Monday’s TSX breakouts: An oversold stock with consistent double-digit annual dividend growth

On today’s TSX Breakouts report, there are just two stocks on the positive breakouts list (stocks with positive price momentum), and 169 stocks are on the negative breakouts list (stocks with negative price momentum).

Given the sharp correction in many stocks, it may soon be a good time for investors to put some beaten-down stocks on their radar screens. Discussed today is one such stock that appears on the negative breakouts list, Jamieson Wellness Inc. (JWEL-T).

The share price of this consumer staples stock has declined 10 per cent month-to-date and is down nearly 18 per cent year-to-date. The stock is now in oversold territory with a relative strength index (RSI) reading of 28. Generally, an RSI reading at or below 30 reflects an oversold condition.

Despite the uncertain economic outlook, earnings expectations have increased for this stock. In August, management raised its guidance. In 2022, management now anticipates adjusted earnings per share will grow by between 15 per cent and 21 per cent year-over-year. The average one-year target price has remained relatively steady at $45.42, implying the stock may realize a potential total return of just under 40 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 including vitamins and minerals, supplements, digestive health products, sleep aids and herbal extracts. The company’s products are sold in over 45 regions globally.

The company’s revenue stems from two business segments, its branded business and its strategic partners business.

For the first six months of 2022, the Jamieson Brands segment represented 79 per cent of total revenue and 93 per cent of adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) with an adjusted EBITDA margin of 24.6 per cent.

The Jamieson brand is the best-selling brand by sales in Canada within the VMS (vitamins, minerals, and supplements) market. Other brands include Progressive, Precision, Iron Vegan and Smart Solutions. Through the company’s Strategic Partners segment, Jamieson Wellness co-manufactures products for blue-chip companies.

In the first six months of 2022, this segment represented 21 per cent of total revenue and 7 per cent of adjusted EBITDA with an adjusted EBITDA margin of 7.3 per cent.

Investment thesis

• Market leadership. In terms of sales, Jamieson is the leading brand in VMS in Canada.
• Revenue and earnings growth.
• Inflation protection with management able to pass higher costs through to the consumer. On the second-quarter earnings call, chief financial officer Chris Snowden said, “We lock the vast majority of our input costs at the beginning of the year…We are not seeing any material increases going into 2023 at this point in time … The one area where we’ve continued to experience inflation is fuel and transportation. We still believe that that’s impacted by geopolitical events, and it’s not necessarily permanent in nature. So we will continue to cover those costs with our efficiencies as we drive forward in fiscal 2022 and decide at some point in the future when and if we need to pass those costs on to the consumer.”
• Dividend growth. The company has delivered double-digit annual dividend growth since 2018.
• Attractive valuation.
• Consumer focus on health: positive health and wellness trends, aging population.
• Key potential risk to consider: further multiple compression with stock markets under pressure.

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 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 Aug. 2018 (13 per cent increase), Aug. 2019 (11-per-cent increase), Feb. 2020 (10-per-cent increase), Aug. 2020 (14-per-cent increase), Aug. 2021 (20-per-cent increase) and Aug. 2022 (13-per-cent increase).

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 Aug. 4, the company reported solid second-quarter financial results.

Total revenue increased 1 per cent year-over-year to $112-million, just shy of the Street’s forecast of $114-million driven by growth from its branded segment. Revenue from the Jamieson Brands segment grew 6.5 per cent year-over-year to $87.7-million. This strength offset weakness from its Strategic Partners segment. Revenue from the Strategic Partners segment declined 13.8 per cent to $24.3-million.

The company reported adjusted EBITDA of $24.4-million, slightly above the consensus estimate of $23.9-million and up 9.5 per cent year-over-year. The adjusted EBITDA margin was 21.8 per cent, up from 20.2 per cent reported last year. Adjusted earnings per share came in at 32 cents, two cents ahead of the consensus estimate, and up 10 per cent year-over-year.

Management raised its guidance for 2022 to reflect its recent acquisition of Nutrawise Health & Beauty Corp., owner of the youtheory brand.

In 2022, management expects revenue to be between $550-million and $565-million, up from its prior guidance of between $474-million and $491-million, and up from $451-million reported in 2021. Adjusted EBITDA is now anticipated to come in at between $120-million and $125-million, up from its previous guidance of between $108-million and $112-million, and up from $100-million reported in 2021. Adjusted earnings per share is expected to be between $1.52 and $1.60, up from its previous outlook of between $1.42 and $1.48, and up from $1.32 reported in 2021.

The following day, the share price rallied 2 per cent on high volume with approximately 209,000 shares traded, above the three-month historical daily average trading volume of approximately 103,000 shares.

Analysts’ recommendations

This small-cap consumer staples stock with a market capitalization of nearly $1.4-billion is actively covered by 10 analysts, of which nine analysts have buy recommendations and one analyst (Scotiabank’s George Doumet) has a ‘sector perform’ recommendation.

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, Eight Capital, National Bank Financial, RBC Dominion Securities, Scotiabank, Stifel Canada and TD Securities.

Revised recommendations

In August, five analysts revised their expectations with minor changes.

• ARC’s Mark Rosen raised his target price by $1 to $44.
• Canaccord’s Tania Armstrong-Whitworth’s target increased to $46 from $45.
• CIBC Capital Markets’ John Zamparo bumped his target price to $46 from $45.
• RBC’s Sabahat Khan lowered his target price to $45 from $46.
• TD’s Derek Lessard upgraded his recommendation to “action list buy” from a “buy” but maintained his target price of $50.

Financial forecasts

Strong growth is forecast for the company.

The Street is forecasting revenue of $556-million in 2022, up 23 per cent from $451-million reported in 2021, with revenue expected to reach $689-million in 2023. The consensus EBITDA estimate is $123-million in 2022, up from $100-million reported in 2021, and anticipated to increase to $150-million in 2023. The consensus earnings per share estimate is $1.56 in 2022, up 18 per cent from $1.32 reported in 2021, and expected to increase to $1.87 in 2023.

Earnings expectations have been rising. Four months ago, the Street was forecasting revenue of $487-million in 2022 and $515-million in 2023. The consensus EBITDA forecasts were $111-million for 2022 and $120-million for 2023. The consensus earnings per share estimates were $1.48 for 2022 and $1.63 for 2023.

Valuation

According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 10 times the 2023 consensus estimate, near its lowest level over the past five years (trough multiple was roughly 9.8 times reached in Feb. 2019). The stock is trading well below its five-year historical average EV/EBITDA multiple of 13.9 times.

The stock is trading at a price-to-earnings multiple of 17.7 times the 2023 consensus estimate, below its five-year historical average multiple of 23 times and approaching its lowest level seen over the past five years (trough multiple was approximately 15 times in Feb. 2019).

The average one-year target price is $45.42, implying the share price has 37 per cent upside potential over the next year. Individual target prices are: $39 (from Scotiabank’s George Doumet), $42, $44, $45, three at $46, $46.25, 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 somewhat limits technical analysis.

Year-to-date, the share price is down nearly 18 per cent, underperforming the S&P/TSX consumer staples (sector) index, which is up 0.5 per cent.

In terms of key technical resistance and support levels, the share price has a major ceiling of resistance around $38. The stock may soon find downside support around $32. 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.

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