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Inside the Market Wednesday’s TSX breakouts: A beaten-down dividend stock with a 30% gain expected

On today’s TSX Breakouts report, there are 17 stocks on the positive breakouts list (stocks with positive price momentum), and three securities are on the negative breakouts list (stocks with negative price momentum).

Discussed today is a stock that appeared on the negative breakouts list at the end of December. However, next month the company will be reporting its earnings results from its seasonally strongest quarter. If the company reports an earnings beat once again, this could give the share price a boost. The stock has nine buy recommendations and four hold recommendations. The consensus target price implies the stock may deliver a potential total return (including the dividend yield) exceeding 30 per cent over the next year. The security highlighted today is Canadian Tire Corporation (CTC.A-T).

A brief outline is provided below that may serve as a springboard for further fundamental research.

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The company

Toronto-based Canadian Tire has over 1,700 retail stores and gas stations across the country under banners such as Canadian Tire, Mark’s, Sport Chek, Atmosphere, National Sports, and Sports Experts. Canadian Tire’s retail segment offers investors a diversified platform with exposure to a variety of consumer markets such as automotive, home living, home repair, sporting goods and clothing. In addition to the retail segment, Canadian Tire operates a Financial Services segment, which offers products such as credit cards and in-store warranties. Canadian Tire also has a 76-per-cent interest in CT Real Estate Investment Trust, providing further diversification to the company’s revenues.

Before the market opened on Nov. 8, the company reported better-than-expected third quarter financial results. Reported normalized earnings per share came in at $3.47, well above the consensus earnings per share estimate of $2.84. Normalized earnings per share took into account $22.4-million of costs related to the acquisition of activewear clothing manufacturer, Helly Hansen. Consolidated same-store sales were strong, up 2.5 per cent year-over-year. Same-store sales at Canadian Tire, FGL (Sport Chek, Hockey Experts, Sports Experts, National Sports, Intersport and Atmosphere) and Mark’s rose 2.2 per cent, 2.2 per cent and 6.1 per cent, respectively, year-over-year. The share price increased 11 per cent that trading day on high volume with over 1-million shares traded, well above its three-month historical daily average trading volume of approximately 350,000 shares.

On the earnings call, management indicated that they are not signs of weakness in consumer spending. The chief executive officer Dean McCann remarked, “We haven't seen any weakness in the consumer at all or change, if you will.” Greg Hicks, president of Canadian Tire Retail, added, “Within the business, we look at a few things. So we look at high ticket discretionary items and category performance and our overall portfolio [is] showing no signs of declines in unit sales on a year-over-year basis. We also look for evidence of the customer trading down from best to better or better to good and we don't see any material indicators of this type of activity either. Lastly, we take a look at growth rates in repair and maintenance businesses mostly in our fixing portfolio and again we're just not seeing any indicators that there's any softening based on kind of those three big looks into the business.”

On Feb. 14, the company will be reporting their year-end financial results before the market opens. There is seasonality in the company’s operations with the first quarter typically generating the lowest earnings and the fourth quarter typically the strongest. The Street is currently anticipating the company will report earnings per share of $4.70 in the fourth quarter.

Returning capital to investors

Management is committed to returning capital to its shareholders, announcing dividend increases in November for the past five consecutive years. Last November, the company announced a 15-per-cent increase to its dividend, raising its quarterly dividend to $1.0375 per share from 90 cents per share. This equates to a yearly dividend of $4.15 per share, or an annualized dividend yield of 2.9 per cent.

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The company has also been active in its share buyback program. In October, management completed its $550-million share buyback program. Subject to regulatory approval, the company intends to repurchase between $300 and $400 million of its shares by the end of 2019.

Analysts’ recommendations

Since the company reported its third quarter results on Nov. 8, 13 analysts have issued research reports on the company, of which nine analysts have buy recommendations and four analysts have hold recommendations.

