On today’s Breakouts report, there are 16 stocks on the positive breakouts list (stocks with positive price momentum), and 20 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is an industrial stock that is on the positive breakouts list - Héroux-Devtek Inc. (HRX-T). Year-to-date, the share price is up 25 per cent and based on the average target price, an additional 18 per cent upside is anticipated by the Street.
A brief outline on Héroux-Devtek is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Quebec 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 business segments: defence and civil/commercial sales. In fiscal 2023, 69 per cent of the company’s total sales came from defence aerospace with the remaining 31 per cent from civil/commercial aerospace.
Major shareholders include the Caisse de dépôt et placement du Québec, owning approximately 14 per cent of the shares outstanding, and Le Fonds de solidarité FTQ with an ownership position just above 10 per cent.
Quarterly earnings and outlook
Before the market opened on Aug. 8, the company reported better-than-expected first-quarter fiscal 2024 earnings results (the company’s fiscal year-end is March 31), which lifted the share price nearly 3 per cent that day.
Sales in the first-quarter came in at $140.7-million, up 23 per cent from $114 million reported during the same period last year, and slightly ahead of the consensus estimate of $139 million. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) came in at $16.4-million, up 43 per cent year-over-year and just above the Street’s forecast of $16-million. The adjusted EBITDA margin was 11.7 per cent, up from 10 per cent reported last year. Adjusted earnings per share came in at 12 cents, up from 3 cents reported last year and above the consensus estimate of nearly 10 cents per share. At quarter-end, the net debt-to-adjusted EBITDA ratio stood at 2.8 times.
On the earnings call, president and chief executive officer Martin Brassard commented on positive drivers and goal of having its adjusted EBITDA margin return to pre-pandemic levels (in fiscal 2020, the adjusted EBITDA margin was 15.7 per cent), “We remain committed to maintaining this positive momentum that along with our continued efforts and key initiatives will allow us to return to historical levels of profitability in the coming quarters. The aerospace demand environment is exceptionally strong at present with major aircraft manufacturers, such as Boeing and Airbus reporting record backlogs. This surge in demand is a result of air travel rebounding nearly to pre-pandemic 2019 levels, reflecting the strong recovery of the industry. Furthermore, the defense sector has also experienced significant growth, driven by increasing branches from the U.S. and several naval countries.”
Dividend policy
The company does not pay its shareholders a dividend.
Analysts’ recommendations
This small-cap industrial stock with a market capitalization of $556-million is covered by six analysts on the Street, of which four analysts have buy recommendations and two analysts have neutral recommendations.
The firms providing recent research coverage on the company are: Desjardins Securities, ISS-EVA, Laurentian Bank Securities, National Bank Financial, Scotiabank, and TD Securities.
Revised recommendations
After the company released its quarterly earnings results in Aug., five analysts revised their expectations.
- Desjardins’ Benoit Poirier trimmed his target price to $21 (the high on the Street) from $22.
- The research team at ISS-EVA downgraded the stock to a “hold” recommendation from “overweight” without a specified target.
- Laurentian Bank’s Jonathan Lamers lifted his target price to $19 from $17.
- National Bank’s Cameron Doerksen trimmed his target price to $20 from $21.
- Scotiabank’s Konark Gupta increased his target price by $1 to $19.
Financial forecasts
The company’s fiscal year-end is March 31.
The Street is forecasting revenue of $594-million in fiscal 2024, up from $543.6-million reported in fiscal 2023, and $639-million in fiscal 2025. The consensus EBITDA estimates are $77-million in fiscal 2024, up from $61.4-million reported in fiscal 2023, increasing to $93-million in fiscal 2025. The consensus earnings per share estimates are 69 cents in fiscal 2024, up from 37 cents reported in fiscal 2023, and $1.00 in fiscal 2025.
Valuation
According to Bloomberg, the stock is trading at a price-to-earnings multiple of 23.8 times the fiscal 2024 consensus estimate, above its five-year historical average multiple of 20 times. The stock is trading at 16.4 times the fiscal 2025 consensus estimate, above its five-year historical average multiple of 15.4 times.
On an enterprise value-to-EBITDA basis, the stock is trading at a multiple of 9.6 times the fiscal 2024 consensus estimate, above its five-year historical average multiple of 8.9 times. The stock is trading at a multiple of 8 times the fiscal 2025 consensus estimate, slightly above its five-year historical average multiple of 7.7 times.
The average target price is $19.40, implying the share price has 18 per cent upside potential over the next year. Individual target prices are as follows in numerical order: $18 (from TD’s Tim James), two at $19, $20 and $21 (Desjardins Benoit Poirier).
Insider transaction activity
Looking back to the beginning of the third-quarter, there has not been any trading activity in the public market reported by insiders.
Chart watch
Year-to-date, the share price has rallied 25 per cent.
Looking at key technical resistance and support levels, shares face an initial ceiling of resistance around $18. After that, there is overhead resistance around $20. Looking at the downside, there is initial support between $15 and $15.50, close to its 50-day moving average (at $15.78). Failing that, there is strong technical support around $14, near its 200-day moving average (at $14.33).
This small-cap security can be thinly traded, which can create price volatility. The three-month historical daily average trading volume is approximately 31,000 shares.
ESG Risk Rating
Looking at three risk providers, Sustainalytics, MSCI and Bloomberg, the company currently does not have an environmental, social and governance (ESG) risk rating.
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.
This report should not be considered an investment recommendation.
Jennifer Dowty