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Inside the Market Thursday’s TSX breakouts: A growth stock reporting record results received a takeover offer last year

On today’s TSX Breakouts report, there are 28 stocks on the positive breakouts list (stocks with positive price momentum), and only five securities are on the negative breakouts list (stocks with negative price momentum).

Discussed today is a stock that appeared on the positive breakouts list earlier this week. During the past four consecutive quarters, the share price has increased upon the release of its quarterly results. Last quarter, the company reported record revenue and EBITDA [earnings before interest, taxes, depreciation and amortization]. Given the positive outlook provided by management in Nov., the company may report another solid quarter when it releases its fourth-quarter results in March. Furthermore, the consensus estimate for 2019 may prove to be too conservative given management’s guidance. Earlier this month, both the chief executive officer and the chief financial officer were buying shares in the market.

The security featured today is Badger Daylighting Ltd. (BAD-T).

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A brief outline is provided below that may serve as a springboard for further fundamental research.

The company

Calgar-based Badger Daylighting is North America’s largest provider of non-destructive excavating services. Its systems use water and vacuum technology to remove dirt and debris. The company services industries such as the oil and gas market and utilities. In terms of geographical breakdown, last quarter 77 per cent of the company’s total revenue was from the U.S. with the balance, 23 per cent, from Canada. There is seasonality in the company’s operations with the highest revenue typically reported in the third-quarter.

Interestingly, in a news release issued on Dec. 10, the company reported that they had received a takeover offer in mid-2018. It was announced that board member David Calnan resigned and “Mr. Calnan advised in his resignation letter that he disagreed with the manner in which the Board dealt with a confidential unsolicited acquisition proposal made to the Company by a third party in mid-July of 2018. The consideration offered by the third party consisted of a combination of cash and shares of the third party. Mr. Calnan advised the Company in his resignation letter that he is of the view that the proposed acquisition price was sufficiently high and its terms sufficiently attractive that the Board should have transitioned the proposal into a formal offer and presented the offer to Badger’s shareholders for consideration or in the alternative, the Board should have engaged in a market check process to determine if the terms of the proposal could be enhanced. Following receipt of the proposal in mid-July of 2018, the Board concluded that it constituted a bona fide proposal that required a thorough review. The Board subsequently engaged financial and legal advisors to assist in its review of the proposal, including the consideration offered by the third party. The Board’s review of the proposal was conducted over a three month period during which the Board completed a comprehensive review of the Company’s strategic plan, operations and financial condition and considered all of the strategic alternatives available to the Company. Following such review, the Board unanimously concluded that the consideration being offered by the third party was not sufficiently compelling to induce the Company to enter into exclusive negotiations because such consideration did not adequately reflect the fair value of the Company and discussions with the third party terminated.”

After the market closed on Nov. 12, the company reported better-than-expected third-quarter financial results that send the share price soaring nearly 11 per cent. The company reported record revenue of $168.7-million, rising 20 per cent year-over-year and slightly ahead of the consensus estimate of $166-million. Badger reported record adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $50.9-million, up 31 per cent year-over-year and above the consensus estimate of $46.3-million. Adjusted EBITDA margins expanded to 30.2 per cent from 27.6 per cent reported during the same period last year.

On the earnings call, chief executive officer Paul Vanderberg indicated that financial results may have been higher if not constrained by skilled labour shortages. He remarked on the strong quarterly results, “We continue to anticipate solid activity levels across the majority of our markets with our pricing initiatives driving modestly higher rates. This was reflected in our Q3 [third-quarter] margin results, and our revenue growth also drove margin based on a combination of volume levels and also in pricing, as I mentioned…. Our excellent U.S. growth has enabled Badger to successfully reposition our geographic and end-use markets, and because of this growth, the Western Canada oil and gas market is a much smaller part of our business mix than it was just a few years ago. In light of the significant growth opportunities we see across the majority of our operations, we continue to focus on recruiting and training operators. The strong U.S. economy provides great macroeconomic fundamentals, but it also has created challenges related to sourcing labor. We could have realized more than the top line 20 per cent revenue growth in Q3 versus last year if we could have found and trained all the operators we needed. But the real positive here is that the market opportunity for Badger growth is there. The opportunity is there, and we’re focused on executing on it. We have a strong focus on recruitment and retention of hydrovac operators.”

The company is expected to report its fourth-quarter financial results after the market closes on March 12. The Street is forecasting revenue of $160-million, EBITDA of $43-million, and earnings per share of 55 cents reported in the final quarter of 2018.

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Dividend policy

The company pays its shareholders a monthly dividend of 4.5 cents per share, or 54 cents per share on a yearly basis. This equates to an annualized dividend yield of 1.5 per cent.

In March of 2018, the company announced an 18 per cent dividend increase, lifting its monthly dividend to the current level of 4.5 cents per share up from 3.8 cents per share.

Analysts’ recommendations

There are seven analysts covering this small-cap industrials stock with a market capitalization of $1.3-billion, of which four analysts have buy calls, two analysts have hold recommendations, and the analyst from Veritas Investment is maintaining his ‘sell’ recommendation (a call that he has had on the stock since at least 2017).