The 14 firms providing recent research coverage are as follows in alphabetical order: Accountability Research, Barclays, BMO Capital Markets, Canaccord Genuity, CIBC Capital Markets, Desjardins Securities, Macquarie, Morningstar, National Bank Financial, Raymond James, RBC Capital Markets, Scotia Capital and TD Securities.

Revised recommendations

Last month, Zain Akbari, the analyst at Morningstar, increased his target price to $150 (the low on the Street) from $144.

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After the company reported its third quarter results, several analysts revised their target prices. Of note, Irene Nattel, the analyst from RBC Capital Markets, lifted her target price to $201 from $197. Chris Li, the analyst from Macquarie, tweaked his target price higher to $180 from $178. Jim Durran, the analyst from Barclays, raised his target price to $193 from $190. Mark Petrie from CIBC Capital Markets bumped his target price $181 from $179. Vishal Shreedhar, the analyst from National Bank Financial, increased his target price to $181 from $179.

One analyst lowered his expectations. Derek Dley from Canaccord Genuity, trimmed his target price by $2 to $170.

Financial forecasts

The Street is forecasting earnings per share of $11.71 for 2018 with earnings per share anticipated to rise 10 per cent to $12.88 in 2019.

Earnings forecasts have increased for 2018 and held relatively constant for next year. For instance, three months ago, the consensus earnings per share estimates were $11.17 for 2018 and $12.84 for 2019.

Valuation

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The stock can be valued using a sum-of-the-parts calculation to account for the distinct business segments.

The average 12-month target price is $185.38, implying the share price has 28 per cent upside potential over the next year, and if you include the dividend yield, the potential one-year total return is over 30 per cent.

Individual target prices range from a low of $150 (from the analyst at Morningstar) to a high of $205 (from the analyst at Desjardins Securities). Individual target prices are as follows in numerical order: $150, $170, $180, three at $181, $184, $192, two at $193, $200, $201, $205.

Insider transaction activity

Since the beginning of the fourth quarter, there has only been one trade in the public market reported by an insider.

In a relatively small transaction on Dec. 13, director Diana Chant invested just over $50,000 in shares of the company. She purchased 350 shares at a price per share of $143.68, increasing her portfolio position to 1,800 shares.

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Chart watch

Up until the summer, the share price was in a multi-year uptrend, making higher highs and higher lows, with the stock price closing at a record high of $181.30 on Aug. 8, 2018. Since then, however, the share price has nosedived, plunging 25 per cent.

Looking at key resistance and support levels, the share price has a major ceiling of resistance around $160, near its 200-day moving average (at $160.21). The next major resistance level is around $180, close to its record closing high of $181.30. On price weakness, the stock price has strong downside support around $140.

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.

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A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.

Positive Breakouts Jan. 8 close
ALC-T Algoma Central Corp $13.32
ATD.B-T Alimentation Couche-Tard Inc $70.28
ATP-T Atlantic Power Corp $3.04
BAD-T Badger Daylighting Ltd $33.64
CGY-T Calian Group Ltd. $30.75
ENB-T Enbridge Inc $45.37
GDI-T GDI Integrated Facility Services Inc. $19.56
INE-T Innergex Renewable Energy Inc $13.61
MAG-T MAG Silver Corp $10.80
MRT-UN-T Morguard Real Estate Investment Trust $11.69
NGD-T New Gold Inc $1.43
NVO-T Novo Resources Corp. $2.88
PLC-T Park Lawn Corp. $24.25
RVX-T Resverlogix Corp $3.45
SMU-UN-T Summit Industrial Income REIT $9.81
TXG-T Torex Gold Resources Inc $13.47
ZCL-T ZCL Composites Inc. $7.23
Negative Breakouts
ABX-T Barrick Gold Corp $16.32
HLS-T HLS Therapeutics Inc. $13.01
MAXR-T Maxar Technologies Ltd. $8.06

Source: Bloomberg

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