On today’s TSX Breakouts report, there are 27 stocks on the positive breakouts list (stocks with positive price momentum), and 22 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that appears on the positive breakouts list. Last year, while the S&P/TSX composite index tumbled, this stock provided investors with downside protection with its share price edging 3 per cent higher. Year-to-date, the share price has increased 16 per cent.
With a unanimous buy recommendation from five analysts and a 24 per cent further gain expected, the security highlighted today is 5N Plus Inc. (VNP-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Montreal-based 5N Plus produces specialty metal and chemical products with manufacturing facilities in North America, Europe, and Asia. Its products include metals such as bismuth, gallium, germanium, indium, tellurium, and selenium that are used in pharmaceutical, electronic and industrial markets.
After the market closed on Feb. 26, the company reported its fourth-quarter financial results. Revenue came in at $47.7-million, down 8 per cent year-over-year and below the Street’s expectations of $54.6-million. The gross margin for the quarter stood at 25.3 per cent, down from 26.3 per cent reported during the same period last year. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $6.9-million, shy of the consensus estimate of $7.6-million. Earnings per share was 5 cents, a penny above expectations. For the year, adjusted EBITDA came in at $32.4-million, up from $29.6-million reported in 2017 and in-line with management’s guidance of between $30-million and $33-million. ROCE (return on capital employed) was 15.1 per cent in 2018. Backlog climbed to 217 days of sales outstanding as at Dec. 31. The following day, the share price rallied 2 per cent on very high volume with over 600,000 shares traded.
In the management’s Discussion and Analysis, management remarked on the weaker than expected top line, “Both revenue and gross margin were negatively impacted by adverse movements in the underlying metal notations, especially in the second half of 2018. The stability of revenue and gross margin in 2018, despite adverse impacts from the commodity markets, is congruent with the company’s new business model under its strategic plan to reduce earnings volatility from notable movements in the metal notations.”
On the earnings call, president and chief executive officer AJ Roshan elaborated on the pricing headwinds, “In 2018, and more specifically in the second half of the year, 5N Plus faced an important test with respect to the key deliverable under 5N21 (5N Plus’ plan by 2021) strategic plan pertaining to the reduction of earnings volatility. During this period, nearly all notations associated with the key metals used by the company moved unfavorably by as much as over 30 per cent. Despite this effect, 5N Plus continued to grow its earnings. In contrast, just a few years ago, such movement in metal notations would have substantially impaired the company’s ability to maintain stable earnings, let alone grow there. To quantify the difference, we simulated 5N Plus under the new and old business models. The analysis indicates that under the old business model, the company would have experienced $12 million negative impact towards adjusted EBITDA, whereas under the new business model this impact has been reduced by more than 50 per cent to about $5 million. We believe a number of items contributed to this positive development, including our selectivity approach, movement into products with less metal content and more value-added transformation, commercial hedging and overall streamlining of the operations.”
According to Bloomberg, the Caisse de dépôt et placement du Québec owns approximately 19 per cent of the shares outstanding.
Returning capital to its shareholders
The company does not pay its shareholders a dividend.
On Feb. 27, the company announced its share buyback program. Between March 1, 2019 and Feb. 29, 2020, the company may repurchase up to 3,515,926 shares.
Analysts’ recommendations
This small-cap security with a market capitalization of $305-million is covered by five analysts on the Street, and all five analysts have buy recommendations.
The firms providing research coverage on the company are as follows in alphabetical order: Cormark Securities, Desjardins Securities, GMP Securities, Laurentian Bank Securities, and National Bank Securities.
Revised recommendations
In Feb., three analysts tweaked their expectations – all higher.
Macmurray Whale, the analyst at Cormark Securities, lifted his target price to $5.15 from $4.75. Stephen Harris, the analyst at GMP Securities, raised his target price to $4.25 from $4. Rupert Merer, the analyst at National Bank Financial, lifted his target price to $4.50 from $4.25.
Financial forecasts
The Street is forecasting revenue of US$224-million in 2019, up from US$218-million in 2018, and anticipated to rise 8 per cent to US$242-million in 2020. The consensus EBITDA estimates are US$35.7-million in 2019, increasing to US$40-million in 2020. Under 5N21, management is targeting adjusted EBITDA of between US$40-million and US$60-million in 2021.The consensus earnings per share estimates are 22 US cents in 2019 and forecast to increase to 26 US cents in 2020.
Financial forecasts have been relatively stable in recent months. For instance, three months ago, the 2019 consensus EBITDA estimate was US$34.7-million for 2019 and the earnings per share estimate was 22 US cents.
Valuation
According to Bloomberg, the stock is trading at a price-to-earnings multiple of 12.1 times the 2019 consensus estimate. On an enterprise value-to-EBITDA basis the stock is trading at a multiple of 7 times the 2019 consensus estimate.
The average 12-month target price is $4.48, implying the share price has 24 per cent upside potential over the next year. Individual target prices are as follows in numerical order: three at $4.25, $4.50, and $5.15.
Insider transaction activity
So far this year, three insiders have reported trades in the public market – all sales.
Most recently, on March 15, Jean-Marie Bourassa, who sits on the board of directors, exercised his options and sold the corresponding number of share received (125,000) at a price per share of $3.205, leaving 1,172,000 shares in his account. Proceeds totaled $400,000.
On March 6, Jean Mayer, vice-president of legal affairs, exercised his options and sold the corresponding number of shares received (21,250) at an average price per share of $3.30, eliminating this account’s holdings. Proceeds totaled approximately $70,000.
On March 4, chief financial officer Richard Perron exercised his options and sold the corresponding number of share received (125,000) at a price per share of $3.314, eliminating this portfolio’s position. Proceeds from the sale surpassed $414,000.
Chart watch
Year-to-date, the share price has rallied 16 per cent. In 2018, when the S&P/TSX composite index declined, the share price of 5N Plus advanced 3 per cent.
The share price is currently hovering around major resistance, between $3.60 to $3.70. Should the share price break and hold above this range, the next ceiling of resistance is around $4 and after that around $5. Looking at the downside, there is strong technical support around $3.25, close to its 50-day moving average (at $3.28) and its 200-day moving average (at $3.23).
This small-cap security has low liquidity, which can increase price volatility. The three-month historical daily average trading volume is approximately 94,000 shares.
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.