On today’s TSX Breakouts report, there are 61 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 has been steadily recovering, rising over 8 per cent from its lowest closing price in 2018 (it closed at $30.29 on April 6). The company will be reporting its first-quarter financial results before the market opens later this week on May 10. The security highlighted today is Finning International Inc. (FTT-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Edmonton-based Finning is the world’s largest Caterpillar dealer. The company supplies parts and services, sells, and rents equipment. The company serves businesses across various industries such as construction, mining, power systems, and forestry. In 2017, product support represented 56 per cent of total revenue, new equipment sales accounted for 34 per cent of sales, used equipment was 6 per cent of revenue, and 3 per cent was equipment rental revenue.
In terms of geographical revenue breakdown, the company segments its business into three regions: Canada, South America, and the United Kingdom and Ireland. In 2017, 49 per cent of the company’s revenue was from Canada, 34 per cent stemmed from South America, with the balance, 17 per cent, from the U.K. and Ireland.
Before the market opened on February 6, the company reported its fourth-quarter financial results. Adjusted earnings per share came in at 40 cents, beating the Street’s forecast of 38 cents. EBIT (earnings before interest and taxes) margin continued to track higher closing the quarter at 7.7 per cent. However, it was the backlog that was particularly encouraging. The company’s backlog climbed to $1.3-billion, its highest level in almost four years, primarily reflecting higher orders from the mining sector. In comparison, the previous year the backlog stood at $500-million. On the earnings call, the President and Chief Executive Officer Scott Thomson indicated that there were, “Three or four pretty big adds during the quarter in that backlog.” Higher backlog is positive as it represents future revenue for the company. The share price rallied 2 per cent that day.
Dividend policy
The company pays its shareholders a quarterly dividend of 19 cents per share, or 76 cents per share yearly. This equates to an annualized dividend yield of 2.3 per cent.
Analysts’ recommendations
There are 10 firms providing research coverage on this company, of which nine analysts have buy recommendations and one analyst (at Edward Jones) has a ‘hold’ recommendation.
The 10 firms providing research coverage are as follows in alphabetical order: BMO Capital Markets, Canaccord Genuity, CIBC World Markets, Edward Jones, EVA Dimensions, National Bank Financial, Raymond James, RBC Capital Markets, Scotia Capital, and TD Securities.
Revised recommendations
In April, Ben Cherniavsky, the analyst from Raymond James, upgraded the stock to an “outperform” recommendation from a “market perform” and increased his target price to $37.50 from $36.25.
Several analysts bumped their target prices higher after the company reported its fourth-quarter earnings.
Derek Spronck, the analyst from RBC Capital Markets, raised his target price to $41 from $40. Cherilyn Radbourne from TD Securities lifted her target price by $3 to $39. Devin Dodge from BMO Capital Markets took his target price up to $39 from $37. Maxim Sytchev from National Bank Financial raised his target price to $39 from $37.50. Yuri Lynk from Canaccord Genuity bumped his target price by $1 to $37. Jacob Bout from CIBC Capital Markets increased his target price to $40 from $38.
Financial forecasts
The consensus EBITDA estimate is $680-million in 2018, increasing to $764-million in 2019. The Street is forecasting earnings per share of $1.78 in 2018, jumping to $2.12 the following year.
Since the company reported its financial results in February, earnings forecasts have relatively stable,. For instance, three months ago, the Street was forecasting EBITDA of $683-million in 2018 and $767-million in 2019. The consensus earnings per share estimates were $1.77 in 2018 and $2.12 in 2019.
Valuation
According to Bloomberg, the stock is trading at a price-to-earnings multiple of 15.5 times the 2019 consensus estimate, in-line with its three-year historical average of 15.6 times and well below its peak multiple of approximately 22 times during this period.
The one-year average target price is $37.50, suggesting there is 14 per cent upside in the share price over the next 12 months. Target prices are quite concentrated ranging from a low of $37 (from the analyst at Canaccord Genuity) to a high of $41 (from the analyst at RBC Capital Markets). Individual target prices provided by eight firms are as follows in numerical order: $37, $37.50, $38, three at $39, $40 and $41.
Insider transaction activity
Only three insiders have reported transaction activity in the market so far this year, and all three trades were sales that occurred on February 7.
Juan Carlos Villegas – President of Finning (Canada), and Chief Operating Officer of Finning International, exercised his options and sold the corresponding number of shares (70,632) at a price per share of $34.3374, leaving 45,636 shares in his account.
Joel Harrod, Senior Vice-President – Power Systems at Finning (Canada), exercised his options and sold the corresponding number of shares (9,630) at a price per share above $34 with 5,534 shares remaining in his portfolio.
Mona Hale, Senior Vice-President of Finance at Finning (Canada), sold 2,400 shares at a price per share of $34.03 with a remaining portfolio balance of 11,923 shares.
Chart watch
In recent weeks, the share price has been steadily recovering, increasing over 8 per cent, after bottoming at its lowest level of 2018 last month (the stock price closed at $30.29 on April 6). Year-to-date, the share price is now in positive territory, up 3 per cent.
Should the share price continue to recover, the next area of major overhead resistance is around $34. Looking at a longer-term chart going back over 10 years, the share price peaked at $33.90 in August 2014 and at $33.50 in September 2007. If the share price can break and hold above $34, the next level a major resistance is around $40.
On a pullback, the stock price has support around $32, near its 50-day moving average (at $32.06). Failing that, there is strong support around $30, which is close to its 200-day moving average (at $30.69).
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