Skip to main content

Netflix Inc. on Monday reported second-quarter profit of $65.6-million.Mike Blake/Reuters

Inside the Market's roundup of some of today's key analyst actions

After reporting strong subscriber growth in the second quarter, Canaccord Genuity increased its price target for streaming service Netflix Inc. (NFLX-Q).

"Netflix reported strong Q2 results, with record subscriber additions for Q2, and above-consensus subscriber growth guidance for Q3. In addition, management indicated an expectation that 2017 contribution profit from the international streaming business would be positive, which aligns well with last quarter's comments regarding a renewed focus on global profitability. The company's content strategy continues to deliver results, and we liken NFLX's apparent mentality around cash flow (spend as much as makes sense within a modest cash burn and leverage framework) to AMZN's mentality around profit (invest as much in fulfillment and international growth as possible while keeping margins close to zero). We therefore expect improving profitability to enable more (conservative) leverage and significant growth in original content spend over the next few years. As long as this continues to drive strong subscriber growth, we believe the stock can generally keep working despite a premium valuation," said analyst Michael Graham.

He raised his price target to $200 (U.S.) from $175, and maintained his "buy" rating. The consensus is $159.34, according to Thomson Reuters.

He also boosted his 2017 sales estimate to $11.5-billion, up from $11.37-billion, and raised his 2018 sale estimate to $14.033-billion, up from $13.907-billion. He increased his 2017 EPS estimate to $1.30 from $1, and his 2018 EPS estimate to $2.14 from $2.07.

"We are generally raising estimates, with a smaller impact on EPS due to higher interest expense from increased debt. We raise our price target to $200 (from $175), based on 40 times (unchanged) our 2021 EPS estimate of $7.82, discounted to the present at 11 per cent."

BMO Capital Markets analyst Daniel Salmon raised his price target on Netflix to $180 from $150 and boosted his 2017 EPS estimate to $1.17 from $1.08 and his 2018 EPS estimate to $2.01 from $1.87.

"We raise our price target to $180 from $150 as we raise our estimates and expand our target multiple as Netflix continues to successfully expand its international subscriber base. Our target implies 50 times 2018E EV [enterprise value]/EBITDA, or 36 times 2019E."

***

Real Matters Inc. (REAL-T) has "a technology platform that is poised, in our view, to disrupt several property processes including Appraisals and Title & Closing (T&C) services," said Raymond James analyst Steven Li.

He initiated coverage on the stock at "outperform" with a $14 (Canadian) target price. The consensus is $15.07.

"REAL currently counts 60 of the top 100 mortgage lenders in the U.S. as clients including all top six Tier 1 lenders. We concede timing could be better given the current rising interest rate environment in the U.S. (hurts mortgage volumes) but with a substantial runway for growth longer-term, we would use price weaknesses to accumulate positions," he said.

"Our $14 target is based on 6 times F2019 net revenues/30 times F2019 EBITDA [earnings before interest, taxes, depreciation and amortization], a premium to comps reflecting higher expected revenue growth. We do not factor in M&A."

"Similar to what it accomplished in the appraisal market, REAL plans to use its platform technology to remove inefficiencies in the T&C process. With about 70 per cent of the approximately $13-billion T&C market served by local/independent title agencies, there is a unique opportunity for a larger operator such as REAL, with the capabilities to scale nationally and bring significant value to mortgage lenders with more standardization of the closing process. However, there are a few more unknowns as this is a new platform, the T&C market has different customer dynamics and it may take longer for the platform to gain traction," he said.

***

After Dominion Diamond Corp. (DDC-T;DDC-N) agreed to be bought by The Washington Cos. for $1.2-billion (U.S.), BMO Capital Markets revised its target price to match the puchase price.

"We are downgrading Dominion to 'market perform' [from 'outperform'] with a revised target price of $18 (Canadian) per share [from $20], which approximates Washington's offer of $14.25 (U.S.) per share. Whilst we have downgraded the stock to market perform we recognise that there is still a possibility that another bidder could emerge with a higher offer, with Rio Tinto being the most likely contender in our view (albeit one we would put a relatively low probability on). We note that an offer from Rio Tinto may not have to be that much higher to be considered superior and that Washington may not wish to get dragged into a bidding war."

The consensus is $17.50 (Canadian).

