Breakout Stock On today’s TSX Breakouts report, there are 20 stocks on the positive breakouts list (stocks with positive price momentum), and 22 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that is on the positive breakouts list with its share price rallying ahead of its earnings announcement on Wednesday - Kinaxis Inc. . Year-to-date, the share price is up over 22 per cent, making it the 33rd-best performing stock out of 232 stocks in the S&P/TSX composite index.
This year is anticipated to be a transition year for the company with management forecasting its earnings before interest, taxes, depreciation and amortization (EBITDA) margin to decline but recover in 2024. Consequently, near-term momentum in the share price may be contained.
From a technical analysis perspective, the stock may soon form a triple top pattern, peaking in the low $200s for a third time in recent years. Evidence of margin improvement, contract wins, or strategic acquisitions may be needed to bring buyers into the stock and lift the share price back to record levels around $230.
On the fourth quarter earnings call held in March, the president and chief executive officer John Sicard summarized and captured management’s operational outlook, “As reflected in the 2023 guidance, we’re excited with 2023, but I have to say, I’m even more excited about ‘24, ‘25, and ‘26.”
A brief outline on Kinaxis is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Ottawa-based Kinaxis is a cloud-based supply chain management software provider. The company has four main revenue segments: Software-as-a-Service (SaaS) revenue, professional services revenue, subscription term license revenue, and lastly, maintenance and support revenue.
In 2022, SaaS revenue represented 58 per cent of total revenue. SaaS revenue provides revenue predictability.
Professional services represented 27 per cent of 2022 revenue, subscription term license revenue accounted for 11 per cent of revenue, and 4 per cent of total revenue was from maintenance and support.
In terms of its 2022 geographical revenue breakdown, 62 per cent of the company’s revenue was from North America and 38 per cent was from Europe and Asia.
The company’s customers are generally large corporations with intricate supply chain management needs. Clients include well-known companies such as General Motors, Mazda, Honda, Lenovo, Unilever, Ford, Toyota, Raytheon, Honeywell, Kimberley-Clark, and Proctor & Gamble. In 2022, the company’s top 10 customers accounted for approximately 24 per cent of total revenue, with no individual customer accounting for more than 10 per cent of total revenue.
Investment thesis
- Earnings visibility. Approximately 86 per cent of management’s 2023 SaaS revenue guidance of US$213-million is in RPO (remaining performance obligation), reflecting backlog or future revenue. The average subscription agreement lasts between three and five years.
- Blue-chip clients with a diversified customer base.
- Margin recovery anticipated in 2024. Benefits may become evident from its sales and marketing investments made in the back half of 2022.
- Healthy balance sheet.
- Valuation. Trading at a discount to its historical average.
Quarterly earnings results
After the market closed on March 1, the company reported better-than-expected fourth quarter financial results.
The company reported revenue of US$98.5-million, up 44 per cent year-over year, and relatively in-line with the consensus estimate of US$99-million. SaaS revenue increased 26 per cent year-over-year to US$58.8-million, accounting for 60 per cent of total revenue. While term license revenue came in at US$9.1-million, professional services was US $26.2-million, and maintenance and support revenue was US$4.4-million.
Adjusted EBITDA was US$21-million, well above the Street’s forecast of US$13.6-million and up 87 per cent year-over-year. The adjusted EBITDA margin was 21 per cent. The balance sheet is healthy. At quarter-end, the company had over US$225-million in cash, cash equivalents, and short-term investments and no debt.
The following day, the share price rallied 5 per cent.
On the earnings call, chief financial officer Blaine Fitzgerald indicated that margins are expected to recover next year, “We currently view 2023 as a bottom to our margin profile, with improvement starting in 2024 and over the mid-term. We fully expect to be able to capitalize on the strong underlying demand in our market and the numerous early strategic growth initiatives we have underway. First, we have been in a phase of rapid new customer growth, which naturally attracts somewhat lower margins than expansion business. However, this does set us up for the expand phase of land and expand, which generally has a higher margin profile. We also see efficiencies coming from our public cloud strategy, a declining proportion of professional services in the revenue mix and tapered investment in R&D [research and development] and G&A [general and administrative expense] as a percent of revenue. While we provide specific annual guidance as the usual times, we are actively working towards a mid-term two to four year model that ultimately sees SaaS growth of 30 per cent or higher and adjusted EBITDA margin approaching 25 per cent or higher.”
