The Globe and Mail Nov. 30 On today’s Breakouts report, there are 10 stocks on the positive breakouts list (stocks with positive price momentum), and 73 stocks are on the negative breakouts list (stocks with negative price momentum).
The security highlighted today is one that surfaced on the negative breakouts list - Savaria Corp. (
).
The stock was first featured in the Breakouts report in 2016 when the share price was just under $10. Since then, the share price has experienced choppy pricing action. In 2018, the share price topped $20 but then tumbled to the $11 level in 2019. The market meltdown from the coronavirus took the share price down to below $8 in 2020. However, the share price rallied to a record high of $22.52 by September.
In recent weeks, the share price has been under pressure, falling over 8 per cent quarter-to-date. The stock is now trading at a valuation that is in-line with its historical average. The Street is anticipating the share price will rebound over the next year with a 32 per cent gain anticipated and a unanimous buy recommendation from eight analysts.
However, 2022 earnings estimates may be too high as supply chain challenges and rising input costs may persist into 2022. As a result, the share price may continue to slide, and it may be premature to buy. This is a well-run company but for now, it may be one to watch as a more attractive entry point may present itself to investors.
A brief outline on Savaria is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Quebec-based Savaria is a manufacturer and provider of mobility/accessibility equipment such as stairlifts, wheelchair lifts, ceiling lifts, elevators, and wheelchair adapted vehicles. Its manufacturing facilities are located in Canada, the U.S., Europe and China.
The company has three main reporting segments: the Accessibility segment, Patient Handling, and Adapted Vehicles. In the third-quarter, these business segments represented 75 per cent of total revenue, 19 per cent, and 6 per cent, respectively. The Accessibility segment offers the highest margins. Last quarter, this segment’s adjusted EBITDA margin stood at 18.2 per cent, down from 22.3 per cent reported last year. The Patient Handling segment reported an adjusted EBITDA margin of 8.8 per cent, down from 11.7 per cent reported during the same period last year. Finally, the Adapted Vehicles segment reported adjusted EBITDA of 6.1 per cent, up from 5.8 per cent reported last year.
Savaria has achieved strong top line growth over the years. In 2020, revenue declined 5.3 per cent year-over-year to $354.5-million. However, robust sales growth was reported in prior years. In 2019, Savaria reported revenue of $374-million, up 32 per cent year-over-year) and in 2018, revenue came in at $286-million, up 56 per cent year-over-year). In 2017, the company reported revenue of $183.7-million, up over 50 per cent year-over-over. In 2016, revenue increased approximately 26 per cent year-over-year to $119.7-million. In 2015, revenue climbed 15 per cent compared the prior year to $91.3-million.
SAVARIA CORP
18.67+4.54 (32.13%)
YEAR TO DATE
Investment thesis
- Demographics tailwind with an aging population (users of their accessibility products).
- Economic growth.
- Strong residential and commercial construction (home supply shortage combined with strong demand).
- Revenue growth – acquisition growth. Last quarter, organic (or internal) revenue growth was 3.5 per cent. Management targets reporting revenue of $1-billion by 2025. To put this in perspective, the consensus 2021 revenue estimate is $655-million.
- Price increases put through with further price increases slated for 2022 to help offset rising costs.
- Focus on integrating its acquisition of Handicare Group AB and making ‘tuck-in’ or small acquisitions in 2022.
- Dependable dividend.
- Key potential risks to consider: 1) Valuation isn’t cheap – trading relatively in-line with historical levels; 2) margin pressure arising from higher freight and raw material costs that may persist into 2022; 3) rising costs not being able to be passed on to the consumer; 4) labour shortages (wage inflation); 5) share price volatility; and 6) risk of negative earnings revisions. The 2022 consensus earnings per share estimate of 96 cents per share and EBITDA forecast of $127-million may be too high.
Quarterly earnings
After the market closed on Nov. 10, the company released its third-quarter earnings, which came in slightly below the Street’s expectations.
