On today’s Breakouts report, there are 44 stocks on the positive breakouts list (stocks with positive price momentum), and 13 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that is nearing oversold territory but has yet to appear on the negative breakouts list.
In the near-term, the share price may drift down. However, price weakness has historically represented a buying opportunity.
This is a stock that patient investors may want to watch and put on their radar screens should price weakness persist. This dividend stock has 11 buy recommendations and has an attractive dividend yield of 3.8 per cent. The security highlighted today is Aecon Group Inc. (ARE-T).
A brief outline is provided below that may serve as a springboard for further fundamental analysis when conducting your own due diligence.
The company
Toronto-based Aecon is a construction and infrastructure development company serving both the private and public sectors.
There is seasonality in the company’s operations with the first quarter the weakest, and the second half of the year is typically stronger than the first half.
Quarterly earnings results
After the market closed on April 22, the company reported better-than-expected first-quarter financial results. However, the share price dropped 2.5 per cent the following trading day. Revenue was $754-million, up 1 per cent year-over-year, and ahead of the consensus estimate of $706-million. Adjusted earnings before interest, taxes, depreciation and amortization EBITDA) came in at $20.8-million, surpassing the consensus estimate of $11.6-million. The company reported an EBITDA margin of 2.8 per cent, down from 2.6 per cent reported during the same period last year. Adjusted earnings per share came in at loss of 31 cents. As at March 31, the backlog stood at $5.9-billion down sequentially from $6.45-billion as of Dec. 31, 2020. The company’s balance sheet is strong with $31.5-million of cash as of March 31.
The contraction in the backlog was likely the culprit for the drop in the share price. The backlog represents future revenue for the company. On Fri., the share price dipped as low as $18.24 before recovering slightly to close at $18.63, down from the prior day’s close of $19.10.
On the earnings call, president and chief executive officer Jean-Louis Servranckx remarked, “Backlog recurring revenue programs and the pipeline of bidding opportunities for new work remain at strong levels across Canada, despite the challenges of a pandemic environment. Backlog at the end of the first quarter was $5.9 billion, which does not include the Eglinton Crosstown West Extension Advance Tunnel project in Toronto, where an Aecon consortium has been named as first negotiations proponent and which is expected to be awarded in the second quarter of 2021. We expect demand for our services to remain healthy for the foreseeable future, as the federal government and provincial governments across Canada have identified investment in infrastructure as a key source of stimulus as part of economic recovery plan. Aecon is prequalified on a number of large project bids due to be awarded during 2021 and 2022, and have a robust pipeline of opportunities to further add to backlog over time.”
Investment thesis
- Stock is trading at a reasonable valuation.
- The company’s backlog is anticipated to ramp up over time. Management indicated on the conference call that some projects that the company plans to bid on have been delayed due to COVID but have not been cancelled. Investors may need to be patient.
- Price weakness has historically represented a buying opportunity. Over the past five years, the share price has been range-bound, trading largely between $14 and $20.
- Attractive dividend yield of 3.8 per cent.
Dividend policy
In February, the company announced a 9 per cent dividend increase. The company pays its shareholders a quarterly dividend of 17.5 cents per share, or 70 cents per share yearly, equating to a current annualized yield of 3.8 per cent.
Analysts’ recommendations
This small-cap security with a market capitalization of $1.1-billion is covered by 13 analysts, of which 11 analysts have buy recommendations and two analysts (Davin Dodge at BMO Nesbitt Burns and Sabahat Khan at RBC Dominion Securities) have neutral recommendations.
The firms providing research coverage on Aecon are: ATB Capital Markets, BMO Nesbitt Burns, Canaccord Genuity, CIBC World Markets, Desjardins Securities, iA Capital Markets, Laurentian Bank Securities, National Bank Financial, Paradigm Capital, Raymond James, RBC Dominion Securities, Stifel Canada, and TD Securities.
Revised recommendations
Last week, three analysts revised their expectations.
- BMO’s Devin Dodge trimmed his target price to $19 from $20.
- Canaccord’s Yuri Lynk raised his target price to $23 from $21.
- Paradigm’s Corey Hammill increased his target price by $3 to $25 – the high on the Street.
Financial forecasts
The consensus EBITDA estimates are $243-million in 2021, down from adjusted EBITDA of $264.5-million reported in 2020, and forecast to increase 11 per cent to $270-million in 2022. The Street is forecasting earnings per share of 90 cents in 2021, down from $1.29 reported in 2020, and rising to $1.21 the following year.
Earnings forecasts have remained relatively unchanged for this year. For instance, three months ago, the Street was forecasting EBITDA of $242-million in 2021 and $255-million in 2022. The earnings per share estimates were $1.00 for 2021 and $1.16 for 2022.
Valuation
The stock is commonly valued on an enterprise value-to-EBITDA multiple basis.
According to Bloomberg, the stock is trading at an EV/EBITDA multiple of 5.2 times the 2021 consensus estimate, below its five-year historical average of 6.3 times, and at an EV/EBITDA multiple of 4.6 times the 2022 consensus estimate, below its five-year historical average of 5.6 times.
The average 12-month target price is $22.27, implying the share price has 19.5 per cent upside potential over the next year. Individual target prices are as follows in numerical order: $18 (from RBC’s Sabahat Khan), $19, $21, two at $22, six at $23, $24.50, and $25 (from Paradigm’s Corey Hammill).
Insider transaction activity
Year-to-date, there has not been any trading activity reported by insiders.
Chart watch
Year-to-date, the share price is up 14 per cent but has declined 7 per cent over the past nine trading sessions. On Fri. April 23, the share price fell 2.5 per cent on high volume with over 750,000 shares traded, above its three-month historical average of approximately 420,000 shares.
The stock is nearing oversold territory. The RSI (relative strength index) is at 34. Generally, an RSI reading at or below 30 reflects an oversold condition.
In terms of key resistance and support, the share price has initial overhead resistance around $20, and after that around $21.50 (its closing price on July 26, 2019), and then around $23. In terms of the downside, there is initial support around $18, and then around $16 (close to its 200-day moving average at $16.29).
It’s important to note that this stock has been in a trading band (rallying and retreating) for the past five years, trading largely between $14 and $20, and providing patient investors an opportunity to accumulate shares whenever there were pullbacks.
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.
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