On today’s TSX Breakouts report, there are 54 stocks on the positive breakouts list (stocks with positive price momentum), of which nearly half are energy stocks. Meanwhile, there are 15 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that appears on the positive breakouts list. The share price has rallied nearly 7 per cent over the past two trading sessions on high volume. Easing trade tensions between the U.S. and China, combined with the USMCA (United States-Mexico-Canada Agreement) nearing completion, have provided support for the stock. Last month, the company reported strong third-quarter financial results and the stock’s valuation has room to expand. Earlier this month, the stock exhibited a bullish technical pattern - a “Golden Cross”- with the 50-day moving average crossing above the 200-day moving average. The security highlighted today is Martinrea International Inc. (MRE-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
Vaughan, Ontario-based Martinrea is an automotive parts supplier with operations worldwide. The company operates 52 facilities in nine countries: Canada, the United States, Mexico, Brazil, Germany, Spain, Slovakia, China and Japan. In terms of geographical revenue breakdown, as of Sept. 30, 79 per cent of the company’s sales over the past 12 months have come from North America, 18 per cent of sales came from Europe, and the balance, 3 per cent, came from the rest of the world. There is seasonality in the company’s business with the third-quarter generally the weakest.
The company’s largest customer is GM (General Motors). Its top platforms include GM pickups and SUVs, GM Equinox/Terrain, Ford Escape/Fusion/Edge, GM Malibu, Ram pickups, and Ford pickups.
After the market closed on Nov. 12, the company reported solid third-quarter financial results. Sales came in at $974-million, above the Street’s expectations of $883-million. The company reported record third quarter adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) of $122-million, ahead of the consensus estimate of $120-million. Adjusted earnings per share came in at 53 cents, up 23 per cent year-over-year and exceeding the consensus estimate of 52 cents per share. The company has a healthy balance sheet with a net debt-to-trailing 12-months adjusted EBITDA ratio of 1.45 times, in-line with management’s target. Despite these strong operational results, the share price declined 2 per cent the following trading day as management pushed out its financial targets to 2021 from 2020 and provided a weak outlook for the fourth-quarter due to the strike at GM.
On the earnings call, the president and chief executive officer Pat D’Eramo spoke about the negative impact from the strike, “In Q4 [fourth-quarter], the strike went longer than anticipated. Our full month without sales from one of our largest customers could not be offset. This is being compounded by softening sales in Europe and China as well as a little bit in North America. Due to the strike and softer market, we've reduced our Q4 expectations. Our current forecast for EPS [earnings per share] in Q4 is between 35 cents and 45 cents. The wider range is due the unknown makeup volume effects by GM. It's clear they are pushing to make up what's possible in the remainder of the year, but the line of sight is not 100 per cent. It will not be possible for GM to make up the volume lost during the strike by the end of the year. What's not made up in 2019, we believe, will be made up in Q1 and Q2 of 2020. Our sales rate for Q4 is $750 million to $810 million, again, the primary variable being the GM volume recovery. We view Q4 as a temporary situation and expect GM to recover the majority of the lost volume somewhere between now and possibly into Q2 of next year”.
He also addressed reduced volumes, “Related to our customers, we are seeing many new program delays and slower ramp-ups than originally planned. Most of the delays are six to nine months, moving out over $200 million of projected production sales originally planned for 2020 into 2021. The delayed programs include a Jeep Grand Cherokee, Nissan Rogue, Pathfinder and Ford's new product in the Hermosillo assembly plant meant to replace the Ford Fusion, all of which are large and impactful programs for us. These programs represent an excess of $400-million of full annualized sales at peak volumes. A dollar of new model sales when launched has more margin than most current production. The retiming of our customer new model introduction will push our 2020 $4-billion sales target into 2021. Along with that, our target of 9 per cent operating income will move into 2021 as well. Despite the expected flat sales and delayed launches of new programs, we expect our margins to improve year-over-year, exceeding our original 8 per cent target for 2020, assuming customer programs remain on schedule”.
Returning capital to its shareholders
The company pays its shareholders a quarterly dividend of 4.5 cents per share, or 18 cents per share yearly, equating to a current annualized yield of 1.3 per cent.
During the third quarter, the company repurchased 1,057,370 shares under its share buyback program.
Analysts’ recommendations
This auto parts stock with a market capitalization of $1.1-billion is actively covered by nine analysts, of which six analysts have buy recommendations and three analysts have neutral recommendations.
The firms providing recent research coverage on the company are: BMO Capital Markets, CIBC Capital Markets, Paradigm Capital, Raymond James, RBC Capital Markets, Scotiabank, Stiefel Canada, TD Securities and Veritas Investment Research.
