On today’s TSX Breakouts report, there are 36 stocks on the positive breakouts list (stocks with positive price momentum), and 17 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that is in recovery mode, bouncing off of its 2018 low and rallying 14 per cent since mid-April. This is a company that has delivered steady sales and earnings growth over the years. The security highlighted today is Richelieu Hardware Ltd. (RCH-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Quebec-based Richelieu Hardware manufactures and distributes specialty hardware and complementary products, such as kitchen and bathroom cabinets, servicing the residential and commercial renovation industry. It has more than 80,000 customers and supplies major retailers such as Home Depot, Lowe’s and Costco. Management is focused on growth, both organic and acquisition, and it has a disciplined acquisition strategy.
In terms of geographical sales breakdown, during the first quarter, sales in Canada represented approximately 65 per cent of total sales with the balance coming from the United States.
On April 5, the company reported its first quarter results for the quarter ended February 28, 2018 (Richelieu’s fiscal year end is at the end of November). Sales during the seasonally lowest quarter were $222-million, up 13 per cent year-over-year, of which 6.2 per cent was from internal growth and 7.1 per cent was acquisition growth. EBITDA (earnings before interest, taxes, depreciation and amortization) was $19.8-million, up 8 per cent year-over-year. However, the company’s EBITDA margin contracted to 8.9 per cent, down from 9.4 per cent realized during the same quarter last year. Earnings per share was 22 cents, up from 20 cents per share reported last year.
On the earnings call, president and chief executive officer Richard Lord commented on the margin compression stating, “Gross margin was down from the first quarter of 2017, mainly influenced by [the] lower gross margin of recent acquisitions due to the different product mix as well as a higher level of direct sales made in the first quarter. These factors, combined with the increased costs incurred during the quarter related to market development, the reorganization of certain distribution centers and the implementation of the new technology also affected the EBITDA margin.”
He also noted on the call that the company’s upcoming second and third quarter financial results will reflect price increases that were implemented in late March and extended into early April.
Returning capital to shareholders
Management remains committed to returning capital to its shareholders, announcing a dividend increase in January of each year since 2010.
The company pays its shareholders a quarterly dividend of 6 cents per share, or 24 cents per share on a yearly basis. This equates to an annualized yield of 0.8 per cent.
During the first quarter, the company repurchased 148,200 shares at a cost of approximately $4.5-million.
Analysts’ recommendations
According to Bloomberg, this stock with a market capitalization of $1.8-billion is covered by just two analysts.
Leon Aghazarian, an analyst from National Bank Financial, has an “outperform” recommendation. He has maintained his buy call on the stock since the beginning of 2014. In April, Mr. Aghazarian trimmed his target price to $35 from $36.
In addition, EVA Dimensions analyst Timothy Stanish has a “hold” recommendation.
Financial forecasts
Only the analyst from National Bank Financial provides financial forecasts. Mr. Aghazarian is anticipating the company to report sales of $1.031-billion in fiscal 2018, and $1.104-billion in fiscal 2019. He is forecasting EBITDA of $112-million in fiscal 2018 and $122-million in fiscal 2019. Finally, his earnings per share estimates are $1.26 in fiscal 2018 and $1.41 in fiscal 2019.
Earnings expectations have moderated slightly. For instance, prior to reporting the quarterly results in April, Mr. Aghazarian was forecasting revenue of $1.028-billion in fiscal 2018 and $1.1-billion in fiscal 2019. His EBITDA estimates were $111-million in fiscal 2018 and $121-million in fiscal 2019. Lastly, his earnings per share estimates were $1.24 and $1.39 for fiscal 2018 and fiscal 2019, respectively.
Valuation
The stock is trading at a price-to-earnings multiple of 22 times the 2019 earnings estimate from the National Bank analyst, which is slightly above its three-year historical average multiple of 21.4 times, but below its peak multiple of over 26 times during late 2017. Over the past three years, Richelieu has traded as low as 18 times forward earnings.
The analyst at National Bank Financial has a target price of $35, suggesting there is approximately 13 per cent upside in the share price over the next 12 months.
Insider transaction activity
The most recent sizeable trading activity (greater than 400 shares) in the public market reported by insiders occurred in February.
On February 27, Geneviève Quevillon, Vice-President – Supply Chain and Logistics, exercised her options and sold the corresponding number of shares, 4,375 shares.
Chart watch
The share price was in a multi-year uptrend until the beginning of 2018, when the stock’s price momentum reversed course. On April 17, the share price closed at its lowest level in 2018, declining 21 per cent year-to-date. Since then, the stock price has steadily recovered and is currently down only 9 per cent year-to-date. Pull up a five year chart on Home Depot Inc. (HD-NYSE) and you will see a similar chart pattern; however, Home Depot’s share price did not slide by the same magnitude.
Looking at key resistance and support levels, the share price is approaching an initial ceiling of resistance that lies between $31.50 and $32, close to its 200-day moving average. There is major resistance around $35, near its record closing high of $35.25, set back in November 2017. Looking at the downside, there is technical support around $30, and failing that, there is support around $27.50.
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.
Jennifer Dowty