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analysis

On today’s Breakouts report, there are just four stocks on the positive breakouts list (stocks with positive price momentum), and 88 securities are on the negative breakouts list (stocks with negative price momentum).

With stocks under pressure, only a handful of securities are on the positive breakouts list. Discussed today is one of the few such stocks: TransAlta Corp. (TA-T). Quarter-to-date, the share price has rallied 14 per cent, making it the top performing stock in the S&P/TSX utilities index. Earnings expectations have remained relatively stable. The stock has nine buy recommendation and two neutral recommendations with an anticipated one-year price return of nearly 12 per cent.

A brief outline on TransAlta is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.

The company

Calgary-based TransAlta is a utility stock with 15 natural gas facilities, 27 hydro facilities, 29 wind and solar facilities and one coal facility. As such, the company has a diversified portfolio generating power from natural gas, hydro, wind and solar, and coal.

According to the company’s May investor presentation, its current EBITDA (earnings before interest, taxes, depreciation and amortization) breakdown is 35 per cent renewables, 30 per cent coal, 24 per cent natural gas and 11 per cent energy marketing. By the end of 2025, management targets its EBITDA composition to be: 70 per cent renewables, 25 per cent natural gas and 5 per cent energy marketing.

Brookfield Asset Management Inc. (BAM-A-T) is a major shareholder. According to Bloomberg, BAM owns 13 per cent of the shares outstanding.

Investment thesis

· Diversified portfolio and earnings profile.

· Rising power prices. On the earnings call, chief financial officer Todd Stack sees “forward prices for the balance of the year in the $112 per megawatt-hour range.” In the first-quarter, the average price was $90 per megawatt-hour.

· Strong free cash flow generation.

· Active on its share repurchase program.

· Continued progression on achieving its 2-gigawatt clean energy growth plan by 2025 and has already secured 40 per cent of this target.

Quarterly earnings and outlook

Before the market opened on May 6, the company released weaker-than-expected first-quarter financial results. Adjusted EBITDA was $266-million, below the consensus estimate of $286-million. Despite the shortfall, management maintained its outlook for 2022. In 2022, management targets realizing adjusted EBITDA of between $1.065-billion and $1.185-billion and free cash flow of between $455-million and $555-million. That day, the share price increased 3 per cent.

Returning capital to shareholders

TransAlta pays its shareholders a quarterly dividend of 5 cents per share or 20 cents per share yearly, equating to a current annualized yield of 1.3 per cent.

For 2022, management’s objective is to maintain its dividend at 20 cents per share annualized.

In May 2022, management renewed its normal course issuer bid (NCIB) in which it can repurchase up to 14-milion shares between May 31, 2022 and May 30, 2023. During the first-quarter of 2022, the company repurchased 1.4-million shares at an average price per share of $12.50.

Analysts’ recommendations

This mid-cap stock with a market capitalization of $4-billion is covered by 11 analysts, of which nine analysts have buy recommendations and two analysts have neutral recommendations.

The firms providing research coverage on the company are as follows in alphabetical order: ATB Capital Markets, BMO Capital Markets, CIBC Capital Markets, Credit Suisse, Industrial Alliance Securities, ISS-EVA, National Bank Financial, Peters & Co., RBC Capital Markets, Scotiabank, and TD Securities.

Revised recommendations

Target prices have remained relatively steady. In June, two analysts made minor revisions.

· CIBC’s Mark Jarvi raised his target price by 50 cents to $17.50.

· Peters’ Ken Chmela tweaked his target price to $14.50 from $14.

Financial forecasts

According to Bloomberg, the Street is forecasting adjusted EBITDA of $1.13-billion in 2022, down from $1.26-billion reported in 2021, moderating to $1.08-billion in 2023. The consensus free cash flow (FCF) estimates are $489-million for 2022 and $492-million in 2023.

Earnings expectations have been relatively stable. For instance, four months ago, the consensus EBITDA estimates were $1.13-billion for 2022 and $1.07-billion for 2023. The consensus FCF estimates were $483-million for 2022 and $477-million for 2023.

Valuation

The stock is commonly valued by analysts on a sum-of-the-parts (SOTP) basis, applying different multiples to its various assets.

The average one-year target price is $16.50, suggesting the share price has nearly 12 per cent upside potential over the next 12 months. Individual target prices provided by 10 firms are as follows in numerical order: $14.50 (from Peters’ Ken Chmela), $15, two at $16.50, three at $17, two at $17.50 and $18 (from Credit Suisse’s Andrew Kuske).

Insider transaction activity

On May 19 and 20, executive vice-president – people, talent and transformation Jane Fedoretz sold a total of 10,000 shares at an average price per share of approximately $14.53 with 57,613 shares remaining in this particular account. Proceeds from the sales exceeded $145,000, excluding trading fees.

On May 12, executive vice-president – legal, commercial and external affairs Kerry O’Reilly Wilks sold 103,081 shares at a price per share of $14.0144, leaving 67,447 shares in this particular account. Proceeds from the sale totaled over $1.4-million, not including commission charges.

Chart watch

The share price has had positive price momentum in recently months. Quarter-to-date, the share price is up 14.4 per cent, outperforming the S&P/TSX utilities index, which is down 4.5 per cent, and making TransAlta the top performing stock in the sector.

Year-to-date, the share price is up 5 per cent, outperforming the S&P/TSX composite index and the S&P/TSX utilities index, which are down 10 per cent and down 1 per cent, respectively.

