On today’s TSX Breakouts report, there are just seven stocks on the positive breakouts list (stocks with positive price momentum), and 70 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a beaten-down dividend stock that is on the negative breakouts list, Jamieson Wellness Inc. (JWEL-T). Year-to-date, Jamieson’s share price is down 14 per cent, making it the worst performing stock in the S&P/TSX consumer staples (sector) index. The stock is now in deeply oversold territory with a relative strength index (RSI) reading of 23. Generally, an RSI reading at or below 30 reflects an oversold condition.
Historically, dips have represented buying opportunities for this stock. Since mid-2020, the share price has traded largely between $32 and $40, but recently broke below this trading band after management provided a weaker-than-expected earnings outlook for 2023.
The average one-year target price is $43.17, implying a potential total return of 46 per cent, including the 2-per-cent dividend yield.
A brief outline on Jamieson Wellness is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Toronto-based Jamieson Wellness manufactures and distributes natural health products worldwide including vitamins and minerals, supplements, digestive health products, sleep aids, and herbal extracts.
The company’s revenue stems from two business segments, its branded business and its strategic partners business. In 2022, the Jamieson Brands segment represented 80 per cent of total revenue and 91 per cent of adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) with an adjusted EBITDA margin of 25.8 per cent. Through the company’s Strategic Partners segment, Jamieson Wellness co-manufactures products for blue-chip companies. In 2022, this segment represented 20 per cent of total revenue and 7 per cent of adjusted EBITDA with an adjusted EBITDA margin of 9.9 per cent.
Investment thesis
- Market leadership. In terms of sales, Jamieson is the leading brand in VMS in Canada.
- Revenue and earnings growth.
- Dividend growth. The company has delivered double-digit annual dividend growth since 2018.
- Historically low valuation with a steep contraction in its multiples.
- Consumer focus on health: positive health and wellness trends, aging population.
- Key potential risks to consider: 1) decelerating earnings growth forecast in 2023; 2) significant margin contraction forecast in 2023 based on management’s guidance; 3) lack of buyers until the company reports strong quarterly earnings, and 4) the consensus earnings estimates remain well above management’s guidance, which may lead to future earnings misses if analysts’ estimates prove to be too high.
Dividend policy
The company pays its shareholders a quarterly dividend of 17 cents per share, or 68 cents per share on a yearly basis, equating to a current annualized yield of 2.3 per cent.
Management is committed to returning capital to its shareholders. Since the stock was publicly-listed in mid-2017, the company has announced dividend hikes in August of 2018 (13 per cent), August of 2019 (11 per cent), February of 2020 (10 per cent), August of 2020 (14 per cent), August of 2021 (20 per cent) and August of 2022 (13 per cent).
Management targets a payout ratio of between 40 per cent and 50 per cent of adjusted net earnings.
Quarterly earnings results and outlook
After the market closed on Feb. 23, the company reported weaker-than-expected fourth-quarter financial results. However, it was management’s outlook that drove the stock down.
Total revenue increased 48.5 per cent year-over-year to $192.8-million, below the Street’s forecast of $202-million. Revenue from the Jamieson Brands segment grew 56 per cent year-over-year to $156-million with organic growth of 5.6 per cent. Revenue from the Strategic Partners segment increased 22.4 per cent to $36.8-million. The company reported adjusted EBITDA of $48.9-million, just shy of the consensus estimate of $47.9-million and up 44.7 per cent year-over-year. The adjusted EBITDA margin was 25.4 per cent, down from 26 per cent reported last year. Adjusted earnings per share came in at 62 cents, in-line with the consensus estimate and up 26.5 per cent year-over-year.
