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Inside the Market Tuesday’s TSX breakouts: A growth stock offering the best of both worlds – price appreciation and dividend growth

On today’s TSX Breakouts report, there are 26 stocks on the positive breakouts list (stocks with positive price momentum), and 21 securities are on the negative breakouts list (stocks with negative price momentum).

Discussed today is a stock that appeared on the positive breakouts list last week with its share price closing at an all-time high on July 3. This growth stock has an attractive business model with high recurring revenue, solid margins and strong cash flow generation. The company has a healthy balance sheet to fund its future growth. The stock is currently trading at a reasonable valuation, relatively in-line with its historical average.

Also positive is management’s commitment to returning capital to its shareholders, boosting its dividend every year since 2014. The current yield is 1.7 per cent. The stock is up 23 per cent year-to-date and has 12 recent buy recommendations. One cautionary note, on the recent earnings call, management moderated earnings expectations for the upcoming quarter. Consequently, the positive price momentum in the share price may pause in the near-term. The stock has been a solid performer for long-term investors. The security highlighted today is Open Text Corp. (OTEX-T).

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A brief outline is provided below that may serve as a springboard for further fundamental research.

The company

Waterloo, Ont.o-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. 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 May 1, 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 US$719-million, up 5 per cent year-over-year from $686-million reported during the same period last year. Annual recurring revenue was $549-million, representing 76 per cent of total revenue. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $262-million, ahead of the Street’s forecast of $251-million. Adjusted EBITDA margin was 36.4 per cent and stands at 38.5 per cent year-to-date. For fiscal 2021, management believes they can achieve an EBITDA margin of between 38 per cent and 40 per cent. Adjusted earnings per share came in at 64 cents, above the consensus earnings per share estimate of 60 cents. Operating cash flows came in at $286-million, up 5.7 per cent year-over-year. The company has a healthy balance sheet with $765-million of cash and a net debt-to-adjusted EBITDA ratio of 1.7 times. The following day, the share price rallied over 3 per cent on slightly higher-than-normal volume.

The company has a strong track record for reporting better-than-expected quarterly financial results. As a result, for the past seven out of eight quarters, the share price has increased during the trading session immediately following the release of its quarterly results. However, the chief financial officer moderated investors’ expectations for the upcoming quarter.

On the third-quarter earnings call, the chief financial officer Madhu Ranganathan stated, “So let me summarize and reiterate the quarterly factors that we anticipate for our fiscal Q4 (fourth quarter). Q3 (third quarter) was negatively impacted by FX (foreign exchange/currency challenge) of $19-million. As we look at where the rates are today, as well as geographical level components of our business, we expect FX headwind in Q4 of approximately $20-million. Given strong execution in Q3, do not expect historical sequential uplift in Q4 compared to Q3, PS (professional services) revenues in Q4 to remain constant sequentially, and Q3 PS revenues of $71-million. As the last quarter of our fiscal year in Q4, we expect operating expenses to be up quarter-over-quarter in the range of 4 per cent to 6 per cent, and given end-of-year expenses. With respect to adjusted EBITDA, Q4 is a seasonally higher quarter, although historically lower than Q2 and Liaison (acquisition of Liaison Technologies Inc. was completed in Dec. 2018) is expected to negatively impact adjusted EBITDA by approximately 100 basis points in Q4.”

Open Text is scheduled to release its fourth-quarter fiscal 2019 financial results after the market closes on Thurs. Aug. 1. That day, management will be hosting an earnings call at 5 p.m. (ET). To listen to the call, investors can call 1-800-319-4610. The Street is expecting the company to report sales of US$762-million, EBITDA of US$289-million and earnings per share of 72 cents US.

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The Caisse de dépột et placement du Québec, a long-term institutional investor, has an ownership position of approximately 6 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 17.46 cents US per share, or roughly 70 cents US per share on a yearly basis. This equates to a current annualized yield of 1.7 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 1, management announced a 15 per cent dividend increase, hiking the quarterly dividend to its present level of 17.46 cents US per share from 15.18 cents US per share. However, going forward, the annual dividend review will coincide with the release of its fiscal year-end returns, so the next dividend increase may not occur until around early-August in calendar 2020.

Management remains committed to returning capital to its shareholders and targets returning 20 per cent of its trailing 12-month operating cash flows.

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Analysts’ recommendations

This technology stock is well covered by the Street. Since the company reported its third-quarter financial results on May 1, 12 analysts have issued research reports and all of these analysts have buy recommendations.

The firms providing recent research coverage on the company are as follows in alphabetical order: Barclays, Beacon Securities, BMO Capital Markets, CIBC Capital Markets, Eight Capital, ISS-EVA, National Bank Financial, Scotiabank, Raymond James, RBC Capital Markets, TD Securities, and Veritas Investment Research.

Revised recommendations

After the company released its third-quarter financial results, four analysts tweaked their target prices – all higher.

All target prices are expressed in U.S. dollars.

