On today’s TSX Breakouts report, there are 40 stocks on the positive breakouts list (stocks with positive price momentum), and 23 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that may soon appear on the positive breakouts list. Over the years, management has successfully delivered both revenue and dividend growth. Revenue expanded at a compound annual growth rate of 9 per cent between fiscal 2014 and fiscal 2018. Looking back to 2009, the company has announced dividend increases of at least 10 per cent every year. This year, the company announced a 22-per-cent dividend hike. From a valuation perspective, the share price is currently trading below its historical trading averages.
With five buy recommendations, the stock discussed below is Enghouse Systems Ltd. (ENGH-T).
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Markham, Ont.-based Enghouse is an enterprise software and services provider.
The company has two core business segments: the Interactive Management Group and the Asset Management Group. The Interactive Management Group provides software and services aimed at the improving customer service and communications. The Asset Management Group provides software and services largely to telecom companies. In the third-quarter of fiscal 2019 (the company’s fiscal year end is Oct. 31), $56.9-million or 56 per cent of the company’s revenue was from the Interactive Management Group with the balance $44.4-million, or 44 per cent, from the Asset Management Group.
Management has been focused on growth, both acquisition and organic growth, funded by the company’s free cash flow. Consequently, the company has delivered solid top-line growth over the years. Revenue came in at $343-million in fiscal 2018, $325-million in fiscal 2017, $308-million in fiscal 2016, $279-million in fiscal 2015, and $220-million in fiscal 2014.
On Oct. 22, the company completed the acquisition of Eptica S.A., a leading customer engagement software provider with operations based in France.
In May, the company purchased two companies, Vidyo Inc., and Espial Group Inc., at a cost of $68.7-million.
On the earnings call, the chief executive officer Steve Sadler said that he expects to see operational improvements in the near-term with the acquisitions of Vidyo and Espial nearly completed, noting: “We are happy to report, excluding purchase price adjustments, both acquisitions were profitable in Q3. Espial had limited profitability as we need to continue to invest in IPTV (Internet Protocol TV), where although we have interested customers, we do not anticipate revenue until Q2 (second quarter) 2020. Vidyo had profitable results in Q3 (third quarter) due to restructuring done just before the acquisition was completed and some additional restructuring has been done since the acquisition. We expect both revenue and operating income will improve further in Q4 when a full quarter is recognized in our financial results. For Vidyo, we intend to invest in improving revenue on a global basis next fiscal year 2020 and, therefore, will require some investment from our increased profitability.”
After the market closed on Sept. 12, the company reported its third-quarter fiscal 2019 financial results that were relatively in-line with the Street’s expectations. Revenue came in at $101.3-million, up 16.8 per cent year-over-year, but just shy of the consensus estimate of $103-million. The Asset Management Group had several deals that were not completed in the third quarter, but this revenue is anticipated to be recognized in the fourth quarter.
Quarterly earnings results can be lumpy due to the unpredictable timing of sales orders. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $28.1-million, up from $27.4-million reported last year, and in-line with the Street’s forecast of $27.6-million. The share price slipped 20 cents, or 0.5 per cent, the following trading day. At the end of the quarter, the company had $141.3-million in cash and cash equivalents, representing over $2.50 per share.
The company is expected to release its fourth-quarter fiscal 2019 financial results in December. The consensus revenue, EBITDA, and earnings per share estimates are $107.7-million, $30.7-million, and 30 cents, respectively.
Returning capital to shareholders
Since 2009, the company has announced a dividend increase of over 10 per cent in March of every year. This year, the company announced a 22 per cent dividend hike, raising the quarterly dividend to 11 cents per share from 9 cents per share. This equates to a current annualized dividend yield of 1.1 per cent.
Over the past five years, the company paid dividends totaling 68 cents per share in fiscal 2018, 60 cents per share in fiscal 2017, 52 cents per share in fiscal 2016, 44 cents per share in fiscal 2015 and 38 cents per share in fiscal 2014.
During the third quarter, the company did not repurchase any shares. Last quarter, the share buyback program was renewed, running between April 30, 2019 and April 30, 2020, and allowing the company to repurchase up to 3,936,892 shares.
Analysts’ recommendations
This small-cap technology stock with a market capitalization of $2.1-billion is actively covered by six analysts, of which five analysts have buy recommendations and one analyst (Paul Steep, an analyst from Scotiabank) has a “sector perform” recommendation.
The firms providing research coverage on the company are as follows in alphabetical order: CIBC World Markets, GMP, ISS-EVA, RBC Dominion Securities, Scotiabank and TD Securities.
Revised recommendations
In October, CIBC’s Stephanie Price increased her target price to $45.50 from $44.
In September, RBC’s Paul Treiber lifted his target price to $50 (the high on the Street) from $48.
Financial forecasts
The Street is forecasting revenue of $386-million in fiscal 2019, up from $342.8 million reported in fiscal 2018, with revenue expected to rise to $451-million in fiscal 2020. The consensus EBITDA estimates are $112-million in fiscal 2019, up from adjusted EBITDA of $106-million reported in fiscal 2018 (adjusted EBITDA margin of 31 per cent in fiscal 2018), and anticipated to reach $131-million in fiscal 2020. The consensus earnings per share estimates are $1.16 in fiscal 2019 and $1.36 the following year.
Earnings expectations have been relatively stable. For instance, three months ago, the Street was forecasting revenue of $387-million in fiscal 2019 and $453-million in fiscal 2020. EBITDA forecasts were $111-million for fiscal 2019 and $129-million for fiscal 2020. The consensus earnings per share estimates were $1.16 for fiscal 2019 and $1.41 for fiscal 2020.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 13.3 times the fiscal 2020 consensus estimate, below its three-year historical average multiple of 14.5 times. Over the past three years, the stock has traded at a peak multiple of over 19 times.
The average one-year target price is $44.90, implying the share price has over 16 per cent upside potential over the next year. However, target prices vary significantly. Individual target prices provided by five firms are as follows in numerical order: $39 (the low on the Street is from Paul Steep of Scotiabank), $43, $45.50, $47, and $50 (the high on the Street is from CIBC’s Paul Treiber).
Insider transaction history
There have not been any trades in the public market reported by insiders since the first quarter of this calendar year. Year-to-date, just two insiders have reported trades in the public market.
Most recently, on March 12, Jane Mowat, who sits on the board of directors, invested over $103,000 in shares of the company for an account in which she has indirect ownership, initiating a position for this account.
Between Jan. 8 and Jan. 24, chairman and chief executive officer Steve Sadler sold over $4-million worth of stock. He remains a large shareholder, holding over 7.6-million shares in an account for which he has indirect ownership (2717065 Ontario Inc.).
Chart watch
Year-to-date, the technology sector is the best performing sector in the S&P/TSX Composite Index with a price return of over 47 per cent compared to a 16 per cent price return for the TSX Index. However, within the sector, the share price for Enghouse has lagged its sector peers, rising just 16 per cent.
Looking at key technical resistance and support levels, the stock has an initial ceiling of resistance is around $40. After that, there is resistance around $42, close to its record closing high of $42.01 reached on Sept. 7, 2018. Should the share price retreat, there is initial technical support around $37, near its 50-day moving average (at $37.31). Failing that, there is technical support around $35, which is close to its 200-day moving average (at $35.50).
This small-cap stock can be thinly traded, which can increase volatility in the share price. The three-month historical daily average trading volume is approximately 120,000 shares.
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