On today's TSX Breakouts report, there are 42 stocks on the positive breakouts list (stocks with positive price momentum), and eight stocks are on the negative breakouts list (stocks with negative price momentum).
Featured today is a stock that appeared on the positive breakouts list last week. The stock has closely tracked the price of oil, which is up one per cent to approximately $51 (U.S.) a barrel today. This newly listed stock has an unanimous buy recommendation from nine analysts with a one-year expected return of 33 per cent. The security discussed today is STEP Energy Services Ltd. (STEP-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Calgary-based STEP is an oilfield services company providing coiled tubing and fracturing services with operations in Canada as well as in the United States. The company is Canada's third-largest fracturing company, as measured by fracturing horsepower (HP), relative to its publicly listed Canadian industry peers. The company has 297,500 HP fracturing capacity with six fracturing spreads representing 176,750 HP currently deployed. The company currently has 17 coil tubing spreads, 16 of which are currently in operation. In terms of revenue breakdown, for the first half of 2017, fracturing services represented 66 per cent of revenue and coiled tubing services represented the balance, 34 per cent, of revenue. The company is a newly listed public company with its shares trading on the Toronto Stock Exchange just a few months ago, in May.
Before the market opened on Aug. 9, the company reported better-than-expected financial results. The share price was little changed that day, declining 5 cents to $9.35 on low volume. Revenue for the quarter was $105.4-million, handily exceeding the Street's forecast of $75.3-million. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) came in at $16.4-million, well above the consensus estimate of $8.6-million. Fracturing prices have climbed approximately 15 per cent to 20 per cent since the first quarter. The company benefits from rising commodity prices, which increases drilling activity.
Management's outlook is positive stating in the press release, "Based on client discussions, activity levels are expected to remain robust for the second half of 2017." With a $109-million capital spending program for 2017, management targets growing its fleet to eight fracturing spreads representing 225,000 HP, and having a fleet of 21 coiled tubing spreads. With its proceeds from the recent initial public offering, the company has a solid balance sheet to fund its growth. As at June 30, the company had no debt on its balance sheet and a cash balance of $57-million.
One constraint for investors to be aware of is the stock's low liquidity. STEP's three –month historical daily average trading volume is low at approximately 56,000 shares.
Dividend policy
The company currently does not pay its shareholders a dividend.
Analysts' recommendations
There are nine firms that provide research coverage on this small-cap stock with a market capitalization of $637-million, and all nine analysts have buy recommendations.
The nine firms providing research coverage on the company are as follows in alphabetical order: BMO Capital Markets, CIBC World Markets, GMP, Industrial Alliance Securities, National Bank Financial, Peters & Co., RBC Capital Markets, Scotia Capital and TD Securities.
Financial forecasts
The Street is forecasting EBITDA to come in at $96-million in 2017 and increase 45 per cent to $139-million in 2018.
Earnings estimates have increased for 2017 and been relatively stable for 2018. To illustrate, three months ago, the consensus EBITDA estimates were $77-million for 2017 and $141-million for 2018.
Valuation
The stock is commonly valued on using an enterprise value-to-EBITDA approach. According to Bloomberg, the stock is trading at an EV/EBITDA multiple of 4.3 times the consensus 2018 estimate.
The one-year consensus target price is $14.11, suggesting there is 33 per cent upside in the share price over the next 12 months. Target prices range from a low of $12 from the analyst at TD Securities (implying 13 per cent upside potential) to a high of $17 from the analyst at Scotia Capital (suggesting there is 60 per cent upside potential). Individual target prices are as follows in numerical order: $12, three at $13, two at $14, $15, $16, and $17.
Revised recommendations
Since early August, five analysts have revised their target prices – all higher.
Ian Gillies, the analyst from GMP, raised his target price to $13 from $12. Jeff Fetterly from Peters took his target price up to $14 from $13. Elias Foscolos, the analyst from Industrial Alliance, lifted his target price to $15 from $13. Earlier this month, Greg Colman from National Bank Financial took his target price up to $14 from $13.50. Michael Mazar from BMO Capital Markets increased his target price by $1 to $13.
Insider transactions
Since being public listed in May, there have been no reported transactions in the public market by insiders.
Chart watch
There is very little trading history on this stock since it just began trading on the Toronto Stock Exchange less than five months ago, limiting technical analysis on the stock.
That being said, pull up a chart showing the price of oil and compare it to the stock chart for STEP, and you will notice that since the stock began trading, it has closely tracked the price of oil. For instance, shares of STEP began trading on May 2. From May 2 through September 22, the stock price increased 6.3 per cent. During the same time period, the price of oil increased exactly 6.3 per cent as well.
The share price is up 6 per cent from its $10 initial public offering price (IPO).
This month, the share price closed above its IPO price for the first time since May. In recent days, the stock price has been rallying on high volume – a positive sign from a technical standpoint. For instance, on Thursday September 21, over 1-million shares traded, well above its three –month historical daily average trading volume of approximately 56,000 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 indices 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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