On today’s TSX Breakouts report, there are 64 stocks on the positive breakouts list (stocks with positive price momentum), and 16 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that appeared on the negative breakouts list several days ago.
For the past two quarters, the company has reported better-than-expected quarterly earnings results that sent the share price to a record high on Nov. 25. However, since then the share price has dropped 14 per cent and is in correction territory.
The company has a relatively defensive business model with stable recurring revenue and offers investors an attractive monthly dividend with a current annualized yield of over 5 per cent.
The company will be reporting its quarterly earnings results on Feb. 24. During the quarter, mortgage spreads tightened. Consequently, if there is further weakness in the share price, this may represent a buying opportunity for investors.
The security highlighted today is First National Financial Corp. (FN-T).
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
Toronto-based First National is the country’s largest non-bank mortgage lender.
Management’s objective is to grow a conservative portfolio of high quality, prime mortgages. First National services both businesses as well as individuals by offering commercial and residential mortgages and has a portfolio of over $110-billion in mortgages under administration (MUA). The company’s business model is relatively defensive with stable recurring revenue from its mortgages. Furthermore, most of the company’s MUA is insured and funded resulting in no residual credit risk to the company. In addition, positive economic and industry conditions (economic growth, employment growth, low interest rates, and housing demand) benefit the company. In 2018, return on equity was an impressive 37 per cent.
On Dec. 13, the company completed a secondary offering as two large shareholders, co-founder Stephen Smith and co-founder Moray Tawse, sold shares at a price of $42.40 per share. After the offering, Mr. Smith’s ownership was reduced (but remains significant) to approximately 37 per cent and Mr. Tawse’s ownership stood at roughly 34 per cent.
On Dec. 2, management announced that it will provide mortgage underwriting to Manulife Bank through its residential mortgage broker channel in Ontario and Atlantic Canada. Perhaps in the future, this relationship may expand to other provinces.
After the market closed on Oct. 29, the company reported solid third-quarter financial results that sent the share price soaring nearly 9 per cent the following trading day.
Mortgages under administration came in at a record $110.6-billion, up 5 per cent year-over-year. New mortgage originations were $5.6-billion, up from $5.4-billion reported last year. New single-family mortgage originations were $4.2-billion, up 8 per cent year-over-year compared to $3.9-billion reported last year. However, commercial originations amounted to $1.4-billion, down 2 per cent from $1.5-billion reported last year. Reported earnings per share of $1.00 exceeded the consensus estimate of 80 cents. The funding mix shift was a major contributor to the strong quarterly earnings results.
On the earnings call, chief financial officer Rob Inglis said: “One of the key storylines so far this year is the change in our funding mix, positive demand. First National increased the amount of mortgages placed with institutional investors by about $1.6-billion in the third quarter compared to last year. Institutional placements increased from about $4.3-billion in the 2018 third quarter to $5.9-billion in 2019. A portion of this expansion was due to overall growth in origination, but [the] majority represented a shift between funding sources. This shift has the effect of accelerating the recognition of our earnings, along with higher MUA and wider spreads. This was a driving force in third quarter performance.”
On the earnings call, Mr. Tawse provided a positive but cautious outlook for the fourth-quarter. He said: “Looking at fourth quarter and considering the various moving parts in our business and in the market overall, we remain optimistic for two very good reasons: one, single-family mortgage commitments continue to outpace commitments at the same time last year; two, our commercial team anticipates a strong finish to the year based on its current pipeline and origination forecast. As our outlook holds up, we execute well on the opportunity inherent in our single-family renewal book. Our MUA for both single-family and commercial will finish the year at record levels. Before we celebrate, I should note that we continue to face uncertainty with our securitization margins. As you may have noticed, mortgage spreads have been volatile in the past 12 months and in fact, tightened towards the end of the quarter compared to where they were at the start of the quarter.”
In the fourth-quarter, the spread between the five-year mortgage rate and the five-year Government of Canada bond yield narrowed, putting pressure on earnings.
The company will be reporting its fourth-quarter financial results after the market closes on Feb. 24 and management is hosting a conference call the following day at 10:30 a.m. ET. The consensus earnings per share estimate is 74 cents.
Management is committed to its dividend, frequently raising its dividend and paying special dividends to its shareholders.
In October of 2019, the company announced a 2.6 per cent increase to the monthly dividend, representing the 12th increase since the company went public in 2006. The dividend was increased to 16.25 cents per share from 15.8333 cents per share. This equates to a yearly dividend of approximately $1.95, or a current annualized yield of approximately 5.1 per cent.
The payout ratio was 48 per cent in the third quarter and 68 per cent during the first nine months of 2019.
Also positive, in October of 2019, the company announced a special dividend of 50 cents per share. In October of 2018, the company announced a special dividend of $1 per share and in October of 2017, announced a special dividend of $1.25 per share.
There are five analysts that cover this small-cap financial stock with a market capitalization of $2.3-billion, of which all five analysts have neutral recommendations.
Interestingly, looking back over the past five years, only one analyst (TD Securities’ Graham Ryding) has ever had a “buy” recommendation on the stock. All of the other analysts have only had neutral/hold or sell recommendations on the stock. Yet, the share price closed at a record high of $44.60 on Nov. 25, 2019.
The firms providing research coverage on the company are as follows in alphabetical order: BMO Nesbitt Burns, National Bank Financial, RBC Dominion Securities, Scotiabank, and TD Securities.
Earlier this month, Mr. Ryding trimmed his target price to $40 from $42.
In December, RBC’s Geoffrey Kwan raised his target price to $43 from $40. Jaeme Gloyn of National Bank Financial increased his target price to $41 from $38.
The consensus earnings per share estimates are $2.97 in 2019, up from $2.73 reported in 2018, and anticipated to increase 5 per cent to $3.12 in 2020.
Earnings forecasts have increased. For instance, four months ago, the consensus earnings per share estimates were $2.73 for 2019 and $3.03 for 2020.
According to Bloomberg, the stock is trading at a price-to-earnings multiple of 12.2 times the 2020 consensus estimate, below its peak multiple of 15 times but above its three-year historical average multiple of 10.5 times.
The average one-year target price is $40.40, implying the stock price has 6 per cent upside potential, and a potential total return of 11 per cent including the 5 per cent dividend yield. Individual target prices are as a follows in numerical order: $38 (from BMO’s Nik Priebe), two at $40, $41 and $43 (from Mr. Kwan of RBC).
Insider transaction activity
Year-to-date, no individual on the management team or board of directors has reported buying or selling activity in the public market.
Year-to-date, the share price is relatively unchanged, up less than 1 per cent. However, the share price has been under pressure since late-Nov., declining 14 per cent from its record closing high of $44.60 set on Nov. 25.
On Feb. 7, the stock became oversold with a relative strength index (RSI) reading of 23 and the share price closing at $36.65. Generally, a reading of 30 or lower represents an oversold condition.
In terms of key resistance and support levels, the stock price has major overhead resistance around $40, and after that, around $45. Looking at the downside, there is strong technical support between $35 and $36, near its 200-day moving average (at $36.25).
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.
Editor’s note: An earlier version of this article incorrectly said mortgages came in at $110.6-million, when it is in fact billion.