Inside the Market's roundup of some of today's key analyst actions
Twitter Inc.'s (TWTR-N) value to advertisers could already be waning, said RBC Dominion Securities analyst Mark Mahaney.
In reaction to a recent advertiser survey, Mr. Mahaney downgraded his rating for the social media giant to "underperform" from "sector perform."
RBC's eighth annual survey of 1,100 advertising professionals found 26 per cent of respondents plan to "significantly" or "modestly" increase their Twitter ad spending, versus 28 per cent who intend to decrease it.
"This is the weakest result we have seen and the first time we have seen a negative skew towards spending," said Mr. Mahaney, noting 30 per cent of respondents do not allocate spending for Twitter, an increase from 25 per cent in February.
"And the percentage who are committing 1 per cent to 10 per cent (an experimental level, perhaps) of their online market budget with Twitter decreased to 54 per cent from 57 per cent last time," he said. "Further, we found response rates to bigger Twitter advertising commitments (11 per cent or greater) to be somewhat low, and decreased slightly to 16 per cent from 17 per cent in February and 18 per cent last year. ... Only 24 per cent of respondents believe their [return on investment] has improved on the platform versus 21 per cent who think it declined (a negative move from the 29 per cent versus 21 per cent split seen earlier this year)."
He said: "Our broad concerns remain: 1) It's not clear when/if product/user interface changes can stabilize or reaccelerate user and usage. 2) Channel checks and our last 4 surveys (and particularly our most recent referenced above) don't provide convincing evidence that a substantial number of advertisers will commit meaningful dollars to TWTR. Twitter believes it can command premium ad pricing, but its dramatic ad revenue deceleration doesn't support that. We have believed that Twitter's lack of real-time commercial intent (a la Google) and detailed, authentic profiles (a la FB) will eventually limit growth. That said, we could become more positive on Twitter if it shows meaningful traction with advertisers."
The analyst lowered his target price for the stock to $14 (U.S.) from $17. The analyst consensus price target is $16.38, according to Thomson Reuters.
The downgrade came before reports Twitter has initiated talks with several companies to explore selling itself. That news sent the stock surging in early trading on Friday.
Despite downgrading his rating for Yum! Brands Inc. (YUM-N), RBC Dominion Securities analyst David Palmer said the stock continues to have "compelling" long-term value that compares favourably to its peers.
Mr. Palmer said the downgrade, to "outperform" from "top pick," was a reaction to a 24-per-cent rise in share price in the year to date, which is an outperformance of both the S&P 500 (up 7 per cent) and the rest of his coverage universe (down 3 per cent).
"We believe the 7-per-cent upside implied by our $97 price target is more representative of an outperform rating," he said. "We believe our target valuation of $63 for the New YUM (post China spin) is reasonable versus highly franchised peers on both a [price-to-earnings] and [enterprise value-to-EBITDA] (implied multiples of 23x and 14x, respectively) basis. We believe these metrics are highly justifiable versus a 100-per-cent franchised peer group that currently trades on avg. 27x 2017E P/E and 16.5x EV/ EBITDA."
Mr. Palmer said he's "dreaming about the possibilities with a new $110 upside scenario" and explained: "We believe these multiples and estimates to be realistic, although we would not be surprised to hear conservative initial guidance from both entities. Our Upside Scenario embraces two major potential areas of upside: 1) Yum China continues its path to margin improvement and a brand recovery in both KFC and — in particular — Pizza Hut, 2) the new Yum Brands continues toward a path of higher free cash flow and accelerating revenue growth — partly through refranchising, new franchising deals, improved Pizza Hut marketing and G&A reductions. We believe effective management of the new Yum Brands could mean a move in YUM's multiple to the mid-20s and ultimately minimize the odds of a future acquisition by Restaurant Brands."
The analyst also said recent trends imply both the Taco Bell and KFC brands are "strong," but the Pizza Hut chain is in search of improved marketing.
He maintained his third-quarter EPS projection of $1.12, which would be a rise of 12 per cent year over year and is 2 cents higher than the consensus. His full-year 2016 projection remained $3.68, an increase of 16 per cent from 2015 and a cent lower than the Street's estimate.
His target for the stock remained $97. Consensus is $90.90.
