On today’s TSX Breakouts report, there are 58 stocks on the positive breakouts list (stocks with positive price momentum), and 90 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that appeared on the positive breakouts list at the beginning of this week. At the end of July, the company reported solid second-quarter financial results that sent the share price spiking over 14 per cent the following trading day. This small-cap stock has been a stellar performer with its share price rising over 34 per cent year-to-date, in addition to the 93 per cent price return realized in 2018. Management provided solid guidance with earnings growth anticipated to continue. The stock is trading at a reasonable valuation and as a result, it has five buy recommendations. The security highlighted today is North American Construction Group Ltd. (NOA-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Alberta-based North American Construction Group, or NACG, is a construction and mining contractor, which services energy and resource companies mostly in western Canada. NACG owns a fleet of equipment including trucks, excavators, dozers, loaders, graders, and compactors. Among its key customers are: Syncrude, Suncor Energy, Imperial Oil and Canadian Natural Resources.
After the market closed on July 30, the company reported better-than-expected second-quarter financial results that sent the share price soaring 14 per cent the following trading day on high volume.
The company reported revenue of $176.9 -million, topping the consensus estimate of $163-million and up 123 per cent year-over-year driven higher by completed acquisitions (in Nov. 2018, the company completed its purchase of the heavy construction fleet from Aecon Group Inc). Adjusted EBITDA came in at $37.1-million, surpassing the consensus estimate of $34.5-million and up 144 per cent year-over-year. Adjusted earnings per share was 43 cents, exceeding the Street’s forecast of 25 cents per share. ROE (return on equity) stood at 18.1 per cent. Backlog, a measure of the company’s future revenue, was $1.4-billion.
Management’s earnings outlook is positive. For 2019, adjusted EBITDA is anticipated to be between $175-million and $190-million with earnings per share between $1.60 and $1.90. ROE (return on equity) is expected to exceed 20 per cent by the end of this year. For 2020, EBITDA is forecast to be between $190-million and $215-million with earnings per share of between $1.90 and $2.30.
Potential catalysts for the stock are continued strong earnings reports and contract wins.
On the earnings call, president and chief operating officer Joe Lambert remarked, “Of note is that Nuna has a major contract for northern operation in late tender stage, and we have seen an uptick on our existing work on-site, which gives us a bit of an optimism of being awarded this larger tendered scope. So stay tuned for what we believe will be an impressive second half of the year from Nuna.”
Back in Nov. 2018, NACG acquired an ownership interest in Nuna Logistics Limited.
The stock is dual-listed trading on both the New York Stock Exchange and the Toronto Stock Exchange under the same ticker, NOA.
Dividend policy
The company pays its shareholders a quarterly dividend of 4 cents per share, or 16 cents per share on a yearly basis. This equates to an annualized dividend yield of 1 per cent.
In July, the company announced a 100 per cent dividend increase, doubling its dividend to its present level of 4 cents per share from 2 cents per share.
Analysts’ recommendations
There are six analysts that cover this small-cap stock, of which five analysts have buy recommendations and one analyst (Anthony Campagna at ISS-EVA) has an “underweight” recommendation.
The firms providing research coverage on the company are as follows in alphabetical order: Canaccord Genuity, CIBC World Markets, ISS-EVA, National Bank Financial, PI Financial, and Raymond James.
Revised recommendations
Earlier this month, Raymond James analyst Ben Cherniavsky increased his target price to $26 from $22.
In July, Canaccord’s Yuri Lynk lifted his target price to $27 (the high on the Street) from $24. Maxim Sytchev of National Bank Financial, tweaked his target price higher by 50 cents to $23.50. Devin Schilling, an analyst at PI Financial Corp., took his target price up to $24 from $23.
Financial forecasts
The Street is forecasting revenue of $727-million in 2019, up from $410-million reported in 2018, and climbing to $809-million in 2020. The consensus EBITDA estimate is $179-million in 2019, up from $101.8-million reported in 2018, and increasing to $199-million in 2020. The consensus earnings per share estimates are $1.60 in 2019 and $1.88 in 2020.
Earnings expectations have increased. For instance, three months ago, the Street was forecasting revenue of $708-million in 2019 and $770-million in 2020. The consensus EBITDA estimates were $172-million for 2019 and $188-million for the following year. The consensus earnings per share estimates were $1.48 in 2019 and $1.79 in 2020.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 4.3 times the 2020 consensus estimate, which is above its three-year historical average of 3.9 times but below its peak multiple of just under 5 times during this time period.
The average one-year target price is $24.70, suggesting there is over 50 per cent upside in the share price over the next 12 months. Individual target prices provided by five firms are as follows in numerical order: $23 (the low on the Street is from CIBC’s Daine Biluk), $23.50, $24, $26 and $27 (the high on the Street is from Mr. Lynk at Canaccord Genuity).
Insider transaction activity
Most recently, on July 1, five management executives exercised their rights but only sold part of their newly acquired shares, potentially for tax purposes.
The company’s chief executive officer and chairman Martin Ferron exercised his rights, receiving 379,038 shares, and sold 33,909 shares in the public market.
The president and chief operating officer Joe Lambert exercised his rights, receiving 90,800 shares and sold 43,585 shares, leaving 113,247 shares in his portfolio.
Barry Palmer, vice-president – heavy construction and mining, exercised his rights, receiving 85,246 shares, and sold 40,919 shares with 107,316 shares remaining in his account.
Jordan Slator, vice-president and general counsel exercised his rights, receiving 47,596 shares, and sold 22,847 shares with a closing account balance of 75,311 shares.
David Kallay, vice-president – health, safety, environment and human resources, exercised his rights, receiving 43,939 shares, and sold 21,091 shares with 22,848 shares remaining in his account.
On June 4, lead director Bryan Pinney purchased 5,000 shares at a cost per share of $14.50 for an account in which he has indirect ownership, initiating a portfolio position.
Between May 3 and May 21, CEO Martin Ferron invested over $93,000 in shares of the company. He acquired a total of 6,000 shares at an average price per share of approximately $15.65.
Prior trades reported by insiders took place during the first quarter.
Chart watch
This stock has delivered spectacular returns to investors. If this small-cap energy stock (with a market capitalization of $446-million) was included in the S&P/TSX composite index, it would be the best performing stock in the energy sector year-to-date with a price return of over 34 per cent. This is in addition to the 93 per cent price return realized in 2018.
Looking at key resistance and support levels, the share price has an initial ceiling of resistance around $18. After that, the next resistance level is around $20. Looking at the downside, there is strong technical support around $14, near its 50-day moving average (at $14.22) and close to its 200-day moving average (at $14.39).
The stock can be thinly traded, which can increase the volatility in the share price. The three-month historical daily average trading volume on the Toronto Stock Exchange is approximately 155,000 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.
Jennifer Dowty