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).
Discussed today is a stock that appeared on the positive breakouts list last week with the share price closing at its highest level since 2014. So far this year, the company has reported better-than-expected financial results for its past two reported quarters resulting in positive earnings revisions from analysts. In August, the share price rallied nearly 9 per cent after reporting strong quarterly results along with a 4 per cent dividend increase. The dividend yield is currently 2.6 per cent. The security featured today is Finning International Inc. (FTT-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Edmonton-based Finning is the world's largest Caterpillar dealer. The company supplies parts and services, sells, and rents equipment. The company serves businesses across various industries such as construction, mining, power systems, and forestry. The construction sector is its largest market served, accounting for 42 per cent of sales so far this year. During the first half of 2017, product support represented 58 per cent of revenues, new equipment sales accounted for 33 per cent of sales, used equipment was 6 per cent of revenues, and 3 per cent was rental revenues.
In terms of geographical revenue breakdown, the company segments its business into three regions: Canada, South America, and the United Kingdom and Ireland. In the first half of 2017, 50 per cent of the company's revenue was from Canada, 35 per cent from South America, with the balance, 16 per cent, from the U.K. and Ireland.
So far this year, the company has reported better-than-expected earnings for its two reported quarters.
Before the market opened on Aug. 9, the company reported better-than-expected second-quarter financial results that sent the share price soaring nearly 9 per cent on high volume. Over 1.89-million shares traded that day, well above the three-month historical daily average trading volume of approximately 740,000 shares. The company reported earnings per share of 34 cents, ahead of the consensus estimate of 29 cents per share, and up from adjusted earnings per share of 20 cents reported during the same period last year. Revenues increased 21 per cent year-over-year to $1.58-billion, reflecting strong demand for new equipment across all regions.
On the conference call, the president and chief executive officer Scott Thomson remarked, "While consolidated revenues are up 6 per cent year-to-date, earnings are up over 60 per cent, demonstrating strong operating leverage… In terms of the macro environment, demand for equipment is improving across our regions. This is demonstrated by higher new equipment sales and the second consecutive quarter of a meaningful increase in our equipment backlog." Equipment backlog increased nearly 30 per cent sequentially to over $900-million as at June 30, its highest level since Dec. 21, 2014.
The company will be reporting its third-quarter financial performance before the market opens on Nov. 7. The Street is anticipating earnings per share of 32 cents.
Dividend policy
The company pays its shareholders a quarterly dividend of 19 cents per share, or 76 cents per share yearly. This equates to an annualized dividend yield of 2.6 per cent.
Last month, management announced a 4 per cent dividend increase, raising it to its current level from 18.25 cents per share each quarter. Management indicated in the earnings release that the dividend hike reflected, "the expectation for positive annual free cash flow and sustainable earnings recovery." This was the first dividend increase announced since 2015.
Analysts' recommendations
There are eight firms providing research coverage on this company, of which six analysts have "buy" recommendations, one analyst (at CIBC World Markets) has a "neutral" recommendation, and one analyst (from Edward Jones) has a "sell" recommendation.
The eight firms providing research coverage are as follows in alphabetical order: BMO Capital Markets, Canaccord Genuity, CIBC World Markets, Edward Jones, National Bank Financial, Raymond James, Scotia Capital, and TD Securities.
Financial forecasts
The consensus EBITDA (earnings before interest, taxes, depreciation and amortization) estimate is $577-million in 2017, increasing 13 per cent to $654-million in 2018. The Street is forecasting earnings per share of $1.30 in 2017, jumping to $1.63 the following year.
In recent months, earnings forecasts have increased. For instance, three months ago, the Street was forecasting EBITDA of $554-million in 2017 and $630-million in 2018. The consensus earnings per share estimates were $1.22 in 2017 and $1.56 in 2018.
Valuation
According to Bloomberg, the stock is trading at a price-to-earnings multiple of 17.7 times the 2018 consensus estimate, above its three-year historical average of 14.7 times but below its peak of 22 times during this period.
The one-year consensus target price is $32, suggesting there is 11 per cent upside in the share price over the next 12 months. When combined with the yield, this equates to a potential total return of 13 per cent. Target prices range from a low of $29 from the analyst at CIBC World Markets (implying the stock is nearly fully valued) to a high of $33 (suggesting 14 per cent upside potential in the stock price). Individual target prices provided by seven firms are as follows in numerical order: $29, four at $32, and two at $33.
Revised recommendations
In August, seven analysts covering the company revised their target prices – all higher.
Cherilyn Radbourne from TD Securities increased her target price to $32 from $29. Maxim Sytchev from National Bank Financial hiked his target price to $33 from $31.50. Jacob Bout from CIBC World Markets took his target price up by $1 to $29. Yuri Lynk from Canaccord Genuity lifted his target price by $2 to $33. Michael Doumet, the analyst from Scotia Capital, raised his target price to $32 from $30. Ben Cherniavsky from Raymond James increased his target price to $32 from $29.50. Devin Dodge from BMO Capital Markets bumped his target price to $32 from $30.
Insider transactions
Recent insider trading has been mixed with both buying and selling activity.
On Sept. 29, the firm's chief information officer Dave Cummings purchased approximately $270,000 worth of stock. He accumulated 9,500 shares at an average cost per share of $28.50, increasing his portfolio's position to 28,673 shares.
Prior to that, on Aug. 15, Cristian Chavez, global supply chain executive, sold 3,000 shares at an average price per shares of $27.90, reducing his portfolio's holdings to 1,292 shares.
Chart watch
Year-to-date, the share price has rallied 10 per cent, slightly underperforming the S&P/TSX composite industrials sector index, which is up 12 per cent.
For the past seven years, the share price has traded principally between $20 and $30, and is currently at the upper end of this trading range.
In terms of key resistance and support levels, the stock price has initial overhead resistance around $30. After that, there is a ceiling of resistance around $32, and then around $34. Looking at the downside, there is support around $27.50, near its 50-day moving average (at $27.52). Failing that, there is support between $25 and $26, around its 200-day moving average (at $26.13), and strong support around $20.
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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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