On today’s TSX Breakouts report, there are 57 stocks on the positive breakouts list (stocks with positive price momentum), and just two stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that is on the negative breakouts list - Uni-Select Inc. (UNS-T).
In 2022, this stock was the ninth-best performing stock in the S&P/TSX Composite Index with a gain of 66 per cent. The share price rallied to a record closing high in December. However, in recent weeks, this positive price momentum has reversed.
Year-to-date, the share price is down nearly 14 per cent. The share price is now in oversold territory and may soon find technical support as the stock price nears its 200-day moving average. The stock has five buy recommendations and one ‘sector perform’ recommendation.
The company
Boucherville, Quebec-based Uni-Select operates three core business segments: FinishMaster U.S., Canadian Automotive Group, and GSF Car Parts U.K. It is a distributor of automotive products in Canada and the U.K., and also a distributor of automotive and industrial paint across North America.
According to Bloomberg, the Caisse de dépôt et placement du Québec, an institutional investor with a long-term investment horizon, has an ownership position of over 9 per cent.
Investment thesis
- Modest earnings growth expected.
- Strong balance sheet. Net debt to adjusted EBITDA stood at 1.4 times at quarter-end. Financial flexibility to pursue acquisition opportunities. Management indicated on the recent earnings call that there are acquisition opportunities across all three business segments.
- Reasonable valuation relative to historical levels.
- Technically oversold.
- Headwinds/challenges: Foreign exchange translation, inflationary pressures (labour, operating costs), supply chain constraints.
Quarterly earnings and outlook
On Nov. 4, the company reported better-than-expected third-quarter financial results.
Sales were US$452-million, up 6 per cent year-over-year. All three business segments reported positive organic, or internal, growth driven by price increases.
Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) climbed to US$49.3-million, up 16.5 per cent year-over-year, topping the Street’s expectations of US$47.2-million. Adjusted earnings per share came in at 48 US cents, surpassing the consensus estimate of 45 US cents.
The following trading day, the share price rallied 9 per cent.
On the earnings call, chief executive officer Brian McManus provided a conservative outlook, “Looking ahead to 2023, we expect higher adjusted EBITDA and adjusted EPS compared to 2022. This will be driven by a strong focus to drive organic sales growth through volume gains across our businesses. Acquisitions completed in 2022, together with associated synergies, will also contribute favorably as they are integrated into our existing operations. Operational efficiency, cost discipline and working capital management have become part of our DNA, and we expect to continue to deliver operational improvements in 2023, albeit to a lesser extent than in 2022. Offsetting these positive drivers, we expect ongoing adverse currency translation impacts, labor and operating cost inflation as well as ongoing but moderating supply chain issues. 2022 generated a tremendous amount of cash flow, and we intend to continue to make this a priority going forward. We are extremely disciplined on capital allocation, and our strong balance sheet positions us well to pursue further acquisition opportunities.”
Dividend policy
In 2020, the dividend was suspended.
Analysts’ recommendations
According to Bloomberg, five analysts have buy-equivalent recommendations and one analyst (RBC’s Sabahat Khan) has a “sector perform” recommendation.
The firms providing research coverage on the company are: Canaccord Genuity, Cormark Securities, Desjardins Securities, National Bank Financial, RBC Dominion Securities, and TD Securities.
Revised recommendations
In November five analysts raised their target prices.
- Canaccord’s Luke Hannan to $46 from $44.50.
- Cormark’s David Ocampo to $50 from $45.
- Desjardins’ Benoit Poirier to $50 from $47.
- National Bank’s Zach Evershed to $50.50 (the high on the Street) from $49.
- ·TD’s Daryl Young to $45 from $44.
Financial forecasts
The consensus EBITDA estimates are US$182-million in 2022, rising 5 per cent to US$191-million in 2023. The Street is forecasting earnings per share of US$1.64 in 2022, rising 12 per cent to US$1.83 in 2023.
Earnings expectations have inched higher in recent months. Three months ago, the 2023 consensus earnings per share and EBITDA estimates were US$1.76 and US$190-million, respectively.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 8.2 times the 2023 consensus estimate, slightly below its five-year historical average multiple of 8.6 times. On a price-to-earnings basis, the stock is trading at 15.1 times the 2023 consensus estimate, below its five-year historical average of 16.6 times.
The average one-year target price is $47.08, implying the share price has 27 per cent upside potential over the next 12 months. Target prices range from a low of $41 to a high of $50.50. Individual target prices are as follows in numerical order: $41 (from RBC’s Sabahat Khan), $45, $46, two at $50, and $50.50 (from National Bank’s Zach Evershed).
Insider transaction activity
Since the start of the fourth-quarter 2022, only one insider has reported trading activity in the public market.
On Nov. 28, Emilie Gaudet, president and chief operating officer - Canadian Automotive Group (CAG), purchased 1,183 shares at a cost per share of $44.36, increasing this particular account’s position to 5,979 shares.
Chart watch
The stock has been an outperformer, rising to a record closing high of $45.58 on Dec. 2, 2022. In 2022, Uni-Select was the ninth best performing stock in the S&P/TSX Composite Index with a return of over 66 per cent.
In recent weeks, the share price has retreated, falling nearly 14 per cent year-to-date. The stock price is down 19 per cent from its record high. As a result, the stock has entered oversold territory with a relative strength index reading of 27. Generally, an RSI reading at or below 30 reflects an oversold condition.
Looking at key technical support and resistance levels, the share price has initial support around $35, near its 200-day moving average (at $35.47). Failing that, there is strong support around $30. On a recovery, the stock has major overhead resistance around $45, near its record closing high.
The stock can be thinly traded. The three-month historical daily average trading volume is approximately 176,000 shares.
ESG risk rating
Looking at Sustainalytics, MSCI and Bloomberg, Uni-Select currently does not have an ESG (environmental, social and governance) risk score from any of these providers.
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.
This report is not an investment recommendation.
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