On today’s Breakouts report, there are 43 stocks on the positive breakouts list (stocks with positive price momentum), and 23 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that appeared on the positive breakouts list earlier this month when the share price closed at a record high. Management is forecasting earnings per share to be between 46 US cents and 51 US cents in 2021, up from 31 US cents reported in 2020, rising to between 55 US cents and 64 US cents in 2022. The stock has a unanimous buy recommendation from 10 analysts. The average target price implies a potential 25-per-cent price return over the next year, on top of the 30-per-cent gain year-to-date.
The stock highlighted today is ECN Capital Corp. (ECN-T).
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Toronto-based ECN Capital is a business services provider serving more than 100 U.S. financial institutions including banks and credit unions by originating, managing, and advising on prime consumer credit portfolios (loan portfolios and credit card portfolio) through its three core operating segments: Service Finance (provides loan options to consumers for home improvement projects through a network of over 13,000 home improvement dealers), Triad Financial Services (provides consumer loans for manufactured home purchases through a network of over 3,000 manufactured housing dealers), and The Kessler Group, or KG, (manages and advises on consumer credit card portfolios through more than 6,000 credit card partnerships).
Investment thesis
- Solid earnings growth expected.
- Trades at a reasonable valuation.
- A potential near-term catalyst: full-year guidance may be raised in August, which could lift analysts’ target prices.
- Committed to returning capital to investors through rising dividends and share buybacks.
Quarterly earnings results
After the market closed on May 12, the company reported first-quarter financial results that were in-line with the Street’s expectations.
Adjusted earnings per share came in at 8 US cents. Within Service Finance, management remarked on the strength in the home improvement market as homeowners continue to undertake major projects that require contractors. Originations were US$479.8-million, up 28 per cent year-over-year. Of note, HVAC originations increased 42 per cent year-over-year, and windows and doors originations increased 64 per cent year-over-year. Within Triad, originations increased 37 per cent year-over-year to US$182.2-million. During the quarter, Triad added five new bank and credit union partners. At KG, partnership services revenue increased 8.6 per cent year-over-year.
Looking forward, management targets continued improvement in return on equity]with an ROE of over 20 per cent anticipated in 2022 (reported ROE of 9 per cent in 2019 and 11 per cent in 2020). Management maintained its full-year earnings guidance, forecasting earnings per share to be between 46 US cents and 51 US cents in 2021, up from 31 US cents reported in 2020, and between 55 US cents and 64 US cents in 2022.
However, these earnings forecasts may be too conservative given: 1) the partnership with Sam’s Club that launched in April in which Service Finance will administer home improvement services nationally such as HVAC, windows and doors, and roofing (Sam’s Club is a warehouse club that is owned by Walmart Inc.), and 2) the recently announced exclusive partnership with Daltile, a subsidiary of Mohawk Industries - the world’s largest flooring company. In the U.S., one out of three tiles sold is made by Daltile. Earnings forecasts from these recent partnerships are not included in management’s guidance. In August, management will be updating its earnings outlook with the release of its second-quarter financial results.
Returning capital to shareholders
The company pays its shareholders a quarterly dividend of 3 cents per share, or 12 cents per share on a yearly basis, equating to a current annualized dividend yield of 1.4 per cent.
In Feb., the company announced a 20-per-cent dividend hike, lifting its quarterly dividend to its current level of 3 cents per share from 2.5 cents per share.
During the first quarter, the company repurchased 1,120,038 shares as part of its share buyback program.
Analysts’ recommendations
There are 10 analysts who actively cover this company and all 10 analysts have buy recommendations.
The firms providing research coverage on the company are: BMO Nesbitt Burns, CIBC WorldMarkets, Cormark Securities, Credit Suisse, National Bank Financial, Raymond James, RBC Dominion Securities, Stephens, Stifel Canada, and TD Securities.
Revised recommendations
After the company reported its quarterly earnings results on May 12, three analysts revised their expectations –all higher.
- Cormark Securities’ Jeff Fenwick raised his target price to $10.75 from $10.
- Credit Suisse analyst Mike Rizvanovic increased his target price by $1 to $11.
- Raymond James’ Stephen Boland lifted his target price to $10.25 from $9.50.
Financial forecasts
The consensus earnings per share estimates are 48.5 US cents in 2021, rising 22 per cent to 59 US cents in 2022. The Street is forecasting revenue to come in at US$344-million in 2021, increasing 18 per cent to US$406-million in 2022.
Earnings forecasts have remained relatively stable over the past few months. Three months ago, the Street was expecting earnings per share of 49 US cents in 2021 and 58.5 US cents in 2022.
Valuation
According to Bloomberg, the stock is trading at price-to-earnings [P/E] multiple of 11.8 times the 2022 consensus estimate, relatively in-line with its historical average P/E multiple of 11.4 times (average multiple since the stock began trading in 2016).
The average one-year target price is $10.50, suggesting there is 25 per cent upside in the share price over the next 12 months. Target prices are quite concentrated, ranging from a low of $10 to a high of $11.50 (from the analyst at Stifel Canada). Individual target prices are as follows in numerical order: four at $10, $10.25, $10.50, $10.75, two at $11, and $11.50.
Insider transaction activity
Over recent months, two management executives have traded shares in the public market.
Between March 1-11, chief executive officer Steve Hudson sold a total of 900,000 shares at an average price per share of approximately $8.32, trimming this particular account’s holdings to 11,920,154 shares. Proceeds from the sales totaled over $7.4-million, not including trading fees.
Prior to that, between Dec. 29 - Jan. 4, management executive Michael McCormack purchased a total of 149,274 shares at an average cost per share of approximately $6.44. The cost of these purchases totaled over $961,000, not including trading fees.
Chart watch
The stock has limited trading history since it just began trading on the Toronto Stock Exchange in 2016.
Year-to-date, the share price of this financial stock has increased 30 per cent, outperforming the S&P/TSX composite index, which is up 12 per cent. In addition, the stock has outperformed the S&P/TSX financials index, which has rallied 19 per cent.
On May 6, the share price closed at a record high of $8.61 and is currently trading just 2 per cent below this price. Over the past three months, the share price has been range bound, trading largely between $7.75 and $8.50.
In terms of key technical resistance and support levels, the share price has major overhead resistance around $8.60. After that, there is a ceiling of resistance around $10. Looking at the downside, there is strong support between $7.75 and $8, in-line with its 100-day moving average (at $7.75).
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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Jennifer Dowty