On today’s TSX Breakouts report, there are 20 stocks on the positive breakouts list (displaying positive price momentum), and two securities are on the negative breakouts list (with negative price momentum).
Discussed today is a stock that recently appeared on the positive breakouts list after the company reported better-than-expected quarterly earnings results last week. The stock pays its shareholders a quarterly dividend with a current yield of 4.8 per cent and based on the average target price, offers investors a potential total return, including the dividend yield, of over 16 per cent.
Looking at the stock’s valuation, it is trading at a discount relative to historical levels suggesting there is room for multiple expansion. The company discussed today is North West Company Inc. (NWC-T).
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own research.
Winnipeg-based North West Company is a retailer that sells food and general merchandise with a focus in northern, rural Canada, rural Alaska, the South Pacific islands, and the Caribbean through its network of 250 stores under banners including Giant Tiger, Northern, NorthMart, Alaska Commercial Company and Cost-U-Less.
In terms of product mix, the company’s primary focus is to offer products that meet people’s basic needs. Consequently, 55 per cent of annual sales are grocery products and 21 per cent are convenience products. There is seasonality in the company’s business with the fourth quarter the strongest (due to the holiday shopping season) and the first quarter is typically the weakest.
On June 10, the company reported stronger-than-expected first-quarter fiscal 2021 financial results (the company’s fiscal year-end is Jan. 31).
Revenue came in at $592.6-million, well above the Street’s expectation of $509-million. Excluding the foreign exchange impact, same-store sales jumped 15.5 per cent. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $59.8-million, surpassing the consensus estimate of $50.6-million, and up 32.6 per cent year-over-year. The share price rallied 2.9 per cent that day with an additional increase of 2.8 per cent during the following two trading days.
On the earnings call, president of Canadian retail Alex Yeo attributed three key drivers to the strength in the Canadian business segment – lower prices aimed at increasing market share, local shopping, and government support payments.
“Pricing investment was the first driver of what we saw in the business in northern Canada," he said. "The second and third driver [was] related to travel restrictions and increased government support for these communities … We’ve seen additional assistance announced for northern communities. As an example, the government announced an initial $305-million investment in northern communities … Because of these travel restrictions, which, by the way, occurred across all of our communities, whether it be road stores or as area stores, we not only saw a wave of initial stock up shopping, but also increased spend in our stores as customers start to take this support and spend it on items that they would use at home, so big-ticket items, for example, electronics, motorized home furnishings.”
Looking ahead,president and chief executive officer Edward Kennedy provided a positive outlook for the upcoming second-quarter on the call: “We’re halfway through Q2 (second-quarter). So I will say that it’s strong … Child benefit payments were increased in May. The senior payment is going to go out in July. The PFDs (Permanent Fund Dividend) went out in July. The CERB (Canada Emergency Response Benefit) payments are in place now…So the income drivers for Q2 (second-quarter) are at least as strong as Q1 (first-quarter) … We’re confident saying that Q2 is robust. When we get to Q3 and 4…there’s a lot of uncertainty.”
Next month, the pending sale of 36 of 46 Giant Tiger stores that the company operates is expected to be completed. Meanwhile, four Giant Tiger stores will be closed, leaving six Giant Tiger stores in its portfolio. The sale of these stores is anticipated to improve the company’s profitability.
North West pays its shareholders a quarterly dividend of 33 cents per share, or $1.32 per share yearly, equating to a current annualized dividend yield of 4.8 per cent.
The stock has mixed recommendations.
This small-cap consumer staples stock with a market capitalization of $1.3-billion is covered by six analysts, of which three analysts have buy recommendations and three analysts have neutral recommendations.
The firms providing research coverage on the company are: BMO Nesbitt Burns, CIBC World Markets, Industrial Alliance Securities, ISS-EVA, RBC Dominion Securities, and TD Securities.
Earlier this month, all six analysts covering the company raised their expectations for the stock after the company reported better-than-expected quarterly earnings.
- TD’s Mike Van Aelst bumped his target price to a Street-high $32 from $30
- BMO’s Stephen MacLeod hiked his target to $30 from $28
- Industrial Alliance’s Neil Linsdell increased his target to $30 from $28
- ISS-EVA’s Anthony Campagna upgraded his recommendation to “overweight” from “hold”
- RBC’s Sabahat Khan lifted his target price to $30 from $27
- CIBC’s Matt Bank increased his target by $3 to $30
The Street is forecasting EBITDA of $235-million in fiscal 2021, and $230-million in fiscal 2022. The consensus earnings per share estimate is $1.89 in fiscal 2021, and $1.86 in the following fiscal year.
The Street’s forecasts have increased in recent months. To illustrate, three months ago, the Street was forecasting EBITDA of $219-million for fiscal 2021 and $227-million for fiscal 2022. The consensus earnings per share estimates were $1.68 in fiscal 2021 and $1.84 for the following fiscal year.
The stock is undervalued relative to historic levels.
According to Bloomberg, the shares are trading at an enterprise value-to-EBITDA multiple of 7.8 times the fiscal 2021 consensus earnings estimate, below its three-year historical average multiple of 9.2 times. On a price-to-earnings basis, the stock is trading at 14.4 times the fiscal 2021 consensus estimate, below its three-year historical average multiple of 16.4 times.
The average 12-month target price is $30.40, implying the share price has nearly 12 per cent upside potential over the next year (including the 4.8 per cent yield, this represents a potential total return of over 16 per cent).
Insider transaction activity
Year-to-date, there has not been any trading activity reported by insiders.
Since mid-2015, the share price has traded largely between $25 and $33, and is currently near the lower end of this trading band.
Looking at key resistance and support levels, the stock has a major ceiling of resistance around $33. After that, there is overhead resistance around $33.50, near its record closing high of $33.41 reached in May 2017. Looking at the downside, there is strong technical support around $25, near its 50-day moving average (at $25.54).
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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