On today’s TSX Breakouts report, there are 66 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 appeared on the negative breakouts list earlier this month after the company reported quarterly earnings results that were shy of expectations. In addition, the company announced an acquisition that appears to be rather expensive, priced at a premium valuation. Despite the earnings shortfall and seemingly pricey purchase, the majority of analysts remain positive on the company. The stock has 10 buy recommendations and four hold recommendations. The consensus target price implies the stock may deliver a potential total return (including the 2 per cent dividend yield) of 13 per cent. The security highlighted today is Canadian Tire Corporation (CTC.A-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Toronto-based Canadian Tire has approximately 1,700 retail stores and gas stations across the country under banners such as Canadian Tire, Mark’s, Sport Chek, Atmosphere, National Sports, and Sports Experts. Canadian Tire’s retail segment offers investors a diversified platform with exposure to a variety of consumer markets such as automotive, home living, home repair, sporting goods and clothing. In addition to the retail segment, Canadian Tire operates a Financial Services segment, which offers products such as credit cards and in-store warranties. Canadian Tire also has an investment in CT Real Estate Investment Trust, providing further diversification to the company’s revenues.
Before the market opened on May 10, the company reported lower-than-expected first quarter financial results. There is seasonality in the company’s operations with the first quarter typically generating the lowest earnings. Reported earnings per share came in at $1.18, falling short of the consensus earnings per share estimate of $1.37. Reported earnings per share included a one-time depreciation expense that amounted to 19 cents per share. In the Management’s Discussion and Analysis, management indicated that the financial results were impacted by “flat earnings in the Financial Services segment and elevated expenses in the retail banners reflecting investments in strategic initiatives.” Same-store retail sales at Canadian Tire increased 5.8 per cent compared to the same period last year. FGL’s (comprised of the banners: Sport Chek, Hockey Experts, Sports Experts, National Sports, Intersport, and Atmosphere) retail same-store sales increased 3.9 per cent year-over-year, and Mark’s same-store retail sales expanded 3.4 per cent.
In addition, the company announced the acquisition of Helly Hansen, an activewear clothing manufacturer, which management expects to be immediately accretive to earnings. The $985-million acquisition is expected to be completed in the third quarter.
The share price declined over 5 per cent that trading day on high volume. Nearly 1-million shares traded (over 991,000), well above its three-month historical daily average trading volume of approximately 325,000 shares. The following trading session, the share price declined a further 2 per cent.
Returning capital to investors
Management is committed to returning capital to its shareholders, announcing dividend increases in November for the past four consecutive years. Last November, the company announced a 38-per-cent increase to its dividend, raising its quarterly dividend to 90 cents per share from 65 cents per share. This equates to a yearly dividend of $3.60 per share, or an annualized dividend yield of 2.1 per cent.
The company has also been active in its share buyback program. In November, management disclosed its plan to repurchase $550-million worth of shares by the end of 2018. At the end of the first quarter, the company had repurchased $216-million worth of shares, nearly halfway through its share buyback plan.
Analysts’ recommendations
Since the company reported its quarterly results, 14 analysts have issued research reports on the company, of which 10 analysts have buy recommendations and four analysts have hold recommendations.
The 14 firms providing research coverage are as follows in alphabetical order: Accountability Research, Barclays, BMO Capital Markets, Canaccord Genuity, CIBC World Markets, Desjardins Securities, Macquarie, Morningstar, National Bank Financial, Raymond James, RBC Capital Markets, Scotia Capital, TD Securities, and Veritas Investment Research.
Revised recommendations
Earlier this month, several analyst revised their target prices and all but one analyst lowered their expectations. Chris Li, the analyst from Macquarie, trimmed his target price by $10 to $175. Jim Durran, the analyst from Barclays, lowered his target price to $186 from $190. Peter Sklar from BMO Capital Markets cut his target price by $2 to $192. Mark Petrie reduced his target price by $5 to $188. Derek Dley from Canaccord Genuity slashed his target price by $15 to $175 and cut his recommendation from a ‘buy’ to a ‘hold’. Brian Morrison took his target price down to $200 from $205. Taking an opposing position, Vishal Shreedhar, the analyst from National Bank Financial, increased his target price to $190 from $187.
Just before the company reported its quarterly results, in late-April, Irene Nattel, the analyst from RBC Capital Markets, reduced her target price to $200 from $202 but maintained her ‘outperform’ recommendation.
Financial forecasts
The Street is forecasting earnings per share of $11.88 for 2018 with earnings per share anticipated to rise over 10 per cent to $13.16 in 2019.
Earnings forecasts have been steadily increasing. For instance, four months ago, the consensus earnings per share estimates were $11.47 for 2018 and $12.74 for 2019.
Valuation
The stock can be valued using a sum-of-the-parts calculation to account for the distinct business segments.
The average 12-month target price is $186.64, implying the share price has 11- per-cent upside potential over the next year, and if you include the dividend yield, the potential one-year total return is 13 per cent. Individual target prices range from a low of $150 (from the analyst at Morningstar) to a high of $200 (from the analysts at Desjardins Securities, RBC Capital Markets and TD Securities). Individual target prices are as follows in numerical order: $150, two at $175, $184, $185, $186, $188, $190, $192, $193, $195, and three at $200.
Insider transaction activity
On May 14, Director Patrick Connolly purchased 4,000 shares at a price per share of U.S. $129.9391 for an account in which he has control or direction over (The Connolly Family Trust), initiating a portfolio position.
Prior to that, there were no material transactions (greater than 100 shares) in the public market reported by insiders so far this year.
Chart watch
The share price is in a multi-year uptrend, making higher highs and higher lows.
After tumbling over 5 per cent on May 10, the day the company reported its quarterly results, the share price has since stabilized. Year-to-date, the stock price is up just under 3 per cent, relatively in-line with the return of the S&P/TSX consumer discretionary sector index, which is up 2 per cent. Of the 22 members in the sector index, this stock is one of the strong performers as many consumer stocks have negative year-to-date returns.
Looking at key resistance and support levels, the share price has an initial ceiling of resistance around $170, near its 50-day moving average (at $170.02), and after that in the $175 to $178 range. On a pullback, the stock price has downside support around $163, close to its 200-day moving average (at $162.72).
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.