On today’s Breakouts report, there are 49 stocks on the positive breakouts list (stocks with positive price momentum), and 10 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a company that surfaced on the negative breakouts list last week when the stock briefly entered oversold territory. However, the downdraft appears to be over with the stock price stabilizing in recent days. The share price is down 21 per cent from its record closing high of $118.51 reached on April 26, putting it in bear market territory. The average one-year target price implies the share price has 28-per-cent upside potential over the next 12 months.
The stock highlighted today is BRP Inc. (DOO-T).
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Quebec-based BRP manufactures and markets powersports vehicles and propulsion systems. Products manufactured include roadsters, all-terrain vehicles, snowmobiles, and personal watercrafts with brand names such as Can-Am, Lynx, Ski-Doo, and Sea-Doo.
The company has operations worldwide, in Canada, the United States, Mexico, Australia, Austria, and Finland. Its products are sold in over 130 countries. There is a high degree of seasonality in the business with the first half of the fiscal year (the company’s fiscal year-end is Jan. 31) historically the weakest period, and the second half the strongest period.
In terms of geographical revenue breakdown, in fiscal 2021, 55.5 per cent of revenue was from the U.S., 15.5 per cent was from Canada and 29 per cent was from international regions. As such, there are foreign exchange currency exposures to consider. The company reports its financial results in Canadian dollars.
The stock is dual-listed, trading on the Toronto Stock Exchange under the ticker DOO, and on the Nasdaq under the ticker DOOO.
Industry conditions
Demand is robust but supply is constrained due to the global shortage of semiconductor chips. As a result, the company is not able to meet all of its demand and inventories are low.
On the earnings call held on June 3, President and Chief Executive Officer José Boisjoli commented on impacts from the supply chain challenges, “For the past month, our main challenge has been dealing with the shortage of semiconductors. This is affecting some of our Tier 1, but also some of our Tier 2 suppliers where we have less visibility. This is presently the main source of disruption in our operation because finding alternative parts would require technical changes. Given these issues, some of our units will need to be retrofitted. This means the unit is missing a few components, and it will move to final assembly when the components are received. This situation will delay the timing of certain deliveries and temporarily increase our work in process. Regardless of these challenges, our objective is to deliver all orders by the end of our fourth quarter. Our plants are running at full capacity, and we are in the process of increasing production capacity at Juarez and Querétaro to make this happen.”
Chief Financial Officer Sébastien Martel added, “Based on the visibility we have today, we believe that these supply chain challenges will impact the timing of product deliveries in Q2 [second quarter] and Q3 [third quarter], and but our full year volume target remains intact. We have included additional costs and maintain a wider than usual guidance range to account for the potential impact of these supply chain constraints and for commodity price increases…In terms of normalized EPS [earnings per share], as mentioned, we expect the supply chain constraints to weigh more on the second and third quarter, therefore, pushing more volume in the fourth quarter. Given this dynamic, we expect to generate a modest normalized EPS growth in Q2, a slight decline in Q3 and strong growth in Q4 [fourth quarter].”
Supply chain challenges are not isolated to BRP. The chief financial officer Bob Mack of Polaris Inc. (PII-N), an industry peer, noted on their first-quarter earnings call held at the end of April that they are experiencing strong customer demand along with, “higher logistics costs in addition to commodity and component pricing pressures driven by supply chain constraints.”
Investment thesis highlights
- Strong consumer demand.
- Entry of new customers. On the earnings call, BRP’s Mr. Boisjoli said, “New entrants continue to enter the industry, representing 37 per cent of buyers in the first quarter compared to about 20 per cent historically.”
- Supply chain constraints expected to be temporary and improve later this year.
- Healthy balance sheet.
- Attractive valuation. The stock is trading below its historical averages.
- Returning capital to shareholders. On Tuesday, management announced a substantial issuer bid to purchase up to $350-million of its subordinated voting shares.
- Risk to consider: 1) Decelerating earnings growth given the record results reported. 2) Momentum investors may rotate into other stocks.
Quarterly earnings
Before the market opened on June 3, the company reported significantly better-than-expected first-quarter fiscal 2022 financial results driven by strong demand for its products.
Revenue was $1.8-billion, a record for the first-quarter, as the company experienced very high demand across all of its product lines. It topped the Street’s forecast of $1.6-billion.
Normalized earnings before interest, taxes, depreciation and amortization (EBITDA) came in at $379-million, surpassing the consensus estimate of $244-million. Normalized EPS was $2.53, also above the Street’s forecast of $1.32.
For fiscal 2022, management raised its guidance, expecting earnings per share to be between $7.75 and $8.50, up from $5.39 reported in fiscal 2021. This represents a potential year-over-year increase of between 44 per cent and 58 per cent.
Previously, management targeted earnings per share to be between $7.25 and $8 in the next fiscal year. Normalized EBITDA is expected to increase between 27 per cent to 35 per cent, up from its previous guidance of between 22 per cent and 30 per cent.
Despite the stellar results and increased guidance, the share price plunged 4.5 per cent that day on high volume. Concerns over global semiconductor shortages weighted the stock down.
