On today’s TSX Breakouts report, there are 43 stocks on the positive breakouts list (stocks with positive price momentum), and 35 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that is widely recommended by analysts with 11 buy recommendations and it appears on the positive breakouts list. However, the share price has yet to recover from its plunge during fourth-quarter of 2018. If the company can show strong growth in its SaaS (Software as a Service) revenue and continue to announce contract wins, this may continue to restore investor confidence and lift the share price back to where it traded before the fourth-quarter market meltdown. Until then, the stock may remain in a ‘wait-and-see’ mode by investors, trading in a range principally between $75 and $85.
The security highlighted below is Kinaxis Inc. (KXS-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Ottawa-based Kinaxis is a cloud-based supply chain management software provider. In 2018, SaaS revenue represented 64 per cent of total revenue. SaaS revenue provides revenue predictability and less variability, and as a result, is valued by investors.
In terms of geographical revenue breakdown, in 2018, 70 per cent of the company’s revenue was from North American based customer contracts, with the balance from Asia and Europe.
In 2018, the company’s top ten customers accounted for approximately 33 per cent of total revenue. In the first quarter of 2019, one customer accounted for 14 per cent of total revenue due to an expanded subscription renewal, but management views this high percentage as temporary and expects individual customers to typically represent less than 10 per cent of total quarterly revenue. The average subscription agreement lasts between two and five years.
Before the market opened on May 10, the company reported its first-quarter financial results that sent the share price rising 4 per cent on high volume that day with over 1.2-million shares traded. The company reported revenue of US$45.8-million, relatively in-line with the consensus estimate of US$44.8-million. SaaS revenue increased 17 per cent year-over-year to US$27.3-million, accounting for 60 per cent of total revenue. While term license revenue came in at US$8.4-million, up 87 per cent year-over-year. Professional services, and maintenance and support represented the balance of the revenue. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was US$16-million, well above the Street’s forecast of US$11.8-million. The adjusted EBITDA margin was 35 per cent.
Total bookings during the quarter were low at US$35.9-million. The chief executive officer John Sicard remarked on the earning call, “While we added new cloud-based SaaS customers during the quarter, other large and active deals are taken longer to finalize than expected, and as a result, Q1 (first quarter) bookings did not meet our expectations. However, given current activities and the state of our sales funnel, we remain very confident in delivering strong SaaS bookings in the coming quarters. In fact, we have begun and we will continue to further expand our sales capacity above our initial plan for 2019.” In July, two customer agreements were announced, one with Johnson Electric and the other with Yamaha Motor Co. Ltd. Additionally, the company announced a partnership agreement with Infosys on July 18.
Management provided guidance for 2019, anticipating total revenue to come in at between US$183-million and US$188-million. SaaS revenue is expected to increase between 20 per cent and 22 per cent year-over-year in 2019, down from its previous guidance of growth between 22 per cent and 24 per cent. Adjusted EBITDA margin is anticipated to be between 25 per cent and 27 per cent, up from its previous guidance of between 23 per cent and 25 per cent.
The company is scheduled to release its second-quarter financial results after the market closes on Aug. 1 and will be hosting an earnings call the following day.
The Street is expecting the company to report revenue of US$43.9-million, EBITDA of US$9.8-million and earnings per share of 30 US cents.
Dividend policy
Management is focused on growth and as a result, the company currently does not pay its shareholders a dividend.
Analysts’ recommendations
This mid-cap technology stock, with a market capitalization of $2.2-billion, is well covered by the Street with 12 analysts actively covering the company. The stock has 11 buy recommendations and one “hold” recommendation from Anthony Campagna, an analyst at ISS-EVA.
The firms providing recent research coverage on the company are: BMO Nesbitt Burns, Canaccord Genuity, CIBC World Markets, Eight Capital, GMP, ISS-EVA, Laurentian Bank Securities, National Bank Financial, Paradigm Capital, RBC Dominion Securities, Scotiabank and TD Securities.