"Dominion's board have unanimously agreed a $14.25 (U.S.) per share all-cash offer for the company from The Washington Companies. The price represents a 6-per-cent increase from Washington's initial expression of interest of $13.50 per share. However, due to exchange rate movement, the offer price remains largely unchanged in Canadian dollar terms at about $18 (Canadian) per share. The transaction is subject to regulatory and shareholder approval and is expected to close in calendar Q4/17," said analyst Edward Sterck.

"We can see good logic for Rio Tinto (RIO-LSE) to consolidate its ownership of Diavik and Ekati, especially given that management has expressed that it finds the diamond industry attractive and given the exploration potential of the two licence areas. However, we also note that with Rio Tinto having just exited a period of asset shedding, making a first acquisition in diamonds versus copper, for example, may be considered optically challenging for investors, and for this reason, we put a relatively low probability on Rio getting involved. Nonetheless, we think that Washington might prove reluctant to get dragged into a bidding war with a company with pockets as deep as Rio's and thus Rio may not have to offer that much more to steal the show. Incorporating the break-fee and adding a little more for good measure (another $30-million to $50-million U.S.?) would lift the equity value offered up from $1.2-billion toward $1.3-billion. This could prove sufficient and would represent only about a 5 to 7 per cent increase over Washington's offer."

***

Credit Suisse has reduced its uranium demand forecast and its long-term price to $40 (U.S.) per pound, down from an earlier forecast of $60 per pound. As a result, the firm is downgrading Cameco Corp. (CCO-T;CCJ-N).

Analyst Robert Reynolds downgraded the stock to "underperform" from "neutral" and cut his target price to $10 (Canadian) from $13.50. The consensus is $15.12.

"Our cataloguing of nuclear power plants drives our forecast for uranium demand below current industry expectations. We reduce our LT [long-term] price to $40 (U.S.) /lb based on the 90th percentile of the cost curve, from a prior forecast for $60/lb based on an incentive price. We estimate that CCO is implying $48/lb to trade at 1 times NAV [net asset value] and expect the shares to come under pressure the longer spot ($21/lb) and term ($31/lb) markets remain below the equity implied price as (i) CCO's 150Mlb [million pounds] contract book shrinks (2017 sales of 30-32Mlbs); and (ii) consensus view for a uranium market recovery gets pushed out. Our $10 (Canadian)/sh TP is based on 1.20 times NAV (multiple reflects a scarcity premium) and a 7 per cent FCF [free cash flow] yield. Our LT EPS estimates have also been reduced," he said.

"Slower demand growth, relatively stable mine supply (Husab ramp up offsets capacity curtailments) and moderating secondary supply drive our forecasts. On the demand side, CS forecasts power from nuclear reactors totalling 412GWe by 2030 (445 plants), up from 354GWe in 2016 (409 plants). Our estimates were developed on a plant by plant basis based on existing policies and are in-line with the "low case" outlook released by the IAEA. An inventory overhang from persistent surpluses is another risk as we est. about 4.6 years of 2016YE utility inventory (versus typical 2-3 years)," he said.

***

RBC Capital Markets raised its price target on Tembec Inc. (TMB-T) as a takeover of the compay by Jacksonville, Fla.-based Rayonier Advanced Materials has been thrown into doubt as major Tembec shareholder Oaktree Capital Management, a Los Angeles-based investment manager, voiced opposition to the friendly $807-million deal.

"Oaktree Capital (on behalf of funds managed) announced that it has informed the Boards of TMB and RYAM of its intention to vote against RYAM's proposed acquisition of Tembec (shareholder meeting on July 27 with two-thirds approval required). However, we think Oaktree is leaving the door open for settlement," said analyst Paul Quinn.

Oaktree, which holds a nearly 20 per cent stake in Tembec, doesn't like the price and says Rayonier must increase its offer.

"Among a number of general suggestions, Oaktree proposes that RYAM increase pro-forma leverage to 3.5 times net debt-to-EBITDA to increase cash consideration. This would suggest adding up to about $170-million (U.S.) to the $807-million offer, which in our view is not tenable. We believe RYAM can still 'sweeten' the offer by around $60-million," the analyst said.

He boosted his target price to $4.75 (Canadian) from $4.25 and kept his "outperform rating." The consensus is $4.25.

***

Interact with The Globe