On today’s TSX Breakouts report, there are 63 stocks on the positive breakouts list (stocks with positive price momentum), and 31 securities are on the negative breakouts list (stocks with negative price momentum).
The positive breakouts list is dominated by energy stocks with crude oil prices continuing to push higher. Financial stocks are also rising as the yield curve steepens.
Discussed today is a stock that appeared on the positive breakouts list several days ago. On Friday, the share price of this stock jumped nearly 4 per cent on unusually high volume with over 2.2-million shares traded, well above the three-month historical daily average trading volume of approximately 346,000 shares.
Year-to-date, the share price has rocketed 55 per cent. Consequently, in the near-term, the share price may remain relatively flat or drift slightly lower as the stock digests these spectacular short-term gains until there is news surrounding strategic acquisitions or divestures.
With a unanimous buy recommendation from five analysts and a 21-per-cent further gain expected, the security highlighted today is 5N Plus Inc. (VNP-T).
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
Montreal-based 5N Plus produces specialty metal and chemical products with manufacturing facilities in North America, Europe, and Asia.
Its products include metals such as bismuth, germanium, tellurium, and selenium that are used in pharmaceutical, electronic, renewable energy, and industrial applications. For instance, micro-powders produced by the company are used in smartphones, semiconductor materials are used for medical imaging and in solar cells for satellites, and the company is a leading supplier of bismuth chemicals to the pharmaceutical market. Bismuth subsalicylate is an active ingredient in the stomach aid Pepto Bismol.
In recent months, 5N Plus’ share price has soared alongside many other renewable energy stocks. 5N Plus is a leading supplier of semiconductor materials to companies in the renewable energy industry including First Solar Inc. (FSLR-Q).
According to Bloomberg, the Caisse de dépôt et placement du Québec (considered a long-term institutional investor) owns approximately 19 per cent of the shares outstanding.
After the market closed on Feb. 23, the company reported its fourth-quarter financial results.
Revenue came in at US$46.2-million, up 3 per cent year-over-year and ahead of the Street’s expectations of US$39.6-million. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was US$6.54-million, in-line with the consensus estimate of US$6.55-million and up from US$4.5-million reported during the same period last year.
ROCE (return on capital employed) was 14.4 per cent in 2020, which management believes can increase to beyond 17 per cent. Backlog climbed to 189 days of annualized revenue as at Dec. 31, up 11 per cent from Sept.
At quarter-end, 5N Plus had US$39.95-million of cash on its balance sheet, or approximately 50 cents per share. In 2020, 5N Plus generated US$24.9-million of cash flow.
The following day, the share price rallied 5 per cent on high volume with over 700,000 shares traded.
On the earnings call, President and Chief Executive Officer AJ Roshan elaborated on the company’s strategic plan, “Our management with support from our Board began the next phase of strategic transformation with two key objectives: one, to move the company’s product offerings toward advanced materials essential for select critical industries of the future; and two, move the company away from products highly influenced by metal notations and those facing commoditization pressure.”
He added, “The 5N Plus of the future will be an easier company to understand with simpler or less number of verticals. Rather than going wide, we’ll go deep, with the focus, with less number of verticals, we will be targeting much larger TAMs (total addressable markets).”
Investment thesis highlights
- Transition of business model to higher margin advanced materials.
- Catalysts: Acquisitions, divestures of legacy businesses.
- Strong balance sheet with extremely low debt levels providing the company with the financial flexibility to pursue strategic acquisitions. 5N Plus has a net debt to EBITDA ratio of below 1 times, which management is comfortable increasing to over 3 times.
Returning capital to its shareholders
The company does not pay its shareholders a dividend.
In the fourth quarter, 391,859 shares were repurchased as part of its share buyback program. In 2020, between March 9 and Dec. 31, 1,750,428 shares were repurchased at an average price per share of $1.26.
This small-cap security with a market capitalization of $375-million is covered by five analysts on the Street, and all five analysts have buy recommendations.
The firms providing research coverage on the company are: Cormark Securities, Desjardins Securities, Laurentian Bank Securities, National Bank Financial and Raymond James.
In February, all five analysts raised their expectations.
Their moves were:
- Cormark Securities’ Macmurray Whale to $6 from $4.50.
- Raymond James’ Michael Glen to $5.50 from $5.
- Laurentian Bank’s Nick Agostino to $5.50 from $5.
- Desjardins Securities’ Frederic Tremblay to $5.50 from $4.50.
- National Bank’s Rupert Merer to $5.25 from $5.
The Street is forecasting revenue of US$186-million in 2021, up from US$177-million in 2020, and anticipated to rise over 4 per cent to US$194-million in 2022. The consensus EBITDA estimates are US$32.8-million in 2021, up from US$28.8-million reported in 2020, increasing to US$35.8-million in 2022. The consensus earnings per share estimates are 16 US cents in 2021 and forecast to increase to 18 US cents in 2022.
Financial forecasts have inched higher in recent months. Two months ago, the 2021 consensus revenue estimate was US$181-million.
The stock is trading at a peak multiple relative to historical levels. According to Bloomberg, on an enterprise value-to-EBITDA basis the stock is trading at a multiple of 9.6 times the 2021 consensus estimate and at 8.8 times the 2022 consensus estimate, near its highest level over the past three years. The three-year historical average multiple is over 6 times.
The average 12-month target price is $5.55, implying the share price has 21-per-cent upside potential over the next year.
Insider transaction activity
There have not been any trades in the public market reported by insiders since May 2020, when there was buying activity disclosed by chairman Luc Bertrand.
On March 6, the share price increased by 4 per cent on high volume with over 2.2-million shares traded. This is well above the three-month historical daily average trading volume of approximately 346,000 shares.
Year-to-date, the share price has rallied an astounding 55 per cent.
The share price has a major ceiling of resistance around $5. After that there is overhead resistance around $6. Looking at the downside, there is strong technical support between $3.50 and $3.75, close to its 50-day moving average (at $3.74).
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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