On today’s TSX Breakouts report, there are 27 stocks on the positive breakouts list (stocks with positive price momentum), and 60 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that appears on the positive breakouts list with the share price closing at a record high on Friday. The company reported solid second-quarter financial results and management provided a positive outlook for the balance of the year.
With the current market volatility, this is a stock to watch given its strong fundamentals, attractive dividend yield of 5.7 per cent, and history of providing special dividends. The security highlighted today is First National Financial Corp. (FN-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
Toronto-based First National Financial Corporation is the parent company of First National Financial LP, and is the country’s largest non-bank mortgage lender. Management’s objective is to grow a conservative portfolio of high quality, prime mortgages. First National services both businesses as well as individuals by offering commercial and residential mortgages and has a portfolio of over $109-billion in mortgages under administration (MUA). In June, First National Financial celebrated its 13th year as a public company. In 2018, return on equity was an impressive 37 per cent.
After the market closed on July 30, the company reported solid second-quarter financial results. Mortgages under administration came in at $109.6-million, up 6 per cent year-over-year. Total new mortgage origination volumes rose 26 per cent year-over-year to $6.4-billion. New single-family mortgage originations were $3.9-billion, up 13 per cent year-over-year compared to $3.4-billion reported last year. Commercial originations amounted to a record $2.6-billion, up 50 per cent year-over-year. In the second quarter Management’s Discussion and Analysis (MD&A), it stated, “Management believes the increase in the single-family segment is due to a strong economy coupled with low mortgage rates and the Company’s position in the mortgage broker distribution channel. With lower risk-free interest rates, mortgage rates offered by the Company have decreased since December 31, 2018. Accordingly, despite new stress tests implemented as part of revised B-20 guidelines effective in 2019, lower mortgage rates make it comparatively easier for borrowers to qualify for similar mortgage amounts between the quarters. The Company believes that its strong market share in the mortgage broker channel has also led to increased origination. While B.C. volumes were down 2 per cent from 2018, the remainder of the company’s regional offices experienced growth, particularly in Ontario and the Maritimes, which increased by 25 per cent over comparative volumes in 2018.” The share price rallied 2.8 per cent the following trading day on high volume.
On the earnings call, co-founder and director Moray Tawse remarked on the second half of 2019, “Going forward, we remain optimistic for the balance of the year. Although not the same degree as we experienced at the end of the first quarter of 2019, single-family mortgage commitments continue to outpace 2018. Similarly, our commercial segment continues its growth initiatives and strengthens its presence across the country. While commercial origination is unlikely to [repeat] for another quarter of 50 per cent year-over-year growth, the forecast is for double-digit [growth] rate to continue this year.”
Management is committed to its dividend, frequently raising its dividend and paying special dividends to its shareholders.
In Oct. 2018, the company announced a 2.7 per cent increase to the monthly dividend, representing the 11th increase since the company went public in 2006. The dividend was increased to 15.8333 cents per share from 15.4167 cents. This equates to a yearly dividend of approximately $1.90, or an annualized yield of 5.7 per cent.
The payout ratio was 66 per cent in the second quarter and 86 per cent during the first six months of 2019.
Also positive, in Oct. 2018, the company announced a special dividend of $1 per share and in Oct. 2017, announced a special dividend of $1.25 per share.
There are five analysts that cover this small-cap financial stock with a market capitalization of $2-billion, of which four analysts have neutral recommendations and one analyst (Graham Ryding, an analyst at TD Securities) has a ‘buy’ recommendation.
The firms providing research coverage on the company are as follows in alphabetical order: BMO Nesbitt Burns, National Bank Financial, RBC Dominion Securities, Scotiabank and TD Securities.
Earlier this month, TD’s Graham Ryding lifted his target price to $36 (the high on the Street) from $34.
In July, BMO’s Nik Priebe increased his target price to $34 from $30. Geoffrey Kwan, an analyst at RBC Dominion Securities, raised his target price to $34 from $32. Scotiabank’s Phil Hardie hiked his target price by $2 to $32. Jaeme Gloyn, the analyst at National Bank Financial, bumped his target price up to $32 from $30.
Analysts are forecasting solid earnings growth for the company. The consensus earnings per share estimates are $2.78 in 2019, increasing 10 per cent to $3.07 in 2020.
Earnings forecasts have been quite stable - rising slightly. For instance, three months ago, the consensus earnings per share estimates were $2.68 for 2019 and $3.02 for 2020.
The stock is not cheap, trading at a high multiple relative to historical levels.
According to Bloomberg, the stock is trading at a price-to-earnings multiple of 10.9 times the 2020 consensus estimate, its highest level over the past three years and above the three-year historical average multiple of 9.4 times.
The average one-year target price is $33.60, implying the stock price is fully valued. Individual target prices are as a follows in numerical order: two at $32, two at $34 and $36.
Insider transaction activity
Year-to-date, no individual on the management team or board of directors has reported buying or selling activity in the public market.
The stock chart is positive. Year-to-date, the share price is up over 21 per cent and closed at a record high on Fri. Aug. 2.
In terms of key resistance and support levels, the stock price has initial overhead resistance around $35. On a pullback, there is strong technical support around $30, near its 200-day moving average (at $29.51).
Liquidity is low for this stock, which can increase volatility in the share price. The three-month historical daily average trading volume is approximately 23,000 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.