On today’s Breakouts report, there are 33 stocks on the positive breakouts list (stocks with positive price momentum), and 48 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that is on the negative breakouts list. The share price has plunged 14 per cent from its record high reached in April and is in correction territory. Last week, the company reported weaker-than-expected second quarter financial results causing analysts to reduce their earnings expectations and lower their target prices. Given the pullback, the stock is nearing oversold territory and may soon find a bottom.
The company has a relatively defensive business model with stable recurring revenue and offers investors an attractive monthly dividend with a current annualized yield of over 5 per cent. The weakness in the share price may represent a buying opportunity for income investors. The security highlighted today is First National Financial Corp. (FN-T).
A brief outline on FNFC is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Toronto-based First National Financial Corp. is the country’s largest non-bank mortgage lender. FNFC services both businesses as well as individuals by offering commercial and residential mortgages and has a portfolio of over $121-billion in mortgages under administration (MUA). Management’s objective is to grow a conservative portfolio of high quality, prime mortgages.
Investment thesis
- Positive macro environment. Economic recovery, low interest rates.
- Industry leader.
- Defensive growth. The company’s business model is relatively defensive with stable recurring revenue from its mortgages.
- Strength in the housing market.
- Dependable dividend.
- High dividend yield.
- Risks to be aware of: 1) Tougher comparisons. Negative year-over-year earnings growth is forecast in the upcoming quarters given the strong operational results reported last year; and 2) moderating strength in the housing market.
Quarterly earnings
After the market closed on July 27, the company reported disappointing second-quarter financial results that sent the share price tumbling 6 per cent the following trading day.
Mortgages under administration came in at $121.5-billion, up 6 per cent year-over-year. New mortgage originations were $10.3-billion, up 56 per cent year-over-year. Breaking it down to the company’s two main segments, new single-family mortgage originations were $7.6-billion, up 71 per cent year-over-year compared to $4.5-billion reported last year. While, commercial originations amounted to $2.7-billion, up 25 per cent from $2.1-billion reported last year.
Reported earnings per share of 86 cents fell short of the consensus estimate of $1.13. The funding mix shift was a major factor to the quarterly earnings miss.
On the earnings call, chief financial officer Rob Inglis explained, “We shifted our funding strategy to allocate more origination volume to securitization, which is economically more favorable for long-term results, even though it does delay the recognition of earnings to future periods under current IFRS (International Financial Reporting Standards).”
In addition, the company realized higher expenses. Brokerage expenses jumped 71 per cent year-over-year, resulting from the spike in single-family originations. Wages also increased. The company workforce has grown to over 1,500 employees, a 40 per cent year-over-year increase, in order to keep up with the high mortgage volumes.
Dividend policy
Management is committed to its dividend, frequently raising its dividend and paying special dividends to its shareholders.
In April, the company announced a 12 per cent increase to the monthly dividend, representing the 14th increase since the company went public in 2006. The dividend was increased to 19.5833 cents per share from 17.5 cents per share. This equates to a yearly dividend of $2.35, or a current annualized yield of 5.1 per cent.
The payout ratio stood at 66 per cent for the first six months of 2021.
Also positive is the company’s history of announcing special dividends. In October of 2020, the company announced a special dividend of 50 cents per share. In October of 2019, the company also announced a special dividend of 50 cents per share. In October of 2018, the company announced a special dividend of $1 per share and in October of 2017, FNFC announced a special dividend of $1.25 per share.
Analysts’ recommendations
There are five analysts that cover this small-cap stock with a market capitalization of $2.7-billion, of which one analyst has an “outperform” recommendation (BMO’s Etienne Ricard) and four analysts have neutral recommendations.
The firms providing research coverage on the company are: BMO Nesbitt Burns, National Bank Financial, RBC Dominion Securities, Scotiabank, and TD Securities.
Revised recommendations
Last month, three analysts trimmed their target prices after the company released its second-quarter earnings results.
- BMO’s Etienne Ricard by $3 to $54.
- RBC’s Geoffrey Kwan to $50 from $52.
- Scotiabank’s Phil Hardie to $49 from $51.
Financial forecasts
The consensus earnings per share estimates are $3.69 in 2021 and anticipated to increase 13 per cent to $4.17 in 2022.
Earnings forecasts have decreased. For instance, three months ago, the consensus earnings per share estimates were $4.15 for 2021 and $4.37 for 2022.
Valuation
According to Bloomberg, the stock is trading at a price-to-earnings multiple of 11 times the 2022 consensus estimate, slightly above its three-year historical average multiple of 10.5 times but below its peak multiple of over 14 times during this time period.
The average one-year target price is $52, implying the stock price has 14 per cent upside potential, and a potential total return of 19 per cent including the 5 per cent dividend yield.
Individual target prices are as a follows in numerical order: $49, $50, $51, $54, and $56 (from Jaeme Gloyn at National Bank Financial).
Insider transaction activity
Year-to-date, no individual on the management team or board of directors has reported buying or selling activity in the public market.
Chart watch
Year-to-date, the share price is up 10 per cent. On April 27, the share price closed at a record high of $52.93. However, since then the share price has been in a downtrend, falling 14 per cent.
The stock is on the cusp of being technically oversold. The relative strength index (RSI) is at 31. Generally, an RSI reading of 30 or lower represents an oversold condition.
In terms of key resistance and support levels, the stock price has major overhead resistance around $50, and after that, around $53, near its record closing high. Looking at the downside, there is strong technical support around $45 (close to where the share price is current trading), which is near its 200-day moving average (at $45.77).
This report is not an investment recommendation. 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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Jennifer Dowty