On today’s TSX Breakouts report, there are just three stocks on the positive breakouts list (stocks with positive price momentum), and a staggering 181 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that appeared on the negative breakouts list last week. The stock is in correction territory with the share price plunging 11 per cent over the past nine trading days. This growth stock has an attractive business model with high recurring revenue, high margins, and strong cash flow generation. Given the pullback in the share price, the stock is now trading relatively in-line with its historical averages. Management is committed to returning capital to its shareholders, boosting its dividend every year since 2014. The current dividend yield is 1.7 per cent. The stock has 12 buy recommendations and it has delivered solid returns to long-term investors. The current market volatility may offer investors a future buying opportunity. This stock is one to put on your radar screen.
The security highlighted today is Open Text Corp. (OTEX-T).
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Waterloo, Ont.-based Open Text is a leading software provider of Enterprise Information Management (EIM), the company’s software helps its customers automate processes. The company’s revenue composition and margins are quite attractive. Open Text has strong earnings visibility given its high recurring revenue business model (cloud services and subscription revenue). There is seasonality in the company’s business with the first-quarter historically the weakest quarter. The company has a diversified customer base with no individual customer accounting for 10 per cent or more of the company’s total revenue.
In terms of geographic revenue breakdown, in fiscal 2019, 58.7 per cent of its revenue was from the Americas, 32.1 per cent came from the EMEA (Europe, Middle East and Africa), with the balance, 9.2 per cent, from the Asia Pacific region.
After the market closed on Jan. 30, the company reported better-than-expected second-quarter fiscal 2020 financial results (the company’s fiscal year-end is June 30).
Revenue came in at US$772-million, up 4.9 per cent year-over-year, and ahead of the consensus estimate of US$754-million. Over 50 per cent of revenue was from the U.S. Annual recurring revenue (cloud services and subscriptions revenue) was US$564-million, up 6.5 per cent year-over-year, representing 73 per cent of total revenue. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was US$317-million, ahead of the Street’s forecast of US$306-million. Adjusted EBITDA margin was 41 per cent. Adjusted earnings per share came in at 84 cents, above the consensus earnings per share estimate of 79 cents. The company had US$675-million of cash and cash equivalents at quarter-end.
Looking ahead to fiscal 2022, management is targeting an adjusted EBITDA margin of between 38 per cent and 40 per cent, and operating cash flows of between US$1-billion and US$1.1-billion.
On Dec. 24, the company completed a sizable acquisition, purchasing Carbonite Inc. for approximately US$1.45-billion, funded with cash and debt. On the earnings call, management indicated that the net leverage ratio was approximately 2.3 times, and anticipates this ratio will decline to less than 2 times over the next four to five quarters. Carbonite has annual recurrent revenue of approximately 90 per cent, providing predictable revenues. Importantly, this purchase provides the company with another growth avenue. The acquisition is expected to be accretive to adjusted earnings per share this fiscal year and to deliver revenue between US$195-million to US$200-million in the second half of this fiscal year.
On the second-quarter earnings call the chief executive officer Mark Barrenechea highlighted four strategic benefits expected from this acquisition, “First, Carbonite brings us leadership in the third pillar, the large and growing cyber resilience market, complementing our leadership positions in content services and business network. Second, it is expected to increase the annualized run rate of our cloud subscription businesses significantly and improve the future predictability of our revenue stream. Third, Carbonite brings 16,000 new channel partners to OpenText and a new route to market that complements our strong enterprise sales capabilities. With Carbonite, we can now deliver world-class information management solution to customers of all shapes and sizes. Fourth, we evolved from EIM to IM, from enterprise information management to information management, expanding our vision of products to, again, all size customers from the largest enterprises, governments, midsized companies, small companies and professional consumers.” The Carbonite acquisition expected to be fully integrated by the end of fiscal 2021 or earlier.
The Caisse de dépột et placement du Québec, a long-term institutional investor, has an ownership position of over 5 per cent.
The company is dual-listed, trading on the Toronto Stock Exchange as well as the Nasdaq under the ticker, OTEX.
Dividend policy
The company pays shareholders a quarterly dividend of 17.46 US cents per share, or roughly 70 US cents per share on a yearly basis. This equates to a current annualized yield of 1.7 per cent.
Since 2014, management has announced a dividend hike each year in the April/May time frame. However, going forward, the annual dividend review will coincide with the release of its fiscal year-end results. Therefore, if the dividend is increased in 2020, a dividend hike would be announced around early August.
Management remains committed to returning capital to its shareholders and targets returning 20 per cent of its trailing 12-month operating cash flows.
