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Monday’s analyst upgrades and downgrades

Snap Inc, owner of popular messaging app Snapchat, kicked off its first investor roadshow on Monday, looking to persuade London money managers to back its initial public offering in the face of concerns about its growth prospects, valuation and corporate governance.

Lucy Nicholson/REUTERS

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

Shares of Sierra Wireless Inc. (SWIR-Q, SW-T) have risen "a little too fast," according to Raymond James analyst Steven Li.

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He downgraded his rating for the best-performing stock in the S&P/TSX composite index since the start of 2017 to "market perform" from "outperform."

"After a torrid run (up 90 per cent versus the NASDAQ at 5 per cent since our upgrade on Jan 23), we believe SWIR stock got a little ahead of itself given valuation now at 15 times estimated 2018 EBITDA for a hardware company growing at [approximately] 6-8 per cent organic with 5 per cent to 10 per cent EBIT margin. No doubt momentum has picked up. In conjunction with its 4Q results last month, SW announced a second sizeable design win with VW (world's largest car manufacturer). But to keep things in perspective, these large contracts come at lower margins and don't fully ramp until 2019."

On Feb. 19, the Vancouver-based company announced Volkswagen selected its WirelessAirPrime AR Series modules and the Legato platform for its next generation of connected cars. The technology is expected to reach the market in several VW models by 2018.

However, Mr. Li warned investors that the announcement should be kept in perspective, noting: "These 'elephant sized' contracts also come at lower margins. We don't have much visibility regarding the profitability of these larger contracts but just to put it in perspective: every point of margin contraction would need four points of revenue growth just to offset. So yes, these contracts are high-volume and could drive SWIR revenue growth from the current 6-8-per-cent range to 15-per-cent-plus. But they also carry some gross margin risks and depending on where the margins end up, some (or all of it) may already be priced in current estimates."

Mr. Li did raise his target price for the stock to $30 (U.S.) from $23.50, which is based on 16 times his 2018 EBITDA estimate.

"This multiple is at a premium to M2M peers and also above SWIR 5-year historical average ," he said. "Given SW recent wins, improving prospects and sentiment, we believe it can sustain a premium multiple (as it has in the past)."

The analyst consensus price target is $22.42, according to Thomson Reuters.

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If Snap Inc. (SNAP-N) is able to sustain its current level of innovation, it will be able to maintain premium growth and scale to profitability, said RBC Dominion Securities Mark Mahaney.

Calling it "one of the best innovation machines on the net today," Mr. Mahaney initiated coverage of the social media company with an "outperform" rating.

"Snap's current revenue growth (we expect close to 200 per cent in 2017) is dramatically higher than any other major Internet asset today … and dramatically higher than FB and TWTR's growth at the time of their IPOs, but that's largely because it came public much earlier on in its growth cycle," said Mr. Mahaney. "Given that the two main drivers are DAUs [daily active users] and ARPU [average revenue per user], the question of growth sustainability is really a call on these two factors. Given the recent slowdown in DAU growth and the company's current efforts to geographically and technologically limit its offering, we have less confidence in the DAU growth driver going forward. That said, its current DAU base of 158 million seems far from long-term mature, given Facebook's base of over 1.2 billion DAUs. Even in North America and Europe, SNAP's DAU base (120MM) is still only 1/4th that of FB. And while our proprietary survey work detects a clear preference for Snapchat amongst younger Internet cohorts (less-than 25 years-old), it also shows reasonable penetration (20 per cent) among older demographics (36-50). And we believe there is a clear opportunity for Snap to boost its monetization given the comparative monetization levels of FB and TWTR, which generated North American ARPUs 7 times and 4 times that of Snap in Q4."

Mr. Mahaney expects online advertising to continue to move toward the mobile market, characterizing it as "a large market opportunity at hypergrowth."