The seven firms providing research coverage on the company are as follows in alphabetical order: Acumen Capital, BMO Capital Markets, Canaccord Genuity, Cormark Securities, Industrial Alliance Securities, Peters & Co., and Veritas Investment.

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Revised recommendations

In Dec., Elias Foscolos, the analyst from Industrial Alliance Securities, downgraded the stock to a ‘hold’ recommendation from a ‘buy’ call but maintained his target price at $39. He lowered his recommendation due to higher valuation from the rising share price. The share price is currently 9 per cent away from this $39 target price.

After the company reported its third-quarter results in Nov., four analysts lifted their target prices. Jeff Fetterly, the analyst from Peters & Co., tweaked his target price up by $1 to $36. Brian Pow from Acumen Capital increased his target price to $40 from $37.50, Yuri Lynk from Canaccord Genuity raised his target price to $41 from $39, and Jonathan Lamer from BMO Capital Markets took his target price up to $41 from $40.

Financial forecasts

The Street is forecasting revenue of $592-million in 2018, $669-million in 2019 and $730 in 2020. The consensus EBITDA estimates are $155-million in 2018, $177-million in 2019 and $195-million in 2020. The consensus earnings per share estimates are $1.85 in 2018, $2.28 in 2019 and $2.56 in 2020.

Management has provided guidance for 2019, anticipating adjusted EBITDA will be between $170-million and $190-million.

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Earnings forecasts have been rising. For instance, three months ago, the consensus EBITDA estimates were $147-million for 2018 and $165-million for 2019. The consensus earnings per share estimates were $1.65 for 2018 and $1.98 for the following year.

Valuation

According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 7.9 times the 2019 consensus estimate, below its three-year historical average multiple of 8.8 times.

After the company reports its fourth-quarter financial results, analysts may roll their valuations forward so that they are based on 2020 EBITDA estimates.

The average one-year target price is $36.79, implying the share price is nearly fully valued. Individual target prices are as follows in numerical order: $20.50 (the low on the Street is from the analyst at Veritas Investment), $36, $39, two at $40 and two at $41 (the highs are the Street are from the analysts at BMO Capital Markets and Canaccord Genuity).

Insider transaction activities

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Despite the recent run-up in the share price, two senior management executives have been buyers in the market.

Between Jan. 2 and Jan. 8, chief financial officer Jerry Schiefelbein bought a total of 15,000 shares at an average price per share of approximately U.S.$24.29, increasing the account’s position to 20,000 shares. The total cost of these purchases amounted to over U.S.$364,000. In December, management announced that Mr. Schiefelbein will be retiring from the company once a successor has been found.

On Jan. 4, president and chief executive officer Paul Vanderberg invested nearly $320,000 in shares of the company. He bought 10,000 shares at a cost per share of $31.99, lifting his account’s holdings to 58,500 shares.

Chart watch

Since mid-2014, the share price has traded sideways, largely between $20 and $35 with the stock price currently at the upper end of this trading range.

In terms of upside resistance and downside technical support, the stock price is approaching a major ceiling of resistance around $36. Should the share price break above $36, the next resistance level is around $40 and then around $43, near its record closing high of $43.25 set back in 2014. Looking at the downside, there is initial technical support around $30, which is close to its 200-day moving average (at $29.30). Failing that, the next support level is around $25.

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This small-cap stock is relatively liquid. The three-month historical daily average trading volume is approximately 370,000 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.

Positive Breakouts Jan. 16 close
ALC-T Algoma Central Corp $13.40
AP-UN-T Allied Properties REIT $45.74
ATP-T Atlantic Power Corp $3.29
CU-T Canadian Utilities Ltd $32.82
CG-T Centerra Gold Inc $6.20
GIB-A-T CGI Group Inc $86.39
CVG-T Clairvest Group Inc. $49.50
DIR-UN-T Dream Industrial REIT $10.48
ERO-T Ero Copper Corp. $11.44
GDI-T GDI Integrated Facility Services Inc. $20.65
GCM-T Gran Colombia Gold Corp. $3.46
GRT-UN-T Granite Real Estate Investment Trust $58.45
GC-T Great Canadian Gaming Corp $52.78
HR-UN-T H&R Real Estate Investment Trust $22.00
HWO-T High Arctic Energy Services Inc $3.72
HBM-T HudBay Minerals Inc $7.39
ITP-T Intertape Polymer Group Inc $19.12
KPT-T KP Tissue Inc $9.30
DR-T Medical Facilities Corp $16.68
MRU-T Metro Inc $49.21
MRT-UN-T Morguard Real Estate Investment Trust $12.29
PZA-T Pizza Pizza Royalty Corp $10.01
QBR-B-T Quebecor Inc $29.91
SOX-T Stuart Olson Inc $5.75
SMU-UN-T Summit Industrial Income REIT $10.25
TC-T Tucows Inc. $86.68
VNR-T Valener Inc $20.69
ZYME-T Zymeworks Inc. $21.48
Negative Breakouts
CLR-T Clearwater Seafoods Inc $5.30
KML-T Kinder Morgan $14.31
MAXR-T Maxar Technologies Ltd. $6.88
NFI-T New Flyer Industries Inc $29.10
PVG-T Pretium Resources Inc $8.90

Source: Bloomberg

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