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On today’s Breakouts report, there are 15 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).

Discussed today is a stock that appeared on the positive breakouts list last month when its share price rallied to an all-time high. Since then, Omicron fears have gripped the stock, causing the share price to plunge 12 per cent and putting the stock into correction territory. The stock has an attractive 5.5 per cent dividend yield, and has paid a monthly dividend to its shareholders throughout the pandemic.

This stock has rewarded its shareholders with both share price appreciation and income. With nine buy recommendations and an anticipated 12-month total return (including the yield) of nearly 33 per cent, the stock is Exchange Income Corp. (EIF-T).

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

The company

Winnipeg-based EIC has two main reporting segments: Aerospace & Aviation and Manufacturing.

The Aerospace & Aviation business segment provides airline, charter flights, and emergency medical air transport services. The Manufacturing segment provides manufactured goods and services across diversified end markets. The company manufactures window wall systems for high-rise residential buildings, manufactures components used in the aerospace and defence sector, manufactures pressure washing and steam systems, and produces tanks used for transporting oil, gas, and water.

During the first nine months of 2021, 64 per cent of the company’s total revenue stemmed from the aerospace and aviation business unit, while 36 per cent from the manufacturing segment. However, in terms of earnings before interest, taxes, depreciation and amortization (EBITDA), 87 per cent of contributions stemmed from the Aerospace and Aviation segment.

There is seasonality in the company’s operations with the first-quarter historically the weakest period.

Investment thesis

  • Diversified business mix/revenue profile.
  • Active acquirer. The most recent acquisition was announced on Dec. 16.
  • Attractive dividend yield. Potential catalyst: a dividend increase may be announced in 2022.
  • Reopening play benefiting from eventual easing coronavirus restrictions/lockdowns.
  • Reasonable valuation.
  • Healthy balance sheet.
  • Series of earnings beats. For the past six consecutive quarters, the company has reported better-than-expected quarterly financial results.
  • Key potential risks to consider: 1) lower traffic due to the coronavirus; 2) inflationary pressures (e.g. higher fuel costs, higher aluminum and steel prices); and 3) tight labour market.

Quarterly earnings and outlook

On Nov.11, the company reported record financial results that sent the share price soaring 6 per cent the following trading day on unusually high volume with over 500,000 shares traded (the three-month historical daily average trading volume is approximately 146,000 shares).

EIC reported record revenue of $400-million and record EBITDA of $95-million, surpassing the consensus estimates of $349-million and $88-million, respectively. The Aerospace and Aviation business segment reported revenue of $275-million and EBITDA of $89-million. The Manufacturing business segment reported revenue of $125-million and EBITDA of $16-million. Adjusted earnings per share came in at 73 cents. The company has a healthy balance sheet. At quarter-end, the leverage ratio stood at 2.25 times.

In the earnings release, chief executive officer Mike Pyle reflected on the strength in the quarterly financial results, “The third quarter was remarkable for EIC as we achieved $400-million of revenue for the first time and hit a new quarterly high in EBITDA at $95-million. The effect of the pandemic has begun to wane, but it is a long way from over. In fact, some of the side effects of the pandemic, supply chain issues, input and labour inflation and labour shortages, are still increasing and creating challenges for our Manufacturing segment. Even with these challenges, the operations delivered solid results. It was our Aerospace & Aviation segment, however, that drove our strong performance in the third quarter. As has been the case throughout the pandemic, our maritime surveillance and medevac businesses have been consistent performers and we benefitted from the acquisition of Carson Air. The big driver of our improvement was primarily our northern flight airline operations, where passenger volumes increased and freight and charter operations remained above pre-pandemic levels. Secondly, our Regional One operation improved significantly, with higher parts, aircraft and engine sales and improved leasing driving increased profitability. If the pandemic has proven anything when it comes to EIC, it is the value of our diversified model and the resilience of our business.”

Looking ahead, management believes that the company will exit 2022 with an EBITDA run rate of $400-million.

Dividend policy

The company pays its shareholders a monthly dividend of 19 cents per share or $2.28 per share on a yearly basis. This translates to a current annualized dividend yield of 5.5 per cent.

The monthly dividend has been maintained throughout the pandemic.

On the third-quarter earnings call, Mr. Pyle indicated that a dividend hike may soon be considered, “Our payout ratios are at a level where financially, we could definitely consider increasing our dividend and that’s a key part of our business model. We want to share our success with our shareholders and that’s given us our 5 per cent CAGR [compound annual growth rate] in our dividend since we started. We don’t want to be perceived as utilizing government money that was to help us maintain services as a way of paying for the dividend. And as such, we’ve chosen to wait until we’ve cleared any sort of government support on our dividend - that’s happening now. So we’re going to be in a position to look at our dividend in the short and medium term.”

