On today’s TSX Breakouts report, there are 15 stocks on the positive breakouts list (stocks with positive price momentum), and 49 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that appeared on the negative breakouts list last week with the share price nearing oversold levels.
The security highlighted today is Diversified Royalty Corp. (DIV-T).
Investors are patiently awaiting news of a fourth royalty acquisition – a potential catalyst for the stock. The stock has a unanimous buy call with an expected potential total return of approximately 30 per cent, which includes the current dividend yield of 6.8 per cent. A brief outline is provided below that may serve as a springboard for further fundamental research.
Diversified Royalty (DIV) is a corporation with three royalty streams from Sutton, Mr. Lube, and the AIR MILES trademarks in Canada.
Sutton is a residential real estate brokerage operator with over 200 offices across Canada. Mr. Lube is an auto service provider with 170 stores across the country. After the market closed on August 25, management announced a key milestone for the company - the addition of a third royalty. In 2017, DIV acquired the Canadian AIR MILES trademarks and began receiving a quarterly royalty amounting to 1 per cent of gross billings from the AIR MILES program.
After the market closes on March 29, the company will be reporting its fourth-quarter financial results. However, the earnings report is not a major catalyst for the stock.
The key catalyst investors are awaiting is an acquisition announcement of a fourth royalty stream. Management seeks to expand its royalty streams and has the cash on its balance sheet to fund a purchase.
In the third-quarter earnings release, President and Chief Executive Officer Sean Morrison remarked, “With the completion of the offering for $57.5-million of convertible debentures, DIV will have approximately $88-million of cash on hand that will enable the corporation to execute on its strategy of acquiring trademarks and royalties from a diverse group of high-quality businesses.” Back in August 2017, on a conference call discussing the acquisition of the AIR MILES trademarks, Mr. Morrison said that the company’s objective was to announce a fourth royalty acquisition before the end of 2017 – investors are still waiting for this transaction to occur.
On Nov. 9, the company reported its third quarter financial results with revenue of $5.4-million, normalized EBITDA (earnings before interest, taxes, depreciation and amortization) of $4.8-million, and earnings per share of 3 cents. Distributable cash flow per share was 4 cents.
Diversified Royalty pays its shareholders a monthly dividend of 1.854 cents per share, or over 22 cents per share yearly, equating to an annualized dividend yield of 6.8 per cent. The company has maintained the dividend at this level since 2015.
The payout ratio exceeds 100 per cent. Within the third-quarter earnings release, management reflected on the payout ratio stating, “The Corporation expects the payout ratio to remain over 100 per cent until such time as further royalty acquisitions are completed and all excess cash has been deployed.” As the company’s cash flow per share increases, management targets increasing its dividend.
This small-cap stock, with a market capitalization of $349-million, is well-covered by the Street. There are eight analysts officially covering the company and all eight analysts have buy recommendations.
The firms providing research coverage on the company are as follows in alphabetical order: Beacon Securities, Canaccord Genuity, Cormark Securities, CIBC World Markets, GMP, Haywood Securities, Paradigm Capital, and PI Financial Corp.
Recommendations and target prices have been relatively stable.
The most recent revision occurred in January when Colin Healey, the analyst from Haywood Securities, increased his target price to $4.25 from $3.75.
The consensus EBITDA estimates are $18.1-million in 2017, rising to $29.1-million in 2018. The Street is forecasting earnings per share of 11 cents in 2017 and 18 cents in 2018. The consensus distributable cash flow per share is 16 cents in 2017, increasing to 23 cents in 2018.
Over the past several months, earnings forecasts have been steady for 2017 but declined slightly for 2018. To illustrate, four months ago, the Street was anticipating EBITDA of $18.2-million in 2017 and $31.5-million in 2018. The consensus earnings per share estimates were 11 cents in 2017 and 19 cents in 2018.
According to Bloomberg, shares of Diversified Royalty are trading at an enterprise value-to-EBITDA (EV/EBITDA) multiple of 11.5 times the consensus 2018 estimate, a slight premium to its three-year historical average forward multiple of 10.1 times but below its peak multiple of approximately 16 times during this period.
The consensus one-year target price is just above $4, implying a potential total return, including the dividend yield, of approximately 30 per cent. Individual target prices were updated by six analysts after the company reported its most recent quarterly earnings results, they are as follows in numerical order: $3.75, three at $4, and two at $4.25.
Insider transaction activity
Year-to-date, there has not been any buying or selling activity reported by insiders.
The share price experienced a parabolic move in 2017, rising from around the $2.30 level in August 2017 to approximately $3.50 just two months later, driven by news of its acquisition of the AIR MILES trademarks. Since then, the share price has had a nearly 50 per cent retracement, pulling back to $3.15 on March 21, just above its 200-day moving average (at $3.08), a key support level.
On March 21, the stock was nearly oversold with a relative strength index (RSI) reading of 32. Generally, an RSI reading at or below 30 indicates an oversold condition.
Looking at key support and resistance levels, the stock price has strong technical support around $3, and there is a major ceiling of upside resistance between $3.50 and $3.70.
This small-cap consumer discretionary stock has reasonable liquidity. The historical three-month daily average trading volume is approximately 290,000 shares.
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.