On today’s TSX Breakouts report, there are nine stocks on the positive breakouts list (stocks with positive price momentum), and 21 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is an oversold stock that appears on the negative breakouts list - Park Lawn Corp. (PLC-T).
Quarter-to-date, the share price is down 26 per cent, making it the worst performing stock in the S&P/TSX SmallCap consumer discretionary sector. Bargain hunters may want to put this stock on their radar as the share price may be nearing a bottom. However, for the share price to rebound, the company needs to deliver solid quarterly earnings results. Until then, the share price may hover in the low to mid-$20 range.
The stock has a unanimous buy recommendation from nine analysts. The average one-year target price implies the share price may rally nearly 64 per cent over the next year. In addition to potential price gains, PLC pays its shareholders a quarterly dividend with a current annualized yield of 1.8 per cent.
A brief outline on Park Lawn is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
With headquarters in Toronto as well as in Houston, Park Lawn’s operations include cemeteries, funeral homes, and crematoriums in Ontario, British Columbia and Quebec and 17 U.S. states.
A common concern by investors is the frequent issuance of shares by the company used to finance acquisitions - between Dec. 2013 and June 2020, the company raised over $500-million. In Sept. 2021, the company raised approximately $148.5-million, issuing over 4 million shares at $36.40. Yet, given that the share price is now in the mid-$20s, management may wait for the share price to recover before announcing another financing.
The majority, approximately 90 per cent, of the company’s revenues are generated in U.S. dollars. Consequently, the company benefits from a stronger U.S. dollar and weaker Canadian dollar.
Investment thesis highlights
- Long-term growth. Management targets pro forma adjusted EBITDA of $100-million, approximately US$79-million, by the end of 2022 and US$150-million by the end of 2026. Management aims to report adjusted earnings per share of at least US$2 by the end of 2026. In 2021, the company reported adjusted EBITDA of US$76-million and adjusted earnings per share of US$1.205.
- Acquisition opportunities. Highly-fragmented industry with approximately 80 per cent of funeral homes and cemeteries independently owned in North America.
- Compelling valuation. Trading at significant discount to its five-year historical average.
- High barriers to entry (given zoning laws and permitting requirements).
- Aging population.
Quarterly earnings results and outlook
After the market closed on Aug. 11, the company reported weaker-than-expected second-quarter financial results.
Revenue came in at US$75.9-million, up 5 per cent year-over-year, but below the consensus estimate of US$78.5-million. Adjusted EBITDA was US$15.6-million, down 16 per cent year-over-year, and well below the Street’s expectation of US$18.5-million. The adjusted EBITDA margin declined to 20.6 per cent, down from 25.8 per cent reported during the same period last year. Adjusted earnings per share came in at 19 US cents, below the Street’s forecast of 27 US cents.
The share price tumbled 6 per cent the following day on high volume with over 785,000 shares traded.
On the earnings call, chief executive officer Brad Green explained the earnings shortfall, “During the second quarter of this year, there was a decline in year-over-year mortality, which contributed to a difficult comparison to last year’s COVID-impacted second quarter. From a high level, while our funeral homes were not as heavily impacted, we did see some challenges in our cemetery businesses. Specifically, our revenue for the second quarter increased 5.4 per cent and to $75.9 million but was negatively impacted as a result of the decrease in high-margin property sales at certain of our legacy cemetery businesses. Breaking this down a bit more, in our funeral businesses, we were pleased to see an increase in our market share in many of the communities we serve and a strong demand in our average revenue per call. Our call volumes from comparable operations decreased approximately 3 per cent year-over-year due to the drop in the death rate.”
Mr. Green also remarked on future acquisition opportunities, “As we continue our operational focus in the acquisition process, even during these downturns, we’ve been able to maintain strong momentum and a robust pipeline, and we fully expect to execute within our publicly stated range of $75 million to $125 million for acquisitions this year … And as we continue our focus of adding high-quality and accretive businesses to our portfolio, not only will we see incremental improvements, our investment thesis remains intact. We still remain poised to display EBITDA and earnings growth for 2022 and expect that our operating environment will normalize into the fall and winter.”
