On today’s Breakouts report, there are 16 stocks on the positive breakouts list (stocks with positive price momentum), and 47 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that surfaced on the positive breakouts list - CCL Industries Inc. (CCL.B-T). The stock has 10 buy recommendations and one neutral recommendation. The average target price implies a potential price return of 22 per cent over the next 12 months.
Over the past month, the share price has rallied 5 per cent but on relatively low volume. Consequently, this positive price momentum may be short-lived. That being said, the stock is trading at a discount relative to historical levels and the company has been actively repurchasing shares, providing some downside protection for the share price.
If the share price were to fall back below $60, this may represent a buying opportunity for long-term investors. Since 2017, the share price has traded in a range largely between $50 and $70.
A brief outline on CCL is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Toronto-based CCL Industries is an industry leader. It is the largest label company in the world with over 200 facilities and operations in 43 countries. CCL provides services to large multinational customers through its four reporting business segments: CCL, Avery, Checkpoint, and Innovia. In 2021, the CCL segment accounted for 61 per cent of total revenue, Avery represented 12.4 per cent of total revenue, Checkpoint was 13.5 per cent of total revenue, and roughly 13.1 per cent was from Innovia.
Investment thesis
- Industry leader.
- Able to pass on rising costs. As stated in the MD&A (Management’s Discussion and Analysis), “Price increases were implemented across all the company’s segments to offset inflationary tensions in almost all expense categories, with further increases to come.”
- Healthy balance sheet with a leverage ratio of 1.24 times.
- Steady but modest earnings growth over the years. Adjusted basic earnings per share grew by 1.5 per cent in 2018, 2.2 per cent in 2019, 10.4 per cent in 2020 and 9.4 per cent in 2021.
- Reasonable valuation. Trading at a discount relative to its historical average.
- Actively repurchasing shares. In the first-quarter, repurchased over 1.7-million shares at a cost of approximately $100-million.
- From a technical perspective, stock could fall back into the $50′s in the near-term.
- Key potential risks: 1) supply chain challenges; 2) lockdowns in China; and 3) risk of a recession.
Quarterly earnings
After the market closed on May 11, the company reported better-than-expected first-quarter financial results. Sales increased 12.8 per cent year-over-year to $1.52-billion, ahead of the Street’s expectations of $1.475-billion. Organic growth was 10.8 per cent, driven by price increases. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was $301.5-million, surpassing the consensus estimate of $284-million, and up 5.3 per cent year-over-year. Adjusted earnings per share came in at 84 cents, well above the consensus estimate of 75 cents per share. The company has a healthy balance sheet with a net debt-to-adjusted EBITDA ratio of 1.24 times. In the first-quarter, the company repurchased 1,733,419 shares. The share price rallied 5 per cent the next day.
On the earnings call the president and chief executive officer Geoff Martin commented on a major headwind for the company, “The biggest concern we have for the coming quarters is the situation in China with lockdowns. It’s affecting Checkpoint and CCL Design, which have very big operations in the country. Q2 [second quarter] impact, frankly, depends on the duration, how long the government keeps things locked down there for.”
Dividend policy
Over the years, the company has steadily increased its dividend. Most recently, in Feb., the company announced a 14 per cent dividend hike, raising its quarterly dividend to 24 cents per share (96 cents per share yearly) from 21 cents per share. The current annualized dividend yield is 1.5 per cent.
Analysts’ recommendations
There are 11 analysts providing coverage on the company, of which 10 analysts have buy-equivalent recommendations and one analyst (KeyBanc Capital’s Adam Josephson) has a “sector weight” recommendation.
The firms providing research coverage on the company are as follows in alphabetical order: ARC Independent Research, BMO Nesbitt Burns, CIBC World Markets, Cormark Securities, KeyBanc Capital Markets, National Bank Financial, PI Financial, Raymond James, RBC Dominion Securities, Scotia Capital and TD Securities.
Revised recommendations
Since the beginning of May, four analysts have cut their target prices.
- BMO’s Stephen MacLeod by $1 to $80.
- PI Financial’s Ben Jekic to $79 from $80.
- RBC’s Walter Spracklin to $74 from $80.
- Scotiabank’s Mark Neville to $78 from $79.
Financial forecasts
The consensus EBITDA estimates are $1.26-billion for 2022 and $1.33-billion for 2023. The consensus earnings per share estimates are $3.53 for 2022, rising to $3.76 in 2023.
Earnings estimates have inched higher in recent months. Four months ago, the consensus EBITDA estimates were $1.24-billion for 2022 and $1.29-billion for 2023. The consensus earnings per share estimates were $3.44 for 2022 and $3.66 for the following year.
Valuation
According to Bloomberg, on an enterprise value-to-EBITDA basis, the stock is trading at a multiple of 9.5 times the 2023 consensus estimate, below its five-year historical average of 10.6 times.
On a price-to-earnings (P/E) basis, the stock is trading at a multiple of 16.8 times the 2023 consensus estimate, below its five-year historical average P/E multiple of 18.4 times.
The average 12-month target price is $77.10, suggesting the stock has 22 per cent upside potential over the next year. Individual target prices provided by 10 analysts are as follows in numerical order: $70 (from TD’s Daryl Young), $71, $74, $78, four at $79, $80 and $82 (from Cormark’s David McFadgen).
Insider transaction activity
On June 7, Sebastian Rubino sold 5,483 shares at an average price per share of approximately $60.29, trimming this particular account’s position to 71,292 shares. Proceeds from the sale exceeded $330,000, not including trading fees.
On May 18, Günther Birkner, president of Innovia Films (an operating segment of CCL) sold 10,000 shares at a price per share of $62.0265, leaving 87,615 shares in this particular account. Proceeds from the sale, not including commission charges, exceeded $620,000.
Chart watch
Year-to-date, the share price is down 6.8 per cent, outperforming the S&P/TSX Composite Index and S&P/TSX Materials Index, which are both down 10.4 per cent. However, the share price has been rebounding. Over the past month, the stock price has rallied 5.1 per cent, bouncing off its 2022 low of $54.13, which the stock closed at on May 11.
That being said, looking at a longer-term chart, the share price appears to be locked in a trading range. Since the beginning of 2017, the share price has been trading largely between $50 and $70 (excluding the drop in early 2020 when news of COVID gripped the markets).
Looking at key support and resistance levels, there is strong technical support around $50. However, the share price is approaching initial resistance around $70, and after that there is major resistance around $75.
Given the volatile market we are in, investors may wish to wait for a better entry point in the $50′s.
ESG Risk Rating
According to risk provider Sustainalytics, the company has an ESG risk score of 18 as of June 23, 2022. A risk score between 10 and 20 reflects a ‘low risk’ rating.
This 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