Revised recommendations
Last month, three analysts revised their expectations.
· Mark Neville, the analyst at Scotiabank, increased his target price to $19 from $17.50.
· Ben Jekic, the analyst at Stifel Canada, trimmed his target price to $17.50 from $20.50.
· Brian Morrison, the analyst from TD Securities, downgraded his recommendation to a ‘hold’ from a ‘buy’ and reduced his target price to $14 from $15.
Financial forecasts
The Street is forecasting EBITDA of $499-million in 2019, rising nearly 5 per cent to $522-million in 2020. The consensus earnings per share estimates are $2.25 in 2019, increasing to $2.52 in 2020.
Earnings expectations have come down, negatively impacted by the strike at GM. To illustrate, three months ago, the consensus EBITDA estimates were $511-million for 2019 and $532-million for 2020. The consensus earnings per share estimates were $2.48 for 2019 and $2.70 for 2020.
Valuation
According to Bloomberg, shares of Martinrea are trading at an enterprise value-to-EBITDA (EV/EBITDA) multiple of 3.9 times the 2020 consensus estimate, relatively in-line with its three-year historical average of 3.7 times. Looking at its industry peers, shares of Magna International Inc. (MG-T) are trading at a forward EV/EBITDA multiple of 5.6 times and shares of Linamar Corp. (LNR-T) are trading at a forward EV/EBITDA multiple of 4.8 times.
On a price-to-earnings (P/E) basis, the stock is trading at a multiple of 5.4 times the 2020 consensus estimate, relatively in-line with its three-year historical average of 5.1 times. Shares of Magna are trading at a forward P/E multiple of 8.4 times and shares of Linamar are trading at a forward P/E multiple of 6.8 times.
The average 12-month target price is $16.50, implying the share price has 22 per cent upside potential over the next year. Individual target prices vary widely and are as follows in numerical order: $11 (the low on the Street is from Peter Sklar, the analyst at BMO Capital Markets), $12, $14, two at $16, $17.50, $19, $21 and $22 (the high on the Street is from Steve Arthur, the analyst at RBC Capital Markets).
Insider transaction activity
During the second half of 2019, insiders have been accumulating shares in the market with one exception - a small sell order that was completed earlier this month. Several of the most recent trades are listed below.
In a relatively small transaction, on Dec. 11, director Fred Olson sold 860 shares at a price per share of $12.70, trimming his account balance to 23,707 shares. Proceeds, not including trading fees, totaled over $10,000.
Prior to that, on Sept. 17, chief information officer Ganesh Iyer invested over U.S. $19,000. He purchased 2,200 shares at a cost per share of U.S. $8.72, lifting his account’s holdings to 12,850 shares.
On Sept. 5, Peter Cirulis, executive vice-president – aluminum, bought 3,725 shares at an average price per share of approximately U.S. $8.10, raising his portfolio’s position to 19,333 shares. The cost of this investment exceeded U.S. $30,000.
On Aug. 28, Alfredo Alonso, executive vice-president – fluids, invested over U.S. $40,000 in shares of the company. He acquired 5,386 shares at an average cost per share of roughly U.S. $7.44, raising his account balance to 13,526 shares.
On Aug. 27, Larry Paine, vice-president – flexible manufacturing group, invested over $100,000 in shares of Martinrea. He acquired 10,480 shares at a price per share of $9.5533, raising his account’s holdings to 26,503 shares.
Chart watch
Share prices of auto parts stocks are percolating in recent weeks. Over the past two trading sessions, Martinrea’s share price has rallied nearly 7 per cent on high volume. On Tues., over 750,000 shares traded, well above three-month historical average daily trading volume of roughly 350,000 shares.
Year-to-date, the share price is up over 24 per cent, outperforming its peers Magna and Linamar whose share prices are up 19 per cent and 7 per cent, respectively. In addition, the stock has also outperformed the S&P/TSX composite index, which is up 19 per cent year-to-date.
Earlier this month, the stock experienced a bullish technical signal, a “Golden Cross”, which occurs when the 50-day moving average crosses above the 200-day moving average.
In terms of key resistance and support levels, shares of Martinrea have an initial ceiling of resistance around $14. After that, there is overhead resistance around $16. Looking at the downside, the stock price has technical support around $12, which is close to its 50-day moving average (at $11.53) and 200-day moving average (at $11.29). Failing that, there is strong support around $10.
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 indices that have a minimum market capitalization of $200-million.
Technical analysis does not replace fundamental analysis, but can help identify companies worth having a closer look at.
Jennifer Dowty