On today’s Breakouts report, there are 55 stocks on the positive breakouts list (stocks with positive price momentum), and 11 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that appears on the positive breakouts list - Park Lawn Corp. (PLC-T).
The stock has a unanimous buy recommendation from nine analysts that have issued recent research on the company. The average one-year target price implies the share price may rally nearly 17 per cent over the next year to a new record high. In addition to potential price gains, PLC pays its shareholders a stable monthly dividend with a current annualized yield of 1.5 per cent.
For the past four months, the share price has been stuck in a range, trading largely between $27 and $30. If the share price can break above $31 (near its record closing high), this may lift the stock price into the mid-$30s.
Potential catalysts that may boost the share price out of its trading band include a large acquisition announcement and improving profitability - watch for a rising EBITDA (earnings before interest, taxes, depreciation and amortization) margin.
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
Toronto-based Park Lawn operates businesses including cemeteries, funeral homes, and crematoriums in five Canadian provinces (Ontario, British Columbia, Manitoba, Quebec, and Saskatchewan) and 15 U.S. states.
Management’s core objectives are organic growth, acquisition growth, and margin expansion. Management has delivered strong top line growth over the years, fueled by acquisitions. The company reported revenue of $244-million in 2019, $161-million in 2018 and $87-million in 2017.
A common push back by investors is the frequent issuance of shares by the company used to finance acquisitions. Between Dec. 2013 and June 2020, the company raised over $500-million.
In recent months, the company completed two small purchases. In November, PLC bought U.S.-based J.F. Floyd Mortuary, Crematory and Cemeteries, which has nine cemeteries, four funeral homes, and one crematory. In October, PLC acquired B.C.-based Bowers Funeral Services Ltd., which has three funeral homes.
Investment thesis highlights
- Growth. Management is targeting adjusted EBITDA of $100-million by 2022.
- Rising profitability. Management targets an EBITDA margin of 26 per cent.
- Acquisition opportunities. Highly-fragmented industry.
- Healthy balance sheet to fund its growth. Debt-to-adjusted EBITDA ratio of 2.69 times.
- High barriers to entry (given zoning laws and permitting requirements).
- Aging population.
Quarterly earnings results
After the market closed on Nov. 12, the company reported its third-quarter financial results.
Revenue came in at $83.8-million, up 26 per cent year-over-year, ahead of the consensus estimate of $82.7-million. Organic, or internal, revenue growth was 11 per cent. Adjusted EBITDA was $19.1-million, up 26.5 per cent year-over-year, slightly below the Street’s expectations of $19.5-million. The adjusted EBITDA margin was relatively unchanged from a year ago, coming in at 22.8 per cent compared to 22.7 per cent reported last year, and below the Street’s expectations of 23.6 per cent. Adjusted earnings per share came in at 26 cents, matching the Street’s forecast. The share price declined 4 per cent the following day on high volume with over 460,000 shares traded.
On the earnings call, chief executive officer Brad Green remarked on future acquisition opportunities in this fragmented industry, “We’re doing our best to get back to a normalized environment in the acquisition setting … I can tell you for a fact that we’re active in that and I would expect to continue doing acquisitions in the next couple of quarters.”
The company pays its shareholders a monthly dividend of 3.8 cents per share, or 45.6 cents per share yearly. This equates to an annualized dividend yield of 1.5 per cent. The dividend has been maintained at this level since 2011.
The dividend appears sustainable with an adjusted cash flow payout ratio of 23 per cent last quarter and 25 per cent for the first nine months of 2020.
This small-cap consumer discretionary stock with a market capitalization of $864-million is well covered by the Street. After the company released its third-quarter financial results, nine analysts issued research reports on the company – all with buy recommendations on the stock.
The firms providing recent research coverage on the company are: Acumen Capital, CIBC World Markets, Cormark Securities, National Bank Financial, Paradigm Capital, RBC Dominion Securities, Scotia Capital, Stifel Canada and TD Securities.
In November, six analysts revised their target prices modestly higher.
- Cormark Securities’ Kyle McPhee to $35 from $33.50.
- Paradigm Capital’s Corey Hammill by $2.50 to $34.50.
- Scotia Capital’s George Doumet by $1 to $33.
- Stifel Canada’s Maggie MacDougall to $35.50 from $34.50.
- National Bank Financial’s Zachary Evershed up by 50 cents to $35.50.
- Acumen Capital’s Jim Byrne to $35 from $34.
The Street is expecting revenue to reach $327-million in 2020, up from $244-million reported in 2019, and increase to $360-million in 2021 and $380-million in 2022. The consensus adjusted EBITDA estimates are $75-million in 2020, increasing to $86-million in 2021 and $93-million in 2022. The Street is forecasting earnings per share of $1.06 in 2020, rising to $1.23 in 2021 and $1.26 in 2022.
Current earnings expectations are not far off from pre-COVID levels. For instance, in Feb., the consensus revenue estimates were $312-million for 2020 and $328-million for 2021. Adjusted EBITDA estimates were $77-million for 2020 and $87-million for 2021. Earnings per share estimates were $1.10 for 2020 and $1.29 for 2021.
According to Bloomberg, shares of Park Lawn are trading at an enterprise value-to-EBITDA multiple of 12.3 times the 2021 consensus estimate, relatively in-line with its three-year historical average of 11.9 times. The stock is trading at a price-to-earnings multiple of 24.2 times the 2021 consensus estimate, above its three-year historical average of 22.3 times.
The average one-year target price is $34.72, suggesting the stock price has nearly 17 per cent upside potential over the next 12 months. Target prices are quite concentrated, ranging from a low of $33 to a high of $36. Individual target prices are: two at $33, $34.50, three at $35, two at $35.50, and $36.
Insider transaction activity
Over the past four months, two company leaders have traded shares in the public market – relatively small buys.
On Nov. 25, director Deborah Robinson purchased 500 shares at a cost per share of $27.60. In addition, between Aug. 20 and Sept. 11, Ms. Robinson acquired a total of 2,300 shares at an average price per share of approximately $27.47.
On Nov. 16, chief financial officer Dan Millett bought 290 shares at a price per share of $28.21. On Sept. 16, Mr. Millett acquired 1,090 shares at a price per share of $27.758.
Earlier in the year, on Feb. 13, the share price closed at a record high of $31.33. As coronavirus cases climbed and equity markets tumbled, the share price fell to the $16 level at the beginning of April. Thereafter, the share price began to recover; however, this rebound stalled in August. For the past four months, the share price has been trading sideways, largely between $27 and $30. The share price is currently at the upper end of this trading band.
Year-to-date, the share price is relatively flat, up less than 2 per cent.
Looking at key resistance and support levels, the stock price is sitting just below major overhead resistance between $30 and $31, close to its record closing high (of $31.33). Should the share price break above this ceiling of resistance, the share price may rally to the mid-$30. Looking at the downside, there is technical support around $27. Failing that, there is support around $25, near its 200-day moving average (at $24.72).
Liquidity can be low for this small-cap stock, which can increase volatility in the share price. The three-month historical daily average trading volume is approximately 120,000 shares.
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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