The company pays its shareholders a quarterly dividend of 11.4 cents per share, or 45.6 cents per share yearly. This equates to a current annualized dividend yield of 1.8 per cent.
The dividend appears sustainable with a payout ratio of 23 per cent of free cash flow in 2021 and 27 per cent for the first six months of 2022.
This small-cap consumer discretionary stock with a market capitalization of $863-million is well covered by the Street. The company has a unanimous buy recommendation from nine analysts.
The firms providing recent research coverage on the company are: Acumen Capital, CIBC World Markets, Cormark Securities, National Bank Financial, Paradigm Capital, RBC Dominion Securities, Scotiabank, Stifel Canada, and TD Securities.
In recent months, several analysts have lowered their expectations
- Acumen Capital’s Jim Byrne to $42 from $44.
- CIBC’s Scott Fromson to $36 (the low on the Street) from $40.
- Cormark Securities’ Kyle McPhee to $40 from $48.75
- National Bank Financial’s Zachary Evershed to $38 from $45..
- RBC’s Irene Nattel to $49 (the high on the Street) from $50.
- Scotiabank’s George Doumet to $37 from $42.50.
- TD’s Daryl Young to $43 from $47.
The Street is expecting revenue of US$318-million in 2022 and US$352-million in 2023. The consensus adjusted EBITDA estimates are US$73-million in 2022, increasing to US$89-million in 2023. The Street is forecasting earnings per share of 99 US cents in 2022, rising to US$1.20 the following year.
Earnings expectations have declined in recent months. Three months ago, the consensus revenue estimates were US$333-million for 2022 and US$363-million for 2023. Adjusted EBITDA estimates were US$87-million for 2022 and US$97-million for 2023. Earnings per share estimates were US$1.29 for 2022 and US$1.43 for the following year.
According to Bloomberg, shares of Park Lawn are trading at an enterprise value-to-EBITDA multiple of 9 times the 2023 consensus estimate, well below its five-year historical average of 11.9 times. In March 2020, at the beginning of the pandemic, the share price traded down to an EV/EBITDA multiple of 8 times.
The average one-year target price is $41.44, suggesting the stock price has nearly 64 per cent upside potential over the next 12 months. Target prices vary widely, ranging from a low of $36 to a high of $49. Individual target prices are: $36 (from CIBC’s Scott Fromson), $37,$38, two at $40, $42, $43, $48 and $49 (from RBC’s Irene Nattel).
Insider transaction activity
Quarter-to-date, several company leaders have traded shares in the public market.
Between Aug. 15-29, director Deborah Robinson invested over $150,000 and purchased a total of 5,500 shares. After these trades, this particular account held 20,100 shares.
On Aug. 15, director Marilyn Brophy acquired 3,450 shares at a price per share of $29.25, increasing this specific account’s holdings to 11,475 shares. The cost of this purchase exceeded $100,000.
On Nov. 15, chief financial officer Dan Millett bought 345 shares at an average price per share of approximately $29.02, lifting this particular account’s position to 2,731 shares.
The stock chart is ugly. Year-to-date, the share price is down 39 per cent. Quarter-to-date, the share price is down 26 per cent, making it the worst performing stock in the S&P/TSX SmallCap consumer discretionary sector.
Bargain hunters may want to put this stock on their radar as the share price may be nearing a bottom. The stock is deeply oversold with an RSI reading of 22. Generally an RSI reading at or below 30 reflects an oversold condition.
However, in order for the share price to recover, you need buyers to bid the share price back up. For this to happen, the company needs to deliver solid quarterly earnings results. Until then, the share price may hover in the low to mid-$20 range.
Looking at key technical resistance and support levels, the stock price has an initial ceiling of resistance around $30, close to its 50-day moving average at $30.53. After that, there is major resistance around $35, near its 200-day moving average at $34.48. Looking at the downside, there is strong technical support around $25. Failing that, there is support around $20.
Liquidity can be low for this small-cap stock, which can increase volatility in the share price. The three-month historical daily average trading volume is approximately 156,000 shares.
ESG Risk Rating
According to risk provider Sustainalytics, Park Lawn has an ESG risk score of 16.7 as of Aug. 10, 2021. A risk score between 10 and 20 reflects a “low 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.
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