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On today’s TSX Breakouts report, there are 27 stocks on the positive breakouts list (stocks with positive price momentum), and 18 stocks are on the negative breakouts list (stocks with negative price momentum).

Discussed today is a stock that appeared on the negative breakouts list last week with its share price falling 17 per cent over the past two months putting the stock in correction territory. Deteriorating profitability has put pressure on the share price.

However, analysts remain bullish, expecting the share price to rebound. There are four analysts with “buy” recommendations and the average 12-month target price suggests the stock may deliver a 29 per cent return over the next 12 months. However, until profit margins improve, the share price is likely to remain depressed.

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This industry leader appears to have become a “show-me” stock with investors needing confirmation of improving profitability before accumulating shares in the market. The next potential catalyst for the stock is the third-quarter earnings results, which are expected to be released in early November. Management provided a positive outlook for the third-quarter. The company highlighted below is Pollard Banknote Ltd. (PBL-T).

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

The company

Winnipeg-based Pollard Banknote is a leading provider of lottery products, suppling over 60 instant ticket lotteries. Management estimates that the company is the largest provider of instant-win scratch tickets in Canada and the second largest supplier of instant tickets worldwide.

In terms of the company’s product mix, in 2018, 75.5 per cent of the company’s sales were from lottery tickets and services, 16.6 per cent of sales came from the charitable gaming market (i.e. pull-tab tickets and bingo paper), and the balance, 7.9 per cent, was from gaming systems.

In terms of geographical sales breakdown, in 2018, 56 per cent of Pollard’s sales were from the U.S., 23 per cent of sales were from Canada, and 21 per cent of sales came from international regions. Consequently, the company has currency exposures to consider with a large exposure to U.S. dollar cash flows. In 2018, an increase in net foreign exchange losses contributed to lower year-over-year net income. Net income was $14.9-million in 2018, down from $16.8-million reported in 2017.

The company has a successful track record of achieving strong sales growth with acquisition growth remaining a key objective by management. Looking back over the past few years, in 2013, Pollard reported revenue of $185-million, which climbed to $195-million the following year. In 2015, revenue was $221-million and increased to $246-million in 2016, $286-million in 2017 and a record $331-million in 2018. Last year, most of the company’s revenue growth was from acquisitions, representing approximately 95 per cent of the 16 per cent top line growth.

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However, profitability stumbled last year. EBITDA (earnings before interest, taxes, depreciation and amortization) margin declined year-over-year to 14.7 per cent in 2018 from 15.4 per cent in 2017. Management attributed this margin contraction to higher administrative and selling expenses. Earnings per share (EPS) was reported at 23 cents in 2013, 37 cents in 2014, 32 cents in 2015, 52 cents in 2016, 71 cents in 2017, but declined to 58 cents in 2018. Again, the drop in profitability stemmed from higher administrative and selling expenses, and foreign currency losses.

After the market closed on Aug. 6, the company reported weaker-than-expected second-quarter financial results.

The company reported sales of $97.1-million, relatively in-line with the Street’s expectations of $97.5-million, and up from $86.8-million reported during the same period last year. Gross profit margin dipped to 22.6 per cent from 23.6 per cent reported last year. Adjusted EBITDA was $13.6-million, below the consensus estimate of $15.9-million and down from $14.1-million reported last year. Reported EPS was 20 cents, falling short of the Street’s forecast of 23 cent per share. The share price declined over five per cent the following trading day.

In the earnings release, co-chief executive officer John Pollard remarked on the weakness in profitability, “Our profitability was lower than expected due mainly to a mix of instant ticket sales that was weighted toward lower average selling price and more challenging production. Not only did this reduce our gross margin percentage, it also resulted in our production volumes being slightly lower than we anticipated, notwithstanding increasing orders. As discussed in previous quarters, our mix of instant ticket orders can vary from quarter to quarter including different order levels from various lottery customers. Some of our larger volume customers generate lower average selling prices and fewer premium features, resulting in lower margins. During the second quarter our mix of work was heavily weighted towards this type of product, impacting negatively our gross margin and bottom-line profitability.”

