On today’s TSX Breakouts report, there are 21 stocks on the positive breakouts list (stocks with positive price momentum), and 32 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that is in correction territory, falling 14 per cent over the past 12 trading sessions. However, this stock has tailwinds to potentially lift the share price higher. The security highlighted today is Norbord Inc. (OSB-T).
Industry fundamentals are positive for the company.
This week, the U.S. Federal Reserve cut the federal funds rate by 50 basis points, supportive of low mortgage rates and positive for the housing market. Strong housing activity translates into strong demand for the company’s products. Recent production curtailments in the industry combined with rising demand for OSB (oriented strand board) is driving OSB prices higher.
The stock is trading at a reasonable valuation and has seven buy recommendations with an anticipated price return of 23 per cent over the next 12 months.
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
Toronto-based Norbord is a global manufacturer of wood-based panels, and the world’s largest OSB producer. In addition, Norbord manufactures particleboard, fibreboard, and related products. The company operates 17 plants in Canada, the United States, and Europe.
In terms of geographical revenue breakdown, in 2019, 71 per cent of sales stemmed from North America, and 29 per cent came from Europe (the U.K represents over 70 per cent of European sales).
Before the market opened on Feb. 5, the company reported lower-than-expected fourth-quarter financial results yet the stock price rallied over 3 per cent that trading day on high volume.
Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) came in at US$27-million, below the consensus estimate of US$45-million, and down from US70-million reported during the same period last year.
So why did its share price rally given the weaker-than-expected results?
OSB prices are recovering fueled by production curtailments as well as rising demand from strong U.S. home construction activity.
On the earnings call, president and chief executive officer Peter Wijnbergen provided a positive outlook based on improving industry fundamentals, saying: “U.S. housing starts continue to improve with experts’ current forecasts averaging 1.33-million starts for 2020, which represents a 3 per cent increase over 2019. Further, the seasonally adjusted annual pace of permits, the more forward-looking indicator, was up nearly 6 per cent year-over-year to 1.42-million in December. Builders have seen early success adapting their offerings, to growing demand for lower cost entry-level homes. Hence, mortgage interest rates remain near multi-year lows. These factors are expected to positively impact housing activity and OSB demand as we enter the prime spring building season. And as of yesterday, Random Lengths’ regional prices are up between 10 per cent and 18 per cent over Q4 [fourth-quarter] average levels. We have significant upside potential in an improving housing market, and I’m increasingly encouraged by the outlook. Outside of new home construction, we see continued solid growth in other OSB end users. Our big box volumes remain strong, and we continue to focus on our ambitious growth targets for industrial products”.
In January, National Association of Home Builders’ chief economist Robert Dietz said in a release: “Low resale inventory, favorable mortgage rates, historically low unemployment and accelerating wage growth are driving builder sentiment and point to single-family production gains in 2020.”
The company is dual listed, trading on the Toronto Stock Exchange as well as the New York Stock Exchange under the ticker OSB.
Variable dividend policy
The company pays shareholders a quarterly variable dividend of 20 cents per share, or 80 cents per share on a yearly basis. This equates to a current annualized yield of 2.1 per cent.
In Oct. 2019, the company announced a dividend cut, slashing the dividend in half to its present level of 20 cents per share quarterly from 40 cents per share quarterly.
On the third-quarter earnings call on Oct. 31, the chief financial officer Robin Lampard said: “We have started to see the housing market recently improving in the U.S., but it’s been slower than we anticipated due to an overhang of unsold new home inventory, and so it’s been taking longer than we and I think most others had expected to translate into a stronger OSB market. This has pressured our financial results in the past three quarters. In addition to that, we’re entering a seasonally slower winter construction season for the next two quarters, and so the Board felt it was prudent to reduce the dividend level for now.”
This stock is covered by nine analysts, of which seven analysts have buy recommendations and two analysts have neutral recommendations.
The firms providing research coverage on the company are: BMO Nesbitt Burns, CIBC WorldMarkets, Credit Suisse, Morningstar, Raymond James, RBC Dominion Securities, Scotiabank, Seaport Global Securities, and TD Securities.
The consensus EBITDA estimates is US$432-million for 2020, rebounding from adjusted EBITDA of US$138-million reported in 2019, and US$421-million for 2021.
Earnings expectations have increased. For instance, three months ago, the consensus EBITDA estimate was US$412-million for 2020.
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 7 times the 2020 consensus estimate and at an EV/EBITDA multiple of 7.2 times the 2021 consensus estimate.
The average one-year target price is Cdn. $47.06, implying approximately 23 per cent upside potential in the share price over the next 12 months.
Individual target prices are as follows: $33 (the low on the Street is from Charles Gross at Morningstar), $44, $45, $47.80, two at $50, two at US$39 (approximately $51.83), and $54 (from Daryl Swetlishoff at Raymond James).
This week, Hamir Patel, an analyst at CIBC World Markets, upgraded his recommendation to “outperformer” from “neutral” and raised his target price to $50 from $45.
Last month, the following analysts revised their expectations – all higher.
- Scotiabank’s Benoit Laprade to $44 from $40.
- Raymond James’ analyst Daryl Swetlishoff by $8 to $54.
- Credit Suisse’s Andrew Kuske to $45 from $42.
- RBC’s analyst Paul Quinn by $5 to $50.
- Seaport’s Mark Weintraub to $47.80 from $44.60.
- TD’s Sean Steuart to US$39 from US$37.
- BMO’s Ketan Mamtora to US$39 from US$32.
Insider transaction activity
Most recently, on March 2, Kevin Burke, senior vice-president – North American operations, purchased 1,150 shares at a price per share of US$26.14, increasing this account’s holdings to 11,599 shares.
Between Feb. 10 and Feb. 25, Paul Houston, who has been on the board of directors since 2015, invested over $2.2-million in shares of the company. He acquired a total of 52,669 shares at an average price per share of approximately $42.22 in his personal trading account. After these purchases, this particular account held 82,679 shares.
On Feb. 14, president and chief executive officer Peter Wijnbergen exercised his options, receiving 27,000 shares at a cost per share of $9.96, and sold 27,000 shares at a price per share of $44, leaving 58,968 shares in this particular account. Net proceeds, not including trading fees, exceeded $919,000.
Year-to-date, the share price is up 10 per cent, despite the 14 per cent move lower since Feb. 12.
Should the share price continue to retreat, there is initial technical support around $35, near its 200-day moving average (at $33.89). On a recovery, there is initial overhead resistance around $40, and after that at $45.
The relative strength index is at 44, suggesting the stock is not quite in oversold territory. Generally, a reading at or below 30 indicates an oversold condition.
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.