For the trailing 12-months, the payout ratio based on free cash flow less maintenance capital expenditures stood at 57 per cent.

Analysts’ recommendations

There are 11 analysts covering this company, of which nine analysts have buy recommendations and two analysts have neutral recommendations (Konark Gupta at Scotia Capital and Kevin Chiang at CIBC World Markets).

The firms providing research coverage on the company are: ATB Capital Markets, Canaccord Genuity, CIBC World Markets, Cormark Securities, iA Capital Markets, Laurentian Bank, National Bank Financial, Raymond James, RBC Dominion Securities, Scotia Capital and TD Securities.

Revised recommendations

In November, all 11 analysts revised their target prices higher, including:

  • CIBC’s Kevin Chiang to $49 from $45.
  • Laurentian Bank’ Nauman Satti to $55 from $49.
  • National Bank’s Cam Doerksen to $51 from $47.
  • Raymond James’ Steve Hansen to $55 from $52.
  • RBC’s Walter Spracklin to $52 from $47.
  • Scotia’s Konark Gupta to $48 (the low on the Street) from $43.
  • TD’s Tim James to $55 from $53.

Financial forecasts

The consensus revenue estimate is $1.4-billion for 2021, rising to $1.6-billion in 2022. The Street is anticipating EBITDA to come in at $328-million in 2021, climbing 19 per cent to $390-million the following year. The consensus earnings per share estimate is $2.10 in 2021, and anticipated to increase 40 per cent to $2.93 in 2022.

In recent months, EBITDA estimates have been rising modestly. For instance, five months ago, the consensus EBITDA estimates were $317-million for 2021 and $371-million for 2022.

Valuation

According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 7 times the 2022 consensus estimate, above its seven-year historical average of 6.4 times, but below its peak multiple of nearly 8 times during this period.

The average one-year target price is $52.82, implying the share price has 27 per cent upside over the next 12 months (a potential total return of nearly 33 per cent including the dividend yield). Individual target prices are: $48 (from Scotiabank’s Konark Gupta), $49, $50, $51, $52, $53, three at $55, $56, and $57 (from ATB’s Chris Murray).

Insider transaction activity

Since the beginning of April, there has only been one small trade in the public market reported by an insider.

On Nov. 16, chief accounting officer Richard Wowryk purchased 150 shares at a price per share of $45.82.

Chart watch

On Nov. 12, the day after the company reported strong third-quarter earnings results, the share price closed at a record high of $47.28.

However, once news of Omicron surfaced the share price tanked, dropping 12 per cent from this all-time closing high.

In terms of key technical support and resistance levels, there is strong support around $40. Failing that, there is support around $35. Looking at the upside, there is a ceiling of resistance between $45 and $47.

This small-cap stock with a market capitalization of $1.6-billion can be thinly traded at times. Again, the three-month historical daily average trading volume is approximately 146,000 shares. However, there are days when less than 100,000 shares are traded.

POSITIVE BREAKOUTSDec. 21 close
BOS-TAirBoss of America Corp $42.83
AND-TAndlauer Healthcare Group Inc. $53.24
BNS-TBank of Nova Scotia $87.69
BLU-TBELLUS Health Inc. $10.67
CIA-TChampion Iron Ltd. $4.83
CUF-UN-TCominar Real Estate Investment Trust $11.71
CSU-TConstellation Software Inc $2,255.06
ECN-TECN Capital Corp. $12.03
FTS-TFortis Inc $60.91
WN-TGeorge Weston Ltd $147.89
MEQ-TMainstreet Equity Corp $126.74
NTR-TNutrien Ltd. $93.24
SJR-B-TShaw Communications Inc $37.61
SGR-UN-TSlate Grocery REIT $14.06
VET-TVermilion Energy Inc $15.12
NEGATIVE BREAKOUTS
AOI-TAfrica Oil Corp $1.79
AIM-TAimia Inc $4.62
AR-TArgonaut Gold Inc $2.11
CKG-XChesapeake Gold Corp. $3.03
CL-CNCresco Labs Inc. $7.99
PAY-TPayfare Inc. $8.20
TXP-TTouchstone Exploration Inc. $1.60

Source: Bloomberg and The Globe and Mail

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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