On today’s TSX Breakouts report, there are 20 stocks on the positive breakouts list (stocks with positive price momentum), and 39 securities on the negative breakouts list (stocks with negative price momentum).
While real estate investment trusts dominate the positive breakouts list, numerous analysts see limited near-term upside potential given that many of these trusts are trading at reasonable valuations.
Year-to-date, Tecsys’ share price has rallied over 30 per cent and analysts are expecting the share price to continue to rise. The stock has seven buy-equivalent recommendations and an average 12-month target price that implies a potential 14 per cent price return.
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
Montreal-based Tecsys provides supply chain management software to its customers, providing solutions in areas such as warehouse, distribution, and transportation management. With over 1,000 customers, the company is a software supplier across four key markets: healthcare, retail, distribution, and third-party logistics.
In terms of geographical breakdown, in fiscal 2019 (the company’s fiscal year-end is April 30), approximately 61 per cent of the company’s revenue was from U.S. customers, roughly 30 per cent was derived from Canada, and the balance was from regions outside of North America (mainly Europe). Consequently, the company faces currency risks with the majority of its revenue denominated in U.S. dollars, while most of the company’s expenses are denominated in Canadian dollars.
In fiscal 2019, roughly 50 per cent of the company’s total revenue was recurring in nature (contracted cloud, maintenance and subscription services). This recurring revenue provides the company with earnings visibility and predictability.
On Sept. 5, the company reported better-than-expected first quarter fiscal 2020 financial results. Revenue came at $24.3-million, up 49 per cent year-over-year and slightly ahead of the consensus estimate of $23.1-million. Organic (internal) revenue growth was 15 per cent year-over-year, including a foreign exchange contribution. Gross profit margin was 48 per cent, up from 47 per cent reported last year. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $2-million, above the Street’s forecast of $0.9-million. The company reported a loss per share of two cents, in-line with the consensus estimate. Bookings in the second quarter totalled $14-million, up from $10.6-million reported during the same period last year. At quarter-end, the company had $13.3-million of cash on its balance sheet.
During the quarter, the company signed eight new contracts with a combined value of $3.4-million. Management stated that another two deals were signed after the quarter. Backlog, an indicator of future revenue, stood at $76.4-million at quarter-end.
After the company released these quarterly results, the share price spiked higher, rallying 6 per cent that day and climbing an additional 7 per cent the following trading session on high volume.
However, I would caution investors that earnings results can result in disappointments. After the company reported each of its quarterly fiscal 2019 results, the share price dropped immediately after the company released its quarterly results. The company has been facing growing pains as it transitions more of its revenue to a SaaS (subscription as a service) model.
On the earnings call, the president and chief executive officer Peter Brereton provided insightful remarks on the transition process and its impacts: “In the last year, we announced that Tecsys is transitioning to a SaaS revenue-based business model and away from its traditional perpetual license-based model. The speed of transition is actually faster than we were anticipating, which tells us that our timing was good because our prospects continue to be eager to adopt the new offering.” He added, “Although we are making progress and we are gaining momentum, it’s not without some short-term negative financial impact. License revenue, which used to be recognized, or I should say, which used to be immediately recognizable on order signing, is being replaced with subscription revenue that is recognized over an extended period of time. The crossover happens around month 40. In other words, after 40 months, the total revenue from the subscription begins to exceed the revenue that would have come from software license and maintenance fees. This delay in revenue is being somewhat obscured by the recent acceleration in overall bookings and new accounts as evidenced by our last fiscal year, where organic bookings grew by 23 per cent, leading to a sustained surge in professional services revenue. The long-term build of our revenue streams should result in a more predictable outlook for investors with elevated long-term margins.”
Chief financial officer Mark Bentler expanded on the near-term impact on margins, “Gross margin was 48 per cent compared to 47 per cent in the prior year with significant expansion in services gross margin offset by lower product margin due to the lower mix of license revenue. As previously indicated, lower license revenue driven by the overall shift to SaaS will have a negative short-term effect on our margins, and we saw this in Q1 (first-quarter) 2020.”