"What is driving this shift towards Internet and Mobile Advertising? Usage," he said. "Or what used to be called Eyeballs about 20 years ago. As the fundamentals and market caps of companies like Google, Facebook, and Amazon surely attest, Internet usage has skyrocketed over the past 20 years. Don't believe us? Well, the truth hurts … According to the ITU, the number of individuals using the Internet globally has grown from roughly 1 billion in 2005, to 3.5 billion in 2016… a 12-per-cent compound annual growth rate (CAGR) over 11 years. We expect this number to continue growing at a robust rate growing forward as global access to both Mobile and Broadband Internet connections expands."

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He added: "Our review of the history of Internet companies is that the companies that most successfully and continuously innovate their offerings win – Amazon, Facebook, Google, and Netflix. And those that don't, lose – AOL, eBay, Yahoo!, Twitter. Product innovation has been one of the most important ingredients for success across the Internet sector. And the level of product innovation we have seen from Snapchat over the last several years has been extremely impressive. It's not just the animated Lenses and the Geofilters and the full-screen vertical Mobile interface, it's the entirely new way that Snapchat approached the Smartphone as a way to communicate, share, entertain, and inform. As an example, check out the ESPN Story on Snapchat and you're seeing Top Ten Highlights … on socialized steroids. This by no means guarantees that the level of product innovation at Snapchat will continue at high levels going forward, but it does provide reasonable odds that it will. Further, one of the key differentiators we have seen from Snapchat versus its Social Media peers and most other Internet Media models is that it has focused a substantial amount of its product innovation on its offerings to advertisers. Our checks with and proprietary surveys of advertisers showed a very strong appreciation for SNAP's ad product innovation. This innovation orientation – towards both advertisers and consumers – should help sustain growth at Snap."

Snap brings a "differentiated value proposition for consumers," according to Mr. Mahaney, who also emphasized a "differentiated appeal" to advertisers and a track record of innovation.

"Financial losses at Snapchat have been very heavy," he warned. "In 2016, Adjusted EBITDA was a negative $459-million and FCF [free cash flow] was a negative $678-million. This was partially due to Snapchat being a relatively young company deep in growth mode. But this is also due to the unusual structure of Snapchat, which has chosen to almost totally outsource its computing infrastructure to Cloud vendors like Google Cloud and AWS. While we continue to see sizeable losses at Snapchat for the foreseeable future, we believe long-term that Snapchat's financial model should scale similar to TWTR and FB, especially in terms of FCF generation or FCF as a percentage of revenue. And our opex estimates assume a scale ramping (opex as a percentage of revenue) that is conservatively lower than what TWTR and FB have achieved to date – we have SNAP running opex at 58 per cent of revenue by 2020 on a $5-billion revenue base vs. TWTR that was running opex at 58 per cent of revenue on less than $3B in revenue in 2015 and 2016, and FB that was running opex at 31 per cent% of revenue in 2012 on a $5B revenue base. We see no structural reasons why SNAP can't scale materially."

He set a price target for the stock of $31 (U.S.). The analyst consensus price target is $20.27, according to Thomson Reuters.

Meanwhile, Credit Suisse analyst Stephen Ju initiated coverage with an "outperform" rating and $30 target.

Mr. Ju said: "While we freely concede that SNAP shares remain a concept stock with an investment thesis we expect to play out over the coming five-plus years, we should receive signals every quarter of its monetization ramp progress. We believe SNAP shares will be one of the most volatile in our coverage given its nascent state and high valuation – we expect it to trade primarily on the growth trajectory and acceleration/deceleration (i.e., the first and second derivative) suggested by the latest reported results for daily active users as well as average revenue per daily active user. With this in mind, it is an investment we enthusiastically underwrite given the following key points: (1) we believe SNAP shares at current levels are exhibiting attractive risk/reward to the upside, with downside risk of 21 per cent in our Grey Sky scenario and upside potential of 32 per cent to our target, (2) it is a scarce asset that offers advertisers access to a coveted younger demographic; and (3) Snap is a margin expansion story with revenue CAGR exceeding cost of sales CAGR. With this in mind, we also point out that investing in SNAP shares, in our view, is high-risk/high-reward given the presence of a long list of well-heeled global competitors, and the potential for the migration and/or the failure to hang on to its existing user base or scale advertising revenue through ongoing product development."

