As an investment reporter, I receive plenty of correspondence from Globe and Mail readers.
I recently received an e-mail from a reader, regarding seafood producer High Liner Foods Inc.. She asked, "I would be interested in your assessment given the stock has had a significant pullback in the price. Should I fish or cut bait?"
To help the reader make an informed investment decision, let's briefly review some of the company's key attributes, beginning with factors that are putting pressure on the share price.
High Liner Foods specializes in processing and selling frozen seafood products under brands such as High Liner, Fisher Boy, Mirabel and Sea Cuisine. There is seasonality to the business, with the first quarter historically the strongest and the second quarter the weakest.
On Nov. 9, the company reported third-quarter financial results that sent the stock price plummeting over 16 per cent that day. Here's why.
Lack of sales growth. Sales in the third quarter declined 3.9 per cent year over year to $230.8-million (U.S.).
The Street is forecasting muted top-line growth but moderate bottom-line growth driven by improvements to the supply chain. The consensus revenue estimate is $966-million for 2016, and $967-million for 2017. The consensus EBITDA estimate is $84.5-million in 2016, and anticipated to rise 5 per cent to $89-million in 2017. The consensus earnings-a-share estimate is $1.34 in 2016, and is forecast to climb 9 per cent to $1.46 in 2017. (EBITDA represents earnings before interest, taxes, depreciation and amortization.)
Negative consumer trends. On the recent earnings conference call, management noted, "[T]he ongoing trend of lower demand for traditional breaded and battered frozen seafood products continues to negatively impact our year-over-year sales volume."
Negative revisions. Analysts have been revising their sales and earnings forecasts lower. For instance, at the beginning of the year, the revenue estimates were $1.05-billion for 2016 and $1.07-billion for 2017, EBITDA forecasts were $91-million for 2016 and $101-million for the following year, and the consensus EPS estimates were $1.44 for this year and $1.68 next year.
Rotation into cyclical stocks and out of defensive sectors. Following the U.S. presidential election, investor optimism for improving U.S. economic growth is translating into higher demand for cyclical stocks, with many consumer staples stocks failing to participate in the recent post-election stock market rally.
Low average daily trading volume. This can create high stock price volatility.
Invest in companies with rising guidance. I recommend investing in companies whose management teams have a history of underpromising and overdelivering, not the reverse.
With respect to High Liner, looking back to February, 2014, on the fourth-quarter 2013 conference call, management set a target of achieving EBITDA of $150-million by 2016 – a target that will take time to realize.
Yet, here are some positives to consider.
Focused on improving profitability. Management targets reaching at least $20-million in annual operating cost savings by the end of 2016, which appears to be achievable.
The company realized $6.5-million in savings during the third quarter, bringing the year-to-date total up to $14.7-million.
Room for future acquisition growth. The company's balance sheet has been improving with its debt-to-adjusted EBITDA ratio declining to three times at the end of the third quarter, down from 3.4 times reported last quarter.
Room for additional dividend growth. Management is committed to returning capital to shareholders. In November, management announced a 7.7 per cent increase to its dividend, its second dividend increase in 2016, raising it to 14 cents (Canadian) from 13 cents, or 56 cents per share on a yearly basis. This equates to an annualized dividend yield of over 2.7 per cent. The dividend appears sustainable, with room to expand, given the company is generating healthy free cash flow.
According to Bloomberg News, the stock is trading at an enterprise value-to-EBITDA multiple of approximately eight times the 2017 consensus estimate. On a price-to-earnings basis, the stock is trading at a multiple of roughly 10 times the 2017 consensus forecast, which is relatively in line with its three-year historical average.
According to Bloomberg, four analysts have issued research reports since the beginning of the month, all of whom have "hold" recommendations.
Analyst's target prices are quite concentrated, ranging from a low of $23 to a high of $24, implying there is moderate double-digit upside potential over the next 12 months.
The share price lacks steady long-term positive price momentum, and is relatively unchanged from where it was three years ago.
Year-to-date, the share price has rallied roughly 30 per cent, but dropped after reporting its third-quarter financial results. The share price has support around $20, which is close to its 200-day moving average.
There is initial overhead resistance around $22, and after that around $24, which is close to its 50-day moving average.
The bottom line
When considering whether or not to purchase any stock, ask yourself, what is going to make investors want to accumulate shares and create buyers for the stock? Unfortunately, I don't see an immediate catalyst to drive the share price higher for High Liner Foods in the near-term. Patience may be required.
As always, I strongly encourage readers to consult a financial adviser, consider potential tax implications and to do their own proper due diligence before taking any investment action.
The author does not personally own shares in the security mentioned in this story.
Jennifer Dowty, CFA, Globe Investor's in-house equities analyst, writes exclusively for our subscribers at Inside the Market.