On today’s Breakouts report, there are 54 stocks on the positive breakouts list (stocks with positive price momentum), and 30 stocks are on the negative breakouts list (stocks with negative price momentum).
Featured today is a stock that appeared on the negative breakouts list last week. The stock is currently in oversold territory; however, the average one-year target price suggests there is 80-per-cent upside potential. The stock offers investors a high dividend yield, currently at 6.8 per cent. The stock has a unanimous buy recommendation from seven analysts.
The company highlighted below is Doman Building Materials Group Ltd. (DBM-T).
A brief outline on Doman is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Vancouver-based Doman is a North American distributor of lumber and building materials used in new home construction as well as in home renovations and repairs. Customers include big box retailers Home Depot and Lowes. The company also produces pressure treated wood products.
In terms of its sales breakdown, during the first-quarter 72 per cent of revenue stemmed from construction materials, 23 per cent came from higher margin specialty and allied products, and 5 per cent was from forestry and other products.
There is seasonality in the company’s operations with Doman realizing the highest revenue in the second and third quarters.
Investors may recall the company under its former name CanWel Building Materials Group Ltd. The company changed its name to Doman on May 31.
Chairman and chief executive officer is Amar Doman. Mr. Doman, as the founder and sole shareholder of The Futura Corp., is the largest shareholder of Doman. According to Bloomberg, The Futura Corp. owns 19 per cent of the shares outstanding.
In the second quarter, the company tapped equity markets, raising $86-million through a bought deal equity financing, issuing over 8.6-million shares at a price per share of $10. The company also completed a $325-million 5.25 per cent senior unsecured note offering.
In June, the company announced the acquisition of Texas-based Hixson Lumber Sales at a cost of approximately U.S. $375-million. Hixson has 19 lumber treating plants and five specialty sawmills with locations in Texas, Arkansas, Illinois, Indiana, Missouri, Mississippi, Louisiana and Tennessee. Management expects the acquisition to be immediately accretive to annual earnings and free cash flow. This acquisition change the company’s geographical revenue breakdown, roughly tripling the company’s sales from the U.S.
Investment thesis
- High dividend yield.
- Attractive valuation.
- Attractive supply/demand fundamentals. High demand for housing and low supply of homes available fueled by low mortgage rates as well as remote working with people moving to the suburbs and satellite cities.
- Raging wildfires. In the near-term, this may limit the slide in lumber prices.
- Key risks to consider include: 1) volatility in lumber prices (Doman’s share price typically mirrors lumber futures); 2) declining earnings (the consensus earnings per share estimate is $1.89 in 2021, declining 26 per cent to $1.39 in 2022); 3) U.S. housing starts increased 6.3 per cent month-over month in June; however, U.S. building permits (reflecting future building activity) declined 5 per cent in June; and 4) Canadian housing starts declined 1.5 per cent month-over-month in June.
Quarterly earnings
After the market closed on May 7, the company reported better-than-expected first-quarter financial results.
Revenue was $519.9-million, up 59 per cent year-over-year, surpassing the Street’s forecast of $450-million. Gross margins came in at 17.4 per cent, up from 13.3 per cent reported during the same period last year. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was $60.1-million, exceeding the consensus estimate of $47.9-million. EBITDA margins were 11.6 per cent, up from 5.1 per cent reported last year. Earnings per share came in at 44 cents, topping the Street’s expectations of 30 cents.
Despite the blowout earnings results, the following trading session, the share price followed the price of lumber futures, which were under pressure. On May 10, lumber futures declined 5 per cent, while Doman’s share price fell 2 per cent on high volume with over 1-million shares traded. The three-month historical daily average trading volume is approximately 466,000 shares.
The company will be releasing its second-quarter financial results after the market closes on Aug. 16. The consensus EBITDA and earnings per share estimates are $98-million and 73 cents, respectively. Management will be hosting an earnings call on Aug. 17 at 11 a.m. ET.
Dividend policy
The company pays its shareholders a quarterly dividend of 12 cents per share, or 48 cents per share on a yearly basis. This equates to an annualized dividend yield of 6.8 per cent.
In March, the company also announced a special dividend of 4 cents per share.
Analysts’ recommendations
This small-cap stock with a market capitalization of $607-million is covered by seven analysts. The stock has a unanimous buy recommendation.
The firms providing research coverage on the company are: Canaccord Genuity, CIBC World Markets, Haywood Securities, National Bank Financial, Raymond James, RBC Dominion Securities and Stifel Canada.
Revised recommendations
In July, CIBC’s Hamir Patel reduced his target price to $10 from $13.
In June, four analysts revised their expectations.
- Haywood’s Colin Healey hiked his target price to $13.50 from $12.
- National Bank’s Zachary Evershed increased his target price by $1 to $13.50.
- Raymond James’ Steve Hansen raised his target price to $13.50 from $12.25.
- Stifel’s Anoop Prihar lifted his target price to $14 from $11.80.
Financial forecasts
The Street is forecasting adjusted EBITDA of $279-million in 2021, up from $143-million reported in 2020, but declining 19 per cent to $227-million in 2022. The consensus earnings per share estimates are $1.89 in 2021 and $1.39 in 2022.
Earnings expectations increased in recent months with the Hixson acquisition. For instance, three months ago, the consensus EBITDA estimates were $182-million for 2021 and $142-million for 2022. The earnings per share estimates were $1.25 in 2021 and 78 cents in 2022.
Valuation
The stock is trading at a low valuation relative to historical levels.
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 5 times the 2022 consensus estimate, below its three-year historical average of 8.6 times and at trough levels over this time period.
On a price-to-earnings basis, the stock is trading at a multiple of 5 times the 2021 consensus estimate, below its three-year historical average of 11.6 times and at trough levels over this time period.
The average 12-month target price is $12.64, implying the share price has 80 per cent upside potential over the next year. Individual target prices are: $10 (from CIBC’s Hamir Patel), two at $12, three at $13.50, and $14 (Stifel’s Anoop Prihar).
Insider transaction activity
Year-to-date, only one insider has reported trading activity in the public market.
Between June 17 and 25, chief financial officer Jay Code invested over $25,000 in shares of Doman. He purchased a total of 3,000 shares at an average cost per share of approximately $8.57 for an account in which he has control or direction over, increasing this particular account’s position to 103,043 shares.
Chart watch
The share price has tumbled in recent months, declining 35 per cent from its 2021 peak of $10.715 reached on April 21. Consequently, the stock is now technically oversold with an RSI reading of 29. Generally, an RSI reading at or below 30 reflects an oversold condition.
Year-to-date, the share price is down 8 per cent, making the stock one of the worst performing stocks in the S&P/TSX Small Cap Index’s industrials sector.
In terms of key technical resistance and support levels, the stock has initial overhead resistance around $8, near its 50-day moving average (at $8.07) and its 200-day moving average (at $8.06). After that, there is a ceiling of resistance around $10. Looking at the downside, the stock is hovering around support at $7. Failing that, there is technical support around $6.
This report is not an investment recommendation. 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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Jennifer Dowty