On today’s TSX Breakouts report, there are seven stocks on the positive breakouts list (stocks with positive price momentum), and 55 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that has provided stability to portfolios in recent weeks amidst increasing market volatility.
Month-to-date, the share price is relatively unchanged, up 1 per cent. It was one of the few stocks that closed higher on Monday, rising 0.35 per cent (just 29 of the 223 stocks in the S&P/TSX composite index closed higher), while the TSX declined 1.3 per cent.
The company has benefited from this work-from-home world. Some jobs may potentially move to permanent full-time or partial remote working.
The company reported better-than-expected second-quarter earnings results leading most analysts to revise their expectations higher. The stock has nine buy recommendations with an expected 14-per-cent total return (including the 2.3-per-cent dividend yield) over the next 12-months.
The security highlighted below is Intact Financial Corp. (IFC-T).
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Toronto-based Intact Financial is an industry leader. The company is Canada’s largest home, auto, and business insurance provider serving over five million customers in North America. The company has four core business segments: personal auto (e.g. auto insurance, which is the company’s largest business segment), personal property (e.g. home insurance), commercial lines in Canada, and U.S. P&C (property and casualty).
A key measure to monitor is the combined ratio, which is simply a measure of profitability (the lower the ratio, the higher the profitability). The combined ratio is calculated by adding the claims ratio (claims divided by net earned premiums) and the expense ratio (underwriting expenses divided by net earned premiums) together.
The company’s largest business segment is personal auto, accounting for approximately 37 per cent of total DPW (direct premiums written) and 53.5 per cent of total underwriting income in the second-quarter. Last quarter, the combined ratio for the personal auto business line strengthened to 84.7 per cent compared to 99.5 per cent reported last year. Less drivers on the road due to stay-at-home restrictions reduced claims.
The personal property business line represented 22.2 per cent of total DPW and 24 per cent of total underwriting income reported last quarter. The combined ratio improved to 88.6 per cent from 99.6 per cent last year.
Commercial lines in Canada represented 26.6 per cent of total DPW and just below 13 per cent of total underwriting income last quarter. The combined ratio for this business line was 95.1 per cent, up from 92.8 per cent reported last year. Lastly, U.S. P&C represented 14 per cent of total DPW and 9 per cent of total underwriting income and reported a combined ratio of 93.2 per cent, down from 94.8 per cent realized last year.
In terms of geographic breakdown, last quarter roughly 91 per cent of underwriting income was from Canada (combined ratio was 89 per cent), with over 9 per cent coming from the U.S. (combined ratio was 93.2 per cent).
Quarterly earnings
After the market closed on July 28, the company reported better-than-expected second-quarter financial results.
Net operating income per share (NOIPS) came in at $2.35, up 63 per cent year-over-year, surpassing the consensus estimate of $1.96. The consolidated combined ratio was 89.5 per cent. Premium (DPM) growth was 7 per cent. The balance sheet remains strong with a debt-to-total capital ratio of 22 per cent. Book value per share increased to $53.95, up 8 per cent year-over-year and up 4 per cent from the previous quarter. At quarter-end, the operating ROE (return on equity) for the past 12-months stood at 15.6 per cent.
The following trading day, the share price rallied 3 per cent on solid volume with over 512,000 shares traded. To put this in perspective, the three-month historical daily average trading volume is approximately 440,000 shares.
In the earnings release, management’s outlook was positive. They said: “For the remainder of 2020 the crisis is expected to impact direct premiums written growth in the mid-single to low-double digit range, while underwriting performance is expected to be on track.”
Investment thesis highlights
- Industry leadership: Canada’s leading P&C insurer with an estimated 17 per cent market share in fiscal 2019
- Reliable and growing dividend
- Strong balance sheet
- Solid financial results (strengthening combined ratio, DPW have a 10-year compound annual growth rate of 8 per cent)
- Growing work-from-home trend (some jobs may shift to permanent full-time or partial remote working)
- Recession resistant (not recession proof) business
- Reasonable valuation
- Upside from potential future acquisitions in this fragmented market
Dividend policy
Management is committed to returning capital to its shareholders. Looking back to 2006, the company has announced a dividend increase in February of each year. Its dividend has a 10-year compound annual growth rate of 9 per cent (between fiscal 2010 and fiscal 2019).
The company pays its shareholders a quarterly dividend of 83 cents per share or $3.32 per share yearly, equating to a current annualized yield of 2.3 per cent.
Analysts' recommendations
This stock is covered by 11 analysts, of which nine analysts have buy recommendations and two analysts have neutral recommendations.
The firms providing analyst coverage on the company are: Accountability Research, Barclays, BMO Nesbitt Burns, CIBC World Markets, Desjardins Securities, Morgan Stanley, National Bank Financial, Raymond James, RBC Dominion Securities, Scotia Capital and TD Securities.
Financial forecasts
According to Refinitiv, the consensus net operating earnings per share estimates are $8.10 in 2020, up from $6.16 reported in 2019, and $8.58 in 2021.
Valuation
The stock is commonly valued on a P/BV (price-to-book value) basis.
According to Bloomberg, the stock is trading at a P/BV multiple of 2.3 times the 2021 consensus estimate, above its three-year historical average of 2 times.
The average one-year target price is $158, implying the stock price may appreciate nearly 12 per cent over the next 12 months. Individual target prices are as follows in numerical order: $146 (from Desjardins Securities’ Doug Young), $151, four at $155, $157, $159, $163, and two at $165 (from BMO’s Tom MacKinnon and National Bank’s Jaeme Gloyn).
Revised recommendations
In July, 10 analysts revised their expectations – all higher with one exception.
- Scotia’s Phil Hardie increased his target price to $155 from $151 before the company released its second-quarter earnings results.
- BMO’s Tom MacKinnon raised his target by $5 to $165.
- Morgan Stanley’s Michael Phillips lifted his target by $4 to $163.
- Accountability Research’s Mark Rosen hiked his target by $2 to $157.
- Raymond James’ Stephen Boland bumped his target to $155 from $148.
- CIBC’s Paul Holden boosted his target to $155 from $140.
- Desjardins’ Doug Young tweaked his target to $146 from $144.
- TD Securities’ Mario Mendonca increased his target to $155 from $150.
- National Bank’s Jaeme Gloyn raised his target to $165 from $163.
- RBC’s Geoffrey Kwan lowered his target to $151 from $155 (before the release of its earnings results).
Insider transaction activities
Looking back to the beginning of March, only one insider has reported trading activity in the public market - senior vice-president and chief human resources officer Lucie Martel.
Ms. Martel sold 700 shares at a price per share of $141.27 on Sept. 15. She sold 800 shares at a price per share of $145.8269 on Aug. 5, and sold 1,000 shares at a price per share of $127.683 on May 25. After these transactions, this specific account held 4,212 shares.
Chart watch
Year-to-date, the share price is relatively unchanged, up nearly 1 per cent, making it one of the top performing stocks in the S&P/TSX composite financials sector index. Year-to-date, the financials sector is down 16 per cent, sharply underperforming the S&P/TSX composite index, which is down 6 per cent.
During this month’s market volatility and weakness, the share price has been trading sideways, hovering near $140.
In terms of key resistance and support levels, the share price has a ceiling of resistance around $150. After that, there is resistance around $158, near its record closing high of $157.65 reached on March 5, 2020. Looking at the downside, there is technical support around $135, near its 200-day moving average (at $135.82). Failing that, there is strong technical support around $130.
Intraday volatility can be high. For instance, on Monday, the share price traded as high as $142.28 and as low as $139 – a 2.4-per-cent intraday swing.
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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Jennifer Dowty