On today’s Breakouts report, there are 53 stocks on the positive breakouts list (stocks with positive price momentum), and 13 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is stock that just began trading on the Toronto Stock Exchange on May 7.
A mere 12 trading days later, the share price has already gained 12 per cent. The company operates in industry that has sparked a great deal of investor interest – the rapidly growing electric vehicle market.
On May 26, Ford Motor Co. (F-N) said that they expect electric vehicles to represent 40 per cent of its sales by 2030. Given the positive industry momentum, this stock has tremendous earnings growth forecast in the years ahead. As a result, this company is one to watch and the stock may surface on the positive breakouts list later this year. The stock highlighted today is The Lion Electric Company (LEV-T).
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Quebec-based Lion is a manufacturer of electric trucks, buses, and minibuses as well as charging infrastructure.
The stock is dual-listed, trading on the Toronto Stock Exchange and New York Stock Exchange under the same ticker, LEV.
Investment thesis
- Robust earnings growth expected: however, the significant ramp up is a couple of years away.
- Production capacity ramping up. Currently, Lion has a manufacturing facility in Montreal that can manufacture 2,500 vehicles annually. However, construction is ongoing to build a 900,000 square foot facility in the state of Illinois that will be able to produce 20,000 electric vehicles each year starting in the second half of 2022.
- Blue-chip clients that include Amazon, IKEA, Sobeys, Canadian National Railway, Waste Connections, and Student Transportation of America.
- Amazon master purchase agreement. Amazon may purchase up to 2,500 trucks. As detailed in the prospectus, “Lion will be required to reserve manufacturing capacity in respect of forecasted volumes representing up to 500 trucks per year from 2021 to 2025 and the greater of 500 trucks per year or 10 per cent of Lion’s manufacturing capacity from 2026 to 2030.”
- Government support for electric vehicles (e.g. U.S. President Biden wants to electrify 20 per cent of the fleet of 500,000 school buses over the next eight years).
- Increasing Environmental, Social, and Governance (ESG) investing.
- Catalyst: Rising order book with potential new contract wins and orders.
Quarterly earnings results
Before the market opened on May 17, the company reported its first-quarter financial results. Revenue came in at $6.2-million. Earnings before interest, taxes, depreciation and amortization was negative $5.9-million.
During the quarter, 24 vehicles were delivered (18 school buses and six trucks). Subsequent to quarter end, 10 trucks were delivered to Amazon.
As of May 17, the vehicle order book totaled 817 units (608 buses and 209 trucks) and LionEnergy’s order book stood at 76 charging stations and services.
On the earnings call, founder and chief executive officer Marc Bedard stressed three main points, “Number one, we successfully completed our public listing and related private placement for a net raise of approximately $490-million, which is available to support our key growth initiative. Number two, Lion has strong momentum with clients. Despite the continued impact of COVID-19, we are seeing a positive trend in our order book with accelerating deliveries as shown by the significant order of 260 school buses that we announced earlier this morning. Number three, we continue to execute on our strategic plan. We announced the building of a U.S.-based, large-scale 20,000 electric vehicle manufacturing capacity per year plan in Joliet, Illinois. We also announced the construction of a highly automated five gigawatt hour per year battery plant, which we announced with both the Prime Minister of Canada, Mr. Trudeau, and the Premier of Quebec, Mr. Legault. This battery plant has the capacity to provide batteries for approximately 14,000 Lion vehicles per year.”
Dividend policy
Management is currently focused on growing the company and as a result Lion will not be paying dividends to its shareholders. Instead, the company will retain future earnings to fund its growth.
Analysts’ recommendations
There are five analysts who cover this industrial stock, of which three analysts have buy recommendations, one analyst has a “speculative buy” recommendation, and one analyst (Jon Lopez at Vertical Group) has a “neutral” recommendation.
The five firms providing research coverage on the company are as follows in alphabetical order: BMO Nesbitt Burns, Desjardins Securities, Laurentian Bank Securities, National Bank Financial, and Vertical Group.
In the near-term, we may see one additional analyst initiate coverage on the company – Raymond James’ Michael Glen, who asked management several questions on the first-quarter earnings call.
Financial forecasts
The Street is anticipating revenue to come in at US$131-million in 2021, US$597-million in 2022, US$1.4-billion in 2023, and US$2.7-billion in 2024. The consensus EBITDA estimates are a loss of US$2-million in 2021, but turning positive in subsequent years with US$68-million forecast in 2022, US$197-million anticipated in 2023, and US$433-million in 2024. The consensus earnings per share estimates are a loss of 23 US cents in 2021, and turning profitable thereafter with earnings per share of 5 US cents forecast for 2022, jumping to 55 US cents in 2023, and US$1.64 in 2024.
Valuation
Since the company is not yet profitable, analysts commonly value the stock on an enterprise value [EV]-to-sales multiple basis. According to Bloomberg, the stock is trading at an EV/Sales multiple of 6.4 times the 2022 consensus estimate and at 2.7 times the 2023 consensus estimate.
The average one-year target price is approximately $25.80, suggesting the stock has approximately 7 per cent upside potential over the next 12 months. Individual target prices are as follows: US$16 (from Jon Lopez, the analyst at Vertical Group), US$20, US$22, $27 (Canadian), US$26.
Insider transaction activity
There has not been any trading activity reported by insiders since the stock began trading.
Chart watch
Given the stock’s brief trading history, technical analysis is limited.
On May 7, the stock began trading on the Toronto Stock Exchange. That day, the share price closed at $21.59 and since then it has rallied 12 per cent, closing at $24.14 on May 26- just 12 trading days later.
The stock has reasonable trading volume. The daily average trading volume is approximately 600,000 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.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.
Jennifer Dowty