There are 49 stocks on the positive breakouts list (stocks with positive price momentum), and 37 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that is on the negative breakouts list - Maple Leaf Foods Inc. (MFI-T). Before the market opened on Feb. 22, the company reported disappointing quarterly financial results. Since then, the share price has tumbled 12 per cent on high volume.
From a technical analysis perspective, the stock is deeply oversold with a relative strength index (RSI) reading of 23. Generally, an RSI at or below 30 reflects an oversold condition. The share price may soon stabilize; however, it may take time to rebound. While the downside risk in the share price may be limited given the stock’s valuation, investors may need to have patience.
Despite the earnings miss, the stock has unanimous buy recommendation from six analysts with an average target price of $30.75, suggesting there is 36-per-cent upside potential.
A brief outline on Maple Leaf is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Mississauga-based Maple Leaf Foods manufactures food products under brands such as Maple Leaf, Maple Leaf Prime, Maple Leaf Natural Selections, Schneiders, and Schneiders Country Naturals. The company has two reporting segments, its core Meat Protein Group (representing approximately 97 per cent of total sales in 2023) and the Plant Protein Group.
Quarterly earnings results
Before the market opened on Feb. 22, the company reported disappointing fourth-quarter financial results with margins under pressure.
Total sales increased 0.6 per cent year-over-year to $1.193-billion. Sales within the Meat Protein Group climbed 0.8 per cent year-over-year to $1.159-billion with an adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) margin of 10.5 per cent, down from 11.4 per cent reported last quarter. Sales from the Plant Protein Group declined to $36.5-million from $40 million reported last year. Total adjusted EBITDA came in at $120.2-million, below the consensus estimate of $128-million. Adjusted earnings per share came in at 8 cents, falling short of the consensus earnings estimate of 16 cents per share.
The share price declined 7 per cent that day on high volume with over 1.1 million shares traded, above the three-month historical daily average trading volume of approximately 250,000 shares.
President and chief executive officer Curtis Frank remarked on the disappointing adjusted EBITDA margin: “Our Meat Protein adjusted EBITDA margin of 10.5 per cent beat last year’s result of 6.6 per cent, but was lower than what we were striving for and remained below our structural margin target of 14 per cent to 16 per cent in normal market conditions. There are three reasons why this occurred. First, pork markets in Q4 [fourth quarter] did not move as we anticipated. After some positive progress in Q3 [third quarter], we would have expected pork markets to improve in Q4 as they typically do. Instead, vertically integrated pork margins worsened, turning negative once again in Q4 and remain significantly below what we would describe as a normal range… Second, exiting the year, the run rate benefits from London Poultry and our Bacon Center of Excellence were approximately 200 basis points in Q4, which means we have an additional 60 basis points or so of benefits yet to be captured in 2024. In London Poultry, we ended the year very close to capturing our targeted exit rate of $100 million of adjusted EBITDA. While we can definitely put the completion of the London startup in success column, we need to remain focused on chasing down the last of the commercial benefits while navigating through the short-term noise of the consumer demand environment… Third, like most CPG [consumer packaged goods] companies, we experienced a challenging macro consumer demand environment in Q4. With higher interest rates and inflationary pressures, we saw a natural impact on consumer behavior, which affected our commercial volume and mix in the short term and led to softer results than we would have liked in our prepared meats and poultry businesses.”
Chief financial officer David Smales provided management’s 2024 outlook on the earnings call: “For the full year 2024, we expect low to mid-single-digit revenue growth, adjusted EBITDA margin expansion from 2023 to achieve our meat protein target of 14 per cent to 16 per cent adjusted EBITDA margin as markets normalize.”
Dividend policy
Maple Leaf pays its shareholders a quarterly dividend of 22 cents per share, or 88 cents per share on a yearly basis. This equates to a current annualized dividend yield of 3.9 per cent.
Since 2015, management has announced a dividend increase in February of each year. Last week, management announced 4.8-per-cent dividend increase, lifting its quarterly dividend to 22 cents per share from 21 cents.
Analysts’ recommendations
The stock has a unanimous buy-equivalent recommendation from six analysts.
The firms providing recent research on the company are as follows in alphabetical order: BMO Nesbitt Burns, Canaccord Genuity, CIBC World Markets, RBC Dominion Securities, Scotiabank and TD Securities.
Revised recommendations
After the disappointing earnings announcement, analysts revised their expectations - all lower.
- BMO’s Tamy Chen cut her target price to $29 from $31.
- Canaccord’s Luke Hannan slashed his target price to $30 from $35.
- CIBC’s Mark Petrie revised his target price to $32 from $36.
- RBC’s Irene Nattel lowered her target price by $3 to $29.
- Scotiabank’s George Doumet cut his target price to $33.50 from $37.50.
- TD’s Mike Van Aelst revised his recommendation to a “buy” from “action list buy” and reduced his target price to $31 from $40.
Financial forecasts
The Street is forecasting EBITDA of $570-million in 2024, up from $427.6 million reported in 2023, rising to $678-million the following year. The consensus earnings per share estimates are 96 cents in 2024, climbing to $1.70 in 2025.
Earnings expectations have declined materially. Three months ago, the consensus EBITDA forecasts were approximately $665-million for 2024 and $745-million for 2025. The consensus earnings per share forecasts were roughly $1.58 for 2024 and $2.19 for 2025.
Valuation
The stock is trading at the low end of its historical range.
Analysts commonly value the stock using a sum-of-the-parts methodology, ascribing different multiples to the two business segments (meat protein business and plant-based protein business).
According to Bloomberg, the stock is trading at a blended enterprise value-to-EBITDA multiple of 8.8 times the 2024 consensus estimate, below its five-year historical average forward multiple of 10.7 times. Over the past five years, the forward multiple has troughed around 7.5 times.
The average one-year target price is $30.75, suggesting the share price may increase 36 per cent over the next 12 months. Analysts have target prices ranging from a low of $29 to a high of $33.50.
Insider transaction activity
Year-to-date, there has not been any trading activity in the public market reported by insiders.
Chart Watch
Since the company released weaker-than-expected fourth quarter financial results on Feb. 22, the share price has declined 12 per cent on high volume.
Year-to-date, the share price is down 10.4 per cent, making it the worst performing stock in the S&P/TSX Consumer Staples Index.
The stock is in deeply oversold territory with an RSI (relative strength index) reading of 23. Generally, an RSI reading at or below 30 reflects an oversold condition.
The stock is approaching initial technical support around $22. Failing that there is strong technical support around $20. On a recovery, there is overhead resistance around $26, close to its 50-day moving average (at $25.62) and 200-day moving average (at $26.33).
ESG Risk Rating
According to risk provider Sustainalytics, Maple Leaf Foods has an environmental, social and corporate governance (ESG) risk rating of 29.1 as of Nov. 2, 2023. A risk rating of between 20 and 30 reflects a medium risk rating.
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.
This report should not be considered an investment recommendation.