Analysts’ recommendations
This technology stock is covered by 14 analysts, of which 12 analysts have buy recommendations and two analysts (PI Financial’s Gus Papageorgiou and Howard Leung of Veritas Investment Research) have ‘sell’ recommendations.
The firms providing research coverage on the company are as follows in alphabetical order: Barclays, Beacon Securities, Benchmark Company LLC, BMO Nesbitt Burns, CIBC World Markets, Eight Capital, ISS-EVA, National Bank Financial, PI Financial, Scotiabank, Raymond James, RBC Capital Markets, TD Securities, and Veritas Investment Research.
Revised recommendations
After the company released its second-quarter financial results, 12 analysts revised their target prices – all higher. Several revisions are noted below
- Richard Tse of National Bank Financial hiked his target price to US$55 from US$50.
- Paul Treiber at RBC lifted his target by US$4 to US$54.
- Paul Steep of Scotiabank increased his target by US$4 to US$52.
- Raymond James’ Steven Li raised his target to US$54 from US$48.
- TD Securities’ analyst Daniel Chan increased his target to US$52 from US$50.
- TD Securities’ analyst Daniel Chan increased his target to $52 from $50.
- Stephanie Price of CIBC bumped her target to US$57.50 from US$53.
Financial forecasts
The Street is forecasting EBITDA of US$1.16-billion in fiscal 2020 and US$1.32-billion in fiscal 2021. The consensus earnings per share estimates are US$2.88 in fiscal 2020, rising to US$3.32 in fiscal 2021.
Given the acquisition of Carbonite, earnings forecasts have increased for fiscal 2021. For instance, three months ago, the consensus EBITDA estimate was US$1.15-billion for fiscal 2021.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 10.7 times the fiscal 2021 consensus estimate, which is relatively in-line with his three-year historical average of 10.6 times. Earlier this year, the stock was trading at a forward EV/EBITDA multiple of over 12.5 times. The stock is commonly valued using this metric - EV/EBITDA.
The stock is trading at a price-to-earnings (P/E) multiple of 12.6 times the fiscal 2021 consensus estimate, slightly below the stock’s three-year historical average P/E multiple of 12.9 times. Earlier this year, the stock was trading at a forward P/E multiple approaching 16 times.
All but one analyst (PI Financial’s Gus Papageorgiou, who has a target price of $58, the low on the Street) expresses his or her target prices in U.S. dollars. The average one-year target price is US$51.59 (approximately $68.69 Canadian), implying the share price has 22 per cent upside potential over the next 12 months.
Individual target prices provided by 13 firms are as follows in numerical order: $45, $48, $51, two at $52, $53, three at $54, two at $55 and $57.50 (from CIBC’s Stephanie Price).
Insider transaction activity
Year-to-date, four management executives have traded shares in the public market – all sales that occurred last month.
Most recently, on Feb. 14, James McGourlay, executive vice-president – customer operations, sold 2,099 shares at a price per share of US$47.465 with 13,031 shares remaining in this account. Proceeds from the sale, not including trading fees, totaled over US$99,000.
On Feb. 10 and Feb. 11, chief executive officer and chief technology officer Mark Barrenechea exercised his options, receiving 656,140 shares at an average cost per share of approximately US$25.76, and sold 525,000 shares at an average price per share of roughly US$46.65.
On Feb. 7, Gordon Davies, executive vice-president – chief legal officer and corporate development, exercised his options, receiving 65,374 shares at an average cost per share of approximately US$28.41, and sold 65,374 shares at a price per share of US$46.6214. Net proceeds, not including commission charges, exceeded US$1.1-million. After these transactions, this particular account held 54,084 shares.
On Feb. 4, chief human resources officer Brian Sweeney exercised his options, receiving 23,218 shares at a cost per share of US$33.97, and sold 23,218 shares at a price per share of US$46.8322. After these transactions, this particular account did not hold any shares. Net proceeds, not including trading fees, totaled nearly US$300,000.
Chart watch
The stock has delivered strong returns to long-term investors. On Feb. 14, the share price closed at a record high of $63.28. However, over the past nine trading days, the share price has tumbled 11 per cent, taking the stock into oversold territory. The relative strength index (RSI) is at 30. Generally, an RSI reading at or below 30 reflects an oversold condition.
The share price is nearing a key support level of approximately $55, close to its 200-day moving average (at $55.86). Failing that, the next major support level is around $50.
On a recovery, there is initial overhead resistance around $60, and after that around $63, near its record closing high.
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.