Stifel GMP Top Picks for Q4, 2022

Investment banking firm Stifel GMP recently released its Top Picks list for the fourth quarter, with a number of tech-related names in the mix. Stifel analysts are staying bullish on companies with strong fundamentals, saying the Q4 is historically a seasonally strong period for Canadian stocks, giving investors a prime opportunity to rebound after a poor September.

“We believe now is a great time for investors to utilize fundamental analysis to highlight individual equities, given that the baby has been thrown out with the bath water in many cases,” Stifel said in its September 30 report.

“We continue to advocate adding stocks that have well-defined quality characteristics, such as secular growth that can navigate broader economic turbulence, or more traditional measures, such as durable cash flow, low operating costs and strong balance sheets,” Stifel said.

In the Technology space, analyst Suthan Sukumar favours online learning platform Docebo (Docebo Stock Quote, Charts, News, Analysts, Financials TSX:DCBO), which he called the top secular growth story in Stifel’s technology coverage. Sukumar said he likes Docebo’s 50 per cent-plus year-over-year revenue growth and its differentiated approach to corporate e-learning, calling Docebo’s learning management system a disruptive platform that has been gaining traction upmarket in the enterprise segment. Sukumar pointed to Docebo’s wins with blue chip clients like Amazon, Zoom and Lululemon as examples.

“The company is coming off a string of strong earnings prints that underscore consistency in execution and durability of demand trends with record bookings activity. This has set the stage for a strong revenue growth outlook, alongside stronger operating leverage, with tracking to positive FCF and EBITDA by FQ4, highlighting, in our view, a level of capital efficient growth rarely seen for a SaaS company at this growth profile,” Sukumar wrote.

The analyst said there’s opportunity for near-term upside to current expectations on DCBO, considering the company’s continued momentum, new leadership appointments and greater upsell, expanded product suite and growing contribution from a scaling partner channel. Sukumar said Docebo is well-capitalized, with $210 million in cash and no debt, allowing for flexibility and potential M&A.

“We see a compelling buying opportunity, with shares trading at only 3.7x FY23E revenues, versus HCM/Learning peers at 9.0x and comparable high-growth SaaS peers trading at around 8.6x, a steep and unwarranted discount, in our view, given the company’s stronger growth profile and near-term timeline for positive FCF and EBITDA support. An upcoming investor day in the fall could serve as a catalyst, given potential for better visibility on the company’s longer-term growth plan and targets,” he said.

Sukumar maintained a “Buy” rating on DCBO with a US$65.00 target price, which at the time of Stifel’s report’s publication represented a projected one-year return of 140 per cent.

Sukumar also likes Canadian supply chain software company Kinaxis (Kinaxis Stock Quote, Charts, News, Analysts, Financials TSX:KXS), which he says is party to some powerful secular tailwinds. Ongoing global supply chain disruptions are combining with corporate digital transformation are both playing into Kinaxis’ accelerated growth trajectory, according to Sukumar.

“Recent quarters have highlighted record demand trends, increasing win rates, and strong backlog growth alongside raised F22 guidance, signaling strong forward visibility with 21-23 per cent y/y (25-27 per cent year-over-year in constant currency) SaaS growth and 40 per cent-plus year-over-year revenue growth, underpinned by healthy EBITDA margins of 16-19 per cent, despite another growth investment cycle to capture future growth,” Sukumar wrote.

Kinaxis’ share price has dropped a long way over the past 12 months, but there should be better times ahead for investors, Sukumar said, with the company seeing a nearly tenfold increase in its total addressable market given its recent focus on the mid-market space and a growing partner ecosystem. 

The analyst estimated KXS to be trading at 6.2x 2023 EV/Sales which is a discount to it peer group at 8.8x, and with his report Sukumar maintained a “Buy” rating and $235.00 target price, which represented a projected return of 73 per cent.

“We continue to see an attractive risk-reward on Kinaxis shares, given a strong growth and profitability profile, stellar balance sheet ($250 million-plus in cash), and an expanding yet under-penetrated market opportunity,” Sukumar said.

Custom automation and integration solutions provider ATS Automation Tooling Systems (ATS Automation Stock Quote, Charts, News, Analysts, Financials TSX:ATA) also got the nod from Stifel GMP, with analyst Justin Keywood highlighted the company’s strong organic growth at over ten per cent and an historically lucrative M&A program. Keywood said supply chain disruptions and an ongoing tight labour market is pushing demand for automation, while ATS’ track record on acquisitions has seen it deploy $1.1 billion in capital through value-creating transactions with a return on invested capital that has nearly doubled in the past four years from seven per cent to 13 per cent, according to Keywood. 

“The pipeline remains wide with 30-plus targets, and ATS can add key products and build out its global network further. ATA is a rule of 40 stock,” Keywood wrote.

The analyst noted that ATS’ EBITDA margins expanded from 11 to 15 per cent over the past five years and that the company has an opportunity to grow them above 20 per cent with growth in higher margin sectors like Life Sciences and by increasing its after-market services business. As well, Keywood said investors shouldn’t forget about the electric vehicle market, which should have carmakers ramp up their automation investments. 

ATS saw its share price rise dramatically over 2021 but this year the stock is currently at a negative return of about 15 per cent, which is not bad considering the extent of losses across the market. Keywood said even though ATS is not far from its all-time highs, the valuation is still cheap since the company’s M&A keeps re-setting the financials. 

Keywood has reiterated a “Buy” rating on ATS and a target price of $66.00, which at the time of publication represented a projected one-year return of 63 per cent.

“ATA trades at 11x forward EBITDA versus peers at 15x-plus, and a U.S. listing could help bridge the valuation gap,” Keywood wrote.

Finally, in the Consumer and Retail sector, analyst Andrew Partheniou has chosen US cannabis company Green Thumb Industries (Green Thumb Industries Stock Quote, Charts, News, Analysts, Financials CSE:GTII) as a top pick, saying Green Thumb is the best-in-class operator with the most impressive track record in the cannabis industry. Partheniou pointed out that Green Thumb is the only multi-state operator in US cannabis with exposure to New York State, New Jersey, Connecticut, Rhode Island and Virginia, all of which have passed adult-use cannabis legalization and making for an estimated $15-$20 billion of incremental industry sales at maturity.

“Holding a well-diversified state footprint focused on East Coast limited license markets, the company generates among the strongest cash flow, funding the majority of its CAPEX projects to preserve shareholder value. Combined with a robust balance sheet of approximately US$145 million in cash and being the least leveraged among peers at around 1x debt/annualized EBITDA, we believe the company is well funded to execute on its strategic expansion plan,” Partheniou wrote.

Partheniou said Green Thumb checks the right boxes with strong cash flow, a risk-averse balance sheet and an ability to secure growth catalysts to widen the performance gap versus its peers. 

“In our view, GTII addresses every key criteria, however, this is not reflected in its valuation, with shares trading at approximately 6.5x EV/2023 EBITDA, which is roughly in line with the company’s top-five peers but at a material discount of around 3.5x relative to its closest peer; we believe this discount is unwarranted,” he wrote.

With the report, Partheniou maintained a “Buy” rating and $30.50 target price on GTII, which represented at press time a projected return of 141 per cent.