A sign stands in front of Rogers Communications Inc. building in Toronto.Mark Blinch/Reuters
Inside the Market's roundup of some of today's key analyst actions
After Rogers Communications Inc. (RCI.B-T) reported second quarter results that were mainly in-line with expectations, Desjardins Capital Markets raised its target price on the company.
"For 2Q17, Rogers reported financial results that were mostly in line, while operating metrics in wireless were above expectations and cable operating metrics were slightly below consensus. In his first quarter as Rogers' CEO, Joe Natale did not present a significant shift in strategy. The company continues to deliver solid operational execution, but we believe the premium on the shares vs peers is currently not warranted given the above-average indebtedness and current lack of dividend growth," said analyst Maher Yaghi.
He kept his "hold" rating on the stock but raised his target price to $66.50 from $62.50. The consensus is $61.40, according to Thomson Reuters.
"Our valuation for Rogers is based on the average of a DCF [discounted cash flow] approach and an NAV-based [net asset value] model, which yields our new target price of $66.50 (from $62.50). Our three-stage DCF utilizes a WACC [weighted average cost of capital] of 6.9 per cent and a terminal growth rate of 2.0 per cent, which yields a one year value of $66.74. For our NAV-based valuation, we apply an 8.0 times EBITDA [earnings before interest, taxes, depreciation and amortization] multiple to our 2018 EBITDA estimates for wireless and cable, and an 8.0 times multiple for media, which yields a one-year value of $66.05," he said.
"With Rogers trading at a premium to BCE and TELUS, we hesitate to upgrade the stock even though momentum could carry it higher. Leverage and growth continue to hold the company back from increasing its dividend; we believe these issues should be resolved in 2018. In view of current valuations and growth expectations, we continue to rate the stock Hold."
Canaccord Genuity kept its "buy" rating on Rogers, and increased its price target to $69 from $66.
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After DragonWave Inc. (DRWI-T;DRWI-Q) announced that it had received from its lenders a repayment demand of $17.2-million (U.S.), and the company continues to pursue "alternative financing," Desjardins Capital Markets cut its rating and price target on the micro-cap stock.
"This morning, DRWI announced that its creditors were pulling their loan and asking for repayment. While the company has been successful lately in raising equity to fund its operations, the new demand by its creditors will likely reduce the likelihood of further equity issuance or significantly increase the dilution to current shareholders. Hence, we are downgrading the stock to Sell (from Hold) pending further clarity on the company's next steps," said analyst Maher Yaghi.
He cut his rating to "sell" from "hold" and cut his price target to 30 cents (Canadian) from $3.30. The consensus is $1.04.
"We believe there is little recourse for DRWI with regard to that demand as the company was in breach of covenants as per the original terms of the facility, which we have highlighted in the past. Management did undertake significant cost-cutting initiatives, but the company has been burning significant amounts of cash. At this point in time, the company does not appear to have the cash required to repay the loan and is likely to look for expensive dilutive financing to cover the request. However, the company has already heavily diluted its equity recently, so it might be difficult for management to achieve such financing in such short order. The company's revenues appear to have stabilized recently; however, even with its significant cost-cutting efforts, the cash drain has continued. At this point, we do not see an easy way out of this pressing situation for current DRWI shareholders," he said.
"We view the potential downside in the stock as significant and while the company could find some form of financing to repay the loan, it is likely that current shareholders will be significantly diluted in the process. It is also possible that the company might not be able to secure the financing necessary in such short order, which could mean complete loss of value to current shareholders."
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After Microsoft Corp. (MSFT-Q) reported strong earnings, Canaccord Genuity boosted its price target on the technology giant.
"Microsoft's results came in largely as we had previewed – which means impressive headline numbers, and even chipping away non-recurring things like tax benefits, the results were legitimately solid. Broad trends look to be moving in the right direction, and this notion is reflected in Microsoft's valuation," said analyst Richard Davis.
"The incremental view, that we outlined over a month ago following E3, is that large cap technology has increasingly become a world of walled gardens, whether that is Apple, Salesforce, Google, or Microsoft. Vendors who build these walled gardens will be successful if they are able to mine the social graphs that emerge. Remember that once you become large, the Realized Price x Quantity ratio shifts away from new customer acquisition and toward higher price, or more accurately, a bigger share of wallet. Therefore, that "last piece" that we need to complete in the near term is how much, and how long Microsoft can mine its four Walled Gardens: O365, Xbox, Marketing Tech and Azure, all the while managing the replacement of its legacy revenue streams with those new, more compelling growth drivers. This is the project we plan to complete in the near future."
He kept his "hold" rating on the stock, and raised his target price to $76 (U.S.) from $68. The consensus is $74.67.
"We are increasing our price target by $8.00 to $76.00, which is based on an EV [enterprise value] /FCF [free cash flow] multiple of 17 times and 16 times applied to our respective C2017 and C2018 estimates of $31.0-billion and $33.3-billion plus approximately $54.5-billion in prospective net cash and assuming about 7.7 billion shares outstanding."
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After Hydro One (H-T) announced it was buying Avista Corp. (AVA-N), BMO Capital Markets raised its price target on Avista.
"Hydro One will acquire AVA for $53 (U.S.) per share, a 24-per-cent premium to the market closing price on July 18. The acquisition price represents a 2018 P/E multiple of 27 times our EPS estimate. Prior to the announcement, AVA shares had traded at about 22 times our 2018 EPS estimate," said analyst Michael Worms.
He kept his "market perform" and raised his target price to $53 from $42. The consensus is $39.50.
"The combined entity will serve more than 2 million retail and industrial customers and hold assets throughout North America, including Ontario, Washington, Oregon, Idaho, Montana, and Alaska," he said.
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Exchange Income Corp. (EIF-T) posted higher than expected second quarter results "but there remain concerns over its long-term FCF [free cash flow] generation and normalized capital intensity within Regional One (R1)," said CIBC analyst Kevin Chiang.
"While EIC has noted its capex will decline in H2, we expect its shares to remain volatile until this starts materializing more consistently. Also, a growing concern we have is the increasing contribution from R1 which is muting EIC's diversification strategy," he said.
He kept his neutral rating on the stock but cut his price target to $35 from $39. The consensus is $44.09.
"Our more cautious view on EIC has been due to the increasing capital intensity within its operations. While EIC posted Q2 EBITDA growth of 23 per cent year over year, FCF was $25-million. H2 capex will decline though as there are fewer aircraft overhauls, reducing maintenance capex. As well, growth capex should decline as EIC has taken delivery of all its CRJs from BBD related to their marketing agreement and as a result of a reversal in working capital. We are currently assuming total capex of $70-million in H2 and operating cash flow of $105-million with dividend payments totalling $34-million. Improved FCF generation will help reduce the volatility in EIC's share price."
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