On today's TSX Breakouts report, there are 13 stocks on the positive breakouts list (stocks with positive price momentum), and 65 stocks are on the negative breakouts list (stocks with negative price momentum).
I try to feature a variety of stocks in the Breakouts report to appeal to a wide variety of investors. Discussed today is a company that is in the penalty box after reporting weaker-than-expected quarterly financial results.
As a result, the share price has declined sharply and the stock's valuation has become rather interesting. In order for the share price recover on meaningful volume, investor sentiment needs to be restored, and for that to occur, the company has to deliver solid financial results. Positive earnings momentum (year-over-year growth) is expected to accelerate starting in the second half of this year and continuing into 2018 owing to a recently announced acquisition. In recent weeks, four insiders have taken advantage of the price weakness, buying shares on the pullback. The security highlighted below is Uni-Select Inc. (UNS-T).
The company
Boucherville, Que.-based Uni-Select currently operates two core business segments: it is a distributor of automotive products across the country, and also a distributor of automotive and industrial paint across North America. However, the company will soon have a third operating segment.
On June 1, management announced the acquisition of The Parts Alliance, the second largest U.K. automotive aftermarket parts distributor with roughly a 7 per cent market share. Parts Alliance has 161 corporate stores and will provide Uni-Select with a new geographical footprint and revenue growth opportunity. The purchase price was roughly £205-million, representing a multiple of approximately 9.7 times adjusted earnings before interest, taxes, depreciation and amortization (EBITDA). The acquisition is anticipated to be immediately accretive. The deal will be funded with debt and management anticipates the proposed acquisition will be completed in the third quarter.
The president and chief executive officer Henry Buckley stated in a news release, "We are excited to establish a third growth pillar in the large UK parts aftermarket that is expected to be immediately accretive in a market with great upside potential from future consolidation opportunities. Parts Alliance is a great organization, with a market leadership position and national scale, a proven growth platform and an experienced management team that has demonstrated its ability to drive profitable growth both organically and through acquisitions."
After the market closed on May 3, the company reported weaker-than-expected first-quarter financial results. The company reported EBITDA of $23.2-million, up 6.8 per cent year-over-year, but below the consensus estimate of $27.2-million. EBITDA margins slipped to 7.8 per cent from 8.2 per cent. The company reported earnings per share of 26 cents, down from 27 cents reported during the same period last year and well below the Street's forecast of 33 cents per share. The following day, the share price plunged 11 per cent on heavy volume with over 1.68-million shares traded. To put this in perspective, the three-month historical daily average trading volume is under 200,000 shares.
Eric Bussières, the chief financial officer, addressed the earnings weakness on the conference call stating, "The organic growth was impacted by the product line changeover in the U.S. and the loss of an independent member in Canada." When asked about the impact of the member loss on margins on the conference call, he responded, "We've secured new members, new customers and we are very confident that the loss of that EBITDA will be replaced in a short order."
Returning capital to shareholders
Management is committed to its dividend policy. Last month, management announced an 8.8 per cent dividend increase, lifting its quarterly dividend to 9.25 cents per share from 8.5 cents per share. On a yearly basis, this amounts to 37 cents per share, equating to an annualized yield of 1.2 per cent.
In 2016, the payout ratio was conservative at 19.4 per cent, providing room for future dividend increases.
During the first quarter of 2017, the company did not repurchase any shares. In 2016, the company repurchased 1,027,390 shares.
Analysts' recommendations
According to Bloomberg, five analysts have buy recommendations and three analysts have hold recommendations. There are no sell recommendations.
The eight firms providing research coverage on the company are as follows in alphabetical order: BMO Capital Markets, Desjardins Securities, EVA Dimensions, Laurentian Bank Securities, Macquarie, National Bank Financial, RBC Capital Markets, and Scotia Capital.
Financial forecasts
The consensus EBITDA estimates are $120-million for 2017 and $151-million for 2018. The Street is forecasting earnings per share of $1.39 in 2017, rising 23 per cent to $1.71 in 2018.
Earnings expectations have declined for 2017 but increased for the following year given the announced acquisition of Parts Alliance. To illustrate, three months ago, the consensus EBITDA estimates were $123-million for 2017 and $132-million for 2018. The consensus earnings per share estimates for 2017 and 2018 were $1.50 and $1.64, respectively.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 8 times the 2018 consensus estimate, at the lower end of its two-year historical trading range of between 8 times and 11 times, suggesting there is room for multiple expansion.
The consensus one-year target price is $36.93, implying the stock price has nearly 18 per cent upside potential over the next 12 months. Target prices range from a low of $33 to a high of $40. Individual target prices provided by seven firms are as follows in numerical order: $33, $35, $36, $37.50, $38, $39, and $40.
Revised recommendations
In June, four analysts revised their target prices, three changes were positive revisions and one was a negative revision.
Last week, Jonathan Lamers, the analyst from BMO Capital Markets, raised his target price by $1 to $35. In early June, Anthony Zicha, the analyst at Scotia Capital, lifted his target price to $39 from $37, and Elizabeth Johnston from Laurentian Bank Securities lifted her target price to $37.50 from $35.
Taking an opposing perspective, Benoit Poirier from Desjardins Securities reduced his target price by $2 to $36.
Insider transaction activities
On June 6, four insiders were buyers in the market. The president and chief executive officer Henry Buckley acquired a total of 3,275 shares. Chair of the board André Courville bought 1,500 shares at an average cost per share of $30.69, taking his holdings up to 7,500 shares. In smaller transactions, Louis Juneau, the chief legal officer and corporate secretary, bought 395 shares, and the chief financial officer Eric Bussières purchased 160 shares.
Chart watch
Looking back to October 2015, the share price has traded largely between $30 and $35. This consolidation, or sideways trading action, is understandable given the stock's parabolic move in 2015. That year, the share price rallied 121 per cent to over $34 from $15.48.
The stock remains locked in this $30 to $35 trading range and is currently trading at the lower end of the band.
In order for the share price recover on meaningful volume, investor sentiment needs to be restored, and for that to occur, the company has to deliver strong financial results. Until then, the share price may continue to hover around $30.
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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 indices 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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