On today’s TSX Breakouts report, there are 26 stocks on the positive breakouts list (stocks with positive price momentum), and 11 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that appears on the positive breakouts list. Year-to-date, the share price is up 46 per cent; however, the share price has not yet fully recovered from the steep drop experienced during the fourth quarter of calendar 2018.
In August, the company reported the highest second quarter financial results in the company’s history and raised its earnings guidance for the fiscal year, which sent the stock price soaring over 15 per cent. Management’s bullish expectations are driven by volume growth and improved profitability anticipated in the second half of the fiscal year. With few of its components sourced from China, tariffs have a minimal impact on the company’s profitability.
The security highlighted today is BRP Inc. (DOO-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
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, Austria and Finland. There is a high degree of seasonality in the business with the first half of the fiscal year (the company’s fiscal year-end is Jan. 31) historically the weakest period, and the second half the strongest period.
In terms of geographical revenue breakdown, during the first half of fiscal 2020, 57 per cent of its revenue was from the U.S., 17 per cent was from Canada, and the balance 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. During the first half of fiscal 2020, revenue from the U.S., Canada and international regions increased 20 per cent year-over-year, 23 per cent year-over-year and 16 per cent year-over-year, respectfully.
Earlier this week, the company unveiled six electric concept vehicles along with its line-up of new powersports models to BRP dealers at Club BRP, a dealer event that was held at the MGM Grand hotel in Las Vegas.
Denys Lapointe, senior vice-president of design, innovation and creative services remarked, “BRP has been working for some time on how to create e-vehicles to bring new experiences to potential and existing riders. As we’ve said, it was never a question of “if’’, but “when’’. We are truly excited about electric and see it as a potential opportunity for our business. We continue to constantly innovate, and e-vehicles are no exception. Our talented team from around the world is working on new ideas and we’re eager to hear the consumer’s reaction. For the moment, these are preliminary concepts as we are currently evaluating market viability’’.
Before the market opened on Aug. 29, the company reported better-than-expected second-quarter fiscal 2020 financial results – the highest revenue and EPS (earnings per share) reported during the second quarter in the company’s history. Revenue came in at $1.46-billion, rising 21 per cent year-over-year. Normalized EBITDA (earnings before interest, taxes, depreciation and amortization) came in at $168-million, increasing 16 per cent year-over-year and surpassing the consensus estimate of $163-million. Normalized EPS was 71 cents, above the Street’s forecast of 65 cents.
Importantly, management increased its guidance for fiscal 2020, now expecting EPS to be between $3.65 and $3.80, up from its previous guidance of between $3.55 and $3.75. Revenue is expected to rise between 16 per cent and 19 per cent year-over-year, up from its prior guidance of between 14 per cent and 19 per cent. Normalized EBITDA is expected to rise between 21 per cent and 23 per cent year-over-year, previously targeted at between 20 per cent and 23 per cent.
On the earnings call, chief financial officer Sébastien Martel said, “Our guidance calls for a strong second half of the year as the demand for product remains solid, and we have good visibility on our shipment volumes and operating expenses for the remaining of the year. We expect fiscal year ’20 to be a record year for BRP, and our business fundamentals are solid, giving us the confidence in delivering these strong results.” He indicated that the expected strength in the second half of the fiscal year is a function of both volume growth and improving profitability. The share price soared over 15 per cent that day on high volume with over 1.4-million shares traded.
On the earnings conference call, president and chief executive officer José Boisjoli addressed concerns about an economic slowdown potentially impacting demand for the company’s products, the “U.S. unemployment rate in July was 3.7 per cent, very low. The housing slowed down a bit, but it was up 0.6 per cent in July versus a year ago. The U.S. consumer consumption remained strong. It was up 3.3 per cent in June and 3.4 per cent in July, and to be honest, I mean, we don’t see a slowdown in our powersports business. I mean, Q1 [first quarter] the industry was up high single-digit and in Q2 over mid-single-digit up…you know we’re not economists, but this is the thing that we believe that is affecting our business and so far, we’re very happy with the state of the economy and the consumer.”
When asked on the earnings call about the potential impact of tariffs on the company arising from the U.S.-China trade dispute, Mr. Boisjoli stated, “The whole tariff dispute between U.S. and China is having minimal impact on our results… we source very few of our components from China.”
The stock is dual-listed, trading on the Toronto Stock Exchange under the ticker DOO, and on the Nasdaq under the ticker DOOO.