For 2023, management is guiding to revenue of between US$420-million and US$430-million. SaaS revenue is expected to increase between 25 per cent and 27 per cent year-over-year. Adjusted EBITDA margin is anticipated to bottom between 13 per cent and 15 per cent, down from 22 per cent reported in 2022 but recover in 2024.
On May 3, the company will be releasing its first quarter financial results after the market closes. The consensus revenue and EBITDA estimates are US$101-million and US$17.8-million, respectively.
Dividend policy
The company does not pay its shareholders a dividend.
Analysts’ recommendations
This mid-cap technology stock with a market capitalization of $5-billion is well covered by the Street. The stock has a unanimous buy recommendation from 11 analysts.
The firms providing research coverage on the company are: ATB Capital Markets, BMO Nesbitt Burns, Canaccord Genuity, CIBC World Markets, Eight Capital, Laurentian Bank, National Bank Financial, RBC Dominion Securities, Scotiabank, Stifel Canada and TD Securities.
Financial forecasts
The consensus revenue estimates are US$427-millon in 2023, up from US$367-million reported in 2022 and US$512-million in 2024. The Street is forecasting EBITDA of US$61-million in 2023, down from US$79-million reported in 2022, rebounding to US$88-million in 2024.
Over the past few months, top line forecasts have increased, while EBITDA estimates have declined. Three months ago, the consensus revenue estimates were US$417-million for 2023 and US$495-million for 2024. The consensus EBITDA estimates were US$70-million in 2023 and US$95-million in 2024.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-sales multiple of 8.7 times the 2023 consensus revenue estimate, below its five-year historical average multiple of 10.7 times.
The average one-year target price is $218.64, implying the stock price may appreciate nearly 18 per cent over the next 12 months. Individual target prices are: two at $200 (from BMO’s Thanos Moschopoulos and CIBC’s Stephanie Price), four at $210, two at $225, $230, $235, $250 (from National Bank’s Richard Tse).
Revised recommendations
In March, five analysts raised their target prices.
- ATB Capital’s Martin Toner to $210 from $200.
- BMO’s Thanos Moschopoulos to $200 from $185.
- RBC’s Paul Treiber to $210 from $200.
- Scotiabank’s Kevin Krishnaratne to $225 from $203.
- TD’s Daniel Chan increased to $210 from $200.
Insider transaction activity
Multiple company leaders have been sellers in the public market. Noted below are several recent transactions reported by insiders.
On March 23, Gelu Ticala, executive vice-president – engineering, exercised his options, receiving 5,000 shares at an average cost per share of approximately $83.62 and sold 5,000 shares at a price per share of $185 with 220 shares remaining in this particular account. Net proceeds exceeded $506,000, excluding any associated transaction fees.
Between March 7-16, chief marketing officer Jay Muelhoefer exercised his options, receiving a total of 25,000 shares at a cost per share of $81.24 and sold 25,000 shares at an average price per share of roughly $169.98. Net proceeds exceeded $2.2-million, not including any associated transaction charges.
Between March 6-9, chief strategy officer Anne Robinson exercised her options, receiving a total of 25,000 shares at a cost per share of $76.48 and sold 25,000 shares at an average price per share of roughly $171.65. Net proceeds exceeded $2.3-million, excluding any associated transaction fees.
On March 7-8, Paul Carreiro, president – global field operations, divested a total of 22,500 shares at an average price per share of approximately $171.23. Proceeds totaled over $3.8-million, not including trading fees. On March 13-14, Mr. Carreiro exercised his options, receiving a total of 14,505 shares at an average cost per share of roughly $111.85, and sold 14,505 shares at an average price per share of approximately $168.36. Net proceeds totaled over $819,000, not including any associated transaction fees.
Chart watch
Over the past three years, the share price has made large moves, rallying and retreating repeatedly, largely between $125 and $225.
In terms of key technical resistance and support levels, the stock has initial technical resistance around $200. There is a major ceiling of resistance around $230, near its record closing high of $229.10 set in Nov. 2021. Looking at the downside, there is technical support around $175, near its 50-day moving average (at $175.03). Failing that, there is support around $150, close to its 200-day moving average (at $155.78).
ESG Risk Rating
According to Sustainalytics, Kinaxis has an environmental, social and governance (ESG) risk rating of 11.8 as of Oct. 26, 2022. A rating of between 10 and 20 reflects “low” risk.