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Desjardins Securities analyst Benoit Poirier called BRP Inc.'s (DOO-T) fourth-quarter results "a grand finale."

On Friday, the Quebec-based recreational vehicle manufacturer reported quarterly revenue of $1.305-billion, exceeded the projections of both Mr. Poirier ($1.162-billion) and the consensus of $1.222-billion. It represented an increase of 18 per cent year over year.

Earnings per share of $1 also exceeded the analyst's estimate (94 cents) and the consensus of a penny more, while gross margin of 25.7 per cent missed Mr. Poirier's 28.2-per-cent forecast and consensus of 27.2 per cent. He attributed the miss to higher sales program costs in year-round products and FX.

At the same time, BRP revealed 2018 guidance which Mr. Poirier characterized as "impressive."

"BRP guided to 2–6 per cent year-over-year revenue growth (we expected 4 per cent) and normalized EPS of $2.15–2.27 (above our former forecast of $2.09 and consensus of $2.15)," he said. "The company expects sales growth will be driven by year-round products (notably SSVs) and parts, clothing and accessories. With this solid guidance, we are confident that BRP will generate another year of strong FCF, which should bring debt to EBITDA close to 1.0 times by the end of FY18. We believe this low debt ratio provides plenty of room to invest in organic growth and M&A opportunities."

Mr. Poirier raised his 2018 EPS projection to $2.22 from $2.09 and introduced a 2019 estimate of $2.39.

"For FY18, we expect revenues and normalized EBITDA to increase 4 per cent and 8 per cent, respectively," he said. "These growth rates are conservative, in our view, given BRP plans to introduce several products that will continue to fuel market share gains and translate into higher utilization rates/margins in the long term."

With a "buy" rating (unchanged), Mr. Poirier raised his target price for BRP shares to $35 from $33. Consensus is $31.91.

"Despite the uncertain global economic environment, we see sizeable upside potential for the stock at current levels, given the compelling 6-per-cent FCF yield," he said. "We expect BRP to outperform peers in FY18 due to: (1) the solid performance of recently introduced products (Can-Am Defender, Maverick X3), (2) expected margin improvement from increasing operating leverage, and (3) adequate inventory in the network. We expect the valuation gap vs peers (EV/FY2 EBITDA of 6.5 times versus average of 11.1 times for its closest peers) to tighten as management demonstrates, once again, its ability to meet its FY18 guidance."

Elsewhere, Canaccord Genuity analyst Derek Dley also raised his target to $35 from $33 with a "buy" rating.

"Our target represents 8.4 times our fiscal 2018 EBITDA estimate of $543-million," he said. "We have increased our target multiple from 8.2x to bring it more in line with higher peer multiples. BRP currently trades at 7.0 times our F2018 EBITDA estimate. In our view, BRP is well positioned to capture additional market share in a growing powersports market, as it introduces new products, and extends its reach into complementary product."

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Canaccord Genuity analyst Mark Rothschild raised his target price for Tricon Capital Group Inc. (TCN-T) in reaction to its $1.4-billion (U.S.) acquisition of Silver Bay Realty Trust (SBY-N), which he called "significant."

With the deal, announced on Feb. 27, Tricon is set to become the fourth-largest owner of single family rental (SFR) homes in the United States.