"Our Outperform rating is based largely on the value-creation opportunity that exists from the return of cash to shareholders over the next two years and the upcoming business separation of Yum China as an independent, publicly traded franchisee," he said. "We believe the dialogue on Yum Brands has shifted from a hyper-focus on China division same store sales toward a view of the company in its future parts. In our meetings with investors, we are seeing increased interest in Yum Brands, and our guess is that investor focus will only continue to increase ahead of the Yum China split (likely to occur around October 31 this year). Remaining news flow leading up to the split includes $5+ billion in share repurchase (throughout 2016) and the Yum China IPO roadshow later this fall. Increasingly, we believe investors will come to view Yum Brands as anchored by a KFC emerging market growth story and a strong domestic grower in Taco Bell. Our investment case centers heavily on the New Yum, which we believe can generate consistent total returns in the mid-teens, placing the stock among a very small group of consistent large-cap double-digit EPS growth stories."
Canaccord Genuity analyst Camilo Lyon's concerns about Nike Inc. (NKE-N) are "mounting."
Mr. Lyon expects the apparel maker to top consensus earnings per share estimates of 56 cents (U.S.), and perhaps his own 58-cent projection, when it reports first-quarter results on Sept. 27. However, he said that beat will be due largely to the company's "conservative" guidance, emphasizing the metric to watch will be future orders.
He said: "We expect global constant currency futures to decelerate to 5.6 per cent due to five factors including: 1) increasing competitive pressures from adidas and UA impacting orders; 2) lack of exciting new product to warrant increased shelf space allocation; 3) price reductions on Nike Signature basketball not likely to be made up by unit growth; 4) inventory building in China and Western Europe; and 5) post-Olympics deceleration of orders."
Based on those expectations, Mr. Lyon lowered his fiscal 2017 sales and EPS projections to $34.321-billion and $2.32 from $34.920-billion and $2.38, and he cautioned that second-half revenue acceleration, as implied in guidance, will not materialize.
"Our retailing checks coupled with discussions with our industry contacts point to adidas and UA continuing to gain share at NKE's expense," he said. "The product pipeline strength from adidas is broad based across categories (Superstar/Stan Smith in classics, Kanye's Yeezy's in celebrity /influencer, Ultra Boost/Tubular in performance, and NMD in innovation) and is leading to a sharp resurgence of the brand such that retailers are clamoring for increased allocations. Furthermore, UA continues to chip away at NKE's share in basketball via [Steph] Curry while also expanding its premium running footwear assortment (eight styles greater-than $100 in 2016 versus four in 2015 and 14 styles in 2017 greater-than $100). Separately, UA's entry into Kohl's next year could crimp $200-million-$300-million off NKE's NA business as we suspect open-to-buy dollars that were mostly exclusive to NKE will get allocated to both brands.
"History has shown that brand shifts take a long time to materialize, and similarly a long time to revert back. The last time NKE lost share in NA was in 2009 to a far less product-diverse adidas. It took two years for NKE to recapture the lost share. Given that the adidas trend surge began last year, the duration of its popularity could extend for another 2-plus years, thus threatening NKE's lofty $50-billion sales target by 2020."
Maintaining his "hold" rating for the stock, he lowered his price target to $52 from $56. Consensus is $65.60.
Activision Blizzard Inc. (ATVI-Q) and Electronic Arts Inc. (EA-Q) are likely to lead an industry's "digital shift away from 'units sold' to a model based on users, engagement, and digital monetization," according to Morgan Stanley analyst Brian Nowak.
Projecting rising margins for both companies, he initiated coverage of the stocks with "overweight" ratings.
Mr. Nowak gave EA stock a target of $101 (U.S.). The analyst average is $88.31, according to Bloomberg.
His Activision target price is $56, versus the $46.78 average.
In other analyst actions:
Barclays analyst Karen Short upgraded Wal- Mart Stores Inc. (WMT-N) to "overweight" from "equal-weight." Her target is $87 (U.S.), versus the average of $75.47.
TheScore Inc. (SCR-X) was raised to "buy" from "hold" at Beacon Securities by analyst Vahan Ajamian with a target of 40 cents (unchanged). The analyst average is 65 cents.
Raymond James analyst Kevin Smith upgraded Cabot Oil & Gas Corp. (COG-N) to "strong buy" from "market perform." His target is $30 (U.S.), versus the average is $29.30.