On the earnings call, chief financial officer Chris Snowdon highlighted management’s 2023 outlook with forecasts that were below the Street’s expectations, “We are introducing our outlook for fiscal 2023 and anticipate the following: net revenue in the range of $670 million to $700 million, reflecting annual growth of 22 per cent to 28 per cent. Adjusted EBITDA in the range of $140 million to $146 million, an increase of 13 per cent to 18 per cent compared to the prior year, and adjusted earnings per fully diluted common share of between $1.62 and $1.72, an increase of between five cents and 11 cents compared to the prior year.”
The following day, the share price tumbled nearly 8 per cent on high volume with over 700,000 shares traded. Since reporting its financial results and its 2023 outlook, the share price has continued to decline on elevated volume.
Analysts’ recommendations
This small-cap consumer staples stock with a market capitalization of $1.25 -billion is well covered by analysts on the Street. After the company released its fourth quarter financial results, seven analysts issued buy recommendations and two analysts (Scotia Capital’s George Doumet and CIBC’s John Zamparo) issued neutral recommendations.
The firms providing recent research coverage on the company are as follows in alphabetical order: ARC Independent Research, BMO Nesbitt Burns, Canaccord Genuity, CIBC World Markets, National Bank Financial, RBC Dominion Securities, Scotia Capital, Stifel Canada, and TD Securities.
Revised recommendations
After the company released its fourth-quarter earnings, five analysts lowered their expectations.
- CIBC Capital Markets’ John Zamparo downgraded the stock to a “neutral” recommendation from an “outperformer” and cut his target price to $37 from $41.
- Canaccord’s Tania Armstrong-Whitworth to $42 from $45.
- National Bank’s Endri Lenoto $44 from $46.25.
- RBC’s Sabahat Khan to $41 from $42.
- Scotiabank’s George Doumet to $38.50 from $39.
Financial forecasts
The Street is forecasting revenue of $686-million in 2023, up 25 per cent from $547-million reported in 2022, with revenue expected to reach $732-million in 2024. The consensus EBITDA estimate is $143-million in 2023, up from $123.8-million reported in 2022 and anticipated to increase to $155-million in 2024. The consensus earnings per share estimate is $1.67 in 2023, up 8 per cent from $1.55 reported in 2022 and expected to increase to $1.94 in 2024.
Earnings expectations have moderated. Four months ago, the Street was forecasting revenue of $696-million in 2023 and $735-million in 2024. The consensus EBITDA forecasts were $152-million for 2023 and $162-million for 2024. The consensus earnings per share estimates were $1.82 for 2023 and $2.05 for 2024.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 11.6 times the 2023 consensus estimate, near its lowest level over the past five years (trough multiple was roughly 11.1 times reached in Feb. 2019). The stock is trading well below its five-year historical average EV/EBITDA multiple of 15.4 times.
The stock is trading at a price-to-earnings multiple of 17.9 times the 2023 consensus estimate, below its five-year historical average multiple of 26 times and approaching its lowest valuation seen over the past five years (trough multiple was approximately 17.7 times in Feb. 2019).
The average one-year target price is $43.17, implying the share price has 44 per cent upside potential over the next year. Individual target prices are: $37, $38.50, $41, two at $42, two at $44, two at $50 (from Stifel’s Justin Keywood and TD’s Derek Lessard).
Chart watch
The stock began trading on the Toronto Stock Exchange in July 2017, which limits technical analysis.
Since mid-2020, the share price has traded largely between $32 and $40, and recently broke below this trading band.
Year-to-date, the share price is down 14 per cent, making it the worst performing stock in the S&P/TSX consumer staples (sector) index. Given the sharp decline, the stock is now deeply oversold with an RSI (relative strength index) reading of 23. Generally, an RSI 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 $32.50. After that, there is overhead resistance between $37 and $38.50. The stock is currently sitting around $30, an area with strong technical support. Failing that, there is support around $28.
ESG Risk Rating
According to Sustainalytics, Jamieson Wellness has an environmental, social and governance (ESG) risk rating of 36 as of July 1, 2022. A rating of between 30 and 40 reflects “high” risk.
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.
This report should not be considered an investment recommendation.
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