On today’s TSX Breakouts report, there are 72 stocks on the positive breakouts list (stocks with positive price momentum), and just five securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that may appear on the positive breakouts list later this year as the share price continues to stabilize and recover from its steep decline in late 2018. Recessionary fears drove the share price lower as investors feared demand for the company’s products would fall. Given the sharp pullback in the share price during the final four months of last year, the stock is inexpensive, trading at a discount to its historical valuations. The stock has eight buy recommendations and an expected one-year price return of nearly 43 per cent.
The security highlighted today is BRP Inc. (DOO-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Quebec-based BRP manufactures and markets powersports vehicles and propulsion systems. Products manufactured include roadsters, all-terrain vehicles, snowmobiles, and personal watercrafts with brand names such as Can-Am, Lynx, Ski-Doo, and Sea-Doo. The company has operations worldwide, in Canada, the United States, Mexico, Austria and Finland. There is a high degree of seasonality in the business with the first half of the fiscal year (the company’s fiscal year-end is Jan. 31) historically the weakest period, and the second half the strongest period.
In terms of geographical revenue breakdown, during the first nine months of fiscal 2019, 54 per cent of its revenue was from the U.S., 17 per cent was from Canada, and the balance was from international regions. As such, there are foreign exchange currency exposures to consider. The company reports its financial results in Canadian dollars.
Before the market opened on Nov. 30, the company reported better-than-expected third-quarter fiscal 2019 financial results. Revenue came in at $1.39-billion, rising 14 per cent year-over-year. Normalized EBITDA (earnings before interest, taxes, depreciation and amortization) came in at $203-million, surpassing the consensus estimate of $194-million. Normalized EPS (earnings per share) was $1.04, well above the Street’s forecast of 98 cents. The share price rallied 7 per cent that day on high volume.
In the earnings release, the president and chief executive officer José Boisjoli noted, "The fundamentals of our business are robust, we continue to drive operational excellence, and are thus well positioned to be very competitive despite the current potential headwinds caused by current market inflationary pressure. The diversified BRP product portfolio and line-up has never been as strong and the degree of positive engagement from our dealers is very high. We are excited by our momentum and are committed on delivering another record year of normalized EPS growth of 30 per cent to 35 per cent".
On the earnings conference call, Mr. Boisjoli remarked on macroeconomic conditions as it relates to demand for the company’s products, “Obviously, we are not economists but the interest rate has increased, and many are a bit concerned that it will impact consumer demand. But to be honest, in Q3 (third-quarter), the traffic at the store was good as you can see in our retail (figures). So far, in Q3, watercraft and side-by-side were up about 25 per cent, and in Europe, it was the same thing. We don't see any impact at the retail level and like I said, the traffic was still very good…everything is growing except ATV, which is flattish, and the snowmobile, which is too early to conclude anything. We understand that there is some concern on the global economy, but we don't see that at our level and we believe that as long as the unemployment rate is low and the housing market is, I would say, okay, we are in good shape.”
The company is scheduled to report its fourth-quarter fiscal 2019 financial results around March 20, a firm date has not be set yet. The Street is forecasting EBITDA of $179-million and the consensus earnings per share estimate is 83 cents.
The stock is dual-listed, trading on the Toronto Stock Exchange under the ticker DOO, and on the Nasdaq under the ticker DOOO.
Returning capital to shareholders
In June 2017, management announced the initiation of a quarterly dividend. Less than one year later, management announced a dividend increase, raising its quarterly dividend to 9 cents per share from 8 cents per share. This equates to a yearly dividend of 36 cents per share and an annualized dividend yield of 0.9 per cent.
During the first nine months of fiscal 2019, the company repurchased over 3.6-million shares, completing its current share buyback program.
Analysts’ recommendations
There are 10 firms providing recent research coverage on the company, of which eight analysts have buy recommendations and two analysts have hold recommendations.
The firms providing recent research coverage on BRP are as follows in alphabetical order: Baird, BMO Capital Markets, Canaccord Genuity, CIBC Capital Markets, Desjardins Securities, GMP Securities, Morningstar, National Bank Financial, TD Securities, and Wells Fargo Securities.
Revised recommendations
Earlier this month, TD Securities’ Brian Morrison initiated coverage on the stock with a “hold” recommendation and a target price of $46.
In January, Cameron Doerksen, the analyst from National Bank Financial, slashed his target price to $48 from $63.
Financial forecasts
The Street is forecasting EBITDA of $654-million in fiscal 2019, increasing 14 per cent to $748-million in fiscal 2020. The consensus earnings per share estimates are $3.06 in fiscal 2019 and $3.59 in fiscal 2020. Management is guiding to earnings per share of at least $3.50 in fiscal 2020.
Over the past several months, consensus estimates have declined. To illustrate, three months ago, the Street was forecasting EBITDA of $656-million for fiscal 2019 and $756-million in fiscal 2020. The consensus earnings per share estimates were $3.08 for fiscal 2019 and $3.63 for fiscal 2020.
Valuation
According to Bloomberg, the stock is trading at a price-to-earnings multiple of 11.3 times the fiscal 2020 consensus estimate, well below the three-year historical average P/E multiple of 15.7 times. On an enterprise value-to-EBITDA basis, the stock is trading at 6.8 times the fiscal 2020 consensus estimate, which is below its three-year historical average multiple of 9.1 times.
The consensus one-year target price is $57.76, implying the stock has nearly 43 per cent upside potential. Target prices vary widely. Individual target prices are as follows in numerical order: $39 (the low on the Street is from Timothy Conder, the analyst at Wells Fargo Securities), $46, $48, $51, $58.35, $60, $63, $65, $73 and $74 (the high on the Street is from Benoit Poirier, the analyst at Desjardins Securities).
Insider transaction activity
Looking back to the beginning of the fourth-quarter, Oct. 1, 2018, there have not been any transactions reported by insiders.
Chart watch
Year-to-date, this consumer discretionary stock is up over 14 per cent, recovering after its sharp decline during the final four months of 2018. Late last year, the share price was cut in half, plunging 111 per cent to $33.35 on Dec. 24, 2018 from $71.11 on Sept. 10.
In terms of key resistance and support levels, there is a major ceiling of resistance around $50. Looking at the downside, there is initial technical support around $37, close to its 50-day moving average (at $37.54). Failing that, there is strong support around $33.
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