Dividend policy
In June 2017, management announced the initiation of a quarterly dividend. The company announced two dividend increases, one in March 2018 and the other in March 2019. However, in March 2020, management announced the suspension of its dividend in order to preserve capital given heightened uncertainties resulting from the COVID-19 pandemic. Prior to being suspending, the quarterly dividend was 10 cents per share or 40 cents per share yearly.
One year later, in March 2021, management announced the reinstatement of the quarterly dividend, and increased it to 13 cents per share or 52 cents yearly, equating to a current annualized yield of just under 0.6 per cent.
Analysts’ recommendations
There are 12 firms providing recent research coverage on this mid-cap consumer discretionary stock. After the company released its first-quarter earnings results, nine analysts issued buy recommendations, and three analysts issued neutral recommendations.
The firms providing recent research coverage on BRP are: Baird, BMO Nesbitt Burns, Canaccord Genuity, CIBC World Markets, Desjardins Securities, Edgewater Research, Exane BNP Paribas, Morningstar, National Bank Financial, Stifel Canada, TD Securities, and Wolfe Research.
Revised recommendations
Thus far in June, four analysts have revised their expectations.
- BMO’s Gerrick Johnson raised his target price by $2 to $100.
- CIBC’s Mark Petrie reduced his target price to $108 from $117.
- Morningstar’s Jaime Katz upgraded his recommendation to “hold” from “sell” and raised his target price to $89.
- Stifel’s Martin Landry also raised his recommendation to “buy” from “hold” and hiked his target price to $120 from $112.
Financial forecasts
The company’s fiscal year-end is Jan. 31.
The Street is forecasting EBITDA of $1.33-billion in fiscal 2022, up from $999-million reported in fiscal 2021, and anticipated to increase modestly to $1.35-billion in fiscal 2023. The consensus earnings per share estimates are $8.12 in fiscal 2022, up from $5.39 reported in fiscal 2021, and $8.47 in fiscal 2023.
Earnings estimates have been rising. Three months ago, the Street was forecasting EBITDA of $1.08-billion for fiscal 2022 and $1.15-billion in fiscal 2023. The consensus earnings per share estimates were $6.49 for fiscal 2022 and $5.75 for fiscal 2023.
Valuation
According to Bloomberg, the stock is trading at a price-to-earnings multiple of 11 times the fiscal 2023 consensus estimate, below the three-year historical average P/E multiple of 13.8 times. On an enterprise value-to-EBITDA basis, the stock is trading at 7 times the fiscal 2023 consensus estimate, which is below its three-year historical average multiple of 8 times.
Industry peer Polaris is trading at a forward P/E multiple of 12.7 times, below its three-year historical average P/E multiple of 13.4 times, and at a forward EV/EBITDA multiple of 7.8 times, also below its three-year historical average of 8.4 times.
The average one-year target price is $120.54, implying the stock has 28 per cent upside potential over the next 12 months. Individual target prices provided by 11 firms are as follows in numerical order: $89 (from Morningstar’s Jaime Katz), $100, $108, $118, three at $120, $123, $125, $131, and $133 (from Exane BNP Paribas’ Xian Siew).
Insider transactions
Quarter-to-date, seven insiders have reported trading activity in the public market – all sales.
On April 21, senior vice-president, general counsel and public affairs Martin Langelier exercised his options, receiving 9,700 shares at a cost per share of $26.6593, and sold 9,700 shares at a price per share of $113.25, leaving 49,437 shares in this particular account. Net proceeds totaled over $839,000, not including any associated transaction fees.
On April 19, vice-president of global brands and communication Anne-Marie LaBerge exercised her options, receiving 9,100 shares at a cost per share of $26.6593, and sold 9,100 shares at a price per share of $113.83, eliminating her position from this specific account. Net proceeds exceeded $793,000, not including any associated transaction charges.
On April 14, senior vice-president – global retail and services – powersports group Sandy Scullion exercised his options, receiving 14,775 shares at a cost per share of $39.4493, and sold 14,775 shares at a price per share of $115 with 33,357 shares remaining in this particular account. Net proceeds totaled over $1.1-million, excluding any associated transaction fees.
On April 12 and 13, senior vice-president – Omnichannel experience and apparel Josée Perreault exercised her options, receiving a total of 21,975 shares at a cost per share of $27.0638, and sold 21,975 shares at an average price per share of approximately $114.38, eliminating her position from this specific account. Net proceeds exceeded $1.9-million, not including any associated transaction charges.
Chart watch
Last week the share price declined sharply, causing the stock to surface on the negative breakouts list. The stock briefly became oversold with the relative strength index (RSI) falling below 30. Generally, an RSI reading at or below 30 reflects an oversold condition.
In recent days, the share price appears to have bottomed. The stock price has stabilized and ticked up slightly, rising 4 per cent over the past three trading sessions. However, the share price is still down 21 per cent from its record closing high of $118.51 set just 10 weeks ago on April 26.
In comparison, its industry peer Polaris has seen its share price decline 11 per cent over the past 10 weeks.
In terms of key technical resistance and support levels, there is initial resistance around $100. After that, there is a major ceiling of resistance between $118.50 and $120, near its record closing high. Looking at the downside, there is initial technical support around $85, close to its 200-day moving average (at $87.71).
Year-to-date, the share price is up nearly 12 per cent.
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.
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