On today’s TSX Breakouts report, there are 19 stocks on the positive breakouts list (stocks with positive price momentum), and 23 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a tech stock that may resurface on the positive breakouts list – Vecima Networks Inc. (VCM-T). This small-cap stock has delivered large returns to its shareholders with its share price nearly tripling in value over the past three years. The stock price is just 26 cents away from setting a new record closing high. Year-to-date, the share price is up 16 per cent. Based on analysts’ target prices, the share price is anticipated to rally between 24 per cent and 47 per cent over the next year.
A brief outline on Vecima is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Victoria-based Vecima is a provider of solutions that enables cable and telecommunications providers to improve their broadband internet capabilities by delivering faster, high quality and reliable internet services to their customers. The company has over 250 customers worldwide.
In terms of its revenue composition, the company has three main reporting segments: Video and Broadband Solutions (VBS), Content Delivery and Storage (CDS), and Telematics. In the first half of fiscal 2023 (the company’s fiscal year-end is June 30), the VBS, CDS, and Telematics segments represented 82 per cent, 16 per cent, and 2 per cent of total revenue, respectively.
In December, the company completed two offerings to fund its growth, raising $15.9-million through the sale of 957,880 shares at a price per share of $17.75.
Investment thesis
- Delivered solid returns to its shareholders. Stock closed at a record high in February.
- Rapid growth in the VBS segment (Vecima’s Entra DAA products) driven by growing demand for streaming services and faster internet speeds combined with high, reliable signal quality
- Expanding broadband services to rural areas
- Transition to 10G internet (faster speed at 10 gigabits per second)
- High management ownership. According to Bloomberg, the CEO owns over 56 per cent of the shares outstanding, aligning managements’ interests with shareholders
- Potential risks to consider: 1) supply constraints; 2) low liquidity with the three-month daily average trading volume at just over 15,000 shares making trading more challenging and this can also increase price volatility; 3) currency translation risk as most of the company’s revenues and costs are in U.S. dollars.
Dividend policy
The company pays shareholders a quarterly dividend of 5.5 cents per share, equating to a current annualized yield of 0.98 per cent.
Vecima has maintained its dividend at this level since 2015.
Quarterly earnings
Before the market opened on Feb. 9, the company reported better-than-expected second quarter fiscal 2023 financial results.
Revenue came in at $76.2-million, up 75 per cent year-over-year and ahead of the consensus estimate of $73-million. The VBS segment reported record revenue of $62.3-million, up 129 per cent year-over-year. The CDS segment realized revenue of $12.4-million, down 17 per cent year-over-year. Telematics delivered revenue of $1.5-million, up 9 per cent year-over-year.
Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was $15.8-million, up 113 per cent year-over-year and ahead of the Street’s forecast of $14-million. Adjusted earnings per share came in at 35 cents, up from 6 cents reported during the same period last year and above the consensus earnings per share estimate of 28 cents.
That day, the share price rallied 9 per cent.
Analysts’ recommendations
This small-cap technology stock has a unanimous buy recommendation from four analysts.
The firms providing research coverage on the company are: Acumen Capital, B. Riley Securities, Cormark Securities, and Raymond James.
Revised recommendations
After the company released its quarterly financial results in February, all four analysts revised their target prices.
- Acumen’s Jim Byrne to $32 from $34.
- B. Riley Securities’ Dave Kang to $33 from $27.
- Cormark’s Jesse Pytlak to $28 from $25.
- Raymond James’ Steven Li to $28 from $26.
Financial forecasts
The Street is forecasting revenue of $310-million in fiscal 2023, rising 16 per cent to $361-million in fiscal 2024. The consensus EBITDA estimates are $62-million in fiscal 2023, increasing 23 per cent to $76-million in fiscal 2024. The consensus earnings per share estimates are $1.37 in fiscal 2023, rising to $1.73 in fiscal 2024.
Earnings forecasts have increased in recent months. Three months ago, the consensus revenue estimates were $298-million in fiscal 2023 and $349-million in fiscal 2024. The consensus EBITDA estimates were $58-million in fiscal 2023 and $71-million in fiscal 2024. The Street was forecasting earnings per share of $1.26 in fiscal 2023 and $1.61 the following year.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 7.3 times the fiscal 2024 consensus estimate, which is below its five-year historical average multiple of 8.7 times.
The average one-year target price is $30.25, implying the share price may appreciate 34 per cent over the next 12 months. Individual target prices are: two at $28, $32, and $33.
Insider transaction activity
Between March 20-23, chief operating officer Clay McCreery exercised his options, receiving a total of 15,000 shares at a price per share of $9.50, and sold 15,000 shares at an average price per share of approximately $21.88 with 40,209 shares remaining in this particular account. Net proceeds totaled over $185,000, excluding any associated transaction fees.
Chart watch
On Feb. 10, the share price closed at an all-time high of $22.75 and is currently just 26 cents away from closing at a new record high.
The share price has been in an uptrend for the past three years, making higher highs and higher lows. Year-to-date, the share price is up 16 per cent.
Looking at key technical resistance and support levels, the stock is nearing initial overhead resistance around $23. After that, there is overhead resistance between $27 and $28. Looking at the downside, there is strong technical support around $21, near its 50-day moving average at $21.28.
This small-cap stock is thinly traded. The three-month historical daily average trading volume is just 15,000 shares.
ESG Risk Rating
Vecima Networks is not rated by risk providers Sustainalytics, MSCI, or 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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