On today’s TSX Breakouts report, there are 17 stocks on the positive breakouts list (stocks with positive price momentum), and 44 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that has positive price momentum with its share price advancing 49 per cent year-to-date. However, the stock has not appeared on the positive breakouts list as its market capitalization (currently at $135-million) is below the $200-million screening threshold.
The stock has strong top-line growth and earnings growth and a strong balance sheet. The share price can be quite volatile. Consequently, this stock may be best suited for consideration by investors with a high risk tolerance. The security highlighted today is Questor Technology Inc. (QST-X).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Calgary-based Questor serves companies in the oil and gas industry, providing waste gas incineration systems that enables companies to meet legislated emission limits. Through Questor’s services, companies are able to meet regulated emission targets that have been put in place to reduce greenhouse gases. Through Questor’s waste gas combustion systems, the company is able to convert waste gases into heat energy that can be used to generate power and treat waste water.
The company has three main revenue streams: incinerator sales, incinerator rentals and incinerator services. In the first quarter, approximately 58 per cent of revenue was from incinerator rentals, roughly 32 per cent of revenue was from product sales and the balance, roughly 10 per cent, was from service revenue. Rental revenue has higher margins compared to equipment sales revenue.
The company manufactures and services waste gas combustion systems with operations in the U.S., Canada and Mexico. The majority of the company’s revenue is derived from the U.S. At year-end, over 90 per cent of the company’s incinerator rental fleet was located in two states, Colorado and North Dakota. The company recently expanded its rental incineration business into three new U.S. states: Texas, Wyoming and New Mexico. This year, management plans to spend between $7-million and $10-million in order to expand its rental fleet in hopes of securing additional contracts with new clients.
In the earnings release, management remarked on another potential growth opportunity for the company, “Questor is ambitious with its expectations for Mexico, given Mexico’s aggressive objectives to address climate change within its mature oil and gas industry.” Mexico is targeting a 75 per cent reduction in methane emissions from oil and gas companies by the year 2025.
Over the year, Questor has delivered strong revenue and earnings growth. Reported revenue was $23.5-million in 2018, $19.5-million in 2017, and $7.1-million in 2016. Earnings per share has also steadily expanded coming in at 26 cents in 2018, 14 cents in 2017, up from a loss of 2 cents in 2016.
Before the market opened on May 15, the company reported strong first-quarter earnings results that sent the share price climbing 4 per cent that day on high volume with nearly 400,000 shares traded that day. The company reported record quarterly revenue and earnings per share. Revenue came in at $7.72-million, up nearly 29 per cent year-over-year, from $6-million reported during the same period last year. EBITDA (earnings before interest, taxes, depreciation and amortization) was $3.8-million. Earnings per share was 9 cents, up from 7 cents reported last year. As at March 31, the company had $7-million of cash on its balance sheet and no debt.
Dividend policy
The company does not pay its shareholders a dividend.
Analysts’ recommendations
This micro-cap stock with a market capitalization of $135-million is covered by two analysts on the Street. Trevor Reynolds, the analyst at Acumen Capital, has a ‘buy’ recommendation. Justin Keywood, the analyst at GMP, also has a ‘buy’ recommendation.
Revised recommendations
In May, Trevor Reynolds, an analyst at Acumen Capital, increased his target price to $6.50 from $5.75.
Financial forecasts
The Street is anticipating revenue to come in at $34.3-million in 2019, up from $23.4-million reported in 2018, and rise to $40.3-million in 2020. The consensus EBITDA estimate is $17.95-million in 2019 and forecast to reach $21.85-million in 2020. The consensus earnings per share estimates are 42 cents in 2019 and 52 cents the following year.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 5.9 times the 2020 consensus estimate, above its three-year historical average of 4.7 times but below its peak multiple of just under 8 times during this time period. The stock is trading at a price-to-earnings multiple of 9.7 times the 2020 consensus estimate, in-line with its three-year historical average.
The average one-year target price is $6.88, implying the stock price may appreciate 38 per cent over the next 12 months. Trevor Reynolds, the analyst at Acumen Capital, has a target price of $6.50, implying a potential one-year return of over 30 per cent. Justin Keywood, the analyst at GMP, has a target price of $7.25, suggesting a potential gain of over 45 per cent over the next year.
Insider transaction activity
Between May 17 and June 7, chief operating officer John Sutherland sold a total of 229,850 shares at an average price per share of approximately $5.06, reducing his portfolio’s position to 99,600 shares. Gross proceeds from the sales totaled over $1.1-million.
On May 17, Justin Mahendra, vice-president of sales and marketing, sold 17,500 shares at a price per share of approximately $5.15, eliminating his portfolio’s holdings. Gross proceeds exceeded $90,000.
On April 30, Jean-Michel Gires, who sits on the board of directors, exercised his options, receiving 20,000 shares at a cost per share of $3.99. On May 21, Mr. Gires sold 20,000 shares at a price per share of $5.25, trimming his account’s holdings to 8,600 shares. Net proceeds from the sale, not including commission charges, totaled over $25,000.
On April 17 and April 18, chairman Stewart Hanlon purchased a total of 40,000 shares at a cost per share of approximately $4.79, initiating a portfolio position. Stewart Hanlon has been on the board of directors since Nov. 2017.
On April 16, director James Inkster sold 1-million shares at a price per share of $4.62, leaving 275,000 shares in his account.
Chart watch
Year-to-date, the share price has rallied 49 per cent.
The stock price can be quite volatile. Looking back five years, for the most part, the share price has moved in the same direction as the price of oil. To illustrate, in mid-June 2014, the stock price was around $5, but by mid-Nov. 2015, the share price had plunged to just 60 cents. During this time period, the price of oil fell from roughly $107 to the $40 level.
Looking at key resistance and support levels, there is overhead resistance around $5.35, near its record closing high of $5.36 reached on May 16, 2019. Should the stock price retreat, there is initial support around $4.50. Failing that, there is strong support around $4, close to its 200-day moving average (at $3.94).
The stock can be thinly traded. Over the past 30 trading sessions, the daily average trading volume is approximately 111,000 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