On today’s TSX Breakouts report, there are 53 stocks on the positive breakouts list (stocks with positive price momentum), and 19 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that appeared on the negative breakouts list on Monday. This dividend stock has become a value play, trading at a large discount relative to its historical average. For patient investors, the upside potential may outweigh the downside risk. The security highlighted today is an industry leader, Intertape Polymer Group Inc. (ITP-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
With headquarters in Montreal and Sarasota, Fla., Intertape develops and manufactures products, such as carton sealing tapes and industrial and specialty tapes and fabrics, used in industrial, automotive, and aerospace applications. An example of films is the shrink wrap used to seal uncooked pizzas that consumers purchase at grocery stores. The company is an industry leader. It is North America’s second largest tape manufacturer. In terms of its revenue composition, in 2017, 68 per cent of the company’s revenue was from tapes, 18 per cent from films, and 14 per cent was categorized as from woven and other. The company has a total of 15 manufacturing facilities, 13 are located in North America (nine plants are located in the United States and four are in Canada), one is in Portugal, and one facility is located in India.
Before the market opened on May 10, the company reported first-quarter financial results that fell short of the Street’s expectations. Revenue came in at US$237-million, relatively in-line with the consensus estimate of US $236-million, and up 14.5 per cent year-over-year. However, gross margin was 21.3 per cent, down from 22.7 per cent reported during the same period last year. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was US $30.2-million, below the Street’s expectations of US $31.7-million and down 0.6 per cent year-over-year. The adjusted EBITDA margin was 12.7 per cent. Earnings per share came in at 19 US cents, well below the consensus estimate of 25 US cents. The stock price declined 3 per cent that day.
On the earnings call, president and chief executive officer Gregory Yull remarked on the compressed gross margin, “I’d like to reiterate that the gross margin compression on sequential basis in the first quarter of 2018, resulting from a decrease in spread and an increase in average freight cost, is expected to be temporary. We’ve previously discussed the fact that when there are very sharp spikes in raw material prices that occur within a very short time frame, there could be some short-term timing effects.” He added, “Selling price increases announced in the late fourth quarter of 2017 and in the first quarter of 2018 are having a positive effect on the gross margin in the second quarter of 2018, and we remain confident in our ability to pass on price increases to our customers in a majority of these cases as we, and our industry in general, have done in the recent years.”
In the earnings release, management provided guidance for 2018, expecting the revenue growth experienced in 2017 to be maintained in 2018 (11-per-cent top line growth was realized in 2017). Adjusted EBITDA is anticipated to be between US $135-million and US $145-million. Total capital expenditures are expected to come in at between US $80-million and US $90-million, which is higher than management’s expected normalized annual capital spending run-rate of roughly between US $40-million and US $60-million. For the second quarter, management expects both revenue and adjusted EBITDA will show year-over-year growth.
Returning capital to shareholders
The company pays its shareholders a quarterly dividend in U.S. dollars of 14 cents per share, or 56 cents per share yearly. This equates to an annualized dividend yield of 4 per cent. The dividend has been maintained at this level since 2016.
As at May 7, the company had repurchased approximately 0.5-million shares under its current share buyback program, leaving roughly 3.5-million shares available to buyback.
Analysts’ recommendations
This small-cap stock with a market capitalization of $1.07-billion is covered by seven analysts, of which five analysts have buy recommendations, one has a “market perform” recommendation, and one analyst has an “underweight” recommendation.
The firms providing research coverage on the company are as follows in alphabetical order: Cormark Securities, EVA Dimensions, GMP Securities, Industrial Alliance Securities, RBC Capital Markets, Scotia Capital, and TD Securities.
Earlier this month, Timothy Stanish, the analyst from EVA Dimensions, cut his recommendation to an “underweight” from a “hold.”
Last month, Michael Doumet, the analyst from Scotia Capital, trimmed his target price to $26 from $27. Damir Gunja from TD Securities lowered his target price by $2 to $26. Maggie MacDougall from Cormark Securities downgraded the stock to a ‘market perform’ from a ‘buy’ recommendation and reduced her target price to $21 from $24.50. Neil Linsdell from Industrial Alliance Securities tweaked his target price to $26 from $27. Ben Jekic from GMP Securities lowered his target price to $25 from $26.
Financial figures
The consensus revenue estimates are US$993-million in 2018, rising over 5 per cent to US $1.049-billion in 2019. The Street is anticipating EBITDA of US $139-million in 2018, increasing 10 per cent to $153-million in 2019. The consensus earnings per share estimates are US $1.09 in 2018, climbing to US $1.25 the following year.
By 2022, management’s objectives are to realized revenue of US $1.5-billion, adjusted EBITDA of at least US $225-million with an adjusted EBITDA margin of at least 15 per cent. To put this in context, in 2017, reported revenue was US $898-million, adjusted EBITDA was US $129.6-million with an EBITDA margin of 14.4 per cent. Return on equity was 26.5 per cent in 2017, up from 22.6 per cent in 2016.
The Street’s top line forecasts have increased while the bottom line estimates have been reduced. To illustrate, three months ago, the consensus revenue estimates were US $986-million for 2018 and US $1.04-billion for 2019. The Street was forecasting EBITDA of US $141.5-million in 2018 and US $156.5-million in 2019. The consensus earnings per share estimates were US $1.16 in 2018 and US $1.31 for the following year.
Valuation
The stock is cheap relative to its historical average multiples.
According to Bloomberg, the shares are trading at a price-to-earnings (P/E) multiple of 11 times the 2019 consensus estimate, well below both its three-year historical average P/E multiple of 13.4 times as well as its five-year historical average P/E multiple of 13 times. On an enterprise value-to-EBITDA basis, the shares are trading at a multiple of 7.6 times the 2019 consensus estimate.
The average 12-month target price is $25.17, implying the stock has 38 per cent upside potential over the next year. Individual target prices provided by six firms are as follows in numerical order: $21, $25, three at $26, and $27.
Insider transaction activity
On May 18, former chairman George Bunze exercised his options and sold the corresponding number of shares (10,000) at a price per share of $18.9837, reducing his portfolio’s position to 53,371 shares.
On May 15, James Pantelidis, appointed as the new chairman, accumulated 4,000 shares at a price per share of U.S.$14.1325, increasing his portfolio’s holdings to 20,000 shares.
Chart watch
The stock is in a downtrend, declining 15 per cent year-to-date.
Looking at key resistance and support levels, the stock has an initial ceiling of resistance around $20, near its 200-day moving average (at $20.06). After that, there is overhead resistance around $22, and then between $24 and $25. Looking at the downside, there is strong technical support around $18. Failing that, there is support around $16.
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.
Jennifer Dowty