On today’s TSX Breakouts report, there are 63 stocks on the positive breakouts list (stocks with positive price momentum), and 20 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that appeared on the positive breakouts list last week as the share price closed in on its record closing high, which it is currently just 4 per cent away from. However, further upside in the stock price may be temporarily limited given management’s muted earnings outlook for the second quarter. The company is expected to report its second quarter earnings results in August. Earlier this month, several insiders were selling shares in the market. The security highlighted today is CCL Industries Inc. (CCL.B-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Toronto-based CCL Industries is an industry leader. It is the largest label company in the world with operations in 40 countries. CCL provides services to large multinational customers through its four reporting business segments: CCL, Avery, Checkpoint, and Innovia. Last quarter, the CCL segment accounted for 66 per cent of total revenue, Avery represented 12 per cent of total revenue, Checkpoint was 14 per cent of total revenue, and the balance, 8 per cent, was from Innovia.
Before the market opened on May 8, the company reported solid first-quarter financial results. Sales increased 15.6 per cent year-over-year to $1.227-billion, relatively in-line with the Street’s expectations of $1.202-billion. EBITDA (earnings before interest, taxes, depreciation and amortization) was $249-million, above the consensus estimate of $247.5-million. Adjusted earnings per share was 68 cents, a penny ahead of the consensus estimate. The company has a healthy balance sheet with a net debt-to-EBITDA ratio of 1.9 times. The share price was relatively unchanged that day, closing at $62.41 up 14 cents from the previous day’s close.
However, the outlook for the second quarter was muted.
On the earnings call, president and chief executive officer Geoffrey Martin stated, “We do face this very tough comp [comparable] at CCL driven by the timing of the CCL Secure orders. Just to give you a rough idea of that, it’s -- we start the quarter with about a $13 million EBIT [earnings before interest and taxes] headwind just in that business so that’s to give you a frame of reference for the difficulty of the comp. Checkpoint gains will narrow in Q2 [due to] technology rollouts.” He added, “The startup of the Avery back to school season, we do expect the season in total to be somewhat below last year”, which he attributed to a declining market share in the “low margin binder business”. Furthermore, he indicated that the, “Treofan transaction [purchase of Treofan Americas is expected to be completed in July] is unlikely to have any impact at Innovia. Resin challenges of course continue and we will have lower tax rates.”
Dividend policy
The company pays its shareholders a small dividend of 13 cents per share, or 52 cents per share yearly. This equates to an annualized dividend yield of 0.8 per cent.
Since 2012, management has announced a dividend increase annually, in February, along with the release of its fourth-quarter financial results. In February, the company announced a 13 per cent dividend increase to its present level.
Analysts’ recommendations
There are 10 analysts covering this company, of which seven analysts have buy recommendations, and three analysts have hold recommendations.
The 10 firms providing research coverage are as follows in alphabetical order: BMO Capital Markets, CIBC Capital Markets, Cormark Securities, EVA Dimensions, GMP Securities, KeyBanc Capital Markets, Laurentian Bank Securities, Macquarie, Scotia Capital, and TD Securities.
Revised recommendations
In May, after the company reported its quarterly earnings several analysts tweaked their expectations.
Stephen MacLeod, the analyst from BMO Capital Markets, reduced his target price by $2 to $75. Scott Neville from Scotia Capital reduced his target price by $2 to $69. Elizabeth Johnston from Laurentian Bank Securities took her target price down to $74 from $76. Scott Fromson from CIBC Capital Markets lowered his target price to $74 from $75.50.
Conversely, TD Securities’ analyst Damir Gunja increased his target price to $70 from $69. Timothy Stanish, the analyst from EVA Dimensions, upgraded the stock to a ‘hold’ recommendation from an ‘underweight’.
Financial forecasts
The consensus EBITDA estimates are $1.058-billion for 2018 and $1.144-billion for 2019. The consensus earnings per share estimates are $2.96 for 2018, rising 11 per cent to $3.30 in 2019.
Earnings estimates have declined. For instance, three months ago, the Street was forecasting EBITDA of $1.074-billion for 2018 and $1.151-billion for 2019. The consensus earnings per share estimates were $3.05 for 2018 and $3.35 for the following year.
Valuation
According to Bloomberg, on an enterprise value-to-EBITDA basis, the stock is trading at a multiple of 11.7 times the 2019 consensus estimate, slightly ahead of its three-year historical average of 11.2 times but below its peak multiple of over 13 times during this period.
On a price-to-earnings (P/E) basis, the stock is trading at a multiple of 19.8 times the 2019 consensus estimate, in-line with the stock’s historical three-year average P/E multiple of 20.1 times. During this time period, the stock has traded as high as 23 times forward earnings.
The average 12-month target price is $73.19, suggesting the stock has 12 per cent upside potential over the next year. Individual target prices provided by eight firms are as follows in numerical order: $69 (the low on the Street is from the analyst at Scotia Capital), two at $70, $72.50, $73, two at $74, and $83 (the high on the Street is from the analyst at GMP Securities),
Insider transaction activity
So far this month, several insiders have been selling shares in the public market.
On June 14, Lalitha Vaidyanathan, senior vice-president – finance, IT and human resources, exercised her options and sold the corresponding number of shares (41,700) over the course of two business days (June 14 and June 15), leaving 92,040 shares in her account.
On June 1, vice-president - corporate accounting Nick Vecchiarelli exercised his options and sold the corresponding number of shares (6,875) with 1,250 shares remaining in his account.
Chart watch
Year-to-date, the share price is up nearly 13 per cent.
The stock price was in a multi-year uptrend until mid-2017. Since then, the share price has been trading sideways, predominately between $52 and $68 with the share price currently approaching the upper end of this trading band.
Looking at key resistance and support levels, the stock is approaching a major ceiling of overhead resistance around $68, near its record closing high of $68.27 reached in June 2017. Looking at the downside, there is strong technical support around $60, close to its 200-day moving average (at $61.29).
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.