Looking out to the third-quarter, Mr. Pollard provided a positive outlook, “Historically our third quarter has generated higher average selling prices as we produce games for the holiday season and we expect 2019 to reflect this, both in terms of premium selling prices and increased volumes. Our orders continue to increase and our production schedules for the remainder of 2019 are now at levels higher than seen in 2018. In addition, our current schedule mix for the third quarter reflects a more typical seasonal mix of higher average selling prices with greater premium products.”

The Pollard family is the main shareholder owning approximately 67.5 per cent of the shares outstanding. This small-cap stock is thinly traded, which can increase price volatility. The three-month historical daily average trading volume is just under 10,000 shares. As at June 30, there were only 25.6-million shares outstanding, limiting the ability for large institutional investors to purchase shares.

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Currently, the company does not hold earnings conference calls to discuss its quarterly financial results.

Dividend policy

The company pays its shareholders a quarterly dividend of four cents per share, or 16 cents per share on a yearly basis. This equates to a current annualized dividend yield of 0.8 per cent.

In April, the dividend increased to four cents per share from three cents per share, its first dividend hike in years. The company had maintained its quarterly dividend at three cents per share since 2010.

Analysts’ recommendations

This small-cap stock with a market capitalization of $510-million is actively covered by five analysts, of which four analysts have “buy” recommendations and one analyst (David McFadgen, an analyst at Cormark Securities) has a ‘market perform’ recommendation.

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The five firms providing recent research coverage on the company are as follows in alphabetical order: Acumen Capital, Canaccord Genuity, Cormark Securities, Echelon Wealth Partners, and GMP.

Revised recommendations

In Aug., Robert Young, an analyst at Canaccord Genuity, increased his target price to $26 from $25. Acumen Capital’s Jim Byrne trimmed his target price to $26.50 from $27, as did Gianluca Tucci of Echelon Wealth Partners.

Financial forecasts

The consensus revenue estimates are $395-million in 2019, up from $332-million reported in 2018, and expected to rise to $422-million the following year. The Street is forecasting EBITDA of $62.1-million in 2019, up from $48.8-million reported last year, and anticipated to increase to $68.5-million in 2020. The consensus earnings per share estimates are 99 cents in 2019, up from 58 cents per share realized in 2018, and forecast to increase to $1.07 in 2020.

Top line expectations have been relatively stable, while bottom line estimates have declined significantly. For instance, three months ago, the Street was forecasting revenue of $395-million in 2019 and $421-million in 2020 - relatively unchanged. EBITDA estimates were $64-million in 2019 and $70-million for the following year, again little changed. However, the consensus earnings per share estimates were $1.06 for 2019 and $1.20 for 2020.

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According to Bloomberg, the stock is trading at a price-to-earnings multiple of 18.7 times the 2020 consensus estimate, above its three-year historical average of 17.8 times but below its peak multiple of approximately 22 times during this period. In Dec. 2018, the P/E multiple contracted to roughly 14 times. On an enterprise value-to-EBITDA basis, the stock is trading at 9.5 times the 2020 consensus estimate, slightly above the three-year historical average multiple of 9.3 times.

The consensus one-year target price is $25.60, suggesting the share price may increase nearly 29 per cent over the next 12 months. Individual target prices are as follows in numerical order: $23 (the low on the Street is from David McFadgen, an analyst at Cormark Securities), two at $26, and two at $26.50.

Insider transaction history

Year-to-date, only two insiders have reported transactions in the public market. The most recent trade reported by an insider occurred several months ago.

On May 24, Jennifer Westbury, executive vice-president – sales and customer development, exercised her options, receiving 5,000 shares at a cost per share of $3.63, and on June 7, she sold 5,000 shares at a price per share of $23.50. Net proceeds from the sale, excluding trading fees, totaled over $99,000.

