Rating Update: Stock Rating C-High Neutral (2/26/20)-Northfield Capital Corp (NFD.A).

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BUSINESS

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INVESTMENT RATING

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With future capital returns forecasted to exceed the cost of capital, NFD.A is expected to be a Value Builder.

Northfield Capital has a current Value Trend Rating of C (High Neutral).
This rating combines very contradictory signals from two proprietary PTR measures of a stock’s attractiveness. Northfield Capital has a very high Appreciation Score of 96 but a poor Power Rating of 28, producing the High Neutral Value Trend Rating.

Northfield Capital’s stock is selling well below targeted value. The current stock price of $31.00 compares to targeted value 12 months forward of $143.
Northfield Capital’s very high appreciation potential results in an appreciation score of 96 (only 4% of the universe has greater appreciation potential.)
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Northfield Capital has a Power Rating of 28. (This poor Power Rating indicates that NFD.A only has a higher likelihood of achieving attractive investment performance over the near to intermediate term than 28% of companies in the universe.)
Factors contributing to this poor Power Rating include: recent price action has been slightly unfavorable; and is in a slightly weakened position current.

INVESTMENT PROFILE

NFD.A’s financial strength is average. Financial strength rating is 42.
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Relative to the S&P 500 Composite, Northfield Capital Corp has moderate Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that NFD.A is higher risk. Relative weaknesses include: low historical profitability, low financial strength, low historical growth, and high earnings variability. NFD.A’s valuation is low: low dividend yield, low P/E ratio, and low price/book ratio. NFD.A has unusually low market capitalization.

CURRENT SIGNALS

Northfield Capital’s current operations are strong. Return on equity is rising, reflecting: improving asset utilization; widening pretax margins; and rising leverage.

Northfield Capital’s current technical position is very strong. The stock price is in a 42.7 month up move. The stock has appreciated 127.4% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

Important changes in Northfield Capital’s investment behavior have recently occurred: shorter term price trend turns up.
Modest change in Northfield Capital’s fundamentals has recently occurred: significant quarterly earnings deceleration.
The stock is currently rated A.
On 12/30/19, Northfield Capital Corp (CVE: NFD.A) stock suffered a major decline of -29.0%, closing at $0.03. The stock has declined -0.8% during the last week but has been strong relative to the market over the last nine months.

CASH FLOW

In 2017, Northfield Capital generated a significant increase in cash of +$3.03 million (+17%). Sources of cash were larger than uses. Cash generated from 2017 EBITDA totalled +$12.26 million. Non-operating sources contributed +$2.66 million (+22% of EBITDA). Cash taxes contributed +$0.10 million (+1% of EBITDA). Re-investment in the business amounted to -$13.34 million (-109% of EBITDA). In 2017, debt investors had no impact on cash while equity investors contributed +$1.36 million (+11% of EBITDA).
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Northfield Capital’s Non-operating Income, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by stability for the Northfield Capital Corp Peer Group. In most years, Northfield Capital was in the second quartile. Currently, Northfield Capital is upper quartile at +22% of EBITDA (+$2.66 million).

Northfield Capital’s Cash Taxes, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Northfield Capital Corp Peer Group. (Since 2015 Cash Taxes, %EBITDA has experienced a very sharp recovery.) In most years, Northfield Capital was in the lower quartile. Currently, Northfield Capital is upper quartile at +1% of EBITDA (+$0.10 million).

Northfield Capital’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Northfield Capital Corp Peer Group. (Since 2015 Business Re-investment, %EBITDA has sharply accelerated.) In most years, Northfield Capital was in the third quartile. Currently, Northfield Capital is lower quartile at -109% of EBITDA (-$13.34 million).

Northfield Capital’s Debt Investors, %EBITDA has experienced a very strong overall downtrend over the period. This downtrend was accompanied by stability for the Northfield Capital Corp Peer Group. In most years, Northfield Capital was in the top quartile. Currently, Northfield Capital is upper quartile at 0% of EBITDA ( $0.00 million).

Northfield Capital’s Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Northfield Capital Corp Peer Group. (Since 2015 Equity Investors, %EBITDA has accelerated very sharply.) In most years, Northfield Capital was in the top quartile. Currently, Northfield Capital is upper quartile at +11% of EBITDA (+$1.36 million).

Northfield Capital’s Change in Cash, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Northfield Capital Corp Peer Group. In most years, Northfield Capital was in the top quartile. Currently, Northfield Capital is upper quartile at +25% of EBITDA (+$3.03 million).
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Northfield Capital’s Cash, %Revenue has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Northfield Capital Corp Peer Group. (Since 2015 Cash, %Revenue has experienced a very sharp recovery.) In most years, Northfield Capital was in the lower quartile. Currently, Northfield Capital is slightly above median at +135%.

