On today’s TSX Breakouts report, there are 52 stocks on the positive breakouts list (stocks with positive price momentum), and 16 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that appears on the positive breakouts list. Since late-July, the share price has been holding steady around the $12 level. The share price is up over 25 per cent year-to-date, and analysts are forecasting further upside. The average 12-month target price implies a potential total return (including the dividend yield) of over 19 per cent. The stock has an attractive yield, currently at 5.9 per cent.
The security discussed today is KP Tissue Inc. (KPT-T).
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
Through its 14.8-per-cent limited partnership interest in Kruger Products L.P., Ontario-based KP Tissue is involved in the manufacturing and marketing of tissue products, including toilet paper, facial tissues, paper towels and paper napkins under brand names that include Cashmere, Purex, Scotties, SpongeTowels, and White Cloud.
According to Nielsen data for the year ending June 13, Kruger products held the top dollar market share position in Canada within the bathroom tissue segment (35.5 per cent), the No. 1 position in the facial tissue segment (30.9 per cent), and had the second-largest dollar market share position in Canada in the paper towel category (21.5 per cent, behind market leader Procter & Gamble).
The company has eight manufacturing plants, four tissue plants are located in Quebec, two facilities are in Ontario, one facility is in B.C., and there is one manufacturing facility in the U.S. (located in Memphis, Tennessee).
The company services two market segments - retail consumers (i.e. households) as well as commercial users or the AFH (away-from-home) market (i.e. hotels, restaurants, schools, office buildings, etc.). Last quarter, the retail consumer segment represented approximately 87 per cent of total revenue and the AFH market represented roughly 13 per cent of total revenue.
The Caisse de dépôt et placement du Québec is a large shareholder with an ownership position exceeding 17 per cent according to Bloomberg.
Quarterly earnings highlights
Before the market opened on Aug. 6, the company reported better-than-expected second-quarter financial results. High demand for its consumer products due to COVID-19 more than offset lower demand from the AFH market.
Revenue came in at $386.8-million, up 5.8 per cent year-over year. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $64.4-million, up 104.6 per cent year-over-year, and well above the consensus estimate of $47.1-million. This strength was driven by strong consumer demand, lower input prices, and lower manufacturing costs. The share price increased 2 per cent that day on normal trading volume.
At the height of the coronavirus pandemic, management streamlined its operations and improved productivity by reducing its product offerings and focusing on its top-selling brands. Its product offerings were reduced by almost 50 per cent, some of these reductions will be permanent. Management plans to slowly return products to its lineup, back to around 75 per cent of its pre-COVID levels.
Management’s objective of achieving cost savings of between $15-million and $20-million on a run-rate basis by the end of this year remains on track.
At the peak of COVID-19, consumers stockpiled toilet paper and paper towels. While demand for these products is expected to continue to subside, chief executive officer Dino Bianco believes there are additional growth opportunities ahead for the company.
On the earnings call, Mr. Bianco highlighted that its TAD (Through-Air-Dried) Sherbrook facility is on budget and on time with a full plant start-up expected in early 2021. He added, “The COVID-19 impact on demand has created elevated interest in the output of this new facility, and we expect demand to exceed supply during the ramp-up period.”
Mr. Bianco also commented on potential acquisition opportunities, “We continue to look at M&A (mergers and acquisitions). I mean, it is -- as you can imagine, multiples for tissue companies are very high these days, given COVID. But we continue to look at not just M&A, but joint partnerships and licensing deals and so forth. There are lots of vectors of growth that we continue to look at in tissue, let alone adjacencies such as wipes and other things. We’re really still focused on tissue. We think there’s lots of room to grow in North America.”
The company pays its shareholders a quarterly dividend of 18 cents per share or 72 cents per share on a yearly basis. This equates to a current annualized yield of 5.9 per cent.
KP Tissue has maintained its dividend at this level since 2013.
There are six firms that provide research coverage on this consumer staples stock, of which two analysts have “outperform” recommendations and four analysts have neutral recommendations.
The firms providing research coverage on the company are: CIBC World Markets, Desjardins Securities, National Bank Financial, RBC Dominion Securities, Scotiabank and TD Securities.
The consensus EBITDA estimates are $219-million in 2020 and $218-million in 2021. The Street is forecasting earnings per share of $1.08 in 2020, and forecast to decline to 92 cents the following year.
Earnings forecasts have increased over recent months. For instance, three months ago, the Street was forecasting EBITDA of $184-million in 2020 and $191-million in 2021. The consensus earnings per share estimates were 66 cents for 2020 and 56 cents for 2021.
Analysts commonly value the stock on an enterprise value-to-EBITDA multiple basis.
The one-year consensus target price is $13.79, suggesting there is nearly 14 per cent upside in the share price over the next 12 months. Including the dividend yield, this represents a potential total return of over 19 per cent.
Individual target prices are as follows in numerical order: two at $13, $13.25, $13.50, $14, and $16 (from Zachary Evershed at National Bank Financial).
In August, all six analysts covering the company increased their target prices.
- CIBC’s Hamir Patel to $13 from $12.
- Scotiabank’s Benoit Laprade to $13.25 from $12.50.
- National Bank’s Zachary Evershed by $3.50 to $16.
- Desjardins’ Frederic Tremblay to $13 from $11.50.
- TD Securities’ Sean Steuart to $13.50 from $12.
- RBC’s Paul Quinn to $14 from $13.
Insider transaction activity
Year-to-date, there has only been buying activity reported by insiders - albeit relatively small trades. The most recent purchases are detailed below.
On Aug. 10-11, Mr. Bianco invested $30,000 in shares of KPT. He acquired a total of 2,500 shares at an average price per share of approximately $12.05, raising this particular account’s position to 9,737 shares.
On May 11, David Angel, the chief financial officer at Kruger Inc., purchased 443 shares at a cost per share of $10, increasing this specific account’s position to 14,840 shares.
On March 24, Mario Gosselin bought 12,000 shares at a price per share of $8.66, increasing this particular account’s holdings to 16,000 shares. The cost of this investment exceeded $103,000. In March 2018, Mr. Gosselin retired from this position as the chief executive officer of KP Tissue and Kruger Products L.P.
Year-to-date, the share price is up nearly 26 per cent.
In spite of the recent market volatility experienced over recent weeks, KPT’s share price been relatively stable, hovering around $12.
Daily average trading volume is low. To illustrate, the three-month historical daily average trading volume is approximately 15,000 shares.
In terms of key resistance and support levels, the stock’s next major overhead resistance level is around $14. Looking at the downside, there is initial technical support just below $12, near its 50-day moving average (currently at $11.79). Failing that, there is technical support around $10, close to its 200-day moving average (at $10.60).
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.
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