Income plus growth – a marriage that many investors seek but one that's not always easy to find. Discussed below is a company that offers an attractive dividend yield of 8 per cent combined with forecast double-digit earnings growth. While this may be a small-capitalization stock, with a market cap of approximately $600-million, there is nothing small about its potential return.
Discussed below are reasons for investors to consider adding shares of Exchange Income Corp. to their portfolios.
The company
Diversified revenues: Exchange Income operates diversified businesses across two key operating segments, aviation and manufacturing. These businesses operate across a variety of geographic regions and in different market segments providing the company with diversification benefits. Within its aviation segment are businesses that provide services such as distribution of regional aircraft and aircraft components, airline operations serving niche markets including northern Manitoba and Nunavut, and cargo handling. Within its manufacturing segment are businesses that provide services such as specialty tanks manufacturing, and the manufacturing, installation and servicing of high-pressure-water cleaning systems.
Disciplined acquisition strategy: Growth through acquisitions is a key objective for management, strategically buying companies that operate in niche markets that generate stable cash flows, have low maintenance capital expenditures, attractive margins, reasonable barriers to entry and internal growth opportunities. Exchange Income retains the current management team and provides expertise to improve profitability. This is a key driver for the company's growth and management shows discipline in what it will pay for an acquisition.
Solid operational growth: In the second quarter, the company reported revenue of $196.2-million, up 46 per cent year-over-year. Earnings before interest, taxes, depreciation and amortization (EBITDA) was a record $48.1-million, up 116 per cent year-over-year, and exceeding the Street's expectations of $38.3-million. The 2013 acquisition of Regional One, an aircraft sales and leasing company, continues to offer Exchange Income growth as Regional continues to take delivery of 12 aircraft purchased from Lufthansa CityLine. In addition, earlier this year, the company purchased Provincial Aerospace and Ben Machine Products with expectations that these businesses will offer attractive growth opportunities through operational improvements and potential synergies with the company's other businesses.
Potential catalyst: On the second-quarter conference call, management indicated that the company would be submitting a bid for the fixed-wing search and rescue aircraft government contract, which they see as having a limited number, perhaps two or three, competitive bidders with an announcement anticipated in 2016.
Balance sheet: In September, the company raised $75-million through a bought-deal financing, with shares offered at $24.85. This allowed the company to reduce its debt levels and provides it financial flexibility for future acquisitions.
Leadership: The chairman of the board is Gary Filmon, the former premier of Manitoba.
Dividend
The company pays shareholders an attractive, sustainable monthly dividend. In August, management said that it was increasing the monthly dividend by 10 per cent to 16 cents a share from 14.5 cents. The dividend payout ratio was 51 per cent based on the company's free cash flow less maintenance capital expenditures, suggesting that the dividend is sustainable.
Chart watch
Year-to-date, the stock price is relatively unchanged, up just more than 1 per cent. Over the past year, the stock price has been consolidating, trading largely in the $21-to-$23.50 price range. There is technical resistance at $24, near its 50-day moving average, then $25, and downside technical support at $22.50, near its 200-day moving average.
The stock has decent liquidity with the average daily volume at just more than 110,000 shares over the past year.
Valuation
The stock is trading at an enterprise value/EBITDA multiple of six times the 2016 consensus estimate, relatively in-line with its three- and five-year historical averages.
Analysts' recommendations
According to Bloomberg, there are nine analysts who cover this stock with two analysts currently restricted from giving a recommendation owing to the recent financing. There are six "buy" recommendations and one "sell" recommendation. The average one-year price target is $29.08, implying a potential price return of more than 20 per cent; including the dividend yield of 8 per cent, this equates to a potential total return of more than 30 per cent. Analysts have been revising their EBITDA estimates higher. The consensus EBITDA estimate is $173-million in 2015 and $185-million in 2016. The earnings-per-share estimate is $1.72 in 2015, growing 13 per cent to $1.94 in 2016.
The bottom line
There is upside potential to earnings, potential expansion to the stock's multiple, and potential dividend increases – in general, a recipe for a solid investment and addition to an investor's portfolio.
Jennifer Dowty, CFA, Globe Investor's in-house equities analyst, writes exclusively for our subscribers at Inside the Market. E-mail any stock suggestions that you want profiled to jdowty@globeandmail.com.