Red Flag: When Stocks Trade Lower on Strong Results

CCL Industries Inc. (TSX:CCL.B) reported a 22.5% increase in sales and a 7.5% increase in earnings, but it is still trading lower.

| More on:
The Motley Fool

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

CCL Industries Inc.’s (TSX:CCL.B) results were strong, no doubt, but is the fact that the stock went lower after these results a red flag, or is it just normal day-to-day short-term movements that mean nothing? Is the stock’s valuation reflecting unrealistically high growth rates?

There are many reasons to be bullish on CCL Industries. The company has acted as the consolidator of its industry as well as expanded geographically and into different product markets. The company has grown revenue of $1.2 billion in 2009 to revenue of $3.97 billion in 2016 for a cumulative annual growth rate of almost 20%.

The corresponding increase in free cash flow has been even more impressive. In 2009, the company generated $52.3 million in free cash flow; in 2015, it generated $329 million. And during this period, the stock increased from $30 to its current price of almost $311 per share.

The dividend has been raised regularly throughout the company’s history from an annual dividend per share of $0.40 in 2005 to an annual dividend of $2.30 currently for a cumulative average growth rate of 16%.

So, in the first quarter of 2017, CCL reported a 22.5% increase in sales, mostly due to the acquisition of Checkpoint Systems in 2016, but the increase is also a reflection of a 2.1% organic growth rate.

The issue that comes to my mind is that the company has relied on acquisitions to get the kind of growth it has been seeing. Organic growth for its business is much lower 2.1% in this quarter. And the balance sheet is becoming more levered with a debt-to-total-capitalization ratio of almost 50%. Although the company has over $580 million in cash and a net-debt-to-EBITDA ratio of 2.5 times, the $2.7 billion in debt can start to become a problem.

So, valuation-wise, the shares trade at a P/E ratio of 27 times this year’s consensus earnings expectation and 24 times next year’s earnings. That’s reasonable given the growth the company has been able to achieve in recent history, but if acquisitions were to slow down, so would the company’s growth rate, meaning that this multiple would be too high, and that we should expect multiple contraction.

So, the fact that the stock declined 1.4% after these results could just be a reflection that the market was somewhat lower yesterday, or it could be a sign that valuations are too high. Time will tell, but one thing that is for sure is that these valuations increase the risk on the stock.

Should you invest $1,000 in Crescent Point Energy right now?

Before you buy stock in Crescent Point Energy, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Crescent Point Energy wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $21,345.77!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 24 percentage points since 2013*.

See the Top Stocks * Returns as of 4/21/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Karen Thomas has no position in any stocks mentioned. CCL Industries is a recommendation of Stock Advisor Canada.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

Man in fedora smiles into camera
Dividend Stocks

How I’d Build a $20,000 Retirement Portfolio With These 3 TSX Dividend All-Stars

If you're worried about returns and want to focus on dividends, these dividend stocks are the first to consider.

Read more »

View of high rise corporate buildings in the financial district of Toronto, Canada
Dividend Stocks

If I Could Only Buy and Hold a Single Canadian Stock, This Would Be It

Here's why this high-quality defensive growth stock is one of the best Canadian companies to buy now and hold for…

Read more »

Concept of multiple streams of income
Dividend Stocks

3 Safe Dividend Stocks for Retirees

These three Canadian stocks are ideal for retirees due to their solid cash flows, consistent dividend growth, and healthy growth…

Read more »

dividends can compound over time
Dividend Stocks

3 Canadian Market Leaders Where I’d Invest $10,000 for Sustained Performance

Market leaders like Alimentation Couche-Tard Inc (TSX:ATD) are worth an investment.

Read more »

Hand Protecting Senior Couple
Dividend Stocks

How I’d Allocate $12,000 Across Canadian Value Stocks for Retirement Planning

Suncor Energy Inc (TSX:SU) is a Canadian energy stock worth investigating.

Read more »

Pile of Canadian dollar bills in various denominations
Dividend Stocks

Stocks You Can Buy Now and Get Monthly Payouts From for Decades

Are you looking for monthly payouts? There are more than a few great investments that can fuel a monthly income…

Read more »

e-commerce shopping getting a package
Dividend Stocks

Where I’d Put $1,000 Right Away in 2 Top Canadian Stocks for Growth

These two Canadian stocks are strong options and have been for decades, and that's not going to change anytime soon.

Read more »

investment research
Dividend Stocks

How I’d Turn the $7,000 TFSA Contribution Into Monthly Passive Income

Here's how this TSX dividend stock can help you earn more than $50 each month in tax-free passive income.

Read more »