On today’s Breakouts report, there are 43 stocks on the positive breakouts list (stocks with positive price momentum), and 12 stocks are on the negative breakouts list (stocks with negative price momentum).
Featured today is Dentalcorp Holdings Ltd. (DNTL-T). The stock that appeared on the negative breakouts list last month, which may have marked a bottom for the share price. Over the past month, the stock price has rallied 10 per cent and this positive price momentum may steadily continue.
The company has been able to deliver solid financial results in the face of challenges created by the pandemic. With COVID restrictions lifting and normal daily living activities resuming, the share price may continue to steadily climb higher as management executes on its growth objectives. The stock has a unanimous buy recommendation from eight analysts with a forecast return of 33 per cent.
A brief outline on Dentalcorp is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Founded in 2011, Dentalcorp is headquartered in Toronto. At the end of 2021, Dentalcorp owned a nationwide network of 458 dental practices with an active client base of over 1.7 million patients.
Investment thesis
- Management’s main objectives: 1) organic growth (i.e. new patients, increase in dental services); 2) acquisition growth; 3) operational efficiencies; and 4) expansion (private-pay and geographical expansion).
- Recurring revenue business model.
- High cost visibility. Ability to forecast its costs.
- Inflation resistant. The company has long-term fixed contracts with its major suppliers. In addition, price increases help offset higher costs.
- Organic growth. Driven by expansion of services including orthodontics and implants. In the fourth-quarter earnings presentation, management indicated that only 202 practices currently offer orthodontics.
- Fragmented industry provides acquisition opportunities. Independent dentists represent roughly 95 per cent of the dental industry in Canada. Dentalcorp has a market share of approximately 3 per cent.
- Acquisition growth. In 2021, the company acquired 67 dental practices. On the earnings call, management noted that it has identified over 685 potential acquisitions and is in advanced discussions that represent over 150 potential acquisitions.
- Financial flexibility to fund acquisition growth. Dentalcorp ended 2021 with $142-million in cash and $400- million in debt capacity. In addition, on Jan. 19, 2022, the company completed a bought deal offering raising approximately $115-million with proceeds earmarked to fund acquisitions. The company’s leverage ratio is approximately 3.6 times.
- Valuation: Room for multiple expansion.
- Proposed new federal dental care program. Announced last month, this proposed dental program is aimed at improving dental care access to seniors and low and middle- income families.
- Potential risks to consider: 1) spread of COVID; 2) lack of demand for health care stocks with investors favouring commodity stocks; and 3) dual-class shares structure (multiple voting shares and subordinated voting shares), which is unattractive to some investors.
Quarterly earnings results
Before the market opened on March 25, the company reported a relatively in-line quarter. During the fourth-quarter, reported revenue stood at $272.5-million, up 21 per cent year-over-year and just above the Street’s forecast of $271-million. Same practice sales growth was 4.9 per cent. Adjusted earnings before, interest, depreciation and amortization (EBITDA) was $50.1-million, up 53 per cent year-over-year, in-line with the consensus estimate of $50.2-million. The adjusted EBITDA margin improved 3.9 per cent to 18.5 per cent from 14.5 per cent during the same period last year. In the fourth quarter, the company added 13 practices to its dental network.
On the earnings call, founder, chief executive officer and chairman Graham Rosenberg provided a positive outlook for the first quarter, “As we begin the new year, we expect to benefit from dentistry’s resiliency as a highly recurring essential health care service. And despite experiencing Omicron-related headwinds in the first six weeks of 2022, we anticipate delivering modestly higher results in the first quarter of 2022 compared to our fourth quarter of 2021.”
Dividend policy
Management is focused on growth. Consequently, management does not expect to pay its shareholders a dividend in the near future.
Analysts’ recommendations
This small-cap stock with a market capitalization of $2.7-billion has a unanimous buy recommendation from eight analysts.
The firms providing research coverage on the company are as follows in alphabetical order: BMO Nesbitt Burns, Canaccord Genuity, CIBC World Markets, Desjardins Securities, Jefferies, RBC Dominion Securities, Scotiabank and TD Securities.
Revised recommendations
In March, three analysts made minor revisions to their target prices.
- BMO’s Stephen MacLeod lowered his target price to $20 from $21.
- Scotiabank’s Patricia Baker raised her target price to $20 from $19.
- TD’s Daryl Young trimmed his target price to $20 from $22.
Financial forecasts
The Street anticipates Dentalcorp will report revenue of $1.26-billion in 2022, rising to $1.48-billion in 2023. The consensus EBITDA estimates are $241-million in 2022 and $296-million in 2023. The consensus earnings per share estimates are 25 cents in 2022 and 41 cents in 2023.
At the beginning of the year, the Street was forecasting EBITDA of $247-million in 2022 and $290-million in 2023. The consensus earnings per share estimates were 23 cents in 2022 and 44 cents in 2023.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 13.3 times the 2023 consensus estimate, near trough levels.
The average 12-month target price is approximately $20.50, implying the share price has 33 per cent upside potential over the next year. Individual target prices are as follows in numerical order: $19.50 (from Canaccord’s Tania Gonsalves), five at $20, and two at $22 (Desjardins’ David Newman and Jeffreies Steph Wissink).
Insider transaction activity
Looking back to May 2021, when the stock was publicly listed, there has not been any trading activity in the public market reported by insiders.
Chart watch
On May 21, 2021, the stock just began trading on the Toronto Stock Exchange. Given its brief trading history, technical analysis is limited.
The stock has made a round trip.
In May 2021, the initial public offering price was set at $14. The stock was off to a strong start, peaking at over $18 in Nov. However, news of the Omicron variant quickly eroded these gains and by March 2022, the share price had returned to its IPO price. On March 15, 2022, the share price closed at $14.02.
Since then, the share price has been steadily rebounding, rallying 10 per cent to close at $15.38 on April 4. If this positive price momentum continues, the stock will face initial overhead resistance around $16. After that, there is major resistance around $18, near its record closing high of $18.20 reached on Nov. 19, 2021.