On today’s TSX Breakouts report, there are 20 securities on the positive breakouts list (stocks with positive price momentum), and 31 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that appears on the positive breakouts list. This small-cap stock that has nearly doubled in value year-to-date. During the past two quarters, the company has reported better-than-expected earnings results sending the share price soaring 9 per cent and 15 per cent the following day. Over the next year, earnings per share is expected to rise over 50 per cent driven higher by a recently announced acquisition. With a unanimous buy call, the security highlighted today is North American Construction Group Ltd. (NOA-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Alberta-based North American Construction Group, or NACG, is a construction and mining contractor, which services energy and resource companies. One of management’s key objectives is to diversify the company’s revenue beyond its core market - the oil sands. NACG owns a fleet of equipment including trucks, excavators, dozers, loaders, graders, and compactors. Among its key customers are: Syncrude, Suncor Energy, Exxon Mobil, and Canadian Natural.
On Sept. 20, the company announced its plan to acquire a 49-per-cent ownership interest in Alberta-based construction and mining company Nuna Logistics Ltd in a deal valued at $42.5-million. The proposed acquisition will diversify the company’s revenues as all of Luna’s sales are generated outside of the oil-sands market from projects principally located in northern Canada (Nunavut and the Northwest Territories). Luna has contracted work on projects such as Rio Tinto’s Diavik diamond mine and Agnico Eagle Mines’ Meliadine gold project. Luna’s customer base includes major players such as Newmont Mining, BHP Billiton, Kinross, DeBeers, Esso, ConocoPhillips, and Imperial Oil.
On Sept. 21, management held a conference call to discuss the deal. Chairman and chief executive officer Martin Ferron remarked on the positive economics, “We expect the following contributions in 2019, which we will account for on a proportional consolidation basis. So firstly, revenue, around $80-million; EBITDA [earnings before interest, taxes, depreciation and amortization], including expected synergies, around $14-million; free cash flow, around $7-million. Then in terms of basic earnings per share, we expect this deal to get us close to our target of $1 a share. So all those numbers are net to us, I just want to stress that…The purchase price to EBITDA is about 3 times….and we will fund it from our existing credit facility.”
Another key driver helping lift the share price higher has been the company’s solid quarterly earnings results.
After the market closed on July 31, NACG reported another earnings beat, which sent the share price soaring 9 per cent the following trading day on high volume. Revenue was $79.5-million, up 67 per cent year-over-year. Adjusted EBITDA was $15.2-million, well above the consensus estimate of $8.9-million.
After the market closed on May 1, the company reported better-than-expected first-quarter financial results. Revenue came in at $114.7-million up 24 per cent year-over-year, and above the Street’s expectations of $102-million. Adjusted EBITDA was $39.1-million, up 24 per cent year-over-year and ahead of the consensus estimate of $29-million. Earnings per share was 44 cents, exceeding the consensus estimate of 36 cents. The share price rallied 15 per cent the following trading session.
The stock is dual-listed trading on both the New York Stock Exchange and the Toronto Stock Exchange under the same ticker, NOA.
Returning capital to its shareholders
The company pays its shareholders a quarterly dividend of 2 cents per share, or 8 cents per share on a yearly basis. This equates to an annualized dividend yield of 0.65 per cent. The company has maintained its dividend at this level since 2014.
During the second quarter, the company repurchased 647,800 shares as part of its share buyback program.
Analysts’ recommendations
There are four analysts that cover this small-cap stock with a market capitalization of $332-million and all four analysts have buy recommendations.
The firms providing research coverage on the company are as follows in alphabetical order: Canaccord Genuity, National Bank Financial, PI Financial, and Raymond James.
Revised recommendations
Earlier this week, , Yuri Lynk, the analyst from Canaccord Genuity, increased his target price to $14 from $11.
Last week, Devin Schilling from PI Financial also boosted his target price to $15. His previous target price was $12.
Financial forecasts
The Street is forecasting revenue of $374-million in 2018, jumping 16 per cent to $458-million in 2019. The consensus EBITDA estimate is $86.6-million in 2018, increasing 17 per cent and breaking above the $100-million mark to $101.7-million in 2019. The consensus earnings per share estimates are 57 cents in 2018, jumping approximately 56 per cent to 89 cents in 2019.
Earnings expectations have been on the rise since April. For instance, three months ago, the Street was forecasting revenue of $358-million in 2018 and $401-million in 2019. The consensus EBITDA estimates were $81.6-million in 2018 and $88.2-million in 2019.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 4.5 times the 2019 consensus estimate, which is above its three-year historical average of 3.7 times, but below its peak multiple of just under 5 times during this period.
The one-year consensus target price is $13.25, suggesting there is approximately 8 per cent upside in the share price over the next 12 months. However, two analysts have yet to adjust their numbers to reflect the recently announced planned acquisition of Luna, likely waiting until deal closes before they update their financial forecasts. The acquisition is expected to be completed at the beginning of the fourth quarter. Consequently, the one-year average target price is likely to rise shortly. Currently, individual target prices are as follows in numerical order: $11.50, $12.50, $14 and $15 (the high on the Street implies the share price has over 22 per cent upside potential).
Insider transaction activity
The most recent transaction reported by an insider occurred in August.
During the month, Mr. Ferron reported mixed activity as both a buyer and seller in the market. On Aug. 17, Mr. Ferron purchased 1,000 shares at a cost per share of $9.40. On Aug. 14, Mr. Ferron acquired 3,000 shares at a price per share of $9.80. Between Aug. 3 and Aug. 7, Mr. Ferron exercised his options and sold the corresponding number of shares received (23,700) at an average price per share of approximately $9.39. After these transactions, his closing account balance stood at 1,658,307 shares.
Chart watch
The share price has nearly doubled year-to-date, rising 94 per cent to its highest level since 2011.
Looking at key resistance and support levels, the share price has an initial ceiling of resistance around $13.50. After that, there is resistance around $15. Looking at the downside, there is strong technical support around $10, near its 50-day moving average (at $9.89).
The stock can be thinly traded. The three-month historical daily average trading volume is approximately 62,000 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