The company is not expected to report its second-quarter fiscal 2020 financial results until the end of November. The Street is anticipating the company to report revenue of $23.9-million, EBITDA of $1.7-million and earnings per share of 2 cents.
Management is committed to returning capital to its shareholders.
The company pays its shareholders a quarterly dividend of 5.5 cents per share, or 22 cents per share yearly. This equates to an annualized dividend yield of 1.4 per cent.
In Nov. 2018, management announced a 10 per cent increase to its quarterly dividend, lifting it to its present level of 5.5 cents per share from 5 cents per share. In Nov. 2017, the company announced an 11 per cent dividend hike. If history repeats itself, management may announce a dividend increase next month.
The small-cap stock with a market capitalization of $211-million is actively covered by seven analysts, and all seven analysts have buy recommendations.
The analysts issuing recent research reports on the company are from the following firms that are listed in alphabetical order: Beacon Securities, Cormark Securities, Echelon Wealth Partners, GMP, Haywood Securities, Laurentian Bank Securities and National Bank Financial.
Earlier this month, Gavin Fairweather, an analyst at Cormark Securities, upgraded his recommendation to a “buy” from a “market perform” and bumped his target price to $19 from $15.50.
In Sept., two analysts revised their expectations – both higher. Nick Agostino of Laurentian Bank Securities increased his target price to $19 from $17. Beacon Securities’ Gabriel Leung took his target price up to $18 from $15.
The Street is forecasting revenue of $97-million in fiscal 2020, up from $76.4-million reported in fiscal 2019, and $106-million in fiscal 2021. The consensus EBITDA estimates are $7.2-million for fiscal 2020, climbing to $11.1-million in fiscal 2021. The Street is anticipating earnings per share will come in at 4 cents in fiscal 2020 and 32 cents in fiscal 2021.
Earnings expectations have jumped for this fiscal year. For instance, three months ago, the Street was anticipating the company would report EBITDA of $5-million in fiscal 2020.
According to Bloomberg, shares of TECSYS are trading at an enterprise value-to-sales multiple of 2.3 times the fiscal 2020 consensus estimate.
The average 12-month target price is $18.43, implying the share price has 14 per cent upside potential over the next year. Individual target prices are as follows in numerical order: $17 (the low on the Street is from Echelon Wealth’s Amr Ezzat), three at $18, two at $19 and $20 (the high on the Street is from GMP’s Deepak Kaushal).
Insider transaction activity
So far in the second half of calendar 2019, two insiders have reported trades in the public market. However, these trades were both relatively small transactions.
Most recently, on Sept. 30, chief financial Mark Bentler purchased 1,300 shares at a price per share of $15.35, increasing his account’s holdings to 3,394 shares. The cost of this investment, not including commission charges, totaled roughly $20,000.
Prior to that, director John Ensign bought 975 shares at a price per share of U.S. $10.1735, lifting his portfolio’s position to 2,475 shares.
Year-to-date, the share price is up nearly 31 per cent.
The stock is thinly traded, which can lead to volatility in the share price. The three-month daily average trading volume is low at approximately 18,000 shares.
During the fourth-quarter of calendar 2018, the share price declined 25 per cent to close the year out at $12.36 from $16.50. The share price has nearly recovered from this loss, closing at $16.15 on Oct. 9, 2019. However, the recovery has been choppy with the share price experiencing pockets of weakness.
In terms of key technical resistance and support levels, the share price faces an initial ceiling of resistance around $16, where the share price currently lies. Should the stock price break and hold materially above $16, the next resistance level is around $17.50, and after that around $18.50. Looking at the downside, there is technical support around $14, near its 50-day moving average (at $14.06) and its 200-day moving average (at $13.62).
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.