On today’s Breakouts report, there are 78 stocks on the positive breakouts list (stocks with positive price momentum), and 30 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that is on the negative breakouts list - BRP Inc. (DOO-T).
Just last month, the stock was on the positive breakouts list with the share price closing at a record high on Oct. 15. However, since Pfizer Inc. (PFE-N) released positive clinical trial data for its coronavirus vaccine on Mon. Nov. 9, BRP’s share price has tumbled 16 per cent. From a technical analysis perspective, the stock is oversold.
The recent pullback in the share price reflects concerns by investors that once there is a coronavirus vaccine, the heightened demand for BRP’s products will drop off as demand was pulled forward.
However, purchases of homes in cottage country have been booming given the low interest rate environment, the ability to work remotely, and travel restrictions. Consequently, demand for BRP’s products may remain strong into next year and pullbacks in the share price may represent buying opportunities.
The average one-year target price is $78.52, implying the stock has 26 per cent upside potential over the next 12 months.
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Quebec-based BRP manufactures and markets powersports vehicles and propulsion systems. Products manufactured include roadsters, all-terrain vehicles, snowmobiles, and personal watercrafts with brand names such as Can-Am, Lynx, Ski-Doo, and Sea-Doo.
The company has operations worldwide, in Canada, the United States, Mexico, Australia and Finland. There is a high degree of seasonality in the business with the first half of the fiscal year (which ends on Jan. 31) historically the weakest period, and the second half the strongest period.
In terms of geographical revenue breakdown, in fiscal 2020, 55 per cent of revenue was from the U.S., 16 per cent was from Canada, and the balance, 29 per cent, was from international regions. As such, there are foreign exchange currency exposures to consider. The company reports its financial results in Canadian dollars. Top-line growth is evident across its geographies. In fiscal 2020, revenue from the U.S., Canada and international regions increased 18 per cent year-over-year, 13 per cent year-over-year and 13 per cent year-over-year, respectfully.
The stock is dual-listed, trading on the Toronto Stock Exchange under the ticker DOO, and on the Nasdaq under the ticker DOOO.
Industry conditions
Industry conditions are positive.
In late October, Polaris Inc. (PII-N), an industry peer, reported strong third-quarter earnings results. Adjusted earnings per share came in at $2.85, well above the Street’s forecast of $2.20.
On the earnings call, Polaris Chief Executive Officer Scott Wine said, “Between our strong year-to-date results and improving outlook for the fourth quarter, we are raising our full year earnings per share guidance, which now sits above our original targets for 2020. Third quarter North American retail sales were up a healthy 15 per cent, but our internal analysis suggests that it could have been double that if we had been able to accelerate production faster.”
Investment thesis highlights
- Strong consumer demand. COVID-19 has increased demand for stay-at-home, socially distant activities. On the second quarter earnings call, President and Chief Executive Officer José Boisjoli highlighted the strong demand for BRP’s watercrafts saying, “Inventory was very low in June and July, ending the season with almost no Sea-Doo available due to the popularity of our brand. Given the strong retail trend, we expect it could take several quarters before we get back to [an] optimal inventory level.”
- Attractive valuation. The stock is trading relatively in-line with historical levels.
- Seasonally strong period. Earnings are weighted to the second half of the company’s fiscal year.
- Technically oversold.
Quarterly earnings
Before the market opened on Aug. 27, the company reported significantly better-than-expected second-quarter fiscal 2021 financial results driven by strong demand for its products. Normalized EBITDA (earnings before interest, taxes, depreciation and amortization) came in at $214-million, surpassing the consensus estimate of $75-million. Normalized EPS (earnings per share) was $1.14, above the Street’s forecast for a loss of 19 cents.
For fiscal 2021, management is expecting earnings per share to be between $3.65 and $3.95, compared to $3.83 reported in fiscal 2020. Normalized EBITDA is expected to range from flat, or unchanged, year-over-year to up 5 per cent year-over-year. On the earnings call, Chief Financial Officer Sébastien Martel said, “We expect a solid second half of the year and expect the momentum to continue well into next year.”
The share price rallied nearly 4 per cent that day on high volume with over 1.3-million shares traded, well above its three month historical daily average trading volume of approximately 300,000 shares.
The company will be releasing its third-quarter fiscal 2021 financial results before the market opens on Nov. 25 and is hosting an earnings call at 9 a.m. (ET). The Street is expecting the company to report EBITDA of $266-million and earnings per share of $1.39.
