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On today’s TSX Breakouts report, there are 21 stocks on the positive breakouts list (stocks with positive price momentum), and 31 stocks are on the negative breakouts list (stocks with negative price momentum).

Discussed today is a stock that is on the negative breakouts list.

The share price has been under pressure in recent weeks, entering correction territory. The share price may soon stabilize, however it may take time to rebound. While the downside risk in the share price may be limited given the stock’s valuation, investors may need to have patience. The average one-year target price is $35.56, suggesting the share price may rally 35 per cent over the next 12 months. This is a stock to watch as it nears oversold levels.

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The security highlighted below is Maple Leaf Foods Inc. (MFI-T).

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

The company

Mississauga-based Maple Leaf Foods manufactures food products under brands such as Maple Leaf, Maple Leaf Prime, Maple Leaf Natural Selections, Schneiders, and Schneiders Country Naturals.

The company has two reporting segments, its core Meat Protein Group (representing approximately 95 per cent of total sales for the first half of 2020) and the Plant Protein Group. While the Plant Protein business is still still quite small, management sees a tremendous growth opportunity for this business segment to grow driven by rising consumer demand for meat alternative foods (e.g. soy protein and pea protein products).

On Aug. 18, the company provided an update on its Brandon, Manitoba facility where employees have tested positive for COVID-19. Management indicated that the plant remains in operation but that pork exports to China have been temporarily and voluntarily halted. This will negatively impact the company’s financial results.

On the positive side, at the Canaccord Genuity Capital Markets virtual growth conference held on Aug. 12, Maple Leaf Foods president and chief executive officer Michael McCain addressed recent challenges faced by the company, “We came into the second quarter slightly oversupplied to begin with in the poultry markets and it basically hit this wall of oversupply … That was compounded by the fact that we had more challenging COVID conditions in the poultry business at our two Toronto facilities … I’m happy to report that those [issues] are substantially mitigated coming into the third quarter… Number one, there was a significant contraction in the supply in the marketplace, the largest that I can ever recall, a 12 per cent reduction in the live supply occurred in mid-May, which effects the back half of 2020 … Secondly, … the facilities that were challenged by COVID in April and May are now very stable and functioning.”

Quarterly earnings

The second quarter was challenging for the company with an oversupplied poultry market, impacts from COVID-19, and lower demand from food service.

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Despite these challenges, management was able to deliver strong financial results. Before the market opened on July 30, the company reported better-than-expected second-quarter financial results.

Total sales increased 7 per cent year-over-year. Sales within the Meat Protein Group climbed 5.8 per cent year-over-year and delivered an adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) margin of 13.3 per cent. The Plant Protein Group experienced sales growth of 41.4 per cent. Total adjusted EBITDA came in at $115.7-million, up 7 per cent year-over-year and above the consensus estimate of $99.1-million. Adjusted earnings per share came in at 35 cents, surpassing the consensus earnings estimate of 26 cents.

The share price rallied 5 per cent that day on high volume with over 950,000 shares traded, above the three-month historical daily average trading volume of less than 400,000 shares.

During the second quarter, costs associated with COVID-19 amounted to roughly $19-million. Looking ahead, management anticipates COVID related expenses will total $25-million in the second half of 2020, skewed to the third-quarter. However, this assumption is unpredictable and subject to change.

The company is expected to report its third-quarter earnings results later this month. The consensus EBTIDA and earnings per share estimates are $98.7-million and 24 cents, respectively.

Investment thesis

  • Battling near-term, temporary uncertainties as the company faces headwinds associated with COVID-19. Consequently, the share price may take time to rebound.
  • Positive medium-term outlook. 1) Management maintained its 2022 adjusted EBITDA target of between 14 per cent and 16 per cent for its meat business. 2) The London, Ontario poultry facility is expected to improve the company’s profitability with efficiencies, lower costs, and an improved product mix. The consolidation of three plants into this new facility in London is anticipated to deliver benefits of more than $100-million of cash flow a year. The plant is expected to be operational in mid-2022. 3) A plant-based protein plant is expected to be in operation in mid-2022 as well. The plant-based protein market is an area with robust growth potential for the company.
  • Strong balance sheet to withstand near-term challenges.
  • An attractive valuation.
  • ·Reliable dividend.

Returning capital to shareholders

Maple Leaf Foods pays its shareholders a quarterly dividend of 16 cents per share, or 64 cents per share on a yearly basis. This equates to a current annualized dividend yield of 2.4 per cent.

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Since 2015, management has announced a dividend increase in February of each year.

During the first six months of 2020, the company did not repurchase any shares as part of its share buyback program.

Analysts' recommendations

According to Bloomberg, eight analysts actively cover this this consumer staples stock, of which seven analysts have buy recommendations and one analyst (BMO Nesbitt Burns analyst Peter Sklar) has a “market perform” recommendation.

The firms providing recent research on the company are: Berenberg, BMO Nesbitt Burns, Canaccord Genuity, CIBC World Markets, RBC Dominion Securities, Scotiabank, TD Securities, and Veritas Investment Research.

Revised recommendations

Earlier this month, BMO’s Peter Sklar reduced his target price to $30 from $34.

