Breakout Stock On today’s Breakouts report, there are 68 stocks on the positive breakouts list (stocks with positive price momentum), and nine stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that is on the positive breakouts list. This technology stock has delivered spectacular sales and earnings growth combined with stellar returns to its shareholders.
Year-to-date, the share price is up 74 per cent, closing a record high of $8.61 on June 8. In 2020, the stock price increased 253 per cent, and in 2019, the share price rallied 155 per cent. The stock has a unanimous buy recommendation from eight analysts.
The security highlighted below is Converge Technology Solutions Corp.
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Founded in 2016, Converge is a hybrid information technology solutions provider. Last quarter, 81 per cent of its total revenue stemmed from hardware and software product offerings and 19 per cent of total revenue was service revenue. Its offerings include cloud services, cybersecurity, digital infrastructure, advance analytics, talent solutions (e.g. staffing services), and managed services (e.g. remote management).
In terms of its revenue breakdown by industry, 25 per cent of the company’s revenue came from the technology sector during the last quarter, 22 per cent from government and education sectors, 13 per cent from the financial sector, 12 per cent from the health care sector, 9 per cent from retailers, and 6 per cent from manufacturing, with the balance, roughly 13 per cent, from various sectors.
On June 3, the company completed a $172.5-million bought deal financing, issuing shares at a price per share of $7.50. Bank of Nova Scotia and Canadian Imperial Bank of Commerce were among the underwriters of this offering. Consequently, I would not be surprised if analysts at one or both of these firms initiated coverage on the company in the future. Proceeds from the financing are earmarked for acquisitions.
The industry is fragmented, providing plenty of acquisition opportunities to management. Management targets acquiring 4-6 North American companies each year. Another key objective by management is to expand in Europe this year. On the earnings call, chief executive officer Shaun Maine indicated that they’ve met with 64 companies in Germany and created a short list of 16 potential acquisition candidates.
On May 20, the company announced the appointment of Thomas Volk to its board of directors. In the news release, Mr. Maine highlighted the strengths that Mr. Volk brings to the board, particularly with its Converge’s European expansion plans, “Thomas’ experience in having previously implemented a managed services and European expansion strategy similar to Converge’s during his time as CEO of Cancom is invaluable. This expertise, in addition to his knowledge from having led teams at Dell and HP, will assist and accelerate Converge in its European expansion and aid in our customers’ adoption of managed services.”
Investment thesis
- Strong growth profile – acquisition and organic (internal) growth. Management targets $5-billion in annual revenue roughly by the end of 2025. The company’s European expansion plans and growth plans for its managed service revenue will be provided at the Annual General Meeting held on June 23.
- Expanding its recurring revenue stream. For instance, managed service revenue is typically comprised of three-year contracts with monthly payments.
- Potential positive earnings revisions.
- Attractive valuation relative to its industry peers.
- Potential near-term catalysts: 1) AGM - when the company will highlight its objectives over the next three to four years, and 2) an acquisition announcement.
Quarterly earnings results
On May 11, the company reported better-than-expected first-quarter financial results.
It reported revenue of $310-million, up 28 per cent year-over year, and above the consensus estimate of $287-million. The gross profit margin declined slightly to 21.9 per cent from 22.7 per cent reported last year. This dip is expected to be temporary. The decline was attributed to high device sales to the Canadian government and a higher proportion of hardware sales from recent acquisitions, which have lower margins. The gross profit margin is expected to recover with an increase in volume rebates as well as from realized cross-selling opportunities with greater managed and professional service sales, which have higher margins.
Adjusted earnings before interest, taxes, depreciation and amortization were $18.8-million, above the Street’s forecast of $17.5-million, and up from $11-million reported last year.
Dividend policy
Management is focused on growth. Consequently, the company currently does not pay its shareholders a dividend.
Analysts’ recommendations
This small-cap technology stock with a market capitalization of $1.6-billion has a buy recommendation from eight analysts.
The nine firms providing research coverage on the company are: Canaccord Genuity, Cormark Securities, Echelon Wealth Partners, Desjardins Securities, Eight Capital, Laurentian Bank Securities, Paradigm Capital, Raymond James, and Sidoti.
Anja Soderstrom, an analyst from Sidoti & Co. LLC, did not specify a recommendation but provided a target target price.
Financial forecasts
Robust growth is forecast for the company.
The consensus revenue estimates are $1.47-billion in 2021, up from $948.8-million reported in 2020, and expected to rise to $1.73-billion in 2022. The Street is forecasting adjusted EBITDA of $104-million in 2021, up from $60.5-million reported in 2020, and anticipated to jump to $151-million the following year. The consensus earnings per share estimates are 28 cents in 2021 and 50 cents in 2022.
Over the past several months, earnings forecasts have increased. To illustrate, three months ago, the consensus revenue estimates were $1.29-billion for 2021 and $1.54-billion for 2022. The consensus adjusted EBITDA estimates were $94.6-million for 2021 and $127.7-million for 2022.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 11 times the 2022 consensus estimate and at a price-to-earnings multiple of 17.4 times the 2022 consensus estimate, the highest multiples since the stock began trading.
The average one-year target price is $10.14, implying the stock price may appreciate 18 per cent over the next 12 months. Individual target prices are as follows in numerical order: $8.75 (from Steven Li at Raymond James), $9.25, $9.50, $10.25, three at $10.50, and two at $11.
Revised recommendations
Month-to-date, two analysts have raised their target prices:
- Cormark’s Gavin Fairweather to $10.25 from $10.50.
- Laurentian Bank’s Nick Agostino to $9.25 from $8.75.
Chart watch
Technical analysis is limited as shares of Converge just began trading on the TSX Venture Exchange in November of 2018. The stock graduated to the Toronto Stock Exchange in Feb. 2021, which increased the stock’s visibility, opening up the pool of institutional investors who can purchase the stock.
The stock has delivered spectacular returns to investors. Since the beginning of May, the share price has jumped 40 per cent. Year-to-date, the share price is up 74 per cent, closing a record high of $8.61 on June 8. In 2020, the stock price increased 253 per cent, and in 2019, the share price rallied 155 per cent.
Given the sharp move higher in the share price in recent weeks, the stock price may need to pause in the near-term before continuing to climb higher. The relative strength index (RSI) is at 73, suggesting the stock is overbought territory. Generally, an RSI reading at or above 70 reflects an overbought condition.
In terms of key resistance and support levels, the stock’s next major overhead resistance level is around $10. Looking at the downside, there is strong technical support around $6.50, near its 50-day moving average (at $6.47).
This small-cap stock has reasonable liquidity. The three-month historical daily average trading volume is approximately 1-million shares.