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Paul Steep, the analyst at Scotiabank, increased his target price by $1 to $43. Gabriel Leung, the analyst at Beacon Securities, lifted his target price to $46 from $44. Thanos Moschopoulos from BMO Capital Markets raised his target price to $45 from $43. Barclays’ analyst Phillip Huang hiked his target price by $1 to $50.

Financial forecasts

All financial figures are expressed in U.S. dollars. The Street is forecasting EBITDA of $1.11-billion in fiscal 2019 and $1.183-billion in fiscal 2020. The consensus earnings per share estimates are $2.75 in fiscal 2019, rising to $2.98 in fiscal 2020.

Earnings estimates for fiscal 2020 have increased slightly over recent months. For instance, three months ago, the consensus EBITDA estimate was $1.177-billion and the earnings per share estimate was $2.96.

Valuation

According to Bloomberg, the stock is trading at a price-to-earnings (P/E) multiple of 14.1 times the fiscal 2020 consensus estimate, in-line with the stock’s three-year historical average multiple of 14.3 times. Over the past three years, the stock has traded at a forward P/E multiple ranging primarily between 12 times to 17 times. On an enterprise value-to-EBITDA basis, the stock is trading at 11.4 times the fiscal 2020 consensus estimate, which is in-line with his three-year historical average of 11.1 times.

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Target prices reported by analysts are expressed in U.S. dollars. The average one-year target price is US$45.09, implying the share price has 8 per cent upside potential over the next 12 months. Individual target prices provided by 11 firms are as follows in numerical order: $40 (the low on the Street is from Howard Leung, the analyst at Veritas Investment Research), $43, $44, two at $45, $46, $47, $48, $49, two at $50 (the high of the Street is from Richard Tse, the analyst at National Bank Financial, as well as Phillip Huang, the analyst at Barclays).

Insider transaction activity

Year-to-date, there has not been any buying or selling activity reported by insiders.

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 47 per cent, topping the 15 per cent gain for the S&P/TSX composite index. Shares of Open Text are up a respectable 23 per cent so far this year.

On a longer-term basis, the stock has been in an uptrend since mid-2015 (excluding the fourth-quarter 2018 market meltdown). Last week, on July 3, the stock price closed at an all-time high.

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In terms of key resistance and support levels, the next ceiling of resistance is around (all in Canadian dollars) $45, and after that around $50. Looking at the downside, there is initial technical support around $40, close to its 50-day moving average (at $40.51). Failing that, there is support around $35.

Tuesday's TSX Breakouts

Price
Positive Breakouts8-Jul
ACI-TAltaGas Canada Inc. $25.40
AIF-TAltus Group Ltd $32.53
CJT-TCargojet Inc $86.89
CIGI-TColliers International Group Inc $94.42
CSU-TConstellation Software Inc $1,250.91
KOR-TCorvus Gold Inc. $2.24
KWH-UN-TCrius Energy Trust $8.77
DOL-TDollarama Inc $49.24
DRM-TDREAM Unlimited Corp $8.04
ET-TEvertz Technologies Ltd $18.42
HRX-THeroux-Devtek Inc $20.00
HCG-THome Capital Group Inc $20.24
H-THydro One Ltd. $23.17
IFC-TIntact Financial Corp $124.27
JWEL-TJamieson Wellness Inc. $20.71
KNT-TK92 Mining Inc. $1.99
KBL-TK-Bro Linen Inc. $41.49
LAS-A-TLassonde Industries Inc $199.17
MRG-UN-TMorguard North American Residential REIT $18.74
OSK-TOsisko Mining Inc. $3.51
QTRH-TQuarterhill Inc. $1.62
REAL-TReal Matters $7.67
TNX-TTanzanian Royalty Exploration Corp $1.53
TF-TTimbercreek Financial Corp. $9.50
RNW-TTransAlta Renewables Inc $14.08
ZYME-TZymeworks Inc. $32.12
Negative Breakouts
BTE-TBaytex Energy Corp $1.87
BB-TBlackBerry Ltd $9.33
GBT-TBMTC Group Inc $12.10
BRE-TBrookfield Real Estate Services Inc $14.91
CNQ-TCanadian Natural Resources Ltd $34.11
TRST-TCannTrust Holdings Inc. $5.00
WEED-TCanopy Growth Corp. $51.64
FAH-UN-TFairfax Africa Holdings Corp. $7.64
FSZ-TFiera Capital Corp $11.21
HARV-THarvest Health & Recreation Inc. $7.80
HNL-THorizon North Logistics Inc $1.81
OGC-TOceanaGold Corp $3.33
ORL-TOrocobre Ltd. $2.54
PONY-TPainted Pony Energy Ltd $0.89
RUS-TRussel Metals Inc $20.78
SJR-B-TShaw Communications Inc $26.51
TOY-TSpin Master Corp. $37.56
TFII-TTFI International Inc. $39.30
TCW-TTrican Well Service Ltd $1.07
TWC-TTWC Enterprises Ltd. $13.90
YGR-TYangarra Resources Ltd. $1.96

Source: Bloomberg

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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