On today’s TSX Breakouts report, there are just nine stocks on the positive breakouts list (stocks with positive price momentum), and 34 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that is less than 4 per cent away from appearing on the positive breakouts list. The stock price has remained relatively stable in recent months despite lower global economic growth expectations and escalating trade tensions. The growth stock has been a strong long-term performer for investors while also providing its shareholders with a stable dividend. The security highlighted today is WSP Global Inc. (WSP-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Montréal-based WSP is a leading engineering, design and consulting firm with operations worldwide. Consequently, the company does not have any construction risk. WSP serves clients in the transportation and infrastructure, resources, property and buildings, environment, power and energy sectors. The company has a diversified team of skilled professionals with approximately 48,000 engineers, surveyors, architects, planners, advisors, scientists, and environmental specialists. There is seasonality in the company’s business with the lowest earnings reported in the first quarter and the highest earnings reported in the third quarter.
For the past five consecutive quarters, the share price has increased the day the company released its quarterly earnings results. Before the market opened on May 14, the company reported solid first-quarter financial results that sent the share price rallying 2 per cent that day. Net revenue experienced 3.2 per cent organic, or internal, growth. Net revenue was $1.66-billion. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) came in at $153.1-million, in-line with the consensus estimate of $153.5-million. Adjusted earnings per share was 66 cents, in-line with the Street’s expectations.
An important metric to watch is the company’s backlog as it is an indicator of future growth. Backlog stood at $7.87-billion, representing 10.7 months of revenues and up 2.5 per cent from the previous quarter, of which 1.4 per cent was organic growth. On the earnings call, the president and chief executive officer Alex L’Heureux highlighted several recent contract wins. “In Canada, as part of the East West Connectors joint venture partnership, we were selected to provide design engineering services related to the $2.6-billion Ottawa confederation line LRT extension project. In the U.S., WSP was selected for the design of the $2.2-billion North Carolina 540 Highway project in Raleigh. As a lead designer for the construction joint venture, WSP will also provide management permitting and construction drawings for the entire project. Finally, in New Zealand, following outstanding collaboration between our New Zealand and our Australian colleagues, our consortium has been selected as the preferred tender for the Auckland city rail loop station and tunnels. This is New Zealand’s largest transportation infrastructure project ever with an overall value of NZD 4.4 billion, and this achievement is the direct result of combining legacy local depth of expertise with our rail capability in Australia.” At least two of these wins have not been included in the backlog.
Management has a growth through acquisition strategy and has already completed four acquisitions year-to-date, adding approximately 300 employees. By 2021, management is targeting having 65,000 employees, annual net revenue growth of more than 10 per cent, and an adjusted EBITDA margin of between 14 per cent and 15 per cent. The company has a healthy balance sheet to fund future acquisitions with a net debt-to-adjusted EBITDA ratio of 1.7 times.
The Canada Pension Plan Investment Board and La Caisse de depôt et placement du Québec are both large shareholders each owning approximately 20 per cent and 19 per cent of the shares outstanding, respectively.
Dividend policy
The company pays its shareholders a quarterly dividend of 37.5 cents per share, or $1.50 per share yearly. This equates to a current annualized dividend yield of 2.1 per cent. The company has maintained its dividend at this level since 2011.
Analysts’ recommendations
There are 13 analysts that actively cover this mid-cap industrial stock with a market capitalization of $7.5-billion. The stock has 10 buy recommendations and three neutral recommendations.
Firms providing recent research coverage on the company are as follows in alphabetical order: Accountability Research, AltaCorp. Capital, BMO Capital Markets, Canaccord Genuity, CIBC Capital Markets, Desjardins Securities, ISS-EVA, Laurentian Bank Securities, National Bank Financial, Raymond James, RBC Capital Markets, Scotiabank, and TD Securities.
Revised recommendations
Earlier this month, Frederic Bastien, the analyst at Raymond James, lifted his target price by $6 to $86.
In May, Derek Spronck, the analyst at RBC Capital Markets, increased his target price to $87 (the high on the Street) from $82. Michael Tupholme from TD Securities hiked his target price to $84 from $81. Maxim Sytchev from National Bank Financial upgraded his recommendation to ‘outperform’ from ‘sector perform’ and increased his target price to $79 from $75. Chris Murray from AltaCorp Capital also upgraded the stock to an ‘outperform’ recommendation from a ‘sector perform’ recommendation and lifted his target price by $15 to $86. Yuri Lynk from Canaccord Genuity raised his target price to $75 from $72.
Financial forecasts
The Street is forecasting adjusted EBITDA of $949-million in 2019 and $1.02-billion for the following year. The consensus earnings per share estimate is $3.74 in 2019 rising to $4.16 in 2020. Management is guiding to adjusted EBITDA of between $950-million and $1-billion in 2019.
Analysts have increased their EBITDA forecasts in recent months after applying IFRS 16 (International Financial Reporting Standard 16). For instance, three months ago, the consensus EBITDA estimates were $779-million in 2019 and $843-million in 2020.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 9.8 times the 2020 consensus estimate, slightly below its three-year historical average of 10.1 times and well below its peak multiple of approximately 12.5 times during this period.
The average one-year target price is $80.77, suggesting the share price has over 13 per cent upside potential. Target prices range from a low of $74 (from Devin Dodge, the analyst at BMO Capital Markets) to a high of $87 (from Derek Spronck, the analyst at RBC Capital Markets).
Insider transaction activity
Year-to-date, there has not been any buying or selling activity reported by insiders.
Chart watch
Looking at a long-term chart, the share price has been in an uptrend since 2013. Year-to-date, the stock price is up 21 per cent.
Over recent months, while trade tensions have escalated and global economic growth expectations have declined, the stock price has remained relatively stable, holding in the low-to-mid $70 range.
In terms of key resistance and support levels, there is initial overhead resistance around $75, close to its record closing high of $75.35 reached on June 15, 2018. After that, the next ceiling of resistance is around $80. Looking at the downside, there is strong technical support around $68, near its 200-day moving average (at $67.97).
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
Jennifer Dowty