Financial forecasts
The consensus revenue estimates are US$186-million in 2019 and US$211-million in 2020. The Street is forecasting EBITDA of US$49-million in 2019 rising to US$56-million the following year. Earnings per share is anticipated to come in at US$1.18 in 2019 and US$1.38 in 2020.
Over the past few months, earnings forecasts for 2020 have moderated slightly. To illustrate, three months ago, the consensus revenue estimates were US$187-million for 2019 and US$220-million for 2020. The consensus EBITDA estimates were US$46-million for 2019 and US$57-million for 2020. The Street was anticipating earnings per share of US$1.12 for 2018 and US$1.39 for 2020.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-sales multiple of 7.1 times the 2020 consensus estimate, just below its three-year historical average of 7.4 times. On an enterprise value-to-EBITDA basis, the stock is trading at 26.9 times the 2020 estimate, in-line with its three-year historical average of 26.9 times and below its peak multiple of over 30 times reached during this period.
The consensus one-year target price is $93.82, implying the stock price may appreciate 10 per cent over the next 12 months. Individual target prices provided by 11 firms are as follows in numerical order: $86 (the low on the Street is from Paul Steep, an analyst at Scotiabank), $89, two at $90, $91, two at $95, $96, three at $100.
Revised recommendations
After the company reported its first-quarter financial results in May, analysts had mixed reactions with several hiking their target prices while others reduced their expectations. Here are several notable revisions.
Canaccord Genuity’s Robert Young trimmed his target price to $90 from $96. RBC’s Paul Treiber raised his target price to $95 from $90. Scotiabank analyst Paul Steep reduced his target price by $2 to $86. Anthony Campagna, an analyst at ISS-EVA, upgraded his recommendation to a “hold” from a “sell.” Paradigm’s Kevin Krishnaratne cut his target price to $95 from $100.
Insider transaction activities
Throughout the first half of 2019, insiders have been sellers in the market. Listed below are several recent trades.
Most recently, on June 17, chief revenue officer Paul Carreiro sold 2,000 shares at an average price per share of approximately US$63.40, leaving 2,005 shares in his account. Gross proceeds from the sale totaled over US$253,000.
On June 13, chief financial officer Richard Monkman sold 3,000 shares at a price per share of $83.71 for an account in which he has control or direction over (Richard Monkman 2039 Family Trust), eliminating the account’s position. Gross proceeds totaled over $251,000. On May 14, Mr. Monkman divested 5,000 shares at a price per share of $75.4366 for a separate account for which he also has control or direction over (2496248 Ontario Inc.), trimming the account balance to 102,027 shares. Gross proceeds from this sale exceeded $377,000.
On May 28, president and chief executive officer John Sicard sold 1,900 shares at a price per share of $80, trimming his account’s holdings to 48,989 shares. Gross proceeds totaled $152,000. Earlier in the year, Mr. Sicard sold 5,000 shares at a price per share of $80 on March 21.
Chart watch
This stock was a strong performer from its initial public offering in mid-2014 up until mid-2017. Since then, the share price has been volatile, rising and falling, with the share price relatively unchanged from its price back in mid-2017.
Year-to-date, the stock price is up nearly 30 per cent, a respectable return but below the 54 per cent gain realized by the S&P/TSX information technology sector index.
In January, the share price partially recovered from its sell-off in the fourth-quarter of 2018. However, the share price has yet to return to its price level from the start of the fourth quarter of last year. For the majority of 2019, the share price has been trading in a range, largely between $75 and $85.
The stock appears to be in a ‘wait-and-see’ mode by investors until the company delivers strong SaaS revenue growth and continues to announce contract wins.
In terms of key resistance and support levels, the stock has initial overhead resistance around $90, and after that, around $100, which is close to its record closing high of $99.98 set back on Aug. 14, 2018. Looking at the downside, there is initial technical support around $80, near its 50-day moving average (at $80.84).
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.