"We expect Tricon to achieve stronger operating margins and improved profitability in its Tricon American Homes (TAH) platform as it consolidates the Silver Bay portfolio and reaps the benefits of the larger combined portfolio," said Mr. Rothschild. "The Silver Bay portfolio comprises 9,044 SFR homes and pro forma the transaction, Tricon will be the fourth largest SFR operator in the US with 16,809 SFR homes in its portfolio. While initially Tricon entered the SFR business to take advantage of an opportunity following the credit crisis, management of Tricon had expressed a commitment to remaining in this business and growing the portfolio. Having said that, we had previously believed that management of Tricon would consider exiting this business if the pace of growth in home values declined. It is now clear to us that Tricon intends on remaining in the SFR business for the long run.

"Over the past several years, Tricon has been rapidly growing its SFR home portfolio primarily through the acquisition of single homes. At the same time, Tricon has been increasing its exposure to a number of other residential asset classes in which it can create value through various forms of development or improving operations. These include land development and home-building, rental apartment development, and manufactured home communities. While the businesses were united as being forms of residential real estate, and management presented a reasonable strategy for how the various investments fit into Tricon, we have long believed that investors would prefer a more focused company. To that end, management indicated that it will divest non-core properties as it attempts to increase the focus of Tricon, which we view positively. We note that Tricon will not be exiting its land development business, Tricon Housing Partners (THP), which in our view is the company's most exciting division through the material value creation from the land development and home building process."

With a "buy" rating, his target went to $13.25 from $12. Consensus is $10.03.

"In our view, the Silver Bay acquisition carries some risk, as Tricon is growing its exposure to the SFR market in the U.S. in a material way while increasing leverage. In addition, equity was raised at a sizable discount to NAV. However, fundamentals in the U.S. housing market are quite strong, and Tricon is heavily exposed to some of the strongest markets. In addition, demand for rental housing is expected to remain elevated and should be fuelled by: A robust pace of household formation in the U.S. from an increasing proportion of millennials, who have a greater propensity to rent; and, an expected slowdown in the rate of home ownership due to higher levels of existing indebtedness and rising mortgage rates."

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BMO Nesbitt Burns analyst Gerrick Johnson is encouraged by the early signs of the first-quarter retail performance of Harley-Davidson Inc. (HOG-N).

Also citing progress on clearing 2016 models and "compelling" new product releases, Mr. Johnson raised his target price for the stock.

"With a bevy of new products, including the new Road King Special and Street Rod, great deals on prior-year models, and excitement around the new 2017 touring bikes with the Milwaukee-Eight engine, we expect retail momentum to continue and are lifting our estimate of 2Q17 U.S. retail sales growth to 5.0 per cent from 3.5 per cent. This brings our full-year estimate to 4.1 per cent from 3.6 per cent.

"We continue to receive excellent feedback on the new 2017 touring models with the new Milwaukee-Eight engine. The only complaint is that dealers wish they had more of them. An increase in supply should be forthcoming as the inventory overhang from last year's overshipment of 2016 models is abating."

Mr. Johnson maintained an "outperform" rating for the stock and increased his target price to $72 (U.S.) from $66. Consensus is $58.67.

"From a longer-term perspective, we think Harley-Davidson is making good progress in its turnaround. HOG's strategy to improve and accelerate product development to drive consumer-focused innovation and upgrades is, in our opinion, showing early signs of succes," he said. "With more half-year and off-cycle model introductions, the company is also increasing speed to market and bringing new products at a quicker pace. More and better product, delivered more quickly should give buyers a reason to upgrade, as well as a reason to eschew a competitor or used motorcycles. And since the launch of its model year 2017 product, the company has gained share in the U.S. market in every month for which we have data (through January)."

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In other analyst actions:

Franco-Nevada Corp.
(FNV-N, FNV-T) was raised to "buy" from "hold" at TD Securities by analyst Greg Barnes with a target of $83 (U.S.) per share. Consensus is $68.61.

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About the Author
Globe Investor Content Editor

David Leeder is a content editor in the Report on Business. He was previously Deputy Sports Editor and Weekend Digital Editor at The Globe.  He holds an undergraduate degree from McMaster University and a graduate degree from Ryerson University. More

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