On today’s TSX Breakouts report, there are 61 stocks on the positive breakouts list (stocks with positive price momentum), and 12 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a small-cap industrials stock that is on the positive breakouts list. This is a turnaround story.
For years, the company invested heavily in its operations putting pressure on the company’s profitability. With its major investments completed, the company’s margins are rebounding and the stock’s valuation is expanding. Over the past three months, the share price has rallied over 20 per cent.
In addition to price appreciation, the company offers its shareholders a stable monthly dividend with a current annualized yield of 2.7 per cent. The stock has a unanimous buy recommendation from seven analysts.
The security highlighted today is K-Bro Linen Inc. (KBL-T).
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
Edmonton-based K-Bro Linen provides laundry and linen processing services through its network of nine plants located nationwide in Quebec City, Montreal, Toronto, Regina, Saskatoon, Prince Albert, Calgary, Edmonton, Vancouver, and Victoria. The company also has operations in the U.K.
For the first nine months of 2019, the company generated 74 per cent of its revenue from its Canadian operations, and 26 per cent of total revenue came from its U.K. division.
In terms of revenue composition, the company serves the hospitality and healthcare markets. Last quarter, hospitality revenue accounted for 49 per cent of total revenue, and the balance, 51 per cent of revenue was from the healthcare market.
This is a turnaround story. For several years, the company was investing heavily in its operations, spending over $200-million. EBITDA margins dipped from 18.8 per cent in 2015 to 12.3 per cent in 2018. Earnings per share dropped from $1.52 reported in 2015 to 59 cents reported in 2018.
In the third-quarter MD&A (Management’s Discussion and Analysis) released on Nov. 7, management said: “These investments have been made because management believes that new opportunities, both current and future, justify the significant additional capacity. The construction and/or upgrade of three of our large facilities enables us to bid on a significant amount of additional business, but created margin pressure through 2017, 2018 and Q1 (first-quarter) 2019 as K-Bro incurred significant one-time and transition costs associated with these large investments. Management believes that the one-time and transition costs incurred will position K-Bro to achieve more growth and a lower cost structure into the future and that K-Bro will return to normalized margins, for its Canadian operations, closer to those achieved in 2015 as we progress through 2019.”
With its major spending projects completed, management targets capital spending of approximately $5-million in 2020.
After the market closed on Nov. 7, the company reported its third-quarter financial results. Revenue came in at $67.8-million, up 6 per cent from $64-million reported during the same period last year. Adjusted EBITDA was $12.3-million. The company realized an EBITDA margin of 18.1 per cent, up from 13 per cent reported last year. Reported earnings per share came in at 45 cents. The following trading day, the share price rallied over 6 per cent.
On the earnings call, president and chief executive officer Linda McCurdy said management’s main objective was to deploy its free cash flow into acquisitions to expand its market share before considering dividend increases and share repurchases. She said: “The key priority is ensuring that we are able to pursue additional growth in both Canada and the U.K.”
The company pays its shareholders a monthly dividend of 10 cents per share, or $1.20 per share yearly, equating to a current annualized yield of 2.7 per cent.
The monthly dividend has been maintained at 10 cents per share since 2014. For the first nine months of 2019, the payout ratio based on distributable cash flow stood at 42 per cent.
There are seven analysts that cover this small-cap stock with a market capitalization of $467-million, and the stock has a unanimous buy recommendation.
Firms providing research coverage on the company are as follows in alphabetical order: Acumen Capital, Cormark Securities, Echelon Wealth Partners, Eight Capital, National Bank Financial, Raymond James, and Stifel Canada.
The company has gained visibility on the Street with several analysts recently initiating coverage on the company. Eight Capital’s Ammar Shah launched coverage on the company in December, while Raymond James’ Michael Glen initiated coverage on K-Bro in November.
Earlier this month, National Bank Financial’s Endri Leno increased his target price to $47 from $41.50.
The consensus revenue estimate is $251-million in 2019, up from $239.5-million reported in 2018, and expect to climb to $262-million in 2020. EBITDA is anticipated to come in at $44.8-million in 2019 and $49-million in 2020. The consensus earnings per share estimates are $1.16 in 2019, jumping to $1.66 in 2020.
Earnings estimates have been relatively stable over the past few months.
For instance, four months ago, the earnings per share estimates were $1.17 for 2019 and $1.65 for 2020. Meanwhile, EBITDA estimates have inched higher from forecasts of $42.2-million in 2019 and $46.5-million in 2020.
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 11.7 times the 2020 consensus estimate, below its three-year historical average multiple of 12.7 times. An industry peer, GDI Integrated Facility Services Inc. (GDI-T) is trading at a forward EV/EBITDA multiple of 10.3 times.
The consensus one-year target price is $48.25, implying the stock price may appreciate nearly 10 per cent over the next 12 months, providing a potential total return of over 12 per cent if you include the dividend yield.
Individual target prices are as follows in numerical order: $45 (from Raymond James’ Michael Glen), $45.50, $47, $48, two at $50, and $52 (the high on the Street is from Stifel Canada’s Justin Keywood).
Insider transaction activity
On Dec. 20, two insiders were sellers in the market.
Jerry Ostrzyzek, manager – strategic projects, sold 4,500 shares at a price per share of $41.75, trimming this account’s position to 8,992 shares. Proceeds from the sale, not including trading fees, totaled over $187,000.
General manager Jeff Gannon sold 1,043 shares at a price per share of $41.76 with 7,186 shares remaining in this account. Proceeds from the sale, excluding commission charges, exceeded $43,000.
In recent months, the share price has climbed sharply, breaking above a downtrend that had been in place since 2015. The stock price has rallied 21 per cent over the past three months, closing at $44 on Feb. 11, up from $36.45 on Nov. 6.
Looking at technical resistance and support levels, the stock price is approaching an initial ceiling of resistance between $44.50 and $45. After that, there is major resistance around $50. Looking at the downside, the share price has initial technical support around $42, at its 50-day moving average. Failing that, there is downside support around $40, close to its 200-day moving average (at $39.73).
Liquidity can be quite low for this stock, which can create price volatility. The three-month daily average trading volume is approximately 19,000 shares.
The relative strength index (RSI) is at 69, suggesting the stock is nearing overbought territory. Generally, an RSI reading at or above 70 indicates an overbought condition. Consequently, the positive price momentum may pause in the near-term.
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.