On today’s TSX Breakouts report, there are 32 stocks on the positive breakouts list (stocks with positive price momentum), of which 12 are energy stocks, and 30 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that recently appeared on the positive breakouts list. On Aug. 14, the share price closed at an all-time high of $30.48. The stock appears fairly valued, trading at a slight premium to its five-year historical forward price-to-earnings multiple. As a result, the positive price momentum has paused. Any price weakness may represent a buying opportunity for long-term investors.
For the past seven quarters, the company has reported better-than-expected financial results. In July, management announced its second dividend increase in 2023. The share price is up over 10 per cent year-to-date, providing investors with capital appreciation in addition to its dependable dividend. The security discussed today is TMX Group Ltd. (X-T).
A brief outline on TMX Group is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Toronto-based TMX Group is an exchange operator, providing listing and trading markets as well as clearing facilities through its operation of leading exchange groups such as the Toronto Stock Exchange, TSX Venture Exchange and the Montreal Exchange amongst others.
In terms of its revenue breakdown, in the first half of 2023, 34 per cent of its revenue was from the global solutions, insights and analytics (GSIA) segment, 20 per cent was derived from equity and fixed income trading and clearing, 24 per cent was from capital formation (including new listings on the Toronto Stock Exchange and TSX Venture Exchange) and 22 per cent was from derivatives trading and clearing.
Management targets delivering long-term revenue growth of 5 per cent or higher and adjusted earnings per share growth in the double-digits.
Quarterly earnings and outlook
For the past seven quarters, the company has reported better-than-expected financial results.
After the market closed on July 27, the company reported better-than-expected second-quarter financial results that lifted the share price 2 per cent the following trading day. TMX Group reported record revenue of $306 million, up 7 per cent year-over-year, despite weakness in trading volumes and listing activity. Adjusted earnings per share came in at 38 cents, three cents ahead of the consensus estimate and up 6 per cent year-over-year. At quarter-end, the company’s debt-to-adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) ratio stood at 1.9 times, which is within management’s target range of between 1.5 and 2.5 times.
On the earning call, chief financial officer David Arnold commented, “Revenue increased $7.1 million from the first to second quarter, primarily reflecting higher TSX Trust revenue driven by an increase in net interest income and higher additional listing fees due to an 82 per cent increase in the number of transactions billed at the maximum fee as well as higher Trayport revenue on the back of an increase in subscribers and a number of long-term deal renewals. This was somewhat offset by lower equities and fixed income trading, driven by a 19 per cent decline in the overall volumes of securities traded on our equities marketplaces, as well as lower Derivatives Trading and Clearing revenue, reflecting a 10 per cent decrease in volumes for the Montreal Exchange and CDCC.”
Chief executive officer John McKenzie was confident about a future pickup in listings activity where the company has experienced declining revenue, saying: “We are now, call it, 12 months into a tighter period. You will have balance sheet rebuilding needs in companies. You have companies that have been on the sidelines in terms of expansion opportunities, companies that raised money in 2021 that are going to need to re-raise. Any period we’ve had in the past [with] this kind of pullback in capital raising activity, 12 to 24 months later, you start to see a very strong resurgence. So that’s exactly what we’re actually anticipating regardless of whether or not we see a reduction in the rate regime in the near-term. And we certainly have both anecdotally from other bankers that we talk to, but from our own folks that are working on the pipeline, we know there are substantial companies that are ready to access the capital markets when they see those conditions normalize. So it’s actually less about the rates coming down and more around confidence and valuation on the equity markets, that’s going to support the capital raising piece, but a lower rate regime does often help with valuations on the equity market.”
Dividend policy
The company pays its shareholders a quarterly dividend of 18 cents per share or 72 cents per share yearly. This equates to a current annualized yield of 2.4 per cent.
The company has increased its dividend each calendar year since 2016. Year-to-date, two dividend increases have been announced - one in February and another in July.
Based on adjusted second-quarter earnings per share, the payout ratio stands at 47 per cent. Management targets a payout ratio of between 40 per cent and 50 per cent.
Analysts’ recommendations
According to Bloomberg, the stock has a unanimous neutral recommendation by eight analysts.
The firms providing recent research coverage on the company are: Barclays, BMO Nesbitt Burns, CIBC World Markets, Deutsche Bank, National Bank Financial, RBC Dominion Securities, Scotiabank and TD Securities.
Revised recommendations
After the company released its second-quarter financial result, five analysts raised their target prices.
- Barclays’ Ben Budish to $33 from $30.
- Deutsche Bank’s Brian Bedell to $30 from $29.
- National Bank’s Jaeme Gloyn to $34 from $33.
- Scotiabank’s Phil Hardie to $33 from $32.
- TD’s Graham Ryding to $31 from $30.
Financial forecasts
The consensus EBITDA estimates are $674-million in 2023 and $720 million in 2024. The Street is forecasting earnings per share of $1.49 in 2023, rising 8 per cent to $1.61 in 2024.
Earnings forecasts have been edging higher. Four months ago, the consensus EBITDA estimates were $664-million in 2023 and $704-million in 2024, and the earnings per share estimates were $1.47 in 2023 and $1.58 in 2024.
Valuation
According to Bloomberg, the stock is trading at a price-to-earnings multiple of 18.6 times the 2024 consensus estimate, just above its five-year historical average multiple of 17.8 times.
The average one-year target price is $32.63, suggesting there is 9 per cent upside potential in the stock price over the next 12 months. Individual target prices are: $30 (from Deutsche Bank’s Brian Bedell), $31, $32, two at $33 and three at $34.
Insider transaction activities
Year-to-date, there has not been any trading activity in the public market reported by insiders.
Chart watch
Year-to-date, the share price is up nearly 11 per cent. On Aug. 14, the share price closed at $30.48 - an all-time high.
In terms of key resistance and support levels, the share price has a major ceiling of resistance around $30.50. After that, there is overhead resistance around $32. In terms of downside support, there is initial technical support around $28, close to its 200-day moving average (at $28.23). Failing that, there is strong support around $25.
ESG Risk Rating
According to risk provider Sustainalytics, TMX Group has an environmental, social and governance (ESG) risk score of 20.2 as of Sept. 2, 2023. A risk score of between 20 and 30 reflects a ‘medium risk’ rating.
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.
Jennifer Dowty