On today’s TSX Breakouts report, there are 51 stocks on the positive breakouts list (stocks with positive price momentum), and 26 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 month after the share price climbed to a record closing high on Feb. 7. However, over the past seven trading days the share price has fallen 8 per cent.
The security highlighted today is Héroux-Devtek Inc. (HRX-T).
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
Longueuil, Que. based-Héroux-Devtek is involved in the design, development, manufacturing, and repair of landing gear systems and aerospace components. The company is an industry leader as the third largest landing gear manufacturer worldwide. The company has two main reporting segments: defence and commercial sales.
Last quarter, 53 per cent of the company’s total sales came from defence aerospace with the remaining 47 per cent from commercial aerospace.
Before the market opened on Feb. 6, the company reported solid third-quarter fiscal 2020 financial results (the company’s fiscal year-end is March 31), which lifted the share price 3 per cent that day to a record high. For the past five consecutive quarters, the share price has rallied the day it reported its quarterly earnings results.
Sales in the third-quarter came in at $157-million, up 9 per cent year-over-year, exceeding the consensus estimate of $151-million. Organic sales growth was 1.4 per cent. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $24.56-million, ahead of the Street’s forecast of $24-million. Adjusted earnings per share came in at 24 cents, a penny shy of expectations. The company’s backlog climbed to a record $839-million, up 9 per cent sequentially from $769-million reported at the end of the previous quarter.
The company’s strengths includes its growing backlog driven by defense sales, strong revenue visibility stemming from long-term contracts, new programs expected to fuel revenue growth next year, and potential future acquisition growth.
Major shareholders include the Caisse de dépôt et placement du Québec, owning approximately 13 per cent of the shares outstanding, and the Fonds de solidarité FTQ, with an ownership position just above 10 per cent.
The company does not pay its shareholders a dividend.
This small-cap industrials stock with a market capitalization of $718-million is covered by six analysts on the Street, of which five analysts have buy recommendations and one analyst (Ben Cherniavsky, of Raymond James) has a “market perform” recommendation.
The firms providing research coverage on the company are as follows in alphabetical order: Desjardins Securities, Laurentian Bank Securities, National Bank Financial, Raymond James, Scotiabank, and TD Securities.
Earlier this month, five analysts revised their expectations – all higher.
- Laurentian’s Mona Nazir lifted her target price to $24.50 from $23.
- Raymond James’s Ben Cherniavsky hiked his target price to $22.50 from $19.50.
- Scotiabank’s Konark Gupta increased his target price by $1.50 to $24.
- TD’s Tim James raised his target price by $1 to $25.
- National Bank’s Cameron Doerksen bumped his target price to $24 from $23.
Again, the company’s fiscal year-end is March 31.
The Street is forecasting revenue of $608-million in fiscal 2020, up from $484-million reported in fiscal 2019, and anticipated to rise to $640-million in fiscal 2021. The consensus EBITDA estimates are $95-million in fiscal 2020, increasing to $104-million in fiscal 2021. The consensus earnings per share estimates are 93 cents in fiscal 2020 and forecast to increase to $1.14 in fiscal 2021.
Earlier this month, management raised its sales guidance for the current fiscal year to between $600-million and $610-million from between $580-million and $600-million.
According to Bloomberg, the stock is trading at a price-to-earnings multiple of 17.3 times the fiscal 2021 consensus estimate, above its three-year historical average multiple of 15.5 times. Over the past three years, the stock has traded at a multiple as high as nearly 19 times forward earnings and as low as 12 times forward earnings. On an enterprise value-to-EBITDA basis, the stock is trading at a multiple of 9.3 times the fiscal 2021 consensus estimate.
The average 12-month target price is $24.17, implying the share price has 22 per cent upside potential over the next year. Individual target prices are as follows in numerical order: $22.50 (from Mr. Cherniavsky), two at $24, $24.50 and two at $25 (from Desjardins’ Benoit Poirier and TD’s Tim James).
Insider transaction activity
Looking back over the past eight months, there has only been one transaction in the public market reported by an insider.
On Nov. 13, James Morris, who sits on the board of directors, purchased 15,000 shares at an average price per share of approximately $19.39, increasing this account’s holdings to 35,000 shares. The cost of this investment exceeded $290,000.
On Feb. 7, the share price closed at a record high of $21.46 after the company reported solid quarterly earnings results. However, since then the share price has retreated 8 per cent.
Despite this swift move lower, the stock is not in oversold territory. The RSI (relative strength index) is at 43. Generally, an RSI reading at or below 30 reflects an oversold condition.
The share price is currently trading near a major technical support level, just above its 50-day moving average (at $19.72). However, should the share price break materially below its 50-day moving average, the next key support level is around $18, near its 200-day moving average (at $18.19).
This small-cap security can be thinly traded, which can create price volatility. The three-month historical daily average trading volume is approximately 44,000 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.