Breakout Stock Tuesday’s breakouts: This industrial stock has rallied more than 15% this month
On today’s Breakouts report, there are 18 stocks on the positive breakouts list (stocks with positive price momentum), and 37 stocks are on the negative breakouts list (stocks with negative price momentum).
Featured today is a small-cap industrial stock whose share price quickly rebounded from its COVID low and continues to surge higher - IBI Group Inc. Prior to the widespread emergence of the COVID-19 pandemic, the share price closed at $5.15 on Feb. 28, 2020. By March 23 of that year, the share price declined to $2.79. However, since then, the share price has been charging back. A little over two years later, the share price closed at $13.03 on May 16.
Month-to-date, the share price is up 15 per cent on the back of better-than-expected quarterly earnings reported earlier in the month. If this positive price momentum continues, the stock may soon resurface on the positive breakouts list.
The next potential catalyst that may lift the stock price is an acquisition announcement that may lead analysts to raise their earnings expectations. On the first-quarter earnings call, Chief Financial Officer Stephen Taylor stated, “We expect at least one to two more acquisitions to come in the door over the coming months.”
The stock has a unanimous buy recommendation from eight analysts and a 12-month forecast return of 39 per cent.
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: Buildings, Infrastructure and Intelligence.
In terms of net revenue reported last quarter, Buildings represented over 51 per cent, Infrastructure at 31 per cent and Intelligence more than 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 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.
Investment thesis
- Earnings visibility. Backlog, an indication of future earnings, at $661-million, up 6 per cent sequentially, equating to 17 months of contracted work.
- Steady growth. IBI reported net revenue of $444-million in 2021, $393-million in 2020, $377-million in 2019, $368-million in 2018, $361-million in 2017, $354-million in 2016, $327-million in 2015, $298-million in 2014, and $257-million in 2013.
- Continued growth ahead. By 2026, management targets having revenue of $960-million, earnings before interest, taxes, depreciation and amortization (EBITDA) of between $130-million and $160-million, and a debt leverage ratio of 1 times. In 2021, the company reported revenue of $444.5-million and adjusted EBITDA of $68-million.
- Acquisition growth. On the earnings call, Mr. Taylor indicated that an acquisition could be announced quite soon. He said, “Our M&A [mergers and acquisitions], we have an in-house corporate development capability now that we didn’t have 12 months ago. We have a healthy pipeline of opportunities that we’re working on and we expect at least one to two more acquisitions to come in the door over the coming months. Our debt, as we’ve said before, we would be comfortable at anything up to sort of 2 times to 2.5 times EBITDA. So we’ve got a long way to go in terms of getting close to those numbers.”
- Healthy balance sheet. As at March 31, the net debt-to-adjusted EBITDA ratio stood at 0.6 times. The company has the financial flexibility to make acquisitions.
- Reasonable valuation with room for multiple expansion.
- Key potential risks to consider include: 1) potential recession or stagflation; 2) low trading volume for this small-cap stock can increase share price volatility; 3) weakness in overall markets with low investor sentiment.
Quarterly earnings
After the market closed on May 5, the company reported its better-than-expected first-quarter financial results. Net revenue was $120.8-million, up 11 per cent year-over-year and ahead of the Street’s forecast of $112-million. Organic, or internal, growth was 9.3 per cent. Revenue growth was strong across all business segments, the company’s Buildings sector realized 6 per cent year-over-year growth, the Infrastructure segment was up 6 per cent year-over-year, and revenue from the Intelligence segment increased 5 per cent year-over-year. Adjusted EBITDA was $18.9-million, exceeding the consensus estimate of $16.8-million. Earnings per share came in at 21 cents, topping the consensus estimate of 17 cents. The company’s backlog increased 13 per cent year-over-year to $661-million, representing roughly 17 months of contracted work. Management raised its 2022 net revenue outlook by 3.5 per cent, now forecasting $473-million, up from its prior guidance of $457-million. The following day, the share price rallied an impressive 14 per cent on high volume.
Dividend policy
The company does not pay its shareholders a dividend.
Analysts’ recommendations
This small-cap stock with a market capitalization of approximately $408-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, National Bank Financial, PI Financial, Raymond James, Stifel Canada and TD Securities.
Revised recommendations
Month-to-date, three analysts have made minor increases to their target prices.
- Acumen’s Jim Byrne to $18 from $17.50.
- Desjardins’ Benoit Poirier to $18 from $17.
- Laurentian Bank’s Troy Sun to $18 from $17.50.
Financial forecasts
The Street is forecasting steady growth for the company.
The consensus revenue estimates are $468-million in 2022, up from $444-million reported in 2021, and anticipated to increase to $487-million in 2023. The consensus adjusted EBITDA estimates are $74-million in 2022, up from $68-million reported in 2021, and $79-million in 2023. The consensus earnings per share estimates are 82 cents in 2022, up from 66 cents reported in 2021, and 92 cents in 2023.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 6.6 times the 2023 consensus estimate, below its five-year historical average multiple of 7.6 times.
The average 12-month target price is $18.06, implying the share price has 39 per cent upside potential over the next year. Individual target prices are: $17 (from Stifel’s Ian Gillies), two at $17.50, three at $18, $18.50, and $20 (from National Bank’s Maxim Sytchev).
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 down 3.8 per cent, outperforming the S&P/TSX SmallCap Industrials Sector Index, which is down 11.3 per cent.
However, the share price has rebounded nicely after the company reported better-than-expected earnings earlier this month. Month-to-date, the stock is up 15 per cent, making it the top performing stock in the S&P/TSX SmallCap Industrials Sector Index.
In terms of key resistance and support levels, there is an initial ceiling of resistance between $14.50 and $15. After that, there is overhead resistance around $17. Looking at the downside, the share price has initial technical support around $11. Failing that, there is major support around $10.