On today’s TSX Breakouts report, there are 52 stocks on the positive breakouts list (stocks with positive price momentum) and 39 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a security that may resurface on the positive breakouts list in time. This micro-cap stock with a market capitalization of $134-million is currently below the screening minimum market capitalization threshold of $200-million. The share price has rallied 455 per cent since the beginning of 2016 with its share price rising to over $1 from a share price of 20 cents. The stock price is up 23 per cent this year. The five analysts covering the company all have ‘buy’ recommendations and the average one-year target price implies a potential gain of 38 per cent. The share price can be very volatile. Consequently, this stock is best suited for consideration by investors with a high risk tolerance within a diversified portfolio. The security discussed below is Hamilton Thorne Ltd. (HTL-X).
A brief outline is provided below that may serve as a springboard for further fundamental research.
Hamilton Thorne is a medical provider to over 1,000 clinics in 75 countries. The company specializes in the assisted fertility industry, providing medical equipment and services related to IVF (in vitro fertilization), which assists a woman in conceiving a child. The company’s core brands are Hamilton Thorne, Gynemed and Embryotech. Its customers include the Stanford School of Medicine, McGill University, Charles River Laboratories, Sanofi and Genea. The company has plants in the U.S. and Germany and a sales and support office in Singapore.
The company has steady growth – both organic and acquisition growth. In 2018, revenue increased 32 per cent year over year and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) rose 24 per cent year over year. Hamilton Thorne has an attractive business model with approximately 60 per cent of its revenue recurring and margins are high. For instance, in 2018, the adjusted EBITDA margin was 21 per cent.
On May 23, the company reported its first-quarter financial results, which are reported in U.S. dollars. Sales came in at $7.6-million, up 9 per cent year over year and up 13 per cent on a constant currency basis. The declining Euro relative to the U.S. dollar negatively affected sales. Gross profit margins were 52 per cent. Adjusted EBITDA was $1.5-million, up 1 per cent year over year. Organic growth was 6 per cent. On the earnings call, the chief executive officer and president David Wolf said that he expects gross profit margins to normalize around the mid-50-per-cent level for the balance of the year.
On the earnings call, Mr. Wolf commented on acquisition growth: “Our acquisition program continues to be an important element in our growth plans, we have begun to devote additional resources to this area as well. We continue to maintain ongoing discussions with several targets and expect that we will see accelerated activity in this area.” Looking at the competitive landscape, there are two major industry players that each generate annual revenue of more than $100-million. There are eight companies that generate annual revenue of between $20-million and $40-million, a bracket that Hamilton Thorne is in. Meanwhile, there are approximately 150 companies with annual revenue of less than $20-million, providing industry leaders with acquisition targets and opportunities. Hamilton Thorne has a solid balance sheet with $14-million of cash and cash equivalents on hand to fund its growth. For the past three calendar years, the company has announced three major acquisitions. In 2018, the company purchased the Zandair product line that had revenue of around $550,000, paying four times EBITDA. In 2017, the company bought Gynemed, paying approximately 6.5 times EBITDA. The deal was immediate accretive and the company had revenue of roughly $9.6-million. In 2016, it acquired Embryotech Laboratories, acquiring it at a multiple of less than 5 times EBITDA that was also immediately accretive and had revenue of roughly $5-million.
In terms of geographic revenue breakdown, in 2018, 50 per cent of the company’s revenue was derived from Asia-Pacific, 30 per cent from the Americas and 20 per cent from EMEA (Europe, Middle East and Africa). Given the company’s exposure to China, on the earnings call management was asked if the company’s products were subject to tariffs. The CEO said: “As of today, it does not appear so...We know exactly what is happening with the retaliatory tariffs that were proposed but have not come into place yet. I suppose in the short-term, we might see a very large order from China in Q2 (second quarter) if that were the case. But in the long-term, if we ended up subject to tariffs, that would obviously have a negative [impact] on our business.” In the MD&A (Management’s Analysis and Discussion) the company expanded on trade risks, stating: “A significant portion of Hamilton Thorne’s total revenues are derived from the sale of products and services outside its home markets. Given the current intention of the United Kingdom to withdraw from the European Union and the threatened imposition of tariffs and retaliatory measures by the US and China, there is significant political uncertainty at this time as to the continued status of trade between certain countries where Hamilton Thorne does business. Greater restrictions on free trade generally or the imposition by countries of tariffs or other non-tariff barriers could have a negative effect on the Company’s ability to export its products and/or receive payment in a timely manner.”
Management and directors own 25 per cent of the shares outstanding.
The company does not pay its shareholders a dividend.
This micro-cap stock with a market capitalization of $134-million is covered by five analysts and has a unanimous ‘buy’ recommendation.
The firms providing research coverage on the company are as follows in alphabetical order: Acumen Capital, Beacon Securities, Bloom Burton & Co., Cormark Securities and M Partners.
In April, three analysts revised their target prices – all higher. Tania Gonsalves, the analyst at Cormark Securities, increased her target price to $1.50 from $1.25. Beacon Securities analyst Doug Cooper took his target price up to $1.65 (the high on the Street) from $1.55. Jim Byrne, the analyst at Acumen Capital, raised his target price to $1.45 from $1.30.
Financial figures are expressed in U.S. dollars.
The consensus revenue estimates are $33.3-million in 2019, rising to $35.8-million in 2020. The consensus EBITDA estimates are $6.7-million in 2019 and $8-million in 2020. The Street is forecasting earnings per share of 2 cents in 2019 and 3 cents the following year.
Financial forecasts have edged down slightly for this year and are relatively stable (top line outlook is slightly higher) for next year. To illustrate, three months ago, the consensus revenue estimates were $33.8-million for 2019 and $35-million for 2020. The consensus EBITDA forecasts were $7.1-million for 2019 and $8-million for 2020.
The stock is trading at an enterprise value-to-EBITDA multiple of 12.4 times the consensus 2020 estimate. This is below its peak multiple over 15 times (reached in mid-2018) and below its trough multiple of approximately 9 times (from December, 2018).
The average one-year target price is $1.53, implying the share price may appreciate 38 per cent over the next 12 months. Individual target prices are as follows in numerical order: $1.45 (the low on the Street is from Jim Byrne, the analyst at Acumen Capital), two at $1.50, $1.55 and $1.65 (the high on the Street is from Doug Cooper, the analyst at Beacon Securities).
Insider transaction activity
This year, only one insider has reported trading shares in the public market.
On Jan. 9, Keith Edwards, senior vice-president and general manager, exercised his options, receiving 31,250 shares at a cost per share of 22 U.S. cents. Between Jan. 28 and June 12, he sold a total of 62,500 shares at an average price per share of approximately $1.06, leaving 11,563 shares in his account.
The share price can be volatile and is best suited for consideration by investors with a high risk tolerance.
This year, the share price is up 23 per cent.
The share price has been in an uptrend since late 2016, making higher highs and higher lows. However, the stock price has been quite volatile, experiencing periods of steep declines. For instance, on April 30, the stock price closed at $1.25 (a record high) but is currently in correction territory, closing at $1.11 on July 17, declining over 11 per cent from its peak.
In terms of key resistance and support levels, the next ceiling of resistance is around $1.20, After that, there is resistance at $1.25 (at its record closing high). Looking at the downside, the stock price has initial technical support around $1.05, near its 200-day moving average (at $1.06). Failing that, there is support at $1.
Liquidity is low. The three-month historical daily average trading volume is approximately 104,000 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.