Capital Ideas Media has identified some Canadian stocks that could outperform, including a diversified financial company
Capital Ideas Media | March 20, 2020 | SmallCapPower: Capital Ideas Media Publisher Mark Bunting wrote: Research teams are still coming out with their best ideas for 2020. National Bank Financial (NBF) is an example of that with its top picks, Canadian stocks, for robust earnings growth among diversified financials.
(Originally published on Capital Ideas Media on February 11, 2020)
NBF’s top two picks are Element Fleet Management (TSX:EFN) and People Corp. (TSXV:PEO).
NBF has a price target of $15 on EFN, giving it nearly 18% upside, as of this writing, and the target on PEO is $12, implying a gain of nearly 13%.
Below we summarize NBF’s recent report on why it has placed these two stocks on top of the heap:
2019 was a good year for our Diversified Financials coverage universe. 12 of the 16 companies we currently cover outperformed the S&P/TSX Index and the S&P/TSX Financials Index, by more than double-digits in each case.
We found that multiple expansion explained most of the strong share price performance in 2019. Therefore, while we believe valuations can move higher still, in 2020 we prefer to invest in companies that offer compelling earnings growth with visible catalysts.
The two companies in our coverage universe that best fit this objective are: Element Fleet Management and People Corporation.
Both companies are expected to generate a 2019-2021 earnings compound annual growth rate (CAGR) solidly in the double-digits – EFN EPS at 17% and PEO EBITDA at 27%.
Both companies also provide investors with several potential catalysts.
In 2020, EFN catalysts could come from EPS beats on revenue upside and strong execution of the transformation plan as well as from communicating a return of capital to shareholders strategy (i.e. dividends and/or buybacks).
For PEO, we see several revenue catalysts as well as continued consolidation of the benefits industry driving upward earnings revisions.
Both stocks trade below their recent peaks – leaving room for multiple expansion as these catalysts unfold.
Element Fleet Management
Rationale:
- We forecast adjusted EPS CAGR of 15% through 2021.
- Catalyst 1: Revenue objective of 4-6% achievable in our view with significant upside from expanding total addressable market (self-managed fleets, government managed fleets) and mega-fleet market (e.g. Amazon).
- Catalyst 2: $180 million profitability improvement plan remains on track, reasonable and achievable.
- Catalyst 3: Double-digit free cash flow yield supports doubling of the dividend/ share buybacks.
Consensus forecasting EPS growth of 21% in 2020 and 13% in 2021.
Source: Bloomberg, NBF.
“Both Element Fleet Management and People Corp. are expected to generate a 2019-2021 earnings compound annual growth rate solidly in the double-digits – EFN EPS at 17% and PEO EBITDA at 27%.”
National Bank Financial
“In 2020, Element Fleet Management catalysts could come from EPS beats on revenue upside and strong execution of the transformation plan as well as from communicating a return of capital to shareholders strategy (i.e. dividends and/or buybacks).”
National Bank Financial
Valuation
- We apply a 13x multiple to our $1.15 2021 estimated EPS to arrive at our $15 target price.
- Currently trading at ~12x consensus EPS vs. recent peak of 13x.
- Execution on profitability plan – EFN tracking ahead of plan to date.
Execution of stated strategy will drive EFN to peak valuation, while outperformance (revenue, transformation plan) and a return of capital strategy will drive valuation above peak in 2020, in our view.
Source: Company reports, NBF.
Risks
- Highly competitive industry of private players – EFN performing better than expected on retention.
- 19th Capital likely to result in another write-down/loss on sale – we expect this to be the last charge.
ELEMENT FLEET MANAGEMENT CORP (TSX:EFN) | 5YR CHART
People Corp.
Rationale
- We forecast adjusted EBITDA and adjusted EPS CAGR of ~30% through 2021.
- Catalyst 1: Consistently delivering at the upper end of the company’s 5%-10% annual growth guidance with several upside revenue drivers.
- Catalyst 2: Upside from M&A over last 24 months, acquired subsidiaries totalling ~$150 million, driving average acquired revenue growth of 15% year-over-year in last eight quarters.
- Catalyst 3: Consolidating the benefits brokerage industry with ~$100 million in deployable capital.
Adjusted EBITDA margins expanding on M&A and integration initiatives.
Source: Company reports, NBF.
“People Corp. is consistently delivering at the upper end of the company’s 5%-10% annual growth guidance with several upside revenue drivers.” National Bank Financial
Valuation
- We use a 14x multiple to arrive at our $12 price target.
- Trading at 14.5x consensus EV/EBITDA vs. historic average of 12x –16x.
Risks
- Economic: PEO actually posted positive growth in Alberta during 2015/2016 oil price collapse.
- Talent attraction/retention: PEO recently hiring key personnel including senior leadership positions in new Western Canada regional office and in Ontario.
- Access to capital markets: PEO consistently pre-funds acquisitions, strong existing shareholder support, recently up-sized the credit facility at cheaper cost of funds and with softened covenants.
PEOPLE CORPORATION (TSX:PEO) | 5YR CHART
Disclosure: National Bank Financial has provided investment banking services to Element Fleet Management and People Corp. within the last 12 months.
Why “This Stock is Going Up”
FirstService gets upgraded to “outperform”
FirstService Corporation (TSX:FSV) (NASDAQ:FSV) is a company we’ve never covered for whatever reason.
We’ve been aware of the property services company for years as a steady, perennial winner, one that’s gained nearly 300% since June of 2015.
FIRSTSERVICE CORP (NASDAQ:FSV) | 5YR CHART
Better late than never as we hi-light an upgrade to “outperform” from Raymond James, which raises the target on the U.S.-listed shares to $120 (U.S.) from $106.
Analyst Fredric Bastien says FSV ended 2019 on a “good note” with “solid” Q4 results, and sees “excellent” revenue visibility.
FirstService reported Q4 adjusted EBITDA of $64 million, which was a “broad-based” beat of analysts estimates with its operating segments (FirstService Residential and FirstService Brands) topping estimates in revenue and profitability, according to Bastien.
Bastien increased his earnings per share estimates for 2020 and 2021 to 77 US cents and $1.06 from 69 US cents and $1.02.
Here are some more comments from Raymond James:
“FirstService’s Q4/2019 results were reflective of a company that continues to capitalize on powerful urbanization trends, a highly fragmented market for property services across North America, and the lower-for-longer interest rate environment.
With the U.S. housing sector on firm footing and the risks to the domestic economy fairly contained in this election year, we expect FSV to grow earnings at a healthy pace and sustain its multiple over the next 12-18 months.”
Our 5% organic growth target for FirstService Residential (FSR) this year is predicated on the residential property manager capturing an outsized share of new condo developments and finding the right balance between contract wins and retention rates.
It seems reasonable FirstService Brands (FSB) could do even better than that. For one, steady growth in home equity values and shifting preferences for luxurious living spaces should drive renovation activity further, to the benefit of franchises like California Closets and Floor Covering International.
We also see opportunities for management to meaningfully enhance the Century Fire platform this year and scale the recently acquired Global Restoration businesses with pace.
FIRSTSERVICE CORP (NASDAQ:FSV) | 1YR CHART
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Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.
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