On today’s TSX Breakouts report, there are 35 stocks on the positive breakouts list (stocks with positive price momentum), and 10 securities 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. However, analysts remain bullish on this small-cap consumer stock. There are eight buy recommendations with 28 per cent upside anticipated in the share price over the next year. The stock pays its shareholders a quarterly dividend, currently yielding 2.3 per cent, which it has increased annually. The security highlighted today is Sleep Country Canada Holdings Inc. (ZZZ-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Brampton, Ont.-based Sleep Country is a leading mattress retailer in Canada with its two banners, Sleep Country Canada and Dormez-vous? in Quebec.
As of May 11, Sleep Country had 252 corporate-owned stores with 16 distribution centers located across the country. There is seasonality in the company’s sales with the lowest sales, historically, reported during the first quarter and the highest sales reported during the third quarter.
After the market closed on May 7, the company reported first quarter financial results that were relatively in-line with expectations. Revenue came in at $135.3-million, up 8.9 per cent year-over-year but just shy of the consensus estimate of $137.8-million. Same store sales increased 5.1 per cent. Revenue from mattresses increased 8.2 per cent year-over-year, while revenue from accessories, including pillows and bedding, grew by 11.8 per cent year-over-year. Operating EBITDA (earnings before interest, taxes, depreciation and amortization) was $19.3-million, which was in-line with the Street’s expectations of $19.2-million. Reported adjusted earnings per share was 30 cents, matching the Street’s expectations. The share price plunged 5 per cent the following trading day on high volume with over 960,000 shares traded.
On the earnings call, chief executive officer David Friesema reiterated management’s commitment to added between eight and 12 stores annually to its store count. However, in 2018, he expects to exceed this targeted objective, anticipating opening a minimum of 15 stores seeing a growth opportunity in mall locations. During the first quarter, the company opened three new stores in shopping malls. He stated on the earnings call, “We expect four of the store openings planned for 2018 to be mall locations. We began to test the mall store concept at the beginning of 2017 and have seen promising performance over the last year. These stores encourage impulse purchase and offer a unique opportunity to expose our brand to new customers. As of Q1 (first quarter) 2018, we had three mall store locations in our network. Our intention is to end the year with seven mall locations, more than double our current presence. We see this as a promising avenue for future growth.” He went on to say, “We’re not really looking at the mall stores to ever be a huge amount of locations.”
When asked about the potential benefit from its competitor Sears closing its stores during the first quarter, Mr. Frieseman said on the call, “We still look at this as a very big opportunity for us, and to your point, it is a multiyear opportunity. It’s not all going to happen immediately. We would, and again, this is some speculation, but we would think that some of our growth in accessories was from our marketing, but we were marketing to people that would have maybe possibly shopped at Sears. So not only do we look at it as a multiyear opportunity for us and a good one at that, but we also look at it as an opportunity for mattresses but equally for accessories.”
Dividend Policy
Management is firmly committed to returning capital to its shareholders. In May, management announced a 12 per cent increase to its quarterly dividend, raising it to 18.5 cents per share from 16.5 cents. This equates to 74 cents per share on a yearly basis, or an annualized yield of 2.3 per cent. This was the third dividend increase since the company began trading on the Toronto Stock Exchange in July 2015.
On the earnings call, chief financial officer Robert Masson stated, “Our payout ratio is still very modest at sort of mid-50’s on a go forward basis, and so that leaves our share buybacks as an opportunity for us to use up the excess cash that is not used up with the dividend.”
Analysts’ Recommendations
According to Bloomberg, nine analysts issued research reports on this small-cap stock (with a market capitalization of approximately $1.2-billion) after the company reported its first quarter financial results, of which eight analysts issued buy recommendations and one analyst (from TD Securities) had a “hold“ recommendation.
The nine firms providing recent research coverage are as follows in alphabetical order: BMO Capital Markets, CIBC World Markets, GMP Securities, Laurentian Bank Securities, National Bank Financial, Raymond James, RBC Capital Markets, Scotia Capital, and TD Securities.
Revised recommendations
Last month, numerous analysts revised their target prices with mixed changes.
Kenric Tyghe, the analyst from Raymond James, upgraded the stock to an “outperform“ from a “market perform“ recommendation and raised his target price by $1 to $39. Elizabeth Johnston from Laurentian Bank Securities increased his target price to $42 from $41.
Taking an opposing approach, Martin Landry, the analyst from GMP Securities, lowered his target price to $36 from $41.50. Matt Bank from CIBC Capital Markets cut his target price by $3 to $40. Meaghen Annett from TD Securities lowered her target price by $3 to $40. Vishal Shreedhar, the analyst from National Bank Financial, reduced his target price to $39 from $43.
Financial forecasts
The Street is forecasting solid growth for the company with revenue expected to reach $649-million in 2018 and increase 9 per cent to $707-million in 2019. The consensus EBITDA estimates are $111-million in 2018, rising 10 per cent to $122-million in 2019. The consensus earnings per share estimates are $1.82 in 2018, rising over 12 per cent to $2.05 in the following year.
Over recent months, earnings forecasts have modestly increased. For instance, four months ago, the Street was forecasting EBITDA of $109-million in 2018 and $121-million in 2019. The consensus earnings per share estimates were $1.78 for 2018 and $2.01 for 2019.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 10.5 times the 2019 consensus estimate, which is below its historical average of 11.6 times, and well below its peak multiple of nearly 15 times. On a price-to-earnings basis, the stock is trading at 15.7 times the 2019 consensus estimate, below its historical average of 17.2 and below its peak multiple of over 22 times.
The one-year consensus target price is $41.11, suggesting there is 28 per cent upside in the share price over the next 12 months. Target prices range from a low of $36 (at GMP Securities) to a high of $46 (from RBC Securities and Scotia Capital). Individual target prices are as follows in numerical order: $36, two at $39, two at $40, two at $42, and two at $46.
Insider transaction activity
The most recent transactions reported by insiders occurred in March.
Between March 8 and March 16, co-founder and co-chair Stephen Gunn sold a total of 198,200 shares for an account in which he has indirect ownership (Gunnbar Inc.), reducing his portfolio balance to 242,905 shares.
On March 13, Sieg Will, senior vice-president of operations, divested 4,500 shares at a price per share of $36.60, leaving a remaining portfolio balance of 52,797 shares.
On March 6, co-founder and co-chair Christine Magee sold 150,000 shares at a price per share of $35.75 with 293,198 shares remaining in her account.
Chart watch
The stock began trading on the Toronto Stock Exchange on July 15, 2015. Therefore, there is limited pricing history, which limits the usefulness of technical analysis.
The share price has increased 89 per cent from its initial public offering price of $17. Year-to-date, the stock price is down 4 per cent.
The share price has been in a downtrend since mid-2017, making lower highs. That being said, the share price has strong downside support between $31 and $32. The share price has retested and held above $31 on several occasions, namely last week, in March, in February, in November 2017 and in September 2017. Consequently, $31 has proven to be a very strong level of support. Should the share price break below this level, the next level of support is around $30.
Looking at key resistance levels, the share price has an initial ceiling of resistance around $35. After that, there is resistance around $37, and then around $40.
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