On today’s TSX Breakouts report, there are 49 stocks on the positive breakouts list (stocks with positive price momentum), and 22 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a little-known industrial stock that appeared on the positive breakouts list last week. This micro-cap stock has rallied 181 per cent year-to-date, and this positive price momentum is anticipated to continue. The average one-year target price implies a potential 38-per -cent return.
With a unanimous buy recommendation from four analysts, the security I am referring to is Xebec Adsorption Inc. (XBC-X).
The share price can be quite volatile. Consequently, this stock is best suited for consideration by investors with a high risk tolerance within a well-diversified portfolio.
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Montreal-based Xebec manufactures equipment that is used to produce renewable gases. Climate change is creating greater awareness of the need for clean energy and renewable natural gas.
The company has two main reporting segments: systems and support. For the first nine months of 2019, systems represented 77 per cent of total revenue with the balance, 23 per cent, from support. The company has a global client base, which includes Enbridge, Sapio Group of Italy, Southern California Gas Company, and FortisBC.
On Nov. 12, the company reported record revenue of $13.2-million, beating the consensus estimate of $12.8-million, and up 136 per cent year-over-year from $5.6-million reported last year. EBITDA (earnings before interest, taxes, depreciation and amortization) was $1.5-million, up from $0.1-million reported during the same period last year. Earnings per share came in at 2 cents, compared to a 1-cent loss reported last year, and in-line with the consensus estimate.
The company’s backlog stood at $71-million ($68.3-million in systems revenue and $2.7-million in support revenue), up sequentially from $63.5-million reported last quarter. Also positive, the company has $26-million of awarded tenders, which are not yet formally contracted and are expected to be included in the company’s backlog within 12 to 14 weeks. The company had $10-million of cash on their balance sheet, strengthened by its recent financing.
In July, the company completed an $11.6-million bought deal financing, issuing 8,280,000 units (each unit includes one common share and one warrant with an exercise price of $1.85) at a price per share of $1.40. That day, the share price increased 2 per cent on unusually high volume with over 1.7-million shares traded, which is well above the three-month historical daily average trading volume of roughly 410,000 shares.
Management raised its 2019 guidance, expecting revenue to be between $48-million and $49-million, up from its previous guidance of “$45-million plus.” Revenue from RNG systems and equipment is expected to be between $34-million and $36-million. Earnings per share is anticipated to come in at between 6 cents and 7 cents. For 2020, management anticipates revenue to increase to between $80-million and $90-million with EBITDA margins of between 11 per cent and 13 per cent.
Catalysts for the stock include new contract announcements as well as acquisition announcements.
In the earnings release, management indicated they are currently working on two acquisitions with one acquisition expected to be announced before year-end.
Dividend policy
Management is focused on growth. Consequently, the company currently does not pay its shareholders a dividend.
Analysts’ recommendations
There are four analysts that actively cover this micro-cap stock with a market capitalization of $147-million, and all four analysts have ‘buy’ recommendations.
The firms providing recent research coverage on the company are as follows in alphabetical order: Beacon Securities, Desjardins Securities, H.C. Wainwright & Co., and Paradigm Capital.
Revised recommendations
Earlier this month, two analysts raised their expectations.
Paradigm’s Jason Tucker increased his target price to $2.60 from $2.20.
Beacon’s Ahmad Shaath lifted his target price to $3.50 (the high on the Street) from $2.25.
Financial forecasts
The Street is forecasting revenue of $48.5-million in 2019 and $77.1-million in 2020. The consensus EBITDA estimate is $6.1-million in 2019, rising to $11.1-million in 2020. The consensus earnings per share estimate is 5 cents in 2019, and expected to rise to 11 cents in 2020.
In recent months, top line estimates have increased for 2020, while bottom line estimates have moderated slightly. To illustrate, three months ago, the Street was forecasting revenue of $48.5-million for 2019 and $65.5-million for 2020. The Street anticipated EBITDA of $6.7-million for 2019 and $11.4-million for 2020. The consensus earnings per share estimates were 6 cents for 2019 and 12 cents for 2020.
Valuation
According to Bloomberg, shares of Xebec are trading at an enterprise value-to-EBITDA multiple of 13.7 times the 2020 consensus estimate.
The average one-year target price is $2.84, suggesting there is 39 per cent upside potential over the next 12 months. Individual target prices are as follows in numerical order: $2.25 (the low on the Street is from Frederic Tremblay, an analyst at Desjardins Securities), $2.60, $3, and $3.50..
Insider transaction activities
Year-to-date, two insiders have reported selling activity in the public market.
Between Sept. 20 and Nov. 5, Simon David Arnsby, with an ownership position exceeding 10 per cent, completed three sales, divesting a total of 40,700 shares at an average price per share of approximately $1.75, trimming his portfolio’s holdings to 7,051,800 shares. Proceeds from the sales, not including trading fees, totaled over $71,000.
Between June 28 and July 8, co-founder, chairman, president and chief executive officer Kurt Sorschak exercised his options, receiving 1,399,500 shares at a cost per share of 10 cents, and sold 1-million shares at an average price per share of roughly $1.56 with 2,611,196 shares remaining in his account.
Chart watch
Year-to-date, this industrial stock has been a stellar performer, soaring nearly 181 per cent.
Over the past three weeks, the share price has rallied 22 per cent, breaking out of a trading range. Between March 2019 and October 2019, the share price traded in a trading range that was largely between $1.40 and $1.80. As a result, the share price may settle in around the $2 level before moving higher.
The share price can be quite volatile with large intraday swings on some days. For instance, on Thurs. Nov. 14, the share price traded at a low of $1.97 and a high of $2.13 – an 8 per cent intraday move. On Fri. Nov. 15, the share price traded at a low of $2.03 and high of $2.14, before closing at $2.05.
Looking at key overhead resistance and downside support levels, there is an initial ceiling of resistance around $2.30. After that, there is overhead resistance around $2.50. Looking at the downside, there is initial technical support around $2. Failing that, there is support around $1.75, near its 50-day moving average (at $1.72), and then around $1.50, which is at its 200-day moving average.
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.
Jennifer Dowty