Returning capital to shareholders
In June 2017, management announced the initiation of a quarterly dividend. Since then it has announced two dividend increases, one in March 2018 and the other in March 2019. Its quarterly dividend is 10 cents per share, or 40 cents per share yearly, equating to a current annualized yield of 0.8 per cent.
During the second quarter of fiscal 2020, the company completed its share buyback program that was launched in May 2019. On the earnings call, the CFO suggested that buyback activity will continue given the stock’s attractive valuation, “Obviously, we are very disappointed with where the stock price is trading. Obviously, it's not reflective of the performance that we've had over the last several years and last quarters. As you said, the momentum is there and so the valuation is attractive for buybacks and obviously it's something that we will consider and entertain in the next few quarters.” On Aug. 28, the share price closed at $40.17 but has had a strong move higher since then. The company renewed its share buyback program and can purchase for cancellation up to 4,170,403 subordinated voting shares between April 2, 2019 and April 1, 2020.
Analysts’ recommendations
There are nine firms providing recent research coverage on this mid-cap consumer discretionary stock, of which eight analysts have buy recommendations and one analyst (Jaime Katz, the analyst at Morningstar) has a “hold” recommendation.
The firms providing recent research coverage on BRP are as follows in alphabetical order: Baird, BMO Nesbitt Burns, Canaccord Genuity, CIBC World Markets, Desjardins Securities, GMP Securities, Morningstar, National Bank Financial, TD Securities, and Wells Fargo Securities.
Revised recommendations
Earlier this month, Ms. Katz increased her target price to $55 from $53.
In Aug., Benoit Poirier, an analyst at Desjardins Securities, lifted his target price by $1 to $66 (the high on the Street). National Bank’s Cameron Doerksen increased his target price to $51 (the low on the Street) from $48. The share price is now trading above his target price. CIBC World Markets’ analyst Mark Petrie hiked his target price to $56 from $52. TD Securities’ analyst Brian Morrison upgraded his recommendation to a “buy” from a “hold” and raised his target price to $54 from $47.
Financial forecasts
The Street is forecasting EBITDA of $798-million in fiscal 2020, up from $656-million reported in fiscal 2019, and anticipated to increase 7 per cent to $853-million in fiscal 2021. The consensus earnings per share estimates are $3.75 in fiscal 2020 and $4.13 in fiscal 2021.
Over the past several months, consensus estimates have increased. To illustrate, three months ago, the Street was forecasting EBITDA of $794-million for fiscal 2020 and $839-million in fiscal 2021. The consensus earnings per share estimates were $3.66 for fiscal 2020 and $4.04 for fiscal 2021.
Valuation
According to Bloomberg, the stock is trading at a price-to-earnings multiple of 12.5 times the fiscal 2021 consensus estimate, below the three-year historical average P/E multiple of 13.9 times. On an enterprise value-to-EBITDA basis, the stock is trading at 7.3 times the fiscal 2021 consensus estimate, which is below its three-year historical average multiple of 8.3 times.
The average one-year target price is $58, implying the stock has 12 per cent upside potential over the next 12 months. The stock price is currently trading above many analysts’ target prices. Consequently, analysts will either have to downgrade their recommendations to a ‘hold’ from a ‘buy’ due to price appreciation or increase their target prices. Individual target prices are as follows in numerical order: $51 (the low on the Street is from National Bank’s Cameron Doerksen), two at $54, $55, $56, $58, two at $65 and $66 (the high on the Street is from Desjardins’ Benoit Poirier).
Insider transaction activity
Year-to-date, only one insider has traded shares in the public market.
On Sept. 10, Anne Le Breton, senior vice-president – human resources, exercised her options, receiving 7,500 shares at a cost per share of $19.45, and sold 7,500 shares at an average price per share of approximately $49.56, leaving 54 shares in this account. Net proceeds, not including commission charges, exceeded $225,000.
On July 8 and July 9, Ms. Le Breton exercised her options, receiving a total of 6,498 shares at a cost per share of just $1.13, and sold 6,498 shares at an average price per share of roughly $48.75. Net proceeds, excluding commission fees, totaled over $309,000.
Chart watch
Year-to-date, the share price has rallied over 46 per cent, making it the second best performing stock in the S&P/TSX composite consumer discretionary sector index. The share price continues to recover from the large drop experienced in the fourth-quarter of calendar 2018.
In terms of key resistance and support levels, there is initial resistance around $55. After that, there is a major ceiling of resistance around $60. Looking at the downside, there is initial technical support around $45, close to its 50-day moving average (at $45.28). Failing that, there is strong technical support around $40, close to its 200-day moving average (at $41.06).
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