PROFITABILITY

Northfield Capital’s return on equity has improved very significantly since 2012.
This very significant improvement was due to very strong positive trend in pretax operating return and little change in non-operating factors.
The productivity of Northfield Capital’s assets rose over the full period 2008-2019: asset turnover has enjoyed a very strong overall uptrend.
Non-operating factors (income taxes and financial leverage) had little influence on return on equity.
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Northfield Capital’s return on equity is upper quartile (20.1%) for the four quarters ended June, 2019.
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Operating performance (pretax return on assets) is upper quartile (22.0%) reflecting asset turnover that is above median (0.25X) and upper quartile pretax margin (87.6%).
Tax “keep” rate (income tax management) is at median (88.0%) resulting in after tax return on assets that is upper quartile.
Financial leverage (leverage) is lower quartile (1.04X).

GROWTH RATES

There are no significant differences between Northfield Capital’s longer term growth and growth in recent years.
Northfield Capital’s historical income statement growth and balance sheet growth have diverged. Revenue growth has exceeded asset growth; earnings growth has paralleled equity growth.

Annual revenue growth has been 8.3% per year.

Total asset growth has been 1.0% per year.

Annual E.P.S. growth has been 1.5% per year. (More recently it has been -2.0%.)

Equity growth has been 4.2% per year. (More recently it has been 21.6%.)
No consensus growth rate forecast is available for Northfield Capital.
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Relative to the Northfield Capital Corp Peer Group, Northfield Capital’s historical growth measures are erratic. Revenue growth (8.3%) has been at median. E.P.S. growth (1.5%) has been at median. Equity growth (4.2%) has been slightly below median. Total asset growth (1.0%) has been slightly below median.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, Northfield Capital’s stock price performance has been highly stable and below market. Between October, 2013 and February, 2020, Northfield Capital’s stock price rose +41%; relative to the market, this was a -21% loss. Significant price move during the period: 1) April, 2016 – October, 2019: +127%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 3.5% is substantially below median relative to the S&P 500 Composite.
In addition to being substantially below median relative to S&P 500 Composite, current annual total return performance through January, 2020 of 3.5% is above median relative to Northfield Capital Corp Peer Group.

Current 5-year total return performance of 8.4% is below median relative to the S&P 500 Composite.
Through January, 2020, with below median current 5-year total return of 8.4% relative to S&P 500 Composite, Northfield Capital’s total return performance is upper quartile relative to Northfield Capital Corp Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, NFD.A’s overall valuation is quite low. Four of five factors are upper quartile. The highest factor is the ratio of enterprise value/revenue, followed by the ratio of enterprise value/assets, then by the ratio of enterprise value/earnings before interest and taxes, then by the price/earnings ratio. The lowest factor, price/equity ratio, is lower quartile.
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Northfield Capital has a very large value gap compared to the median. For NFD.A to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 3.36X to 2.30X. If NFD.A’s ratio of enterprise value/revenue were to fall to 2.30X, its stock price would be lower by $-9 to $22.
For NFD.A to achieve upper quartile valuation relative to the Northfield Capital Corp Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 3.36X to 4.64X. If NFD.A’s ratio of enterprise value/revenue were to rise to 4.64X, its stock price would increase by $11 from the current level of $31.

VALUE TARGETS

With future capital returns forecasted to exceed the cost of capital, NFD.A is expected to be a Value Builder.
Northfield Capital’s current Price Target of $140 represents a +350% change from the current price of $31.00.
This very high appreciation potential results in an appreciation score of 96 (only 4% of the universe has greater appreciation potential.)
Notwithstanding this high Appreciation Score of 96, the low Power Rating of 28 results in an Value Trend Rating of C.
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Northfield Capital’s current Price Target is $140 (+308% from the 2017 Target of $34 and +350% from the 02/26/20 price of $31.00). This dramatic rise in the Target is the result of a +24% increase in the equity base and a +228% increase in the price/equity multiple. The forecasted increase in growth has no impact on the price/equity multiple and the forecasted increase in cost of equity has no impact either. However, the forecasted increase in return on equity has a very large positive impact.
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PTR’s return on equity forecast is 10.4% — above our recent forecasts. Forecasted return on equity enjoyed a dramatic, erratic increase between 2012 and 2017. The current forecast is significantly below the 2015 peak of 21%.

PTR’s growth forecast is 12.0% — above our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2012 and 2017. The current forecast is well above the 2016 low of 3%.

PTR’s cost of equity forecast is 6.7% — above recent levels. Forecasted cost of equity exhibited a modest, erratic increase between 2012 and 2017. The current forecast is well above the 2015 low of -0.0%.
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At Northfield Capital’s current price of $31.00, investors are placing a negative value of $-7 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 5.0% per year, and a return on equity of 4.0% versus a cost of equity of 6.2%.
PTR’s 2019 Price Target of $140 is based on these forecasts and reflects an estimated value of existing assets of $37 and a value of future investments of $102.

About John Lafferty 80827 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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