On today’s TSX Breakouts report, there are 33 stocks on the positive breakouts list (stocks with positive price momentum), and 60 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that is on the positive breakouts list with the share price closing at an all-time high on Wednesday. Earlier this month, the company reported strong fourth-quarter earnings results that handily beat the Street’s expectations sending the share price up by 4 per cent the following trading day. The stock is currently trading at a reasonable valuation, in-line with its historical average. The stock is up 14 per cent year-to-date with an additional 14 per cent upside anticipated by analysts. The security highlighted today is Open Text Corp. (OTEX-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Waterloo, Ont.-based Open Text is a leading software provider of Enterprise Information Management (EIM), the company’s software helps its customers automate processes. The company’s revenue composition is attractive as Open Text has strong earnings visibility given its high recurring revenue business model (cloud services and subscription revenue). In terms of the company’s geographic revenue breakdown, in fiscal 2018, 57.5 per cent of its revenue is from the Americas, 32.6 per cent is from the EMEA (Europe, Middle East and Africa), with the balance, 9.9 per cent, from the Asia Pacific region. There is seasonality in the company’s business with the first-quarter historically the weakest quarter.
After the market closed on Aug, 2, the company reported better-than-expected fourth-quarter financial results (the company’s fiscal year end is June 30). All financial figures are denominated in U.S. dollars. Revenue came in at $754-million, up over 13 per cent year-over-year from $664-million reported during the same period last year. Annual recurring revenue was $535-million, representing 71 per cent of total revenue. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $282-million, ahead of the Street’s forecast of $263-million. Adjusted earnings per share came in at 72 cents, above the consensus earnings per share estimate of 68 cents. The company has a healthy balance sheet with a net debt-to-adjusted EBITDA ratio of 1.9 times. The following day, the share price rallied 4 per cent on high volume.
On the earnings call, chief executive officer Mark Barrenechea provided a positive outlook for fiscal 2019 stating, “Let me transition to fiscal 2019 in the exciting year ahead. We have strong software and support sales, a solid recurring revenue business, a healthy balance sheet for continued M&A (merger and acquisition) and organic growth, and new products in cloud, security, business networks, content services and analytics and AI. OpenText has a world-class leadership team that is second to none. We’ve also doubled down on global partnerships that move our business forward with uncompromised value to customers. This is why we’re winning customers and platform wins, like Nestlé, General Motors, BMW, U.S. Department of Interior, Daimler and Siemens.”
Management expects to see continued margin expansion and increased their margins expectations by 100 basis points for fiscal 2019, now expecting adjusted EBITDA margins to be between 36 per cent and 38 per cent. In fiscal 2018, adjusted EBITDA margins were 36 per cent, up from 35 per cent in fiscal 2017. Looking out to fiscal 2021, management believes they can achieve EBITDA margins of between 38 per cent and 40 per cent.
The company is dual-listed, trading on the Toronto Stock Exchange as well as the Nasdaq under the same ticker, OTEX.
Dividend policy
The company pays shareholders a quarterly dividend of U.S. 15.18 cents per share, or roughly U.S. 61 cents per share on a yearly basis. This equates to an annualized yield of 1.55 per cent.
Since 2014, management has announced a dividend hike each year around the April/May time frame and this year was no different. On May 9, management announced a dividend increase, hiking the quarterly dividend to its present level of U.S. 15.18 cents per share from U.S. 13.2 cents per share.
Analysts’ recommendations
This technology stock is well covered by the Street. Since the company reported its fiscal year-end financial results on August 2, 14 analysts have issued research reports, of which 13 analysts had buy recommendations and one analyst (Gus Papageorgiou from Macquarie) has maintained his ‘underperform’ recommendation.
Revised recommendations
Many analysts modestly increased their expectations after the company reported the better-than-expected fourth-quarter results.
All target prices are expressed in U.S. dollars. Paul Treiber, the analyst from RBC Capital Markets, lifted his target price to $45 from $44. Stephanie Price from CIBC Capital Markets raised her target price by $1 to $46. Paul Steep from Scotia Capital increased his target price by $1 to $46. Daniel Chan from TD Securities took his target price up to $43 from $40. Blair Abernethy from Industrial Alliance Securities raised his target price by $2 to $42. Thanos Moschopoulos from BMO Capital Markets raised his target price to $43 from $42. Raymond James analyst Steven Li increased his target price to $48 from $42. Barclays’ Phillip Huang hiked his target price by $2 to $48. Gus Papageorgiou from Macquarie lifted his target price to $36.50 (the low on the Street) from $34.
Financial forecasts
All financial figures are expressed in U.S. dollars. The Street is forecasting EBITDA of $1.08-billion in fiscal 2019 and $1.15-billion in fiscal 2020. The consensus earnings per share estimates are $2.73 in fiscal 2019, rising to $2.99 in fiscal 2020.
Earnings estimates for fiscal 2019 have moderated, declining slightly over the months. For instance, in early May, the consensus earnings per share estimate was $2.84 for fiscal 2019.
Valuation
According to Bloomberg, the stock is trading at a price-to-earnings (P/E) multiple of 14.4 times the fiscal 2019 consensus estimate, in-line with the stock’s three-year historical average multiple. Over the past three years, the stock has traded at a forward P/E multiple ranging principally from 13 times to 17 times. On an enterprise value-to-EBITDA basis, the stock is trading at 11.5 times the fiscal 2019 consensus estimate, which is in-line with his historical average.
Target prices from all but one analyst are expressed in U.S. dollars. Upon currency conversion, the average one-year target price is approximately Cdn. $58.07, implying the share price has nearly 14 per cent upside potential over the next 12 months.
Insider transaction activity
Numerous senior management executives have been recent sellers in the market. Several transactions are noted below.
On Aug. 7, recently retired chief financial officer John Doolittle exercised his options and sold the corresponding number of shares (10,000) at a price per share of U.S. $38.5277, leaving 19,861 shares in his account.
On June 14, Gary Weiss, senior vice-president, general manager – discovery and analytics business unit, exercised his options and sold the corresponding number of shares (30,000) at a price per share of U.S. $36.21, leaving 20,618 shares in his portfolio.
On June 11, Ted Harrison, executive vice-president – worldwide sales, exercised his options and sold the corresponding number of shares (10,000) at a price per share of U.S. $35.8077 with 11,734 shares remaining in his portfolio.
On May 31, Mr. Barrenechea sold 98,000 shares at a price per share of U.S. $34.6753, reducing his portfolio’s holdings to 630,966 shares.
Chart watch
Year-to-date, the top performing sector in the S&P/TSX composite index is the technology sector with a price return of nearly 22 per cent, handily exceeding the 0.7 per cent gain for the TSX Index. Within the sector, nine of the 11 stocks have delivered double-digit returns. The top performing stock in the sector is Shopify Inc. (SHOP-T) with a 46 per cent gain realized so far this year. Shares of Open Text have rallied a respectable 14 per cent.
On a longer-term basis, the stock has delivered solid gains to its shareholders. The stock price closed at an all-time high on Wednesday. In calendar 2017, the share price climbed 8 per cent. In the prior year, the share price increased 25 per cent.
In terms of key resistance and support levels, the stock price recently broke above a major resistance level around Cdn. $48. The next ceiling of resistance is around $55. Looking at the downside, there is initial support around $50 and failing that around $48, near its 50-day moving average (at $47.85).
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.
Jennifer Dowty