A consumer stock making a comeback with 8 buy calls and a 27 % return expected
On today’s TSX Breakouts report, there are 46 stocks on the positive breakouts list (stocks with positive price momentum), and 21 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that appears on the positive breakouts list. The stock has been an underperformer since making its debut on the Toronto Stock Exchange in late 2016. However, in recent weeks, the share price has been recovering. Analysts remain optimistic that the stock’s valuation can expand with the Street anticipating a potential 27 per cent return over the next year. The security highlighted today is Aritzia Inc. (ATZ-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Vancouve-based Aritzia Inc. is a vertically integrated designer and retailer of women’s clothing and accessories. In the Management’s Discussion and Analysis released in May , the company indicated they now have 87 stores, 65 located in Canada and 22 stores in the U.S.
After the market closed on May 10, the company reported its fourth-quarter fiscal 2018 financial results (the company’s fiscal year-end was February 25). Reported revenue came in at $219.8-million, up 12 per cent year-over-year and relatively in-line with the Street’s forecast of $219-million. Same-store sales grew 6 per cent year-over-year. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $38.1-million, up 18 per cent year-over-year and above the consensus estimate of $35.6-million. Reported earnings per share was 19 cents, a penny above expectations and up from 16 cents reported during the same period last year. The share price declined 3 per cent the following day on high volume. Over 800,000 shares traded on May 11, well above the three-month historical daily average trading volume approximately 170,000 shares.
On the earnings call, founder and chief executive officer Brian Hill indicated management’s goal of opening between five and six new stores, while expanding or repositioning four or five stores. He noted, “Based on the strong performance of our U.S. stores, we are more excited than ever about the opportunity to acquire premier, real estate locations and plan to open a store in San Diego later this year. We have the opportunity to capitalize on a few highly desirable real estate locations in Canada that we have managed to secure for fiscal 2019. As a result, our openings will skew more to Canada this year. However, the pipeline for the coming years is much more heavily weighted in the United States. In addition to these openings, we have three pop-up stores planned in the U.S., two of which will be in new markets and one in an existing market.”
Chief financial officer Todd Ingledew discussed the company’s introduction of a share buyback program, “We are pleased to be able to allocate excess cash to buying back our stock.” He added, “We announced the intention to proceed with a normal course issuer bid through the facilities of the TSX to repurchase up to 5.4 million of our subordinate and voting shares.”
Looking ahead, Mr. Ingledew highlighted management’s expectations for fiscal 2019, “We expect to deliver low to mid-teens revenue growth and consistent adjusted EBITDA margin as compared to fiscal 2018.”
Dividend policy
The company does not pay its shareholders a dividend.
Analysts’ recommendations
This consumer stock with a market capitalization of $1.7-billion is well covered by the Street. After the company reported its quarterly results in May, eight analysts have since issued research reports on the stock, all of which are buy recommendations.
These eight firms providing recent research coverage on the company are as follows in alphabetical order: Baird, BMO Capital Markets, Canaccord Genuity, CIBC Capital Markets, RBC Capital Markets, Scotia Capital, TD Securities, and William Blair & Co.
It is interesting to note that while the share price declined 27 per cent in 2017, not a single analyst had a hold or sell recommendation on the stock.
Financial forecasts
The consensus revenue estimates are $851-million in fiscal 2019, rising 12 per cent to $956-million in fiscal 2020. The Street is anticipating EBITDA of $155-million in fiscal 2019, increasing nearly 14 per cent to $176-million in fiscal 2020. The consensus earnings per share estimates are 76 cents in fiscal 2019, jumping to 91 cents in fiscal 2020.
By fiscal 2021, management’s objectives are to reach or exceed revenue of between $1.1-billion and $1.2-billion, realize adjusted EBITDA roughly between $195-million and $220-million, and adjusted net income of approximately $115-million to $130-million.
Earnings forecasts have moderated slightly. To illustrate, three months ago, for fiscal 2019, the consensus revenue estimate was $855-million, the Street was forecasting EBITDA of $156-million, and the consensus earnings per share estimate was 78 cents.
Valuation
The shares are trading at a price-to-earnings (P/E) multiple of 16.9 times the fiscal 2020 consensus estimate. A few months ago, the stock was trading at a forward P/E multiple below 14 times.
The average 12-month target price is $19.44, implying the stock has 27 per cent upside potential over the next year. Individual target prices provided by seven firms are as follows in numerical order: $17.50 (low on the Street is from the analyst at TD Securities), two at $19, three at $20 and $22 (high on the Street is from the analyst at Scotia Capital).
Insider transaction activity
Year-to-date, there has not been any buying or selling activity reported by insiders.
Chart watch
The stock has a limited trading history making technical analysis a challenge. The company began trading on the Toronto Stock Exchange in October 2016.
The share price was in a downtrend from the fourth-quarter of 2016 through to the fourth-quarter of 2017. The initial public offering (IPO) price was $16 a share and the stock price is still trading below its IPO price.
That being said, the share price is recovering, rising 20 per cent year-to-date. Several weeks ago, the stock exhibited a “golden cross” formation – a bullish technical pattern. This occurs when the 50-day moving average crosses above the 200-day moving average and both moving averages are rising.
Looking at key resistance and support levels, the next ceiling of resistance is around $16, and after that around $18. Looking at the downside, there is technical support around $14. Failing that, there is support around $12, close to its 2018 year-to-date closing low of $11.60 set back in April.
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.
Jennifer Dowty