On today’s TSX Breakouts report, there are 34 stocks on the positive breakouts list (stocks with positive price momentum), and 15 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a mid-cap stock that is on the negative breakouts list. Since the company reported weaker-than-expected second-quarter earnings results on Aug. 8, the share price has dropped over $11, or 17 per cent. The stock is now in oversold territory. Concerns surrounding the company’s future sales growth have erased this industry leader’s premium valuation. Yet, many analysts remain bullish on the stock. There are eight buy recommendations and the average target price implies a potential price return of over 25 per cent over the next 12 months. The security highlighted today is CCL Industries Inc. (CCL.B-T).
A brief outline is provided below that may serve as a springboard for further fundamental research when doing your own due diligence.
The company
Toronto-based CCL Industries is an industry leader. It is the largest label company in the world with operations in 40 countries. CCL provides services to large multinational customers through its four reporting business segments: CCL, Avery, Checkpoint, and Innovia. Last quarter, the CCL segment accounted for 61 per cent of total revenue, Avery represented 15 per cent of total revenue, Checkpoint was 13 per cent of total revenue, and the balance, roughly 10 per cent, was from Innovia.
After the market closed on August 8, the company reported weaker-than-expected second-quarter financial results. Sales increased 7.1 per cent year-over-year to $1.354-billion, falling short of the Street’s expectations of $1.38-billion. Organic growth was low at 1.9 per cent. EBITDA (earnings before interest, taxes, depreciation and amortization) was $267-million, below the consensus estimate of $288-million. Adjusted earnings per share came in at 69 cents, well below the consensus estimate of 76 cents per share. The company has a healthy balance sheet with a net debt-to-EBITDA ratio of just under 2 times. The share price plunged almost 9 per cent the following trading session.
On the earnings call, management attributed weakness to sales experienced during the month of June in the company’s largest business segment, CCL, which it noted had subsequently recovered in July. The CCL segment reported sales of $831.5-million, up 3 per cent year-over-year (organic sales growth was 2.3 per cent). EBITDA was $172.6-million, down 2 per cent year-over-year. Within the CCL segment, weakness was noted in home and personal care (low aerosol can demand in North America), food and beverage (expansion costs and pricing pressures), and healthcare and specialty results fell in North America.
On the earnings call, president and chief executive officer Geoff Martin summed up how uncertainty in the company’s sales can create skepticism or nervousness with investors. He noted the low visibility and hence difficulty in forecasting earnings for the company’s label segment, “In the label business, we work on pretty short lead times. The backlog in that business is rarely more than a month… We had a good April, a good May, a soft June, a strong July and I think we look reasonably set for August, but September is a long way off in our business so hard to really comment beyond. We’re certainly seeing a market that’s somewhat more volatile that it was the last two or three years for sure. Probably wouldn’t surprise many people [with] that comment. But they’re more nervous about [sales growth] when you see a month like June come along as soft as it was and then you see a complete rebound the next month, it makes you a little more uncertain about how things are going to be two and three, four months down the road.”
Dividend policy
Over the years, the company has steadily increased its dividend. Most recently, in February, the company announced a 31 per cent dividend hike, raising its quarterly dividend to 17 cents per share (68 cents per share yearly) from 13 cents per share. The current annualized dividend yield is 1.2 per cent.
Analysts’ recommendations
There are 10 analysts providing recent coverage on the company, of which eight analysts have buy recommendations, and two analysts have neutral recommendations.
The 10 firms providing recent research coverage on the company are as follows in alphabetical order: Accountability Research, BMO Nesbitt Burns, CIBC World Markets, Cormark Securities, GMP, KeyBanc Capital Markets, Laurentian Bank Securities, RBC Dominion Securities, Scotiabank, and TD Securities.
Revised recommendations
In September, Ben Jekic, the analyst at GMP, trimmed his target price to $74 from $76.
After the company reported its quarterly earnings in August, several analysts tweaked their expectations. BMO’s Stephen MacLeod raised his target price by $2 to $70. RBC’s Walter Spracklin lowered his target price to $71 from $73. Elizabeth Johnston, an analyst at Laurentian Bank Securities, increased her target price to $74 from $71. CIBC’s Scott Fromson lowered his target price by $1 to $69.
Financial forecasts
The consensus EBITDA estimates are $1.084-billion for 2019 and $1.139-billion for 2020. The consensus earnings per share estimates are $2.82 for 2019, rising 9 per cent to $3.07 in 2020.
After the company reported the second-quarter earnings miss, forecasts declined. For instance, three months ago, the consensus earnings per share estimates were $2.92 for 2019 and $3.18 for the following year.
Valuation
According to Bloomberg, on an enterprise value-to-EBITDA basis, the stock is trading at a multiple of 10.4 times the 2020 consensus estimate, below its three-year historical average of 11.2 times.
On a price-to-earnings (P/E) basis, the stock is trading at a multiple of 17.9 times the 2020 consensus estimate, below the stock’s three-year historical average P/E multiple of 19.2 times.
The average 12-month target price is $68.89, suggesting the stock has over 25 per cent upside potential over the next year. Individual target prices provided by nine analysts vary widely and are as follows in numerical order: $60 (the low on the Street is from Damir Gunja, the analyst at TD Securities), $65, $66, $69, $70, two at $71, and two at $74 (the high on the Street is from Ben Jekic, the analyst at GMP, and Elizabeth Johnston, the analyst at Laurentian Bank Securities).
Insider transaction activity
So far, in the second half of the year, there have not been any trades in the public market reported by insiders.
Most recently, on June 18, Günther Birkner, president of Innovia Films (an operating segment of CCL) sold 56,700 shares at a price per share of $65, leaving 70,260 shares in his account. Proceeds from the sale, not including commission charges, exceeded $3.6-million.
Chart watch
Year-to-date, the share price is up nearly 10 per cent. However, the share price has declined over 19 per cent since July 29, when the share price closed at its year-to-date high. The stock is now in correction territory and oversold. The stock has a RSI (relative strength index) reading of 29. Generally, a reading at or below 30 reflects an oversold condition.
The stock price was in a multi-year uptrend until mid-2017. However, over the past two years, the share price has been consolidating, trading sideways, principally between $50 and just below $70 with the share price currently headed towards to lower end of this trading band.
The downtrend remains intact - for now. Also negative is the high volume. The share price has been declining on high volume. On Fri. Sept. 20, for instance, over 1.3-million shares traded, well above its three-month historical daily average trading volume of approximately 560,000 shares.
Looking at key support and resistance levels, there is strong technical support around $50. Should the share price recover, there is an initial ceiling of resistance around $60, and major resistance around $68, near its record closing high of $68.27 reached in June 2017.
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