On today's TSX Breakouts report, there are 48 stocks on the positive breakouts list (stocks with positive price momentum), and seven securities are on the negative breakouts list (stocks with negative price momentum).
The positive breakouts list is populated with multiple gold and silver stocks and forest products stocks. Marijuana stocks are gaining momentum as well.
Discussed today is a forest products stock that surfaced on the positive breakouts list. The stock is on the cusp of forming a “golden cross” – a bullish technical pattern that occurs when a shorter-term moving average (the 50-day moving average in this case) crosses above a longer-term moving average (the 200-day moving average).
Next week, the company will be releasing its second-quarter financial results. The consensus sales and earnings estimates may prove to be too conservative given strong reported industry data. The security highlighted today is Stella Jones Inc. (SJ- T).
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
Quebec-based Stella-Jones produces pressure-treated wood products. Stella-Jones operates in relatively defensive industries serving the railroad and utility market segments. Railroad operators need to perform regular maintenance and upgrades to their railway ties. Meanwhile, utility poles have to be maintained, replaced and installed in new development projects. Utility poles are used by telecommunications and electrical utilities companies.
The company has operations across North America with facilities in six Canadian provinces and south of the border in 19 states. In the first-quarter, 77 per cent of sales came from the United States with the balance stemming from Canada.
In terms of the company’s business mix, in the first quarter, 40 per cent of sales were from utility poles. The railway ties segment represented 34 per cent of total sales. Residential lumber accounted for 14 per cent of sales. Logs and lumber represented 6 per cent of total sales. Lastly, industrial products accounted for 6 per cent of total sales in the quarter.
In May, management trimmed its earnings outlook for 2020, taking a prudent position given uncertainties arising from the COVID-19 pandemic. Expected EBITDA (earnings before interest, taxes, depreciation and amortization) was reduced to between $300-million and $325-million, down $20-million from its former guidance range of between $320-million and $345-million.
The company will be releasing its second-quarter financial results before the market opens on Aug. 5. The consensus sales, EBITDA and earnings per share estimates are $667-million, $91.6-million and 73 cents, respectively. Management will be hosting an earnings call that day at 10 a.m. (ET).
The consensus estimates and management’s guidance for 2020 may prove to be too conservative given strong reported industry data.
To illustrate, industry peer Koppers Holdings Inc. (KOP-N) began providing monthly business updates in May in order to provide investors with some visibility during this time of uncertainty with COVID-19. Monthly sales from the Koppers’ Railroad and Utility Products and Services (RUPS) segment have been strong. Earlier this week, Koppers’ reported its second-quarter earnings results. Sales for RUPS increased over 5 per cent year-over-year, EBITDA increased to a second quarter record of U.S. $23-million, up from U.S. $19-million reported last year.
During Koppers’ second-quarter earnings call held on July 27, management provided a positive outlook for its RUPS business segment.
With respect to the railroad business, the president and chief executive officer Leroy Ball remarked, “We expect strong first half [of 2020] volumes, primarily supported by the Class 1 [railroads], should continue at least through the third quarte r… Certain railroads are taking advantage of reduced track time to increase maintenance on our infrastructure.” In addition, monthly data reported by the Railway Tie Association showed tie purchases in May increased 2.9 per cent from previous month. Furthermore, Stella-Jones may report solid volumes for residential lumber given robust demand during this seasonally strong period and with people focusing on home improvement projects. On Koppers’ earnings call, Mr. Ball noted that that its, “Experiencing record level demand for residential treated wood with big box retailers continuing to report strong demand for our improvement projects…at this point we’re not seeing any indication of a slowdown.”
The Caisse de dépột et placement du Québec owns over 11 per cent of the shares outstanding.
Returning capital to shareholders
The company pays its shareholders a quarterly dividend of 15 cents per share, or 60 cents per share on a yearly basis. This equates to an annualized dividend yield of 1.45 per cent.
Looking back to 2013, management has announced a dividend increase each year during the month of March.
In 2019, the company repurchased 1.8-million shares at an average price per share of $38.47.
There are eight analysts that actively cover this mid-cap stock with a market capitalization of $2.8-billion, of which six analysts have buy recommendations and two analysts have ‘sector perform’ recommendations.
The firms providing recent research coverage on the company are: Acumen Capital, CIBC World Markets, Desjardins Securities, Laurentian Bank Securities, National Bank Financial, RBC Dominion Securities, Scotia Capital and TD Securities.
Month-to-date, ahead of the company’s second-quarter earnings release, two analysts have revised their expectations – both higher.
- CIBC’s Hamir Patel raised his target price to $45 from $42.
- Mike Tupholme, an analyst at TD Securities, increased his target price to $47 (the high on the Street) from $41.
The consensus EBITDA estimate is $308-million in 2020, down slightly from $312.9-million reported in 2019, with EBITDA forecast to expand 8 per cent to $332-million in 2021. The Street is forecasting earnings per share to come in at $2.33 in 2020, down from $2.37 reported in 2019, but expected to rise over 12 per cent to $2.63 in 2021.
Consensus earnings forecasts have been revised down for 2020 but have remained relatively stable for 2021. For instance, three months ago, the Street was forecasting EBITDA of $311.5-million for 2020 and $333.5-million for 2021 and earnings per share of $2.45 for 2020 and $2.65 for 2021.
According to Bloomberg, the stock is trading an enterprise value-to-EBITDA multiple of 11.1 times the 2021 consensus estimate, in-line with its three-year historical average (at 11.4 times). The peak EV/EBITDA multiple over the past three years was over 14 times.
The average one-year target price is currently at $42.50, suggesting the share price is nearly fully valued. However, should the company deliver solid earnings results, analysts may lift their target prices. Individual target prices are as follows in numerical order: $39 (from National Bank’s Maxim Sytchev), two at $40, two at $42, two at $45, and $47 (from TD’s Michael Tupholme).
Year-to-date, there have only been purchases (albeit relatively small) in the public market reported by insiders – no sales. Several of the most recent trades are noted below.
Most recently, on July 3, director Simon Pelletier acquired 1,000 shares at an average price per share of approximately $34.22.
On May 20, director Rhodri Harries invested over $167,000 in shares of the company. He purchased 5,000 shares at a cost per share of $33.55.
On May 11, chief financial officer Silvana Travaglini bought 1,000 shares at an average price per share of approximately $32.61. The cost of this purchase exceeded $32,000.
The chart is attractive. The stock is on the cusp of forming a ‘golden cross’ – a bullish technical pattern that occurs when a shorter-term moving average (the 50-day moving average in this case) crosses above a longer-term moving average (the 200-day moving average). Right now, the 50-day moving average (at $35.42) is trading relatively in-line with the 200-day moving average (at $35.46).
Between 2008 and 2015, the share price was in an uptrend, rising over 400 per cent during those eight years. However, in recent years, the stock price has been consolidating, trading sideways, largely between $40 and $50. The stock price has rebounded back to its pre-COVID price level (after dropping to $23.69 on March 23) and is once again trading in this $40 to $50 range, albeit at the lower end (closing at $41.40 on Tuesday). Consequently, the share price has room to run higher.
Year-to-date, the share price is up over 10 per cent, outperforming the S&P/TSX composite index, which is down 5.5 per cent.
In terms of key resistance and support levels, the stock has an initial ceiling of resistance around $45. After that, there is major overhead resistance between $48 and $50. Looking at the downside, there is strong technical support around $35, near its 50-day moving average and its 200-day moving average.
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.
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