The company reported revenue of $180.8-million, up 99 per cent year-over-year, relatively in-line with consensus estimate of $179.8-million. Gross margin declined to 32.4 per cent from 35.9 per cent reported during the same period last year. Adjusted earnings before interest taxes, depreciation and amortization (EBITDA) came in at $26.3-million, up 56 per cent year-over-year, falling short of the consensus estimate of $27.6-million. The adjusted EBITDA margin contracted to 14.6 per cent, down from 18.6 per cent reported last year. Adjusted earnings per share was 15 cents, a penny below the consensus estimate. The debt-to-adjusted EBITDA ratio was 3.5 times.
Despite the earnings shortfall, management maintained its guidance, expecting to report adjusted EBITDA topping $100-million in 2021.
The share price increased 6 per cent the following trading day on high volume with just under 425,000 shares traded. This is well above the three-month historical daily average trading volume of approximately 200,000 shares.
Dividend policy
The company pays its shareholders a monthly dividend of 4.17 cents per share, or 50 cents per share on a yearly basis. This equates to a current annualized yield of 2.7 per cent.
Management is committed to its dividend policy. Management did not suspend or reduce its dividend at the peak of the coronavirus pandemic. In fact, the company raised its dividend.
Last year, in a news release issued in Sept. 2020, president and chief executive officer Marcel Bourassa remarked, “The global economic uncertainty stemming from COVID-19 forces Savaria to be cautious about increasing its dividends. For the past five years, we have increased our dividend from 20 cents in 2015 to 46 cents in 2019, representing a 26 per cent average annual increase.”
Consequently, management took a conservative approach and announced modest dividend increases in Sept. 2021 (4 per cent dividend hike) and Sept. 2020 (4 per cent dividend increase).
Analysts’ recommendations
This small cap industrial stock with a market capitalization of $1.2-billion is actively covered by eight analysts. The stock has a unanimous buy recommendation.
The firms providing recent research coverage on the company are: Cormark Securities, Desjardins Securities, Laurentian Bank, National Bank Financial, PI Financial Corp., Scotia Capital Stifel Canada and TD Securities.
Revised recommendations
Earlier this month, Laurentian Bank’s Nick Agostino raised his target price to $25 from $24.
Last month, Justin Keywood at Stifel increased his target price to $25 from $23.
Financial forecasts
The consensus revenue estimate is $655-million in 2021, up from $355-million reported in 2020, with revenue forecast to increase 18 per cent to $773-million in 2022. The consensus EBITDA estimates are $100.8-million in 2021, up from $59.8-million reported in 2020, and forecast to expand 28 per cent to $128.7-million in 2022. The consensus earnings per share estimates are 64 cents in 2021 jumping to 91 cents the following year.
Revenue forecasts have increased while earnings growth expectations have moderated. For instance, four months ago, the consensus revenue estimates were $645-million for 2021 and $752-million for 2022. The Street was forecasting EBITDA of $104-million in 2021 and $127-million in 2022. The consensus earnings per share forecasts were 74 cents in 2021 and 96 cents for the following year.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 12.2 times the consensus 2022 estimate, in-line with its five-year historical average multiple of 12.3 times and well below its peak multiple of approximately 14 times during this time period.
The average one-year target price is $24.88, implying the share price may appreciate 32 per cent over the next 12 months. Individual target prices are as follows in numerical order: $23, $24.50, four at $25, $25.50, and $26.
Insider transaction activity
Quarter-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 30 per cent. However, the share price has been sliding in recent months.
Quarter-to-date, the share price has declined 8 per cent, making it the worst performing stock in the S&P/TSX Small Cap Industrials Sector Index.
However, the share price may have more downside risk. The share price is not yet in oversold territory with an RSI [relative strength index] reading of 39. Generally, an RSI level of 30 or below reflects an oversold condition.
Looking at key technical resistance and support levels, the stock has initial overhead resistance around $20. After that, there is a ceiling of resistance around $22.50, close to record closing high of $22.52 reached on Sept. 16. Looking at the downside, there is initial technical support between $17.50 and $18. Failing that, there is support around $16.