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On today’s TSX Breakouts report, there are 14 stocks on the positive breakouts list (stocks with positive price momentum), and 48 securities are on the negative breakouts list (stocks with negative price momentum).

Discussed today is a stock that is on the positive breakouts list - Open Text Corp. (OTEX-T). Last year, the stock price was in a downtrend. However, in 2023, the share price has rebounded. Year-to-date, the share price has rallied 28 per cent, making it the seventh best performing stock in the S&P/TSX composite index.

This growth stock has an attractive business model with high recurring revenues, high margins, and strong cash flow generation. On a valuation basis, the stock is trading at a discount to its historical average multiple. Management is committed to returning capital to its shareholders, boosting its dividend every calendar year since 2014. The current dividend yield is 2.6 per cent.

A brief outline on Open Text is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.

The company

Waterloo, Ont.-based Open Text is a leading software and services provider of information management solutions. The company’s software helps its customers automate processes and manage supply chains.

Open Text has strong earnings visibility given its high recurring revenue business model. In the second quarter of fiscal 2023 (the company’s fiscal year-end is June 30), total annual recurring revenue (cloud services and subscriptions and customer support) represented 81 per cent of total revenue. Cloud services and subscription revenue alone represented over 45 per cent of total revenue.

In terms of geographic revenue breakdown, in fiscal 2022, 62.6 per cent of its revenue was from the Americas, 29.4 per cent from the Europe, Middle East and Africa (EMEA) and 8 per cent from the Asia Pacific region.

In January, the company completed a sizable acquisition, purchasing Micro Focus International plc for approximately $5.8-billion, funded with cash, debt, and drawing on its revolving credit facility. As a result, the company’s net leverage ratio increased to 3.8 times. Management anticipates this ratio will decline to less than 3 times within the next eight full quarters.

There is seasonality in the company’s business with the first-quarter historically the weakest quarter.

The company is dual-listed, trading on the Toronto Stock Exchange as well as the Nasdaq under the ticker, OTEX.

Investment thesis

  • Strong leadership
  • Attractive revenue composition (high recurring revenue) and high margins
  • Robust earnings growth driven by the acquisition of Micro Focus
  • Diversified customer base
  • Reasonable valuation – room for multiple expansion
  • Strong free cash flow generation
  • Reliable dividend

Dividend policy

The company pays shareholders a quarterly dividend of 24.299 US cents per share, equating to a current annualized yield of 2.6 per cent.

Management remains committed to returning capital to its shareholders and targets returning 20 per cent of its trailing 12-months of free cash flow.

Quarterly earnings and outlook

After the market closed on Feb. 2, the company reported better-than-expected second quarter fiscal 2023 financial results. Revenue came in at US$897-million, up 2.4 per cent year-over-year (or 7.8 per cent year-over-year on a constant currency basis), and ahead of the consensus estimate of US$868-million. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was US$340.9-million, ahead of the Street’s forecast of US$314-million.  Adjusted earnings per share came in at 89 US cents, above the consensus earnings per share estimate of 78 US cents.

For the third quarter of fiscal 2023, management guided to revenue of between US$1.18-billion and US$1.22-billion, of which between US$310-million and US$325-million is from Micro Focus.

For fiscal 2023, management is targeting total revenue growth of between 28 per cent and 30 per cent (organic growth of between 1 per cent and 2 per cent), an adjusted EBITDA margin between 32.5 per cent and 33.5 per cent, and free cash flow of between US$500-million and US$600-million. For fiscal 2024, management is targeting total revenue growth of between 33 per cent and 35 per cent (organic growth of between 1 per cent and 2 per cent), an adjusted EBITDA margin of between 36 per cent and 38 per cent, and free cash flow between US$800-million and US$900-million. For fiscal 2026, management is targeting total revenue growth of between 2 per cent and 4 per cent (organic growth of between 2 per cent and 4 per cent), an adjusted EBITDA margin of between 38 per cent and 40 per cent, and free cash flow of over US$1.5-billion.

Analysts’ recommendations

This technology stock is covered by 10 analysts, of which eight analysts have buy recommendations and two analysts (Citi’s Steven Enders and CIBC’s Stephanie Price) have ‘neutral’ recommendations.

The firms providing research coverage on the company are as follows in alphabetical order: ARC Independent Research, Barclays, BMO Nesbitt Burns, CIBC World Markets, Eight Capital, National Bank Financial, Scotiabank, Raymond James, RBC Dominion Securities and TD Securities.

Revised recommendations

Last month, six analysts revised their target prices.

  • ARC’s Kadambari Daptardar to $50 from $45.
  • BMO’s Thanos Moschopoulos to US$39 from US$34.
  • CIBC’s Stephanie Price to US$40 from US$35.
  • Citi’s Steven Enders to US$35 (the low on the Street) from US$33.
  • Raymond James’ Steven Li to US$42 from US$48.
  • TD’s Daniel Chan to US$50 from US$40.

Financial forecasts

The Street is forecasting EBITDA of US$1.435-billion in fiscal 2023 and US$2.14-billion in fiscal 2024. The consensus earnings per share estimates are US$3.06 in fiscal 2023, rising to US$4.43 in fiscal 2024.

