On today's TSX Breakouts report, there are 42 stocks on the positive breakouts list (stocks with positive price momentum), of which several are marijuana stocks, and there are 30 stocks on the negative breakouts list (stocks with negative price momentum).
Featured today is a relatively undiscovered small cap consumer discretionary stock that we last featured in the Breakouts report eight months ago. Since then, the share price has rallied 66 per cent. Last week, the company reported strong quarterly financial results and management's outlook suggests the company's track record of solid growth may continue. The company is Pollard Banknote Ltd. (PBL-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Winnipeg-based Pollard Banknote is a leading provider of lottery products. Management estimates that the company is the largest provider of instant-win scratch tickets in Canada and the second largest supplier of instant tickets worldwide.
For the first nine months of 2017 (as at Sept. 30), approximately 89 per cent of the company's sales was from instant tickets with the balance, 11 per cent, from charitable gaming products. In terms of geographical sales breakdown, 55 per cent of Pollard's sales was from the U.S., 20 per cent was from Canada, and 25 per cent of sales came from international regions. As such, the company has foreign exchange exposures to consider with a large exposure to U.S. dollar cash flows.
The company has a diversified customer base with over 250 independent distributors and services over 60 instant ticket lotteries.
The company has achieved steady sales and earnings growth. Looking back over the past few years, in 2013, Pollard reported revenue of $185-million, which climbed to $194-million the following year. In 2015, revenue was $221-million and increased to $246-million in 2016. Earnings per share (EPS) was reported at 23 cents in 2013, 37 cents in 2014, 32 cents in 2015, and 62 cents in 2016. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) margins have been relatively stable, in the 12 per cent range over the past four years, but have increased to 15 per cent for the first nine months of 2017.
After the market closed on Nov. 8, the company reported strong third-quarter financial results. Sales came in at $70.7-million, up from $62.7-million last year and exceeding the consensus estimate of $69.2-million. Higher average selling prices helped drive the year-over-year increase in sales. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $11.6-million, surpassing the Street's forecast of $9.2-million. Adjusted EBITDA margins came in at 16.4 per cent up from 12.4 per cent last year. Earnings per share was 20 cents, up from 12 cents reported during the same period last year.
Management's outlook is positive stating in their Management's Discussion and Analysis, "Our 2017 production volumes have been significantly higher than 2016 and we expect these higher levels to continue. Higher order levels from our existing customer portfolio due to increases in the overall lottery market, combined with a higher share of instant ticket orders where there are multiple suppliers, have been the primary reasons for our growth and we expect these factors to continue. Our contract portfolio remains unchanged and we do not have any major existing contracts which expire in the next 12 months. We will maintain our discipline in bidding strategically on instant ticket contracts that become available in the future."
Management added, "Part of our growth strategy includes strategic acquisitions to expand and add to our lottery expertise and we continue to actively pursue opportunities."
Dividend policy
The company pays its shareholders a quarterly dividend of 3 cents per share, or 12 cents per share on a yearly basis. This equates to an annualized dividend yield of 0.8 per cent. Management has maintained its quarterly dividend at this level since 2010.
Analysts' recommendations
This small-cap stock with a market capitalization of $365-million is covered by two analysts, Brian Pow from Acumen Capital and Robert Young from Canaccord Genuity. Both analysts have 'buy' recommendations on the stock.
Revised recommendations
Last week, Mr. Pow increased his target price to $17.75 from $17, and Mr. Young lifted his target price to $17.50 from $16.50.
Financial forecasts
The consensus sales estimates are $284-million in 2017, rising 16 per cent to $329-million in 2018. The Street is forecasting EBITDA of $41.6-million in 2017, rising 27 per cent to $52.9-million in 2018. The consensus earnings per share estimates are 70.5 cents in 2017, increasing 26 per cent to 89 cents the following year.
Valuation
According to Bloomberg, the stock is trading at a price-to-earnings multiple of 17.4 times the 2018 consensus estimate, above its nearly three-year historical average of 14.5 times but below its peak multiple of over 21 times during this period. On an enterprise value-to-EBITDA basis, the stock is trading at 8.4 times the 2018 consensus estimate.
Mr. Pow's target price of $17.75, suggests there is over 14 per cent upside potential in the stock price over the next year. Mr. Young's target price of $17.50, which implies a potential price return of 13 per cent.
Insider transaction history
So far in 2017, there has been no buying or selling activity reported by any individual on the executive management team or by any board members.
Chart watch
Year-to-date, the share price is up 90 per cent. If the stock was a member in the S&P/TSX composite index consumer discretionary sector, it would be the top performing stock year-to-date.
In terms of key technical resistance and support levels, the share price could rally to the $17 level. Looking at the downside, the stock price has initial support around $14, near the stock's 50-day moving average (at $14.50). Failing that, there is support around $11.50, close it is 200-day moving average (at $11.28).
The stock is thinly traded, which can increase price volatility. The three-month historical daily average trading volume is approximately 25,000 shares.
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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.