TSX Breakout Stock On today's TSX Breakouts report, there are 34 stocks on the positive breakouts list (stocks with positive price momentum), and 10 stocks are on the negative breakouts list (stocks with negative price momentum).
As always, I like profile a wide range of securities in order to appeal to a variety of investors. Discussed today is a micro-cap stock that two major institutions have large investments in. The stock is covered by four analysts, all of whom have buy recommendations. The share price is up over 30 per cent year-to-date with a further 30-per-cent gain expected. The company featured today is NAPEC Inc. (NPC-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The Company
Drummondville, Qu©.-based NAPEC provides construction and maintenance services to the public utility and industrial sectors in the eastern United States, Qu©bec, and Ontario. In terms of geographical revenue breakdown, 87.5 per cent of the company's revenues were from the U.S. in the second quarter.
Before the market opened on Aug. 10, the company reported its second quarter financial results. Revenues were $112.16-million, ahead of the Street's forecast of $109.67-million. Earnings before interest, taxes, depreciation and amortization (EBITDA) was $9.01-million, narrowly exceeding the consensus estimate of $8.93-million. EBITDA margins improved to 8.1 per cent from 6.2 per cent reported during the same period last year. Reported earnings per share was one cent. At quarter end, the company's backlog was $471-million. The stock price was relatively flat that day, declining by a penny to close at $1.16.
On the earnings conference call, the chief executive officer Pierre Gauthier provided a positive outlook stating, "Our intent is to increase the volumes in Canada by picking up orders with Hydro One in the transmission area, which we were not an approved contractor until early part of this year. For United States, though, the fundamentals are still extremely strong and we have a very large number of pending bids right now." He added, "Typically a lot of the orders come in, in the third and fourth quarter, as utilities make sure that they commit their budgets."
Management is focused on both organic, or internal, growth as well as acquisition growth. On the earnings call, Mr. Gauthier remarked on acquisition opportunities saying, "In Canada now, we've got basically two product lines, data substation and transmission. That's not enough. We're too vulnerable in Canada versus the eight product lines [that] we have in the U.S. So we're looking to expand either geographically or through product lines for Canada, and that, to me, is an important step that I think we need to make. In the U.S., there's such a huge natural gas market. We're in the process of increasing revenues organically, but I believe it would be a good decision for us to speed up that growth in outlying areas of where we stand today "¦ into areas such as New Jersey, which also has an enormous replacement market. So we're very attentive for maybe an acquisition in that area"¦ We're still looking in the Midwest, although it looks more and more likely that it'll be more CapEx (capital expenditures) investment as orders come in, in that area." As at June 30, the company's net debt-to-pro forma adjusted EBITDA was 2.85 times. Management is targeting reducing this ratio to approximately 2.4 times by the end of the year.
Last year, in November, 2016, the company completed the acquisition of New York-based PCT Contracting LLC. In 2016, PCT reported revenues of over $42-million (U.S.) and EBITDA of approximately $6.5-million (U.S.). Management anticipated realizing synergies from this immediately accretive acquisition.
The company reports its earnings in Canadian dollars but realizes the majority of its revenues in U.S. dollars. Consequently, foreign exchange movements can impact the company's earnings.
Two institutions have sizeable investments in the company, each with ownership positions above 10 per cent, the Fonds de solidarit© des travailleurs du Qu©bec and the Caisse de d©p´t et placement du Qu©bec.
Dividend Policy
The company currently does not pay its shareholders a dividend.
Analysts’ Recommendations
There are four firms that provide research coverage on this micro-cap company, with a market capitalization of $127-million, and all four analysts have buy recommendations.
The four firms that provide research coverage on this stock are as follows in alphabetical order: Cormark Securities, Desjardins Securities, Laurentian Bank Securities, and Raymond James.
Financial Forecasts
The Street is forecasting the company to generate revenues of $456-million in 2017, up from $353-million reported in 2016. Revenues are expected to increase 10 per cent to $501-million in 2018. The consensus EBITDA estimates are $37-million in 2017 and $43-million in the following year. The consensus earnings per share estimates are 4 cents in 2017, rising to 9 cents in 2018.
In recent months, earnings estimates have been relatively stable. For instance, three months ago, the Street was forecasting revenues of $453-million in 2017 and $499-million in 2018. The consensus EBITDA estimates were $37-million in 2017 and $42-million in 2018.
Valuation
According to Bloomberg, on a price-to-earnings basis, the stock is trading at 13 times the 2018 consensus estimate, above the five-year average of 8 times. On an enterprise value-to-EBITDA basis, the stock is trading at a multiple of 5.3 times the 2018 consensus estimate, above the five-year average of 4.7 times.
The one-year consensus target price is $1.59, suggesting there is 30 per cent upside in the share price over the next 12 months. Individual target prices are as follows in numerical order: $1.35, two at $1.60 and $1.80.
Revised Recommendations
In August, all four analysts revised their target prices – most of which were positive revisions.
Frederic Bastien from Raymond James raised his target price to $1.60 from $1.40. Similarly, Maggie MacDougall from Cormark Securities increased her target price to $1.60 from $1.35. Mona Nazir, the analyst from Laurentian Bank Securities, upgraded the stock to a ‘buy’ from a ‘hold’ and tweaked her target price, lifting it to $1.35 (the low on the Street) from $1.10.
Taking the opposite action, Benoit Poirier, the analyst from Desjardins Securities, trimmed his target price by 10 cents to $1.80 (the high on the Street).
Insider Transactions
Year-to-date, there has only been one reported transaction in the public market by an insider.
On June 12, Kenneth Mckay, general counsel and corporate secretary, purchased 50,000 shares at an average price per share of $1.12, initiating a portfolio position. In January, 2017, Mr. Mckay joined the company.
Chart Watch
Year-to-date, the share price of the industrials stock is up 31 per cent. If the stock were included in the S&P/TSX composite index, it would be the third best performing stock in the industrials sector.
The stock price has been in recovery mode for over the past year. From late 2009 until early 2016, the share price was in a downtrend, making lower highs and lower lows.
In terms of key resistance and support levels, the stock price has initial overhead resistance around $1.25, which is near its current level. If the share price can break and hold above the $1.25 level, the next area of resistance is around $1.40, and after that around $1.60. Looking at the downside, there is support around $1.20, near its 50-day moving average (at $1.18). Failing that, there is support around $1.10, close to its 200-day moving average (at $1.08), and strong support at $1.
Liquidity can be low for this micro-cap stock. The three-month daily average trading volume is approximately 110,000 shares.