On today’s TSX Breakouts report, there are seven stocks on the positive breakouts list (stocks with positive price momentum), of which three are gold stocks, and 77 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a dividend stock appearing on the positive breakouts list - Exchange Income Corpo. (EIF-T). The share price is just 3 per cent below its record closing high of $51.47 set on Aug. 15, 2022.
This stock has rewarded shareholders with both price appreciation and regular monthly income with its attractive 5-per-cent dividend yield. Management is firmly committed to its dividend policy, increased its dividend by 5 per cent twice this year. In addition, the company maintained its dividend throughout the pandemic. Year-to-date, the share price has rallied 18 per cent. The stock has a unanimous buy recommendation from 11 analysts with robust earnings growth forecast.
A brief outline on EIC is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Winnipeg-based EIC has two main reporting segments: Aerospace & Aviation and Manufacturing.
The Aerospace & Aviation business segment provides airline, charter flights, and emergency medical air transport services.
The Manufacturing segment provides manufactured goods and services across diversified end markets. The company manufactures window wall systems for high-rise residential buildings, manufactures components used in the aerospace and defence sector, manufactures pressure washing and steam systems, and produces tanks used for transporting oil, gas, and water.
There is seasonality in the company’s operations with the first-quarter historically the weakest period and the third-quarter the strongest.
Investment thesis
- Diversified business mix/revenue profile.
- Acquisition growth. In May, the company purchased Northern Mat & Bridge for $325-million, the largest acquisition in the company’s history.
- Attractive dividend yield with a conservative payout ratio.
- Increased its monthly dividend by 5 per cent twice in 2022.
- Reasonable valuation.
- String of earnings beats. EIC has reported better-than-expected quarterly earnings results nine out of the past 10 quarters.
Quarterly earnings and outlook
After the market closed on Nov. 9, the company reported record financial results that sent the share price rallying 3.6 per cent the following trading day on high volume with over 243,000 shares traded (the three-month historical daily average trading volume is approximately 145,000 shares).
EIC reported record revenue of $587-million (up 47 per cent year-over-year) and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $150-million (up 58 per cent year-over-year), surpassing the consensus estimates $550-million and $135-million, respectively.
The Aerospace and Aviation business segment reported revenue of $363-million. The Manufacturing business segment reported revenue of $223-million.
In September, the company completed a $115-million bought deal financing, issuing over 2.3-million shares at a price per share of $48.70. Proceeds from the financing are earmarked to fund future growth, including acquisitions.
On the earnings call, chief executive officer Mike Pyle commented on acquisition opportunities, “Interest rate environment has continued to rise during 2022. And while this has increased the carrying cost of our floating rate debt, it is a significant positive impact on M&A [mergers and acquisitions]. We often compete for target companies with financial acquirers who will find a higher appetite for leverage than we do at EIC. The higher cost of debt reduces what those companies can afford to pay for an acquisition and mezzanine debt, in addition to be much more expensive, is also hard to access. This has resulted in EIC being more competitive on larger acquisitions than we have been in the last few years when the capital markets were hyper liquid.”
Looking forward, management provided a positive outlook on the earnings call.
Mr. Pyle said, “Many economists are predicting a slowdown in the economy or an outlined recession next year. EIC has seen absolutely no sign of any slowdown in our business to date and our diversification and contractual revenues provide us great protection should a slowdown occur.” President Carmele Peter added, “Looking into 2023, although we do not anticipate the perfect market conditions, which existed in Q2 [second-quarter] and Q3 [third-quarter] of 2022 to continue, we do expect demand to remain very strong and results to continue to be notably better than the financial metrics on which we acquired Northern Mat.”
In 2022, management is calling for adjusted EBITDA to come in at or above its previously issued guidance of between $435-million and $445-million. For 2023, management is expecting adjusted EBITDA to be between $510-million and $540-million.
Dividend policy
The company pays its shareholders a monthly dividend of 21 cents per share or $2.52 per share on a yearly basis. This translates to a current annualized dividend yield of 5 per cent.
Management is firmly committed to its dividend policy. In 2022, the company increased its dividend twice –by 5 per cent each time. In addition, the monthly dividend was maintained throughout the pandemic.
For the trailing 12-months, the payout ratio based on free cash flow less maintenance capital expenditures stood at 52 per cent as at Sept. 30.
Analysts’ recommendations
The stock has a unanimous buy-equivalent recommendation from 11 analysts.
The firms providing research coverage on the company are as follows in alphabetical order: ATB Capital Markets, Canaccord Genuity, CIBC World Markets, Cormark Securities, Industrial Alliance Securities, Laurentian Bank, National Bank Financial, Raymond James, RBC Dominion Securities, Scotiabank, and TD Securities.
Revised recommendations
Since November, eight analysts made revisions to their target prices.
- Canaccord’s Matthew Lee to $64 from $60.
- CIBC’s Krista Friesen to $60 from $59.
- Cormark’s Jeff Fenwick to $64 from $63.
- Laurentian Bank’s Jonathan Lamers to $58 from $53.
- National Bank’s Cam Doerksen to $61 from $60.
- RBC’s James McGarragle to $59 from $61.
- Scotiabank’s Konark Gupt to $60 from $58.
- TD’s Tim James to $65 (high on the Street) from $63.
Financial forecasts
According to Bloomberg, the consensus revenue estimate is $2.04-billion for 2022, up from a record $1.4-billion reported in 2021, rising to $2.26-billion in 2023. The Street anticipates EBITDA will come in at $452-million in 2022, up from a record $330-million reported in 2021, jumping to $542-million the following year. The consensus earnings per share estimates are $2.98 in 2022 and $3.93 in 2023.
Earnings estimates have increased materially throughout the year, particularly after the acquisition of Northern Mat & Bridge was completed in May. This marked the company’s largest acquisition in its history. Prior to this purchase, eight months ago, the consensus EBITDA estimates were $368-million for 2022 and $429-million for 2023.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 7 times the 2023 consensus estimate, slightly above its seven-year historical average of 6.5 times.
The average one-year target price is $61.27, implying the share price has 23 per cent upside over the next 12 months (a potential total return of 28 per cent including the 5 per cent dividend yield). Individual target prices are as follows in numerical order: $56 (from iA Capital Markets’ Matthew Weekes), $58, $59, two at $60, $61, $62, two at $64, and two at $65.
Insider transaction activity
Quarter-to-date, there has only been trade in the public market reported by an insider.
On Dec. 2, executive vice-president – Aviation Dave White sold 630 shares at a price per share of $48.71 from his TSFA, leaving 255 shares in this particular account. Proceeds from the sale exceeded $30,000, not including trading fees.
Chart watch
The stock has been an outperformer. The share price is just 3 per cent below its record closing high of $51.47 set on Aug. 15, 2022.
Year-to-date, EIC’s share price is up 18 per cent, making it the third best performing stock in the S&P/TSX Industrials (sector) index, behind Mullen Group Ltd. (MTL-T) and Bombardier Inc. (BBD-B-T), which are up 34 per cent and 27 per cent, respectively.
In terms of key technical resistance and support levels, there is an initial ceiling of resistance around $51.50, near its record closing high. After that, there is resistance around $60. Looking at the downside, there is technical support around $45, close to its 200-day moving average (at $44.86). Failing that, there is support around $40.
This stock with a market capitalization of $2.1-billion can be thinly traded at times. Again, the three-month historical daily average trading volume is approximately 145,000 shares.
ESG Risk Rating
According to risk provider Sustainalytics, the stock has an ESG risk score of 30.6 as of Oct. 13, 2022. A risk score between 30 and 40 reflects a “high risk” rating.
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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