On today’s TSX Breakouts report, there are 10 stocks on the positive breakouts list (stocks with positive price momentum), and 71 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a defensive stock that may appear on the positive breakouts list later this year as it has a potential catalyst on the horizon.
On Tuesday, the S&P/TSX Composite Index was under pressure, once again, with only 71 of the 250 stocks in the TSX Index closing higher for the day.
Among the positive performers was this stock. The security highlighted today is Northland Power Inc. (NPI-T). The stock provides investors with an attractive dividend yield of 5.2 per cent with a conservative payout ratio of 73 per cent.
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Toronto-based Northland Power is an international power producer. In 2017, the company completed two offshore wind projects in Europe and is currently working on completing a third offshore wind farm, its Deutsche Bucht project located in the North Sea, Germany. This project is expected to be completed by the end of 2019.
After the market closed on Feb. 22, the company reported better-than-expected fourth-quarter financial results.
Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) came in at $239-million, surpassing the Street’s expectations of $198-million. Management provided solid guidance for the upcoming year, anticipating adjusted EBITDA to be between $860-million and $930-million, representing an increase of approximately 17 per cent year-over-year. Management is forecasting cash flow per share to be between $1.70 and $2 in 2018.
The stock has a potential catalyst in 2018 – securing a contract in the Taiwan market where the government is committed to phasing out nuclear power generation by the year 2025.
On the fourth-quarter earnings call, Chief Executive Officer John Brace highlighted this potential international growth opportunity, stating: “We have an office and a local team in Taiwan, which has been identified as a region with some of the best wind resources in the world. To kick-start the offshore wind sector in Taiwan, the Taiwanese government has implemented a feed-in tariff program with long-term contracts. We are working closely with our local partners on advanced site development and completion of all required regulatory and permit-related work in order to obtain the approvals needed to secure a power purchase agreement. We hope to have news about this later in the year.”
Dividend policy
Northland pays its shareholders a monthly dividend of 10 cents per share, or $1.20 per share yearly, equating to an annualized dividend yield of 5.2 per cent.
In November, the company announced an 11 per cent dividend increase, raising it to its present level of 10 cents per share from 9 cents per share.
The company has a predictable revenue stream with 98 per cent of its revenues from long-term power contracts. As such, the dividend appears to be well supported. In 2017, the free cash flow payout ratio was 73 per cent.
Analysts’ recommendations
Since the beginning of the year, 12 analysts have issued research reports on the company, of which nine analysts have buy recommendations, two analysts have hold recommendations, and one analyst (from EVA Dimensions) has a sell recommendation.
The 12 firms providing recent research coverage on the company are as follows in alphabetical order: BMO Capital Markets, Canaccord Genuity, CIBC Capital Markets, Desjardins Securities, EVA Dimensions, Industrial Alliance Securities, GMP, National Bank Financial, Raymond James, RBC Capital Markets, TD Securities, and Veritas Investment Research.
Revised recommendations
The majority of analysts have maintained their recommendations and target prices over the past few months. Only a handful of analysts have made revisions.
This month, Bill Cabel, the analyst from Desjardins Securities, reduced his target price by $1 to $27. Jeremy Rosenfield from Industrial Alliance Securities trimmed his target price to $28 from $30.
In February, Ian Gillies, the analyst from GMP, trimmed his target price to $27 from $27.25. Rupert Merer from National Bank Financial increased his target price to $26 from $25.
Financial forecasts
The consensus EBITDA estimates is $904-million in 2018, up from adjusted EBITDA of $765-million reported in 2017, and forecast to rise to $974-million in 2019.
Over the past several months, the consensus EBITDA forecast has be relatively unchanged. To illustrate, four months ago, the Street was anticipating EBITDA of $905-million in 2018.
Valuation
According to Bloomberg, shares of Northland are trading at an enterprise value-to-EBITDA (EV/EBITDA) multiple of 12.1 times the consensus 2019 estimate, at a discount to its three-year historical average multiple of 14.3 times, and near trough levels during this period.
The consensus one-year target price is $26.59, implying a potential price return of 15 per cent and a potential total return, which includes the dividend yield, of over 20 per cent. Individual target prices provided by 11 firms are in numerical order: $23, $24.50, $25, $26, $26.50, two at $27, three at $28, and $29.50
Insider transaction activity
Year-to-date, only one insider has reported trading activity in the public market.
On March 26, James Temerty, chairman of the board of directors, purchased 150,000 shares at an average price per share of $22.76 for an account in which he has control or direction over (MT 2018 Trust). On March 23, he accumulated 150,000 shares for this account at a cost per share of $22.8334. After these two transactions, the account held 300,000 shares.
Management’s ownership is notable with approximately a 35 per cent ownership position in the company, aligning management team’s interest with investors.
Chart watch
Year-to-date, the share price is relatively flat, down 1 per cent, outperforming the S&P/TSX Utilities Index, which is down 7.4 per cent so far this year, and outperforming the S&P/TSX Composite Index, which has declined 6.1 per cent. Only two utilities stocks have higher returns, Superior Plus Corp. (SPB-T), whose stock price is up 4.8 per cent and Capital Power Corp. (CPX-T), whose share price is unchanged.
Since mid-2016, Northland’s share price has been consolidating, trading sideways, digesting its impressive gains from the preceding months. The share price has traded principally between $22 and $25, and is currently in the middle of this trading band.
Looking at key support and resistance levels, the stock price has strong technical support between $21 and $22, and there is a major ceiling of upside resistance around $25.
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