Thursday’s TSX breakouts: Oversold dividend stock may be a ‘show me' story

On Wednesday, major North American equity markets all closed in relatively neutral territory.

In the U.S., the Dow Jones Industrial Average gained 0.12 per cent, the S&P 500 Index increased 0.19 per cent, and the Nasdaq composite closed higher by 0.03 per cent.

In Canada, the S&P/TSX composite index dipped lower by 6 points, or 0.04 per cent, to close at 14,698. Within the S&P/TSX composite index, there were 105 stocks that advanced, 129 stocks declined, and six securities closed the day unchanged.

The TSX Index is up 0.79 per cent month to date, up 4.50 per cent quarter to date, and up 12.97 per cent year to date.

Turning to today's Breakouts Report, there are 27 securities on the positive breakouts list (stocks with positive price momentum), and 17 stocks on the negative breakouts list (stocks with negative price momentum).

Discussed today is a stock that appears on the negative breakouts list and is technically oversold. The stock may now be a "show me" story with the share price remaining depressed until investor confidence is restored. The security I am referring to is Ritchie Bros. Auctioneers Inc. (RBA-T).

A brief outline is provided below that may serve as a springboard for further fundamental research.

The company

Burnaby-based Ritchie Bros. is the world's largest industrial auctioneer of used heavy machinery, primarily construction machinery, from industries such as agriculture, construction, forestry, mining, energy, and trucking. The company has over 40 permanent auction locations worldwide.

In terms of geographical breakdown, in 2015, 50 per cent of the company's revenue was from the U.S., 32 per cent stemmed from Canada, 10 per cent was from Europe, and the balance was from various regions. On-line bidding allows customers to participate in a global auctions.

Ritchie Bros. Auctioneers is dual-listed, trading on both the New York Stock Exchange and on the Toronto Stock Exchange under the same ticker, RBA.

After the market closed on August 8, the company reported lower-than-expected second-quarter financial results that send the share price plunging nearly 11 per cent the following trading day. Earnings per share (EPS) came in at 37 cents (U.S.), down 12 per cent year over year, and below the consensus estimate of 44 cents. Operating income margin declined to 33.8 per cent from 40.4 per cent during the same period last year.

Higher expenses impacted profitability, and this pressure may continue in the near-term with management laying the foundation for future growth. On the conference call, management stated, "Expense growth during the quarter outpaced revenue growth causing margin compression and ultimately led to a 15% lower operating income year-over-year, or a 13% decline on a constant currency basis. Much of this quarter's expense increase was related for running a larger platform, important new strategic hires, a larger stock base to prepare us for scaling the business, and new operating expenses related to recent acquisitions."

On the conference call, management also discussed pricing pressures that negatively impacted the company's profitability stating,"Used equipment values in the second quarter and June in particular, were impacted by supply-demand dynamics that ultimately led to an overall decline in pricing. The sharp pricing correction in June did take us by surprise, and unfavorably affected the performance of our underwritten contracts in that month. While all categories of equipment saw some decline, not all categories were affected equally. Construction assets specifically saw declines around 6% on average, compared to equipment values in the second quarter last year. Transportation and agricultural assets saw further price erosion."

In the second quarter earnings press release, the chief executive officer, Ravi Saligram indicated that pricing pressure may be easing saying, "[W]e are encouraged by our strong July performance with GAP (gross auction proceeds) up 8%, indications that pricing may be stabilizing, and a robust pipeline going into the rest of the year. We are also excited that more than half of our GAP in Q2 was generated online, which reinforces that our multichannel and digital strategy is gaining momentum."

Dividend policy

On August 8, management announced a 6.25 per cent dividend increase, raising the quarterly dividend to 17 cents per share (U.S.) from 16 cents per share. On a yearly basis, the company pays its shareholders 68 cents per share, equating to an annualized dividend yield of approximately 2.5 per cent.

Looking over the past decade, management has never cut the dividend. In 2015, the company raised its dividend 14 per cent.

The adjusted payout ratio was 56.5 per cent for the 12-month period ending June 30.

The company has been active in its share buyback program, repurchasing 1.46-million shares in March.

Valuation

According to Bloomberg, the stock is trading at a price-to-earnings multiple of 21 times the 2017 consensus estimate. This is below its 3-year historical average of 22.5 times. However, on an enterprise value-to-EBITDA basis is trading at 12.6 times the 2017 consensus estimate, slightly above its 3-year historical average of 11.9 times.

Analysts' recommendations

According to Bloomberg, there are seven 'buy' recommendations, nine 'hold' recommendations, and one 'sell' recommendation. The one-year target price is $40.58 (Cdn), which implies 15 per cent upside potential in the share price over the next 12 months. Target prices range from a low of $34.13 (Cdn) to a high of $44.63.

Analysts have been revising their earnings forecast down for this year and next year. The Street is currently forecasting earnings per share of $1.17 in 2016, rising 12 per cent to $1.31 in 2017. Just weeks ago, on August 1, the consensus EPS estimate was $1.27 for 2016 and $1.39 for 2017.

Chart watch

The stock price has plummeted nearly 18 per cent since the company released disappointing second quarter financial results. The heavy selling pressure continues to push the share price lower. On Wednesday, over 1.1-million shares traded, well above the 2-month historical daily average volume of approximately 267,000 shares.

The shares are now in oversold territory with a relative strength index reading of 20. Generally, a reading at or below 30 indicates an oversold condition. The share price should begin to stabilize once the sell orders are filled and subside.

The shares are approaching downside support around $35 (Canadian), and failing that, there is support between $31 and $32.50.

There is overhead resistance around $37, which is close to its 200-day moving average (at $36.83), and after that at $40, and then at $42.50, near its 50-day moving average (at $42.59).

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, 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.

A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.

Below is a list of securities principally from the S&P/TSX composite index and the S&P/TSX Small Cap index that are technically breaking out, reaching new 55-day highs or lows. Securities on the positive breakouts list have displayed positive price momentum during this period. Securities on negative breakouts list have experienced negative price momentum.