On today’s TSX Breakouts report, there are 48 stocks on the positive breakouts list (stocks with positive price momentum) and 26 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that is on the cusp of resurfacing on the positive breakouts list with its share price is just 12 cents below its record closing high. The stock has a history of rallying the day after its reports its quarterly earnings results – for 14 of the past 16 quarters. Last quarter, the share price soared over 7 per cent the day after it released its better-than-expected first quarter financial results. The share price is up 32 per cent year-to-date, providing investors with capital appreciation in addition to its attractive 2.7 per cent dividend yield. The security discussed today is TMX Group Ltd. (X-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
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 among others. In terms of its revenue breakdown, in the first quarter 38 per cent of its revenue was from the global solutions, insights and analytics (GSIA) segment, 25 per cent was derived from equity and fixed income trading and clearing, 21 per cent was from capital formation (e.g. new listings on the Toronto Stock Exchange and TSX Venture Exchange) and the balance, 16 per cent, was from derivatives trading and clearing. Approximately 50 per cent of its revenue is recurring. In terms of geographical revenue breakdown, roughly 77 per cent of revenue is from Canada.
Management targets delivering long-term revenue growth in the mid-single digits and earnings per share growth in the double-digits.
The share price has a strong track record of rallying the day after it reports its quarterly financial results, for the 14 of the past 16 quarters. After the market closed on May 9, the company reported better-than-expected first-quarter financial results that sent the share price soaring 7.6 per cent the following trading day on high volume. TMX Group reported adjusted earnings per share of $1.30, ahead of the consensus estimate of $1.22. The company’s debt-to-adjusted EBITDA ratio was 2.3 times, which is within management’s target range of between 2 and 3 times.
On the earning call, chief financial officer John McKenzie commented, “While slower capital markets activity impacted the performance of our equity listings and trading businesses, resulting in a 5 per cent decrease in our revenue compared to Q1 ’18 (first-quarter of 2018), we benefited from strength in our Global Solutions, Insight and Analytics business, our Derivatives business as well as from a disciplined approach to cost management as operating expenses declined by 4 per cent as compared to last year.” He added, “Trayport, part of the GSIA segment, led the way in terms of performance with strong results in its core business. Year-over-year, revenue at Trayport was up 7 per cent compared with the prior year.”
The company will be releasing its second-quarter financial results after the market closes on Wed. Aug. 7 with an earnings call taking place the following day at 8 a.m.(ET). Investors can listen to the conference call by calling 1-888-231-8191. A replay is also available by calling 1-855-859-2056 and entering the passcode 5665327. The Street is expecting the company to report revenue of $200-million, EBITDA (earnings before interest, taxes, depreciation and amortization) of $108-million and earnings per share of $1.22. A key focus to investors will be monitoring continued growth from Treyport, including benefits from the recently announced acquisition of VisoTech, an algorithm and trading application that management characterizes as a tuck-in to Trayport (a new application that will be integrated into the Trayport platform). This acquisition was announced on May 9 and expected to be completed in the second quarter.
At a company presentation held at the Deutsche Bank global financial services conference on May 29, the chief executive officer Lou Eccleston remarked on the long-term opportunity from Trayport. “Well, we bought that business for growth. It's a really strong business but almost a greenfield… in its early stages in terms of growth.”
The Canada Pension Plan Investment Board is a large shareholder, holding just over 9 per cent of the shares outstanding.
Dividend policy
The company pays its shareholders a quarterly dividend of 62 cents per share or $2.48 per share yearly. This equates to an annualized dividend yield of 2.7 per cent. In the first-quarter, the payout ratio stood at 48 per cent. Management targets a payout ratio of between 40 per cent and 50 per cent.
The company has increased its dividend each calendar year since 2016. The most recent dividend hike was announced in Feb. when the quarterly dividend was raised 7 per cent to its present level of 62 cents per share from 58 cents per share.
At the investor day held last Nov., the chief financial officer John McKenzie remarked, “We're also going to focus on continuing to grow dividends in line with the growth of the firm.”
Analysts’ recommendations
There are six analysts actively covering this mid-cap stock with a market capitalization of $5.2-billion, of which five analysts have buy recommendations and one analyst (Paul Holden from CIBC WorldMarkets) has a ‘neutral’ recommendation.
The firms providing recent research coverage on the company are as follows in alphabetical order: BMO Nesbitt Burns, CIBC World Markets, National Bank Securities, RBC Dominion Securities, Scotiabank and TD Securities.
Revised recommendations
In May, four analyst revised their expectations – all higher. Phil Hardie, an analyst with Scotiabank, increased his target price to $105 from $101. National Bank Financial’s Jaeme Gloyn boosted his target price to $103 from $97. Graham Ryding of TD Securities raised his target price by $7 to $105. BMO’s Nik Priebe took his target price up by $10 to $105.
Financial forecasts
The consensus EBITDA estimates are $483-million in 2019, rising 7.7 per cent to $520-million in 2020. The Street is forecasting earnings per share of $5.50 in 2019, rising 10 per cent to $6.05 in 2020.
Earnings forecasts have been edging higher. For instance, three months ago, the consensus EBITDA estimates were $480-million for 2019 and $512-million for 2020, and the earnings per share estimates were $5.42 for 2019 and $5.98 for 2020.
Valuation
According to Bloomberg, the stock is trading at a price-to-earnings multiple of 15.4 times the 2020 consensus estimate, near its peak multiple of just under 16 times. For the past three years, the stock has traded at a forward price-to-earnings multiple principally between 12 times and 16 times with the share price currently trading near the peak of this trading range.
The average one-year target price is $102.67, suggesting there is 10 per cent upside potential in the stock price over the next 12 months. Individual target prices are as follows in numerical order: $97 (the low on the Street is from CIBC’s Mr. Holden), $101, $103, three at $105.
Insider transaction activities
Year-to-date, three insiders have reported trades in the public market.
Most recently, on May 15, chief client officer Shaun McIver exercised his options, receiving 3,588 shares at a cost per share of $51.61, and sold 3,588 shares at a price per share of $93.185. Net proceeds, not including commission charges, totaled just under $150,000. His remaining account balance stood at 2,507 shares. The share price closed at an all-time high that day.
On May 13, Mary Lou Hukezalie, senior vice-president – group head of human resources, exercised her options, receiving 3,000 shares at a cost per share of $55.39 and sold 3,000 shares at a price per share of $90 with 1,350 shares left in her portfolio. Net proceeds, excluding brokerage fees, exceeded $103,000.
On Feb. 19, chief financial officer John McKenzie exercised his options, receiving 6,957 shares at a cost per share of $55.39, and sold 6,957 shares at an average price per share of approximately $84.05, eliminating his portfolio’s position. Net proceeds, not including commission fees, totaled just under $200,000.
Chart watch
Year-to-date, the share price is up 32 per cent, making it the fourth best performing stock in the S&P/TSX composite financial sector index behind Home Capital Group Inc. (HCG-T), Element Fleet Management Corp. (EFN-T), and ECN Capital Corp. (ECN-T). On May 15, the share price closed at a record high. However, the share price is not in overbought territory.
In terms of key resistance and support levels, the share price has a major ceiling of resistance around $100. In terms of downside support, there is initial technical support around $90, close to its 50-day moving average (at $91.30). Failing that, there is support around $85.
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.
Jennifer Dowty