Tuesday’s TSX breakouts: A rising industrials stock with a unanimous buy recommendation from the Street
On today’s TSX Breakouts report, there are 76 stocks on the positive breakouts list (stocks with positive price momentum), and just two securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that appears on the positive breakouts list - AG Growth International Inc. (AFN-T).
The company has a new chief executive officer at the helm, Paul Householder, who also assumed the role of president in late 2022. He joined AGI in 2019 and was previously its chief operating officer.
Mr. Householder indicated on the third-quarter earnings call held in November that management has three main priorities, “to focus on operational excellence, profitable organic growth, and balance sheet discipline.” In other words, the objectives are deleveraging the company’s balance sheet and on internal growth, rather than acquisition growth.
Year-to-date, the share price is up 11 per cent with the stock price approaching a major ceiling of resistance around $50. Should the share price break and hold above $50, the stock price could rally back up to the low $60′s, near its record high. The stock has a unanimous buy recommendation from 10 analysts with a forecast return of 20 per cent and is trading at an inexpensive valuation relative to its historical average.
A brief outline on AGI is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Winnipeg-based AGI manufactures agricultural equipment used for grain handling and storage such as grain storage bins, augers and belt conveyors. The company has manufacturing operations in Canada, the United States, Brazil, France, India, and Italy.
The company has three main reporting segments: farm, commercial, and digital. For the first nine months of 2022, 52 per cent of total sales came from its farm segment, 45 per cent from commercial and 3 per cent from digital.
During that period, approximately 23 per cent of sales came from Canada, 47 per cent from the U.S. and 30 per cent from international regions.
Quarterly earnings and outlook
After the market closed on Nov. 8, the company reported better-than-expected third-quarter financial results, which sent the share price soaring by nearly 5 per cent the following day on high volume.
AGI reported sales of $402-million, up 28 per cent year-over-year, surpassing the consensus estimate of $390-million. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was $76.3-million, up 65 per cent year-over-year and above the Street’s expectations of $64-million. The adjusted EBITDA margin improved to 19 per cent, up from 14.8 per cent reported last year. Adjusted earnings per share came in at $1.41, well above the consensus estimate of $1.20. However, the company’s leverage ratio is high at approximately 4 times at quarter-end, which management remains focused on reducing.
On the earnings call, chief financial officer Jim Rudyk said that this ratio may decline to the “low 3′s” by the end of 2023. The company’s backlog increased 4 per cent year-over-year. Backlog provides visibility for future sales over the next roughly four to five months. Management raised its guidance, expecting adjusted EBITDA of at least $228-million, up from its previous guidance of at least $215-million.
On Feb. 2, management is hosting an investor day.
The company is expected to release its fourth-quarter financial results in early March. The Street is currently anticipating the company to report sales of $346-million, EBITDA of $46.4-million, and earnings per share of 37 cents.
Dividend policy
The company pays shareholders a quarterly dividend of 15 cents per share or 60 cents per share yearly. This equates to a current annualized yield of 1.25 per cent. The dividend has been maintained at this level since mid-2020.
Analysts’ recommendations
This small-cap industrials stock with a market capitalization of $898-million is well covered by the Street. According to Bloomberg, the stock has a unanimous buy recommendation from 10 analysts.
The firms providing research coverage on the stock are: ATB Capital Markets, CIBC World Markets, Cormark Securities, Desjardins Securities, iA Capital Markets, National Bank Financial, Raymond James, RBC Dominion Securities, Scotiabank and TD Securities.
Revised recommendations
Month-to-date, two analysts have raised their expectations.
- CIBC’s Jacob Bout to $62 from $53.
- Scotiabank’s Michael Doumet to $65 from $55.
Financial forecasts
The Street is forecasting sales of $1.43-billion in 2022, rising 8.5 per cent to $1.55-billion in 2023. The consensus EBITDA estimates are $230-million in 2022, rising 9 per cent to $251-million in 2023. The consensus earnings per share estimate is $2.78 in 2022, increasing 47 per cent to $4.10 in 2023.
Financial forecasts have been rising. Three months ago, the consensus EBITDA estimates were $219-million for 2022 and $239-million for 2023.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 7.3 times the 2023 consensus estimate, below its five-year historical average multiple of 9.3 times.
The average one-year target price is $57.50, implying the share price has 20 per cent upside potential over the next 12 months. Individual target prices range from a low of $50 (from Matthew Weekes, the analyst at Industrial Alliance) to a high of $65 (from Scotiabank’s Michael Doumet). Individual target prices are: $50, two at $53, three at $55, $62, $63, $64, and $65.
Insider transaction activity
There has not been any buying or selling activity in the public market reported by insiders since September of 2022.
Chart watch
Year-to-date, the share price has rallied 11 per cent.
Looking at key technical resistance and support levels, the stock has an initial ceiling of resistance around $50. After that, there is major overhead resistance between $62.50 and $64, near its record closing high of $63.99 set back in October 2018. Between late 2016 and mid-2019, the share price traded in a band, primarily between $50 and $60. If the share price can break and hold above $50, the share price may return to this trading range. Looking at the downside, there is technical support around $40.
Trading volume in this small-cap stock can be low, which can create volatility in the share price. The three-month historical daily average trading volume is approximately 109,000 shares.
ESG Risk Rating
According to risk provider Sustainalytics, AGI has an ESG (environmental, social and governance) risk score of 23.1 as of March 31, 2022. A risk score of between 20 and 30 reflects a “medium risk” rating.