On today’s TSX Breakouts report, there are 17 stocks on the positive breakouts list (stocks with positive price momentum), and 33 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a top performing stock whose share price is just 1 per cent away from appearing on the positive breakouts list. The company will be reporting its third-quarter financial results later this week. Potential catalysts for the stock are acquisition announcements and an improvement in the company’s organic, or internal, sales growth.
Discussed below is Enghouse Systems Ltd. (ENGH-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
Markham, Ont.-based Enghouse is an enterprise software and services provider. The company has two core business segments: the Interactive Management Group and the Asset Management Group. In fiscal 2017, 59 per cent of the company’s revenue was from the Interactive Management Group with the balance, 41 per cent, from the Asset Management Group. In terms of geographical revenue breakdown, in fiscal 2017, 32 per cent of its revenue was from the U.S., 24 per cent stemmed from Scandinavia, 20 per cent was from the U.K., 15 per cent came from Europe, 6 per cent came from Asia-Pacific regions, and 1 per cent of the company’s revenue was from Canada.
After the market closed on June 7, the company reported better-than-expected second quarter fiscal 2018 financial results (the company’s fiscal year-end is Oct. 31) that sent the share price soaring. Revenue came in at $85.2-million, up from $79.5-million reported during the same period last year. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $25.4-million, ahead of the Street’s expectations of $24.3-million. Earnings per share was 56 cents, surpassing the consensus estimate of 48 cents. The following day, the share price rallied 7.5 per cent on higher-than-normal volume.
Acquisition growth is one of management’s key objectives. The company has completed three acquisitions year-to-date and Enghouse has a strong balance sheet to support additional acquisitions with $155-million in cash and short-term investments at quarter-end. Chief executive officer Steve Sadler stated in the earnings call, “I think overall, on the acquisition side…the opportunities are pretty good.” Management targets acquisitions in the $5-million to $50-million revenue range.
Improving the company’s organic, or internal, growth is another main goal of management’s. On the earnings call, the President Vince Mifsud stated that in a few quarters, organic growth improvements may be evident due to a reorganization of the company’s sales team, which occurred in the second quarter.
After the market closes on Thurs. Sept. 6, the company will be releasing its third-quarter fiscal 2018 financial results and holding a conference call the following day. The Street is anticipating the company will report revenue of $86.6-million, EBITDA of $25.3-million and earnings per share of 50 cents.
Returning capital to shareholders
Since 2009, the company has announced a dividend increase of over 10 per cent in March of every year. This year, the company announced a 12.5-per-cent dividend hike, raising its quarterly dividend to 18 cents per share from 16 cents per share. This equates to an annualized dividend yield of 0.9 per cent.
During the first half of fiscal 2018, the company did not repurchase any shares. However, the share buyback program was renewed until April 29, 2019, allowing the company to repurchase up to 1,939,371 shares.
There are six analysts providing research coverage on this company, of which five analysts have buy recommendations and one analyst (from Scotia Capital) has a hold recommendation.
The firms providing research coverage on the company are as follows in alphabetical order: Echelon Wealth Partners, EVA Dimensions, GMP Securities, RBC Capital Markets, Scotia Capital and TD Securities.
In July, Paul Treiber, the analyst from RBC Capital Markets, increased his target price at $88 from $80.
The consensus revenue estimates are $347-million in fiscal 2018 and $376-million in fiscal 2019. The Street is forecasting EBITDA of $102-million in fiscal 2018, rising to $111-million in fiscal 2019. The consensus earnings per share estimates are $1.91 in fiscal 2018, increasing 26 per cent to $2.41 in fiscal 2019.
In recent months, earnings expectations have increased. For instance, three months ago, the consensus EBITDA estimates were $99-million for fiscal 2018 and $106-million for fiscal 2019, and earnings per share expectations were $1.76 for fiscal 2018 and $2.30 for the following fiscal year.
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of over 18 times the fiscal 2019 consensus estimate. Over the past five years, the stock has traded at a peak multiple of approximately 19 times.
The consensus one-year target price is $82.40, implying the share price is nearly fully valued.
Target prices range from a low of $74 (from the analyst at Scotia Capital) to a high of $88 (from the analyst at RBC Capital Markets). Individual target prices provided by five firms are as follows in numerical order: $74, $80, $84, $86, and $88.
Insider transaction activity
Most recently, two insiders were sellers in the market in July.
Between July 3 and July 20, Mr. Sadler sold a total of 10,400 shares at an average price per share of approximately $81.25, leaving 3,962,100 shares in his portfolio.
On July 19, Sunil Dias, general manager of Enghouse Networks, exercised his options and sold the corresponding number of shares (10,000) at a price per share of $80.532, eliminating his account’s holdings.
Year-to-date, the technology sector is the best performing sector in the S&P/TSX Composite index with a price return of over 25 per cent compared to a 0.3 per cent price return for the TSX Index. Within the technology sector, nine of the 11 constituents have achieved double-digit gains so far this year. Shares of Enghouse have rallied 31 per cent year-to-date, making it the third best performing stock in the sector, behind Shopify Inc. (SHOP-T) and Mitel Networks Corp. (MNW-T) whose shares have climbed 49 per cent and 38 per cent, respectively.
After a stellar run during the first several months of 2018, the positive price momentum has stalled with the share price trading sideways, principally between $75 and $80 since early-June. The share price is just 1 per cent below its record closing high of $81.30 reached on July 19.
In terms of key resistance and support levels, there is initial overhead resistance around $81, near its all-time closing high. After that, the share price has a ceiling of resistance around $85. Looking at the downside, there is strong technical support around $75.
This stock with a market capitalization of $2.2-billion can be thinly traded. The three-month historical daily average is approximately 77,000 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.