On today’s TSX Breakouts report, there are14 stocks on the positive breakouts list (stocks with positive price momentum), and 39 securities are on the negative breakouts list (stocks with negative price momentum).
Energy stocks have been under pressure this year. Year-to-date, the energy sector is the worst performing sector in the S&P/TSX Composite Index, declining 5.2 per cent. In the S&P/TSX SmallCap Index, the energy sector is down 8.5 per cent.
Discussed today is an energy stock that is bucking this negative trend and is on the positive breakouts list – North American Construction Group Ltd. (NOA-T). This energy stock is a stand out, rising 45 per cent in 2023, closing at a record high on Monday.
The stock has eight buy recommendations and two neutral recommendations with a forecast one-year price return of 20 per cent. In April, the company reported better-than-expected first-quarter financial results and management raised its 2023 earnings outlook. The stock is trading at a reasonable valuation, relatively in-line with historical levels.
A brief outline on NACG is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Alberta-based North American Construction Group, or NACG, is a construction and mining contractor, which services energy and resource companies mostly in Canada (Alberta, Saskatchewan, Northwest Territories, Nunavut and Ontario), the United States (North Dakota, Minnesota, Wyoming and Texas) and Australia (New South Wales). NACG owns a fleet of equipment including trucks, excavators, dozers, loaders, graders and compactors.
In 2022, 50 per cent of EBIT (earnings before interest and taxes) stemmed from four oil sands customers. Among its key customers are: Syncrude, Suncor Energy, Imperial Oil and Canadian Natural Resources.
The stock is dual-listed trading on both the New York Stock Exchange and the Toronto Stock Exchange under the ticker, NOA.
Quarterly earnings and outlook
After the market closed on April 26, the company reported better-than-expected first-quarter financial results. The share price rallied over 3 per cent the following trading day.
The company reported adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $84.6-million, surpassing the consensus estimate of $78.8-million and up 47 per cent year-over-year. The adjusted EBITDA margin rose to 26.4 per cent from 24.4 per cent reported last year. Adjusted earnings per share was 96 cents, exceeding the Street’s forecast of 89 cents per share and up from 51 cents reported during the same period last year. The fleet utilization rate stood at 79 per cent. Return on invested capital was 14.3 per cent. The balance sheet is healthy with the net debt leverage ratio (net debt-to-EBITDA) declining to 1.4 times at quarter-end. Backlog, a reflection of future revenue, was $1.1-billion.
Management raised its earnings outlook. For 2023, adjusted EBITDA is anticipated to be between $255-million and $275-million, up from its previous guidance of between $240-million and $260-million. Earnings per share is expected to come in at between $2.40 and $2.60, up from its prior outlook of between $2.15 and $2.35. The net debt leverage ratio is expected to be between 1.1 times and 1.3 times.
On the earnings call, president and chief executive officer Joe Lambert said he believes the company’s backlog will increase to more than $2-billion by year-end, “We’re seeing more projects, especially outside of oil sands and other commodity markets coming through the bid pipeline than we’ve ever seen.”
Dividend policy
The company pays its shareholders a quarterly dividend of 10 cents per share, or 40 cents per share on a yearly basis, equating to a current annualized yield of 1.5 per cent.
In February, the company announced a 25-per-cent dividend increase, increasing to cents per share from 8 cents.
Analysts’ recommendations
There are 10 analysts that cover this small-cap stock, of which eight analysts have buy recommendations and two analysts (CIBC’s Jacob Bout and TD’s Aaron MacNeil) have neutral recommendations.
The firms providing research coverage on the company are: ATB Capital Markets, BMO Nesbitt Burns, Canaccord Genuity, CIBC World Markets, ISS-EVA, National Bank Financial, PI Financial, Raymond James, TD Securities and Thompson, Davis & Co.
Revised recommendations
In April, six analysts raised their targets.
- ATB’s Tim Monachello to $32 from $30.
- BMO’s John Gibson to $30 from $25.
- Canaccord’s Yuri Lynk to $30 from $28.
- CIBC’s Jacob Bout to $27.50 from $23.50.
- National Bank Financial’s Maxim Sytchev to $33 from $27.
- TD’s Aaron MacNeil to $27 from $26.
Financial forecasts
The consensus EBITDA estimate is $275-million in 2023, up from $245-million reported in 2022, and increasing slightly to $280-million in 2024. The consensus earnings per share estimates are $2.55 in 2023, up from $2.41 reported in 2022, and $2.66 in 2024.
Earnings expectations have increased. Three months ago, the Street was EBITDA of $261-million for 2023 and $270-million for the following year. The consensus earnings per share estimates were $2.18 in 2023 and $2.37 in 2024.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 4 times the 2024 consensus estimate, which is relatively in-line with its five-year historical average of 3.9 times and below its peak multiple of approximately 4.8 times during this time period. On a price-to-earnings basis, the stock is trading at 9.8 times the 2024 consensus estimate.
The average one-year target price is $31.28, suggesting there is 20 per cent upside potential in the share price over the next 12 months. Individual target prices provided by nine firms are: $27 (from TD’s Aaron MacNeil), $27.50, three at $30, two at $32, $33 and $40 (from Adam Thalhimer at Thompson, Davis & Co.).
Insider transaction activity
Quarter-to-date, two insiders have traded shares in the public market.
On May 1, chairman Martin Ferron divested 25,000 shares at a price per share of $26.15, leaving 2,132070 shares in this particular account. Proceeds from the sale exceeded $653,000, not including trading fees.
Mr. Ferron is the company’s former chief executive officer.
That same day, lead director Bryan Pinney was also a seller. He sold 20,495 shares at a price per share of $26.20, reducing this particular account’s position to 20,000 shares. Proceeds from the sale totaled more than $536,000, excluding commission charges.
Chart watch
Energy stocks have been laggards this year. However, this energy stock has bucked the trend.
On June 19, shares of NACG closed at a record high of $26.15. Year-to-date, this small-cap energy stock with a market capitalization of $744-million is the eighth-best performing stock out of 255 stocks in the S&P/TSX SmallCap Index with a price return of 45 per cent.
Looking at key technical resistance and support levels, the share price has an initial ceiling of resistance around $30. Looking at the downside, there is strong technical support around $25, near its 50-day moving average (at $25.27). Failing that, there is technical support around $20, close to its 200-day moving average (at $20.10).
The stock can be thinly traded, which can increase volatility in the share price.
ESG Risk Rating
Looking at three risk rating providers, Sustainalytics, MSCI and Bloomberg, the company currently does not have an 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.