On today’s TSX Breakouts report, there are 71 stocks on the positive breakouts list (stocks with positive price momentum), and 24 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a defensive stock that is on the positive breakouts list - George Weston Ltd. (WN-T).
The company has a unanimous buy recommendation from seven analysts actively covering the stock. The stock offers investors a reliable dividend with a current yield of 1.9 per cent. In mid-2019, the share price broke out of a downtrend. Next week, the company will be reporting its fourth-quarter earnings results, and all eyes will be on the bakery segment. The share price may continue to recover if investors see strengthening operational results and management provides a positive outlook for this business unit.
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Toronto-based GWL is a holding company with three core business segments: Weston Foods, Loblaw (L-T), and Choice Properties Real Estate Investment Trust (CHP-UN-T).
Weston Foods is a leading North American bakery. Loblaw, its largest reporting segment, is Canada’s leading grocery and drug retailer with banners that include Loblaw, No Frills, Valu-Mart, Fortinos, and Shoppers Drug Mart. In November, the company’s ownership interest in Loblaw stood at approximately 51.8 per cent. Choice Properties REIT has a portfolio of retail, industrial, residential, and office properties. At the end of the third-quarter, the company’s ownership interest in Choice Properties REIT stood at 62.9 per cent.
The baking segment, Weston Foods, has been the main focus and area of concern for many investors. In 2018, key customers were lost, sales and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) declined year-over-year, and 2017 was also a challenging year for this business unit. The operational weakness from this segment has limited the stock’s upside.
Before the market opened on Nov. 19, the company reported its third-quarter financial results with the share price advancing 0.6 per cent that day. The Weston Food segment reported sales of $638-million, up 0.6 per cent year-over-year excluding the foreign exchange benefit. However, adjusted EBITDA was flat year-over-year.
On the earnings call, president and chief financial officer Richard Dufresne said: “We are pleased with the positive momentum we see at Weston Foods. Management is delivering results, including operational efficiencies, strong customer engagement and benefits from the transformation program. The team continues to focus on winning new business in its growth categories and driving operational efficiencies. There is still a lot of work to do, but we are encouraged by our Q3 [third-quarter] results as we continue to stabilize the business.”
The company is now two years into its three-year transformation program, which is aimed at stabilizing and improving Weston Foods.
On the earnings call, president Luc Mongeau stated: “So part of our transformation program includes the optimization of our network. We’re at a place now where we’re satisfied with the efficiency of the level of utilization within our network. We’re at a place where we can meet a near-term demand, and we’re at a place where we can add capacity as demand materializes. So for example, earlier this year, we added a line in our artisan business to meet growing demand there. As mentioned earlier, we are bringing online two additional lines in Q4 [fourth-quarter] for our doughnuts business, and we’re in the process of commissioning a line that will be adding capacity in our bagels business early in 2020.”
The company will be reporting its fourth-quarter earnings before the market opens on Tues. Feb. 25 and hosting a conference call at 9 a.m. (ET). Management will be providing its outlook for 2020 along with their quarterly financial results.
The Weston family is the largest shareholder with an ownership position of 53 per cent.
Dividend policy
The company pays its shareholders a quarterly dividend of 52.5 cents per share, or $2.10 per share yearly, equating to a current annualized yield of 1.9 per cent.
Since 2012, the company has announced at least one dividend increases in each calendar year, typically in May. Its last dividend hike was announced in May 2019 when the company hiked its dividend by 1.9 per cent to its current level.
Analysts’ recommendations
There are seven analysts who actively cover this large-cap consumer staples stock, of which all seven analysts have buy recommendations.
The firms providing recent research coverage on the company are as follows in alphabetical order: BMO Nesbitt Burns, CIBC World Markets, Desjardins Securities, Morningstar, RBC Dominion Securities, Scotiabank and Veritas Investment Research.
Revised recommendations
Recommendations and target prices have remained stable with no revisions made by analysts since Nov. 2019.
Financial forecasts
The consensus earnings per share estimates are $7.42 in 2019, rising 5 per cent to $7.78 in 2020.
Earnings forecasts increased slightly for 2019 and remained relatively steady for 2020. For instance, four months ago, the consensus earnings per share estimates were $7.27 for 2019 and $7.80 for 2020.
Valuation
Many analysts value the stock using a sum-of-the-parts methodology. The average one-year target price is $120.29, implying the stock price has 8 per cent upside potential over the next 12 months, and a potential total return of 10 per cent including the 1.9 per cent dividend yield.
Individual target prices are as a follows in numerical order: $113 (from Kathleen Wong at Veritas Investment Research), $117, $118, two at $121, $125, and $127 (from RBC’s Irene Nattel).
Insider transaction activity
Looking back to the beginning of the fourth-quarter of 2019, no individual on the management team or board of directors has reported buying or selling activity in the public market.
Chart watch
With supply chain disruptions and concerns over slowing global economic growth caused by the Covid-19 coronavirus, there has been a flight with safety with defensive stocks and bonds rallying.
The share price was under pressure in 2018, falling from roughly $110 at the start of 2018 to the $90 at the end of 2018. However, in the second half of 2019, the stock broke out of a downtrend.
Year-to-date, Weston’s share price has increased 8 per cent, outperforming the S&P/TSX composite index that is up 4.7 per cent.
In terms of key resistance and support levels, the stock price has initial overhead resistance between $113 and $115. After that, there is resistance around $120. Looking at the downside, there is strong technical support around $105, close to its 200-day moving average at $105.38.
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