Financial forecasts

The Street is forecasting EBITDA of $405-million in 2020, rising over 16 per cent to $472-million the following year. The consensus earnings per share estimates are $1.01 in 2020, climbing over 34 per cent to $1.36 in 2021.

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Earnings expectations have increased. For instance, three months ago, the consensus EBITDA forecasts were $378-million for 2020 and $451-million for 2021. The consensus earnings per share forecasts were 85 cents for 2020 and $1.21 for 2021.

Valuation

The stock is trading at an attractive valuation.

Analysts commonly value the stock using a sum-of-the-parts methodology, ascribing different multiples to the two business segments (meat protein business and plant-based protein business).

According to Bloomberg, the stock is trading at a blended enterprise value-to-EBITDA multiple of 8.7 times the 2021 consensus estimate, below its three-year historical average forward multiple of 9.2 times. Over the past three years, the forward multiple has fallen largely between 8 times and 10.5 times.

The average one-year target price is $35.56, suggesting the share price may increase 35 per cent over the next 12 months. Analysts have target prices ranging from $27 (from Berenberg’s Donald McLee) to $45 (from TD’s Mike Van Aelst). Individual target prices are as follows in numerical order: $27, $30, $31, $34, $35.50, $40, $42, and $45.

Insider transaction activity

Year-to-date, only one insider has reported trading activity in the public market.

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In a relatively small transaction, director Geoffrey Beattie bought 459 shares at a price per share of $28.78 on Feb. 6, lifting this particular account’s holdings to 23,139 shares. The cost of this investment exceeded $13,000, not including commission charges.

Chart Watch

The share price closed at $30.53 on Aug. 24. Since then, the share price has declined over 13 per cent, giving up nearly all of its gains in 2020. Year-to-date, the share price is relatively unchanged, up 2 per cent.

The stock is nearing oversold levels with an RSI (relative strength index) reading of 34. Generally, an RSI reading at or below 30 reflects an oversold condition.

Looking at key technical resistance and support levels, there is initial overhead resistance around $28.50, close to its 50-day moving average (at $28.42). After that, there is a major ceiling of resistance between $30 and $30.50, and then around $35. Looking at the downside, the stock is approaching strong technical support between $25 and $26, near its 200-day moving average (at $26.31).

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.

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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.

Wednesday's TSX breakouts

Positive BreakoutsOct. 6 close
AQN-TAlgonquin Power & Utilities Corp $20.35
BLX-TBoralex Inc $40.35
BPF-UN-TBoston Pizza Royalties Income Fund $8.39
CJT-TCargojet Inc $205.69
CLR-TClearwater Seafoods Inc $7.35
CRR-UN-TCrombie Real Estate Investment Trust $13.55
EMP-A-TEmpire Co Ltd $40.29
FTS-TFortis Inc $55.21
GWO-TGreat-West Lifeco Inc $27.69
HLF-THigh Liner Foods Inc $9.39
H-THydro One Ltd. $29.45
INE-TInnergex Renewable Energy Inc $25.05
MX-TMethanex Corp $33.66
NEO-TNeo Performance Materials Inc. $10.89
NPI-TNorthland Power Inc $41.48
TCS-TTECSYS Inc. $32.81
TIH-TToromont Industries Ltd $80.85
RNW-TTransAlta Renewables Inc $17.46
TCW-TTrican Well Service Ltd $1.18
WELL-TWell Health Technologies Corp. $7.60
WILD-TWildBrain Ltd. $1.63
Negative Breakouts
USA-TAmericas Silver Corp $3.28
AR-TArgonaut Gold Inc $2.49
ACB-TAurora Cannabis Inc. $5.96
CCO-TCameco Corp $12.78
CG-TCenterra Gold Inc $13.33
ENB-TEnbridge Inc $38.52
EDV-TEndeavour Mining Corp. $32.28
FD-TFacedrive Inc. $11.99
FR-TFirst Majestic Silver Corp $12.53
FRU-TFreehold Royalties Ltd $3.46
IGM-TIGM Financial Inc $30.37
KBL-TK-Bro Linen Inc. $26.75
KEL-TKelt Exploration Ltd $1.37
KL-TKirkland Lake Gold Inc $62.46
GUD-TKnight Therapeutics Inc $5.60
MFI-TMaple Leaf Foods Inc $26.38
MKP-TMCAN Mortgage Corp $13.13
MRC-TMorguard Corp. $98.02
NVO-TNovo Resources Corp. $3.24
OTEX-TOpen Text Corp $55.12
OSK-TOsisko Mining Inc. $3.42
SIL-TSilverCrest Metals Inc. $10.96
SSRM-TSSR Mining Inc. $23.51
SYZ-TSylogist Ltd. $10.50
TRP-TTC Energy Corp. $55.03
TRZ-TTransat AT Inc $3.65
TRQ-TTurquoise Hill Resources Ltd $1.00
U-TUranium Participation Corp. $4.02
VGCX-TVictoria Gold Corp. $14.68
WTE-TWestshore Terminals Investment Corp $14.57
WPM-TWheaton Precious Metals Corp. $62.98

Source: Bloomberg

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