Given the recent acquisition of Micro Focus International plc that was completed in January, earnings forecasts have increased materially for fiscal 2024. Three months ago, the consensus EBITDA and EPS estimates were US$1.325-billion and US$3.29, respectively.

Valuation

Analysts commonly value the stock on an enterprise value-to-EBITDA multiple basis.

According to Bloomberg, the stock is trading at an EV/EBITDA multiple of 8.8 times the fiscal 2024 consensus estimate, which is well below the five-year historical average multiple of 11 times.

The average one-year target price is US$44.13, implying the share price may appreciate nearly 17 per cent over the next 12 months.

Insider transaction activity

On Feb. 7, executive vice-president of IT and chief information officer Renee McKenzie sold 2,061 shares at an average price per share of approximately US$34.599 with 4,961 shares remaining in this particular account. Proceeds totaled over US$71,000, not including trading fees.

Chart watch

At the beginning of the month, the stock formed a bullish “golden cross” with the 50-day moving average crossing above the 200-day moving average.

Year-to-date, the share price has rallied 28 per cent, making it the seventh best performing stock out of 235 stocks in the S&P/TSX composite index. Should the positive price momentum continue, the stock faces an initial ceiling of resistance around $55. After that, there is overhead resistance between $62.50 and $63. Looking at the downside, there is strong technical support around $44, near its 200-day moving average (at $44.03).

ESG Risk Rating

According to Sustainalytics, Open Text has an environmental, social and governance (ESG) risk rating of 17.2 as of Jan. 14, 2023. A rating of between 10 and 20 reflects “low” risk.

POSITIVE BREAKOUTSMarch 20 close
CSU-TConstellation Software Inc $2,380.00
DSG-TDescartes Systems Group Inc $107.00
ELD-TEldorado Gold Corp $13.72
HPS-A-THammond Power Solutions Inc. $36.15
KBL-TK-Bro Linen Inc. $31.20
NFG-XNew Found Gold Corp. $6.54
OTEX-TOpen Text Corp $51.45
OLA-TOrla Mining Ltd. $6.36
SBB-TSabina Gold & Silver Corp $1.94
SNC-TSNC-Lavalin Group Inc $32.19
TRI-TThomson Reuters Corp $171.91
TXG-TTorex Gold Resources Inc $20.51
VMD-TViemed Healthcare Inc. $13.64
WPM-TWheaton Precious Metals Corp. $62.94
NEGATIVE BREAKOUTS
ABST-TAbsolute Software Corp $10.24
HOT-UN-TAmerican Hotel Income Properties REIT LP $2.46
ANRG-TAnaergia Inc. $3.30
ACB-TAurora Cannabis Inc. $0.91
ACQ-TAutoCanada Inc $18.32
BPF-UN-TBoston Pizza Royalties Income Fund $14.99
BRAG-TBragg Gaming Group Inc. $4.76
BBU-UN-TBrookfield Business Partners LP $22.50
BTB-UN-TBTB Real Estate Investment Trust $3.52
CWB-TCanadian Western Bank $23.53
WEED-TCanopy Growth Corp. $2.52
CJT-TCargojet Inc $105.74
CHW-TChesswood Group Ltd $9.09
CTS-TConverge Technology Solutions Corp. $3.99
CRR-UN-TCrombie Real Estate Investment Trust $14.89
CRON-TCronos Group Inc. $2.57
DNTL-Tdentalcorp Holdings Ltd. $7.89
DIV-TDiversified Royalty Corp $2.97
DII/B-TDorel Industries Inc $3.95
MPCT-UN-TDream Impact Trust $3.04
D-UN-TDream Office Real Estate Investment Trust $14.57
EFX-TEnerflex Ltd $7.58
ESI-TEnsign Energy Services Inc $3.01
EQB-TEquitable Group Inc $54.52
ET-TEvertz Technologies Ltd $10.15
FRX-TFennec Pharmaceuticals Inc. $10.76
HTL-XHamilton Thorne Ltd. $1.49
INO-UN-TInovalis REIT $3.62
LB-TLaurentian Bank of Canada $31.13
LNR-TLinamar Corp $60.27
MG-TMagna International Inc $68.82
NFI-TNew Flyer Industries Inc $8.45
NWH-UN-TNorthWest Healthcare Properties REIT $8.82
OGI-TOrganigram Holdings Inc. $0.81
PET-TPet Value Holdings Ltd. $36.47
PRMW-TPrimo Water Corp. $19.42
PRN-TProfound Medical Corp. $13.55
QTRH-TQuarterhill Inc. $1.51
SIA-TSienna Senior Living Inc $10.50
SOT-UN-TSlate Office REIT $3.60
SRU-UN-TSmartCentres Real Estate Investment Trust $26.13
SYZ-TSylogist Ltd. $4.82
LEV-TThe Lion Electric Company $2.52
TD-TToronto-Dominion Bank $77.75
TA-TTransAlta Corp $10.88
TSU-TTrisura Group Ltd. $31.42
TNT-UN-TTrue North Commercial REIT $3.38
WILD-TWildBrain Ltd. $2.04

Source: Bloomberg

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.

This report should not be considered an investment recommendation

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 19/04/24 11:53am EDT.

SymbolName% changeLast
OTEX-T
Open Text Corp
+0.48%48.11

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