On today’s Breakouts report, there are 27 stocks on the positive breakouts list (stocks with positive price momentum), and 25 stocks are on the negative breakouts list (stocks with negative price momentum).
Featured today is a top-performing small-cap industrials stock whose share price is up 37 per cent year-to-date - IBI Group Inc. Analysts remain bullish on IBI. The stock has a unanimous buy recommendation from eight analysts and a 12-month forecast return of 32 per cent.
The stock appeared on the positive breakouts list in Aug. However, in recent months, the positive price momentum has stalled. The share price has remained stable during the recent stock market volatility. The next potential catalyst that may lift the stock price is the release of its third-quarter financial results in Nov. For the past five quarters, the share price has rallied after the company released its quarterly results.
A brief outline on IBI Group is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Toronto-based IBI Group is a design and technology firm with three main business segments: Intelligence, Buildings, and Infrastructure. In terms of total revenue reported last quarter, buildings represented 50 per cent, infrastructure represented 33 per cent, and intelligence at 17 per cent.
Its Building segment provides interior design, architecture, and engineering expertise for building projects including hospitals, schools, and high-rises. Its Infrastructure segment includes planning, design, engineering for projects such as the Eglinton Crosstown LRT in Toronto, the Edmonton LRT, and Hurontario LRT. The Intelligence segment includes software, systems design, and systems integration expertise used for ground and air traffic management, lighting, and tolling, for instance.
IBI GROUP INC
11.45+3.26 (39.80%)
YEAR TO DATE
Investment thesis
- Contract wins leading to backlog increasing to 17 months of work.
- Aggressive hiring spree. Last quarter, hired over 300 employees (approximately 40 per cent of new hires in the buildings segment, 40 per cent of new hires in infrastructure, and 20 per cent in intelligence), increasing its workforce to approximately 3,200. Management aims to reduce its backlog to around 12 months of work, closer to levels reported by its industry peers.
- Healthy balance sheet. As at June 30, the net debt-to-adjusted EBITDA ratio stood at 0.9 times. The company has the financial flexibility to make acquisitions. However, chief executive officer Scott Stewart noted on the recent earnings call that multiples have increased making acquisitions more expensive and competitive, “The multiples are higher in anticipation of the significant infrastructure spend in the United States.” In terms of geographical expansion, Mr. Stewart said, “Our first priority is to strengthen our presence and profile in the United States.”
- Slew of earnings beats. IBI has reported better-than-expected financial results for the past five consecutive quarters.
- Reasonable valuation with room for multiple expansion.
- Key potential risks to consider include: 1) lack of near-term momentum in the share price (stock price has been trading sideways for months); and 2) steady but single-digit growth anticipated. The Street is forecasting revenue growth of 4 per cent in 2022, and EBITDA growth of 6 per cent. IBI reported revenue of $393-million in 2020, $377-million in 2019, $368-million in 2018, $361-million in 2017, and $354-million in 2016.
Quarterly earnings
After the market closed on Aug. 5, the company reported its better-than-expected second-quarter financial results.
Revenue was $113.2-million, up 13 per cent year-over-year, ahead of the Street’s forecast of $106.8-million. Organic, or internal, growth was 7.6 per cent. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was $18-million, exceeding the consensus estimate of $17.2-million. Earnings per share came in at 22 cents, topping the consensus estimate of 18 cents, and up 22 per cent year-over-year.
The company’s backlog, an indication of future earnings, increased 17 per cent year-over-year to $604-million, representing roughly 17 months of contracted work.
The share price increased 5 per cent the following day on high volume with over 245,000 shares traded. To put this volume in perspective, the three-month historical daily average trading volume is approximately 28,000 shares.
Management raised its 2021 revenue outlook, now forecasting $435-million, up from $422-million. For the balance of the year, management anticipates organic growth will remain solid but moderate to between 3 per cent and 4 per cent, down from 7.6 per cent reported in the second quarter. Management expects margins to remain steady, noting wage inflation that is being felt across the industry.
Dividend policy
The company does not pay its shareholders a dividend.
Analysts’ recommendations
This small-cap stock with a market capitalization of approximately $349-million is covered by eight analysts. The stock has a unanimous buy recommendation.
The firms providing research coverage on the company are: Acumen Capital, Desjardins Securities, Laurentian Bank Securities, National Bank Financial, PI Financial, Raymond James, Stifel Canada, and TD Securities.
Revised recommendations
In August, six analysts made minor revisions to their target prices.
- Acumen’s Jim Byrne to $13 from $12.50.
- Desjardins’ Benoit Poirier to $16 from $15.
- Laurentian Bank’s Troy Sun to $15 from $14.50.
- PI Financial’s Devin Schilling to $15.50 from $14.50.
- Stifel’s Ian Gillies to a Street-high $17 from $15.
- TD Securities’ Mike Tupholme to $13.50 from $13.
Financial forecasts
The Street is forecasting robust revenue growth for the company.
The consensus revenue estimates are $436-million in 2021, up from $393-million reported in 2020, and anticipated to increase marginally, 4 per cent, to $452-million in 2022. The consensus adjusted EBITDA estimates are $64-million in 2021 and $68-million in 2022. The consensus earnings per share estimates are 67 cents in 2021 and 79 cents in 2022.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 7.1 times the 2022 consensus estimate, relatively in-line with its five-year historical average multiple of 7 times.
The average 12-month target price is $14.75, implying the share price has 32 per cent upside potential over the next year. Individual target prices are: $13 (from Acumen’s Jim Byrne), $13.50, two at $14, $15, $15.50, $16 and $17 (from Stifel’s Ian Gillies).
Insider transaction activity
Year-to-date, there has not been any trading activity in the public market reported by insiders.
Chart watch
Year-to-date, the share price is up nearly 37 per cent, making it one of the top performing stocks in the S&P/TSX Small Cap Industrials sector index.
However, since the beginning of the second quarter, the share price has been consolidating, or trading sideways, mainly between $10 and $11.45. The stock has been very stable during the recent heightened volatility in the stock market.
In terms of key resistance and support levels, there is initial technical resistance around $11.50, near its record closing high of $11.45 reached on Aug. 9. After that, there is a major ceiling of resistance between $14 and $15. Looking at the downside, the share price has technical support around $11, near its 50-day moving average (at $10.82). Failing that, there is major support around $10, close to its 200-day moving average (at $9.94).