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Inside the Market Tuesday’s TSX breakouts: A stock yielding 4% with a stable dividend and steady earnings growth

On today’s TSX Breakouts report, there are 48 stocks on the positive breakouts list (stocks with positive price momentum), and five 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.

The security highlighted today is North West Company Inc. (NWC-T).

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On Thursday, the company will be reporting its fourth-quarter earnings results, its seasonally strongest quarter. Year-to-date, this consumer staples stock has lagged the S&P/TSX Index, rising less than 2 per cent. The consumer staples sector is the worst performing sector in the S&P/TSX Index as cyclical stocks have led the rally.

However, for long-term investors, the stock has delivered healthy price returns combined with an attractive yield, currently at 4 per cent.

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

The company

Winnipeg-based North West Company is a retailer that sells food and general merchandise to customers in northern and western Canada, rural Alaska, the South Pacific islands, and the Caribbean through its network of 244 stores under banners including Giant Tiger, Northern, NorthMart, Alaska Commercial Company and Cost-U-Less. North West Company focuses on servicing customers in rural areas.

On Dec. 11, the company reported its third-quarter fiscal 2019 financial results (the company’s fiscal year-end is Jan. 31). Revenue came in at $511.5-million, up 5 per cent year-over-year. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $52.5-million, surpassing the Street’s expectations of $53.1-million and up 9.5 per cent year-over-year. Adjusted earnings per share was 52 cents, a penny shy of the consensus estimate. The share price rallied 2.5 per cent that day with a further increase of 3.5 per cent the following trading day.

In the management’s discussion and analysis accompanying the earnings release, its outlook was positive, “The near-term consumer outlook is stable to positive in most of the Company’s markets and aligns with our lower risk product and service focus, augmented by opportunistic investments. Northern Canada’s economic outlook remains positive for 2018 and into 2019 with a ramp-up in resource development, housing and public sector capital projects. The western Canadian retail environment is important for our Giant Tiger business with more difficult conditions in Alberta expected to be offset by a stable environment in Manitoba, where store concentration is the highest. We expect cost and price inflation to be larger factors through the balance of this year and in 2019 and contribute to a modest net improvement to margins. Economic conditions in Alaska are expected to continue to recover from depressed conditions over the past two years led by stronger commercial fishing, more oil and gas activity, public infrastructure projects and higher Permanent Fund Dividend payments.”

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In Jan., the Alaska Department of Labor and Workforce Development released its outlook report, which suggested that the State will emerge out of its recession this year boosted by higher oil and gas development activity and growing construction activity (i.e. Eielson Air Force Base).

The company will be reporting its fourth-quarter earnings results on Thurs. March 14. The consensus revenue, EBITDA and earnings per share estimates are $521-million, $52.2-million and 49 cents. There is seasonality in the company’s business with the fourth quarter the strongest (due to the holiday shopping season) and the first quarter typically the weakest.

Dividend policy

North West pays its shareholders a quarterly dividend of 32 cents per share, or $1.28 per year, equating to an annualized dividend yield of 4 per cent.

The quarterly dividend has been maintained at 32 cents per share since 2017.

Analysts’ recommendations

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Analysts recommendations are mixed. This small-cap stock with a market capitalization of $1.55-billion is covered by six analysts, of which three analysts have buy recommendations and three analysts have hold recommendations.

The firms providing recent research coverage on the company are as follows in alphabetical order: Barclays, BMO Nesbitt Burns CIBC World Markets, Industrial Alliance Securities, RBC Dominion Securities, and TD Securities.

Revised recommendations

So far this year, one analyst has revised his expectations.

In January, Mike Van Aelst, the analyst at TD Securities, increased his target price to $36 from $34.

Financial forecasts

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The Street is forecasting EBITDA of $186.8-million in fiscal 2019, increasing 12 per cent to $208.8-million in fiscal 2020. The consensus earnings per share estimates are $1.78 in fiscal 2019, climbing to $1.98 the following fiscal year.

The Street’s forecasts have declined slightly in recent months. To illustrate, three months ago, the Street was forecasting EBITDA of $195.2-million for fiscal 2019 and $214.2-million for fiscal 2020. The consensus earnings per share estimates were $1.83 in fiscal 2019 and $2.02 for the following fiscal year.

Valuation

The stock appears to be fairly valued relative to historic levels.

According to Bloomberg, the shares are trading at an enterprise value-to-EBITDA multiple of 9.1 times the fiscal 2020 consensus earnings estimate, which is in-line with its three-year and five-year historical multiples of 9.3 times and 9.4 times, respectively. On a price-to-earnings basis, the stock is trading at 16.1 times the fiscal 2020 consensus estimate, slightly below its three-year historical average multiple of 17 times and its five-year historical average multiple of 17.3 times.

The average 12-month target price is $33.60, implying the stock has just 5 per cent upside potential over the next year. Individual target prices are as follows in numerical order: $31 (the low on the Street is from Matt Bank, the analyst at CIBC Capital Markets, whose target price suggests the stock is fully valued), two at $32, two at $34 and $36 (the high on the Street is from Mike Van Aelst, the analyst at TD Securities, whose target price implies a 13 per cent price return).

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Insider transaction activity

Year-to-date, there has not been any trading reported by insiders.

Most recently, Eric Stefanson, who sits on the board of directors, made a relatively small trade.

On Dec. 17, he acquired 324 shares at a price per share of $30.89, increasing his account balance to 1,479 shares. The cost of the purchase totaled roughly $10,000.

Chart watch

Year-to-date, the stock has been a laggard, rising less than 2 per cent while the S&P/TSX composite index is up over 12 per cent and the S&P/TSX consumer staples index is up over 7 per cent.

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However, looking at a longer-term chart, the share price has been in an uptrend since mid-2008, and is approaching its all-time closing high of $33.41 set back in May 2017.

Looking at key resistance and support levels, the stock has a major ceiling of resistance around $33.50. After that, there is overhead resistance around $35. Looking at the downside, there is technical support around $30, near its 200-day moving average (at $29.92). Failing that, there is technical support around $28.

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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