On today’s TSX Breakouts report, there are 40 stocks on the positive breakouts list (stocks with positive price momentum), and 13 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a growth stock that appears on the negative breakouts list.
In recent months, the share price has come under pressure with the stock now in correction territory and oversold. The stock has a unanimous buy recommendation from the nine analysts covering the company. In addition, the company offers its shareholders a stable monthly dividend that equates to an annualized yield of 1.8 per cent. The average one-year target price implies the share price may rally 30 per cent over the next year.
The security highlighted below is Park Lawn Corporation (PLC-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
Toronto-based Park Lawn operates businesses including cemeteries, funeral homes and crematoria in five Canadian provinces (Ontario, British Columbia, Manitoba, Quebec, and Saskatchewan) and 14 U.S. states. Industry fundamentals are positive with high barriers to entry given zoning laws and permitting requirements. In addition, demographics, with an aging population, acts as a long-term tailwind.
After the market closed on Aug. 12, the company reported its second-quarter financial results. Revenue came in at $58.6-million, up 45 per cent year-over-year, but just below the consensus estimate of $59.4-million. Gross margin was 80.6 per cent, up from 79.4 per cent realized last year. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) to PLC shareholders was $13-million, up 56 per cent year-over-year, and relatively in-line with the Street’s expectations of $13.4-million. The adjusted EBITDA margin increased to 22.6 per cent from 21.1 per cent reported during the same period last year. Management is targeting EBITDA margins to reach 25 per cent in the upcoming years. Adjusted earnings per share came in at 19 cents, three cents below the Street’s forecast. The share price increased 1.2 per cent the following day.
Management’s core objectives are organic growth, acquisition growth and margin expansion. Management has delivered strong top line growth over the years, fueled by acquisitions. In 2018, the company paid $275-million on acquisitions. In recent months, the company completed two large purchases for a total cost of approximately US$101.5-million. In July, PLC bought U.S.-based Horan & McConaty Funeral Services, which has two cemeteries and 11 funeral homes and in June, PLC acquired another U.S.-based company, Baue Funeral Home Company. In April, PLC completed a $143-million bought deal financing issuing over 5.6-million shares at a price per share of $25.65.
On the earnings call, chairman and chief executive officer Andrew Clark remarked on future acquisition opportunities in this fragmented industry, “The competitive environment as it stands right now is - it’s active. It is quite competitive right now, particularly on the M&A [merger and acquisition] front. We’re seeing, as we have seen for quite some time, a lot of activity on the M&A front. The pipeline, our pipeline, anyway, remains full and robust and but we are, given our increased size and scale, we are seeing [that] we are able to play in some more meaningful types of opportunities that we mightn’t have otherwise been able to participate in before, at least credibly. And so that has opened us up to a bit more competition from our peers, both the publicly listed peers, who are tough and challenging competitors, and others, whether it’s private-equity-sponsored or other private capital-sponsored peers. So it’s a competitive landscape in that respect.”
Dividend policy
The company pays its shareholders a monthly dividend of 3.8 cents per share, or 45.6 cents per share yearly. This equates to an annualized dividend yield of 1.8 per cent. The dividend has been maintained at this level since 2011.
The dividend appears sustainable with an adjusted cash flow payout ratio of 45 per cent in 2018.
Analysts’ recommendations
This small-cap consumer discretionary stock with a market capitalization of $717-million is well covered by the Street. All nine analysts covering the company have buy recommendations on the stock.
The firms providing research coverage on the company are as follows in alphabetical order: Acumen Capital, Canaccord Genuity, CIBC World Markets, Cormark Securities, GMP, National Bank Financial, Paradigm Capital, Raymond James and TD Securities.
Revised recommendations
In Aug., four analysts revised their expectations. Acumen Capital’s Jim Byrne increased his target price to $32.50 from $31. Canaccord’s Raveel Afzaal took his target price up by $1 to $31. CIBC’s Scott Fromson trimmed his target price to $30 from $32. National Bank Financial’s analyst Zachary Evershed reduced his target price to $31.50 from $33.
Financial forecasts
Solid earnings growth is anticipated to continue for the company. The Street is expecting revenue to reach $249-million in 2019, up from $161-million reported in 2018, and forecast to increase 20 per cent to $298-million in 2020. The consensus EBITDA estimates are $57-million in 2019, increasing 28 per cent to $73-million in 2020. Management is targeting EBITDA of $100-million by 2022. The Street is forecasting earnings per share of 87 cents in 2019, rising 26 per cent to $1.10 in 2020.
Revenue and EBITDA expectations have been relatively stable in recent months. For instance, three months ago, the consensus EBITDA estimates were $56-million for 2019 and $72-million for 2020.
Valuation
The stock is trading at a discount relative to historical levels. According to Bloomberg, shares of Park Lawn are trading at an enterprise value-to-EBITDA multiple of 10.5 times the 2020 consensus estimate, below its three-year historical average of 11.9 times. Since the beginning of 2018, the stock has traded at a forward multiple as high as 15 times (reached in April 2018) and as low as 10.3 times (set back on Jan. 3, 2019).
The consensus one-year target price is $32.22, suggesting the stock price has 30 per cent upside potential over the next 12 months. Target prices range from a low of $30 (from CIBC’s Scott Fromson) to a high of $36 (from Stephen Harris, an analyst at GMP). Individual target prices are as follows in numerical order: $30, $31, $31.50, two at $32, $32.50, two at $33, and $36.
Insider transaction activities
Year-to-date, only one insider has traded shares in the public market.
Between Aug. 22 and Aug. 26, chief executive officer and chairman Andrew Clark sold a total of 25,900 shares at an average price per share of approximately $26.14 for an account in which he has control or direction over (Nine Two Seven Limited), trimming the account’s holdings to 230,610 shares. Gross proceeds from the sale totaled over $677,000.
Chart watch
In recent months, the share price has come under pressure. The stock is in correction territory and has become oversold.
Since closing at a record high of $29.77 on May 30, the stock price has declined 16 per cent. The relative strength index (RSI) is 23. Generally, a reading at or below 30 reflects an oversold condition. Despite this downdraft, the share price is still up 8 per cent year-to-date.
Looking at key resistance and support levels, the stock price has downside support around its current level, near $25. Failing that, there is technical support around $21. Should the share price rebound, there is overhead resistance between $27.50 and $28, which is close to its 50-day moving average (at $27.73). After that, there is a ceiling of resistance at $30, close to its record closing high.
Liquidity can be low for this small-cap stock, which can increase volatility in the share price. The three-month historical daily average trading volume is approximately 118,000 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.