBITDA estimates are $198-million in 2022, up from $189-million reported in 2021, and $201-million in 2023.
Earnings estimates have increased in recent months. Three months ago, the Street was expecting revenue to come in at $595-million in 2022 and $609-million in 2023. The consensus EBITDA forecasts were $192-million in 2022 and $197-million in 2023.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 4.5 times the 2023 consensus estimate, below its roughly five-year historical average multiple of 5.4 times.
The average one-year target price is $22.83, implying the share price has 37 per cent upside potential over the next 12 months (including the dividend yield this equates to a potential total return of 41 per cent). Individual target prices are as follows in numerical order: $21.50, $22, and $25.
Insider transactions
Over the past year, there has not been any trading activity in the public market reported by insiders.
Chart watch
Year-to-date, the share price is relatively unchanged, down 2 per cent.
Over the past year, the share price has largely traded between $16 and $18. The share price is declining to the lower end of this trading range. The share price has technical support around $16. Failing that, there is initial support around $15 and strong technical support around $14.
The relative strength index (RSI) is 39. Generally, a RSI reading at or below 30 reflects an oversold condition.
On a recovery, there is major technical resistance around $18, near its record closing high of $18.08 reached on Oct. 25, 2021.
This small-cap stock has low liquidity. The three-month historical daily average trading volume is approximately 11,000 shares.
ESG risk rating
Looking at four ESG risk rating providers, Sustainalytics, Refinitive, MSCI and Bloomberg, the stock does not have an ESG risk score.
This report is not an investment recommendation.
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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Jennifer Dowty