On today’s TSX Breakouts report, there are just seven stocks on the positive breakouts list (stocks with positive price momentum), and 57 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a company that is on the negative breakouts list.
Its share price has dropped 16 per cent in the past nine weeks, putting the stock in correction territory. Yet, the stock is not oversold, and in the near-term, the share price may continue to drift down.
The stock has 10 buy recommendations with an anticipated one-year price return of 40 per cent (over 43-per-cent total return including the 3-per-cent dividend yield). However, this anticipated robust return may be pushed out to 2020 as earnings growth is expected to moderate in the second half of this year with challenging year-over-year comparisons.
The security highlighted today is Aecon Group Inc. (ARE-T). This is a stock that investors may want to watch and put on their radar screens should further price weakness continue.
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Toronto-based Aecon is a construction and infrastructure development company serving both the private and public sectors. There is seasonality in the company’s operations with the first quarter the weakest, and the second half of the year is typically stronger than the first half.
After the market closed on July 25, the company reported better-than-expected second-quarter financial results that sent the share price rising nearly 10 per cent the following trading session. Revenue was $867-million, up 15 per cent year-over-year, and ahead of the consensus estimate of $770-million. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) came in at $57.3-million, well above the consensus estimate of $46.5-million. The company reported an EBITDA margin of 6.6 per cent, up from 5.5 per cent reported during the same period last year. Adjusted earnings per share came in at 31 cents, above the consensus estimate of 20 cents. During the quarter, the company was awarded the Highway 401 expansion project in the Greater Toronto Area valued at $640-million, where it has a 50 per cent interest. Construction is slated to begin in the fourth quarter of 2019 and continue to the end of 2022.
The company has a solid backlog, which will translate into future revenue for the company.
On the earnings call, the president and chief executive officer Jean-Louis Servranckx said, “Our backlog at the end of the quarter was $6.8 billion. Backlog to be worked off in the next 12 months of $2.4 billion increased $400 million over last year, and approximately two-thirds of backlog is for work-off beyond the next 12 months, providing significant visibility and stability to Aecon’s longer-term outlook.”
In terms of future growth opportunities, Mr. Servranckx said, "In the construction segment, bidding activity is expected to be solid during the remainder of 2019, although new awards are not likely to match the record level of new awards achieved in 2018, with many of the company's larger pursuits expected to be awarded in 2020. With strong and diverse backlog in hand, Aecon is focused on ensuring strong execution and selectively adding backlog through a disciplined bidding approach that supports continued like-for-like margin improvements in the segment. Our concessions segment continues to partner with Aecon's construction segment to focus on the significant number of P3 (Public-Private Partnerships) opportunities in Canada and on a selective basis internationally.” In terms of specific project opportunities, in the MD&A (Management’s Discussion and Analysis), management commented, “The concessions segment is actively pursuing a number of large-scale infrastructure projects that require private finance solutions as well as participating as a concessionaire on the Finch West LRT, Waterloo LRT, Eglinton Crosstown LRT, Gordie Howe International Bridge and the Bermuda International Airport redevelopment projects.”
The company will be reporting its third-quarter financial results after the market closes on Thurs. Oct. 31 and hosting an earnings call the following morning at 10 a.m. ET.
For the third-quarter, the Street is expecting the company to report revenue of $1.003-billion, EBITDA of $85.3-million and earnings per share of 60 cents. The third-quarter financial results are up against a very strong third-quarter 2018, making year-over-year growth challenging. Recall, in the third-quarter of 2018, revenue was $1.02-million, adjusted EBTIDA was $89.5-million, EBITDA margin was 8.8 per cent, and earnings per share was 60 cents.
For the past five quarters, the share price has rallied sharply the day after the company released its quarterly results with one-day returns ranging from over 4 per cent and up to 12 per cent. However, a spike in the share price may not occur this time around given the difficult year-over-year comparisons.
Dividend policy
In March, the company announced a 16 per cent dividend increase. The company currently pay its shareholders a quarterly dividend of 14.5 cents per share, or 58 cents per share on a yearly basis. This equates to a current annualized yield of 3.2 per cent.
Analysts’ recommendations
This small-cap security with a market capitalization of $1.09-billion is covered by 11 analysts on the Street, of which 10 analysts have buy recommendations and one analyst (Derek Spronck at RBC Dominion Securities) has a “sector perform” recommendation.
The firms providing research coverage on Aecon are as follows in alphabetical order: AltaCorp Capital, Canaccord Genuity, CIBC World Markets, Desjardins Securities, GMP, Industrial Alliance Securities, National Bank Financial, Paradigm Capital, Raymond James, RBC Dominion Securities, and TD Securities.
Revised recommendations
In July, nine analysts revised their expectations – all higher.
Desjardins’ Benoit Poirier raised his target price by $1 to $24. RBC’s Derek Spronck hiked his target price to $22 from $20. TD Securities’ analyst Mike Tupholme increased his target price by $3 to $26. Paradigm’s Corey Hammill increased his target price to $27 from $22.50. CIBC’s analyst Jacob Bout boosted his target price to $24 from $23. Canaccord’s Yuri Lynk bumped his target price to $27 from $26. Industrial Alliance’s Neil Linsdell raised his target price by $1.50 to $25.50. AltaCorp’s Chris Murray tweaked his target price higher by 75 cents to $25. Ben Jekic, an analyst at GMP, raised his target price by $1 to $26.
Financial forecasts
The consensus EBITDA estimates are $222-million in 2019, up from a record adjusted EBITDA of $207-million reported in 2018, and forecast to increase 7 per cent to $238-million in 2020. The Street is forecasting earnings per share of $1.19 in 2019 rising to $1.29 the following year.
Earnings forecasts have been rising. For instance, three months ago, the Street was forecasting EBITDA of $213-million in 2019 and $228-million in 2020. The earnings per share estimates were $1.11 for 2019 and $1.23 for 2020.
Valuation
The stock is commonly valued on an enterprise value-to-EBITDA multiple basis.
According to Bloomberg, the stock is trading at an EV/EBITDA multiple of 5.4 times the 2020 consensus estimate, below its three-year historical average multiple of 6.1 times.
The average 12-month target price is $25.14, implying the share price has 40 per cent upside potential over the next year. Individual target prices are as follows in numerical order: $22 (the low on the Street is from RBC’s Derek Spronck), three at $24, $25, $25.50, three at $26, and two at $27 (the high on the Street is from Canaccord’s Yuri Lynk and Paradigm’s Corey Hammill).
Insider transaction activity
So far this year, only one insider has reported transactions in the public market.
Between March 11 and March 13, John Beck, the founder and executive chairman, sold 46,354 shares at an average price per share of $18.32, eliminating this account’s position. Proceeds from the sales, not including trading fees, totaled approximately $849,000.
Chart watch
The stock is in correction territory with the share price falling over 16 per cent from its closing price of $21.43 set on July 26, 2019.
Despite this move down, the stock is still not in oversold territory. The RSI (relative strength index) level is at 37. Generally, an RSI reading at or below 30 reflects an oversold condition.
In terms of key support and resistance levels, the share price has retreated to a major support level of roughly $18, which is near its 200-day moving average (at $18.18). Should the share price break and remain materially below $18, the next major support level is around $17. On a recovery, there is initial resistance between $19.50 and $20, and a major ceiling of resistance around $21.50.
This small-cap security has reasonable liquidity. The three-month historical daily average trading volume is approximately 600,000 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.
Jennifer Dowty