On today’s Breakouts report, there are 39 stocks on the positive breakouts list (stocks with positive price momentum), and just two securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock on the positive breakouts list that has reported earnings beats for five consecutive quarters - Wajax Corp. (WJX-T). Year-to-date, the share price is up 27 per cent. In addition to price appreciation, the stock offers shareholders an attractive 5-per-cent yield.
However, the share price is hovering around a major ceiling of resistance. Since the beginning of 2021, the share price has traded largely between $19 and $25 and is currently trading at the upper end of this trading band, closing at $25.10 on Tuesday. If the share price can break and hold above $26, the next resistance level is around $30.
A brief outline on Wajax is provided below that may serve as a springboard for further fundamental research when conduction your own due diligence.
The company
Mississauga-based Wajax is an industrial products and services provider of equipment such as excavators, dump trucks, mining trucks and shovels, forestry equipment, cranes and lifts as well as road paving equipment. In addition, it supplies industrial components such as bearings, hydraulic system products and power system parts.
In terms of its 2022 geographical revenue breakdown, 48 per cent was from western provinces, 36 per cent was from eastern provinces and 16 per cent from central Canada.
In terms of industries it serves, the company’s exposures are diversified with 16 per cent of its 2022 revenue from the construction market, 16 per cent from the mining sector, 13 per cent from industrial/commercial markets, 12 per cent from forestry, 9 per cent from oil sands, 9 per cent from oil and gas, 7 per cent from transportation, 6 per cent from metal processing, 5 per cent to government and utilities and 7 per cent from other sectors.
Quarterly financial results and outlook
After the market closed on May 1, the company reported better-than-expected first-quarter financial results, marking the fifth consecutive earnings beat reported by the company.
Revenue was $516-million, up 17 per cent year-over-year and topping the Street’s expectations of $475-million. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was $43-million, up 9.5 per cent year-over-year and above the consensus estimate of $40.5-million. Adjusted earnings per share came in at 80 cents, surpassing the Street’s expectations of 71 cents, and up 13 per cent year-over-year. At quarter-end, the backlog, which reflects future revenue, stood at $530.8-million, up 13 per cent from the prior quarter. The leverage ratio (net debt-to-EBITDA) was 1.7 times as at March 31, within management’s targeted range of between 1.5 times and 2 times. The share price rallied 2 per cent the following trading day.
On the earnings call, president and chief executive officer Iggy Domagalski provided an operational outlook, “After the first three months of 2023, we continue to see solid fundamentals in many of the markets we serve, particularly mining, energy and construction, supported by relatively elevated key commodity prices and sustained budgeting for capital projects. Further, we continue to expect the challenges of 2023 to continue to be similar to those of 2022, ongoing supply chain volatility, higher interest rates, inflation and a tight labor market. We continue to manage these challenges through frequent dialogue with suppliers and customers as well as through combination of initiatives designed to help us hire, train and retain key employees.”
The company will be releasing its second-quarter financial results after the market closes on Aug. 10 and hosting an earnings call on Aug. 11 at 2 p.m. (ET). The Street is expecting the company to report EBITDA of $48.6-million and earnings per share of 94 cents.
Dividend Policy
Wajax pays its shareholders a quarterly dividend of 33 cents per share, or $1.32 per share on a yearly basis. This equates to a current annualized yield of 5.3 per cent.
In March, the quarterly dividend was increased 32 per cent to its current level of 33 cents per share from 25 cents per share.
In the earnings release, Mr. Domagalski said, “The increase in our quarterly dividend, representing an additional annual outlay of approximately $6.9 million, reflects growing confidence in both our near- and longer-term outlooks, which is being driven by our expanded relationship with Hitachi, as well as solid demand for the full suite of products and services we offer across our business. Our strong ability to generate cash flow, coupled with over $300 million in availability on our bank credit facility, allows us to invest in organic growth and acquisition opportunities, while supporting this increased distribution to our shareholders.”
Analysts’ recommendations
This small-cap industrial stock with a market capitalization of $543-million has three buy-equivalent recommendations and one “market perform” recommendation (from BMO’s Devin Dodge).
The firms providing research coverage on the company are: BMO Nesbitt Burns, ISS-EVA, Scotiabank and TD Securities.
Revised recommendations
After the company released its first-quarter financial result, Scotiabank’s Michael Doumet bumped his target price to $30 from $29.
Financial forecasts
The Street is forecasting EBITDA of $178-million in 2023 and $174-million in 2024. The consensus earnings per share estimate is $3.30 in 2023 and $3.25 in 2024.
Financial forecasts have been rising. At the beginning of the year, the consensus EBITDA estimates were $161-million in 2023 and $154-million in 2024. The consensus earnings per share estimates were $2.77 for 2023 and $2.61 for the following year.
Valuation
The stock is trading at a discount relative to historical levels.
According to Bloomberg, shares of Wajax are trading at a price-to-earnings (P/E) multiple of 7.6 times the 2023 consensus estimate, which is below its five-year historical average multiple of 8.3 times.
The average one-year target price is $29, implying the share price has nearly 16-per-cent upside potential over the next 12 months. Individual target prices provided by three firms are: $26 (from BMO’s Devin Dodge), $30 and $31.
Insider transaction activity
In the second quarter, no buying or selling activity was reported by insiders.
Chart watch
Year-to-date, the share price has rallied 27 per cent, making it the fifth best performing stock out of 29 securities in the S&P/TSX SmallCap Industrials sector index.
However, the share price is hovering around a major ceiling of resistance. Since the beginning of 2021, the share price has traded largely between $19 and $25 and is currently trading at the upper end of this trading band, closing at $25.10 on Tues. If the share price can break and hold above $26, the next resistance level is around $30. Looking at the downside, the share price has strong technical support between $19 and $20.
ESG Risk Rating
Looking at three ESG risk rating providers, Sustainalytics, MSCI and Bloomberg, Wajax currently does not have an environmental, social and governance (ESG) risk score.
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.