Looking at key technical resistance and support levels, the share price is approaching initial resistance near the $15 level. After that, there is a major ceiling of resistance around $20. Looking at the downside, there is strong technical support around $12.

ESG Risk Rating

According to risk provider Sustainalytics, the stock has an ESG risk score of 36 as of June 26, 2022. A risk score between 30 and 40 reflects a ‘high risk’ rating.

Positive BreakoutsJune 29 close
BLU-TBELLUS Health Inc. 12.94
CUP-UN-TCaribbean Utilities Company Ltd. 15.64
RBA-TRitchie Bros Auctioneers Inc82.11
TA-TTransAlta Corp14.80
Negative Breakouts
AW-UN-TA&W Revenue Royalties Income Fund36.14
ARE-TAecon Group Inc12.97
AEM-TAgnico Eagle Mines Ltd61.63
AXU-TAlexco Resource Corp. 0.46
AP-UN-TAllied Properties Real Estate Investment32.70
ADW-A-TAndrew Peller Ltd5.51
APS-TAptose Biosciences Inc1.02
AR-TArgonaut Gold Inc0.48
AI-TAtrium Mortgage Investment Corp.11.24
ASM-TAvino Silver & Gold Mines Ltd. 0.73
BTO-TB2Gold Corp4.52
ABX-TBarrick Gold Corp23.81
BDT-TBird Construction Inc7.60
DOO-TBRP Inc/CA79.27
BU-TBurcon NutraScience Corp0.47
CXB-TCalibre Mining Corp. 1.04
CFP-TCanfor Corp21.64
CS-TCapstone Mining Corp3.31
CHW-TChesswood Group Ltd12.04
CGG-TChina Gold International Resources Corp.3.63
CIX-TCI Financial Corp13.83
CTS-TConverge Technology Solutions Corp.5.30
CJR-B-TCorus Entertainment Inc3.67
CL-CNCresco Labs Inc. 3.31
CURA-CNCuraleaf Holdings Inc.6.60
DML-TDenison Mines Corp1.27
DXT-TDexterra Group Inc. 5.50
DPM-TDundee Precious Metals Inc6.54
ECN-TECN Capital Corp. 5.51
ELD-TEldorado Gold Corp8.72
EDV-TEndeavour Mining Corp. 27.14
EFX-TEnerflex Ltd6.11
EFR-TEnergy Fuels Inc.6.68
EQX-TEquinox Gold Corp.6.16
ERE-UN-TEuropean Residential REIT3.57
EXRO-TExro Technologies Inc. 1.06
MHC-UN-TFlagship Communities REIT15.10
GLXY-TGalaxy Digital Holdings Ltd. 5.39
GCM-TGran Colombia Gold Corp. 3.53
GTII-CNGreen Thumb Industries Inc. 10.53
HRX-THeroux-Devtek Inc13.37
HCG-THome Capital Group Inc24.67
HUT-THut 8 Mining Corp.1.82
IAU-Ti-80 Gold Corp. 2.46
IMG-TIAMGOLD Corp2.22
IGM-TIGM Financial Inc34.51
IMV-TIMV Inc. 0.91
IIP-UN-TInterRent REIT11.83
KRR-TKarora Resources Inc. 3.47
K-TKinross Gold Corp4.81
LUG-TLundin Gold Inc9.28
LUN-TLundin Mining Corp8.29
MDI-TMajor Drilling Group International Inc9.18
MND-TMandalay Resources Corp2.80
MOZ-TMarathon Gold Corporation1.39
MUX-TMcEwen Mining Inc. 0.58
MI-UN-TMinto Apartment REIT14.26
MRT-UN-TMorguard Real Estate Investment Trust5.12
MTL-TMullen Group Ltd11.12
NFG-XNew Found Gold Corp. 6.03
NGD-TNew Gold Inc1.46
NGT-TNewmont Corp. 79.96
OGC-TOceanaGold Corp2.52
ONEX-TOnex Corp63.96
OLA-TOrla Mining Ltd.3.68
OR-TOsisko Gold Royalties Ltd13.63
OSK-TOsisko Mining Inc. 3.26
PAAS-TPan American Silver Corp26.46
PLTH-CNPlanet 13 Holdings Inc. 1.64
RSI-TRogers Sugar Inc6.01
SIS-TSavaria Corp. 13.00
SEA-TSeabridge Gold Inc16.78
SKE-TSkeena Resources Ltd. 7.03
SLS-TSolaris Resources Inc. 7.94
SSRM-TSSR Mining Inc. 22.16
TER-CNTerrAscend Corp. 3.25
LEV-TThe Lion Electric Company5.56
TF-TTimbercreek Financial Corp. 7.93
TXG-TTorex Gold Resources Inc10.50
TWC-TTWC Enterprises Ltd. 16.05
URE-TUr-Energy Inc1.37
FORA-TVerticalScope Holdings Inc. 12.38
VGCX-TVictoria Gold Corp. 10.40
WFC-TWall Financial Corp. 11.50
WELL-TWell Health Technologies Corp. 3.08
WRN-TWestern Copper and Gold Corp. 1.85
WEF-TWestern Forest Products Inc1.43
ZEN-XZen Graphene Solutions Ltd. 2.23

Source: Bloomberg, The Globe and Mail

Please note that 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 indices 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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