On Monday, trading volume was low in the S&P/TSX Composite Index due to the U.S. holiday. Consequently, the number of names on the breakouts lists are brief. There are 20 stocks on the positive breakouts list (stocks with positive price momentum), and 22 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that appears on the negative breakouts list.
The stock is technically nearing an oversold condition, and, from a valuation perspective, is trading at a forward price-to-earnings multiple that is near the bottom end of its three-year historical trading range.
Earlier this month, the company reported weaker-than-expected first quarter financial results that sent the share price down 6 per cent the following day. Investors may opt to sit on the sidelines, waiting for the company to report an earnings beat before accumulating shares. Analysts expectations are mixed with nearly half of the analysts covering the company having buy recommendations and the other half having hold recommendations. Discussed below is Linamar Corp. (LNR-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Guelph, Ont.-based Linamar is a global manufacturing company serving the automotive and industrial markets.
After the market closed on May 15, the company reported weaker-than-expected first quarter financial results that sent the share price plunging 6 per cent the following trading day on high volume. Reported EBITDA (earnings before interest, taxes, depreciation and amortization) came in at $306-million, below the consensus estimate of $313-million. The company reported earnings per share of $2.37, falling short of the consensus estimate of $2.42.
On the earnings call, chief executive officer Linda Hasenfratz provided the following industry outlook, “We are seeing stability or moderate growth this year and next year in most of our markets.”
She added, “Sales growth with continued strong margin performance will result in strong double-digit earnings growth as well this year for us at Linamar, moderating in 2019 as we move to organic-only growth, but still at the low double-digit level.”
Dividend policy
The company pays its shareholders a quarterly dividend of 12 cents per share or 48 cents per share on a yearly basis. This equates to an annualized yield of 0.7 per cent.
Dividend increases are rather infrequent. The previous dividend increase was announced in March 2017, the company announced a 20 per cent dividend increase, its first dividend increase since early 2014.
Linamar’s dividend yield is lower than its industry peers, Magna International (MG-T) and Martinrea International (MRE-T), which have yields of 2.1 per cent and 1.1 per cent, respectively.
Analysts’ recommendations
Analysts have mixed recommendations. After the company released its first quarter results, nine analysts issued research reports, of which five analysts issued buy recommendations and four analysts had hold recommendations.
The nine firms providing recent research coverage on the company are as follows in alphabetical order: BMO Capital Markets, CIBC World Markets, Cormark Securities, Gabelli & Co., Macquarie, RBC Capital Markets, Scotia Capital, TD Securities and Veritas Investment Research.
Revised recommendations
Steve Arthur, the analyst from RBC Capital Markets, increased his target price to $86 from $84. Peter Sklar from BMO Capital Markets increased his target price by $7 to $77 (the low on the Street). Brian Morrison from TD Securities trimmed his target price by $2 to $80. Todd Coupland from CIBC Capital Markets reduced his target price to $83 from $85. Dan Fong from Veritas raised his target price to $79 from $75.
Financial forecasts
The consensus EBITDA estimates are $1.25-billion in 2018 and $1.25-billion in 2019. The Street is forecasting earnings per share of $9.47 in 2018, rising 11 per cent to $10.50 in 2019. For Magna, the consensus earnings per share estimates are $7.05 for 2018, rising 9 per cent to $7.68 in 2019. For Martinrea, the consensus earnings per share forecasts are $2.25 for 2018, increasing 13 per cent to $2.55 in 2019.
Analysts’ financial expectations for Linamar have increased over recent months, particularly for 2019. For instance, four months ago, the consensus earnings per share estimates were $9.41 for 2018 and $9.83 for 2019.
Valuation
According to Bloomberg, the stock is trading at a price-to-earnings (P/E) multiple of 6.3 times the 2019 consensus estimate, below with its three-year historical average multiple of 7.8 times and near the bottom end of its multiple range over the past three years. On an enterprise value-to-EBITDA basis, the stock is trading at 4.8 times the 2019 estimate.
In comparison to its industry peers, Magna and Martinrea are trading at forward P/E multiples of 8.3 times and 6.5 times, respectively.
The consensus one-year target price is $84.38, suggesting the share price may increase nearly 27 per cent over the next 12 months. Target prices range widely from a low of $77 (at BMO Capital Markets) to a high of $99 (at Scotia Capital). Individual target prices provided by eight analysts are as follows in numerical order: $77, $79, $80, $82, $83, $86, $89, and $99.
Insider transaction activity
Most recently, on May 23, the Chief Executive Officer Linda Hasenfratz purchased a total of 2,000 shares, priced at over $68 per share, for four accounts in which she has indirect ownership (acquiring 500 shares in each account). Ms. Hasenfratz has not purchased any shares in her personal account since December 2017.
Prior to that, on March 15, Director William Harrison sold 5,000 shares at a price per share of over $73, leaving 10,157 shares in his account.
Chart watch
The stock chart is weak. Year-to-date, the share price has dropped 9 per cent, significantly underperforming its peers. Magna’s stock price is up 16 per cent year-to-date, while Martinrea’s share price is up nearly 4 per cent so far this year.
Looking back over the past six months, the stock price has been consolidating, trading sideways, principally between $65 and $75, and is currently at the bottom end of this trading band.
The stock is approaching an oversold condition with its relative strength index (RSI) is at 31. Generally, a reading at or below 30 indicates an oversold condition.
In terms of key resistance and support levels, there is initial overhead resistance between $75 and $76. After that, there is major overhead resistance around $80. Looking at the downside, the stock is approaching strong technical support around $65. Failing that, the share price has support around $60.
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.