Returning capital to shareholders
In June 2017, management announced the initiation of a quarterly dividend. Since then, the company announced two dividend increases, one in March 2018 and the other in March 2019. However, in March 2020, management announced the suspension of its dividend in order to preserve capital given heightened uncertainties resulting from the coronavirus pandemic.
Prior to being suspending, the quarterly dividend was 10 cents per share or 40 cents per share yearly.
During the three month period ending July 31, the company did not repurchase any shares. However, for the three month period ending April 30, the company repurchased 1,005,300 shares.
Analysts’ recommendations
There are 14 firms providing research coverage on this mid-cap consumer discretionary stock, of which eight analysts have buy recommendations, five analysts have neutral recommendations and one analyst (Jaime Katz, at Morningstar) has a “sell” recommendation.
The firms providing research coverage on BRP are: Baird, BMO Nesbitt Burns, Canaccord Genuity, CIBC World Markets, Desjardins Securities, Edgewater Research, ISS-EVA, Morningstar, National Bank Financial, Northcoast Research, RBC Dominion Securities, Stifel Canada, TD Securities and Wolfe Research.
Revised recommendations
Earlier this month, CIBC’s Mark Petrie tweaked his target price to $78 from $77 and maintained his “neutral” recommendation.
Financial forecasts
The company’s fiscal year-end is Jan. 31.
The Street is forecasting EBITDA of $837-million in fiscal 2021, up from $804-million reported in fiscal 2020, and anticipated to increase over 13 per cent to $950-million in fiscal 2022. The consensus earnings per share estimates are $3.96 in fiscal 2021 and $4.58 in fiscal 2022.
Earnings estimates bottomed in the spring but have been steadily recovering and are now nearly back to pre-COVID levels.
To illustrate, on Feb. 18, the Street was forecasting EBITDA of $912-million for fiscal 2021 and $954-million in fiscal 2022. The consensus earnings per share estimates were $4.48 for fiscal 2021 and $4.80 for fiscal 2022.
Just four months ago, the Street was forecasting EBITDA of $572-million for fiscal 2021 and $778-million in fiscal 2022. The consensus earnings per share estimates were $1.68 for fiscal 2021 and $3.14 for fiscal 2022.
Valuation
According to Bloomberg, the stock is trading at a price-to-earnings multiple of 13.6 times the fiscal 2022 consensus estimate, just below the three-year historical average P/E multiple of 13.6 times. On an enterprise value-to-EBITDA basis, the stock is trading at 7.7 times the fiscal 2022 consensus estimate, which is below its three-year historical average multiple of 8.4 times.
Industry peer Polaris is trading at a forward P/E multiple of 12 times and EV/EBITDA multiple of 7.3 times.
The average one-year target price is $78.52, implying the stock has 26 per cent upside potential over the next 12 months. Individual target prices provided by 11 firms are as follows in numerical order: $52.25 (from Jaime Katz at Morningstar), $70, three at $78, $80, $82, $84, two at $85, and $88 (from Derek Dley at Canaccord Genuity).
Insider transactions
Quarter-to-date, one insider has reported trading activity in the public market.
On Oct. 8, Thomas Uhr, senior vice-president – product engineering and manufacturing operations, exercised his options, receiving 5,025 shares at a cost per share of $27.9623, and sold 5,025 shares at a price per share of $75.3101. Net proceeds totaled over $237,000, not including any associated transaction charges.
Chart watch
On Oct. 15, the share price closed at a record high of $77.40. However, this positive momentum reversed its course in recent days.
On Nov. 9, Pfizer announced positive Phase 3 clinical trial data, increasing optimism that a coronavirus vaccine would be available in 2021. That day, BRP’s share price declined 7 per cent and over the past eight trading sessions, the share price has fallen 16 per cent.
Given this swift and steep downward spiral, the stock is now in oversold territory with a relative strength index reading of 28. Generally, an RSI reading at or below 30 represents an oversold condition.
Also interesting to note is that short interest has increased over the past month, peaking in mid-October when the share price closed at an all-time high.
Given the recent correction, the share price is now up just 5 per cent year-to-date.
In terms of key resistance and support levels, there is initial resistance around $70, near its 50-day moving average (at $71.18). After that, there is a major ceiling of resistance around $77.50, near its record closing high. Looking at the downside, there is initial technical support around $60. Failing that, there is technical support around $55, close to its 200-day moving average (at $55.39).
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