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Prior to that, the last trade reported by an insider in the public market occurred in April, again by Ms. Westbury. On March 19, she exercised her options, receiving 5,000 shares at a cost per share of $3.63, and on April 4, she sold 5,000 shares at a price per share of $22.10. Net proceeds, not including commission charges, exceeded $92,000.

On March 18, Pedro Melo, executive vice-president – information technology, invested over $34,000 in shares of the company. He purchased a total of 1,550 shares at an average price per share of approximately $22.46 for two accounts.

Chart watch

This consumer discretionary stock started off the year with a solid gain. In Jan., the stock price rallied nearly 14 per cent. After that, the share price traded principally between $22 and $25. However, after the company reported disappointing second-quarter financial results in Aug., the share price has retreated sharply – putting the stock in correction territory. Since Aug. 6, the share price has dropped 17 per cent, dipping below $20 in late-Sept.

The stock is nearing oversold territory. The RSI (relative strength index) reading is 36. Generally, a reading at or below 30 reflects an oversold condition.

In terms of key technical resistance and support levels, the share price has an initial ceiling of resistance around $22. After that, there is resistance between $24 and $25, and there is major overhead resistance around $27, close to its record closing high of $26.90 reached on Nov. 7, 2018. Looking at the downside, the stock price is has strong technical support around $18.75, where the share price closed at on Dec. 17, 2018. Should the share price fail to hold at this level, the next support level is around $17.50.

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.

Positive BreakoutsOct. 4 close
AQN-TAlgonquin Power & Utilities Corp $18.55
ACO-X-TAtco Ltd $49.16
APR-UN-TAutomotive Properties REIT $11.20
BCE-TBCE Inc $64.76
BRE-TBridgemarq Real Estate Services $14.90
BEP-UN-TBrookfield Renewable Energy Partners LP $55.35
CAR-UN-TCanadian Apartment Properties REIT $56.22
CFP-TCanfor Corp $15.55
CUF-UN-TCominar Real Estate Investment Trust $13.38
CSU-TConstellation Software Inc $1,333.46
CRR-UN-TCrombie Real Estate Investment Trust $16.15
CRT-UN-TCT Real Estate Investment Trust $15.17
DIR-UN-TDream Industrial REIT $13.36
D-UN-TDream Office Real Estate Investment Trust $29.87
DRM-TDREAM Unlimited Corp $9.79
FTS-TFortis Inc $56.65
GRT-UN-TGranite Real Estate Investment Trust $65.05
HR-UN-TH&R Real Estate Investment Trust $23.38
INE-TInnergex Renewable Energy Inc $15.76
IFC-TIntact Financial Corp $134.96
PDL-TNorth American Palladium Ltd $19.74
NPI-TNorthland Power Inc $26.12
PKI-TParkland Fuel Corp $44.35
PLZ-UN-TPlaza Retail REIT $4.50
TCS-TTECSYS Inc. $15.60
TSGI-TThe Stars Group Inc. $27.83
TSU-TTrisura Group Ltd. $30.53
Negative Breakouts
ALO-TAlio Gold Inc. $0.81
ATZ-TAritzia Inc. $16.06
ATA-TATS Automation Tooling Systems Inc $17.56
BAD-TBadger Daylighting Ltd $39.22
CP-TCanadian Pacific Railway Ltd $281.38
ERO-TEro Copper Corp. $18.22
FAH-U-TFairfax Africa Holdings Corp. $6.44
FEC-TFrontera Energy Corp. $11.60
GMP-TGMP Capital Inc $2.36
GSV-TGold Standard Ventures Corp. $0.97
ISV-TInformation Services Corp. $15.50
PSI-TPason Systems Inc $14.91
PEY-TPeyto Exploration & Development Corp $2.84
SES-TSecure Energy Services Inc $4.41
SCL-TShawCor Ltd $14.39
TMR-TTMAC Resources Inc. $4.41
TOU-TTourmaline Oil Corp $11.72
WTE-TWestshore Terminals Investment Corp $19.03

Source: Bloomberg

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