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Monday’s analyst upgrades and downgrades

Jackets are on display at the Canada Goose Inc. showroom in Toronto.

Aaron Vincent Elkaim/THE CANADIAN PRESS

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

The fact that Canada Goose Holdings Inc. (GOOS-T, GOOS-N) has been around for 60 years "speaks to the durability and heritage of the brand despite warm winters these last few years," said RBC Dominion Securities analyst Brian Tunick.

Calling it a "compelling growth idea," Mr. Tunick initiated coverage of the stock with an "outperform" rating.

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"Despite its 60-year history, we see Canada Goose as in the early stages of its growth trajectory, particularly in the fragmented and growing premium outerwear market," he said. "We see Canada Goose's premium positioning, technical emphasis, strong and authentic heritage, customer loyalty (84 per cent of customers willing to purchase again as per 2016 survey), and seasoned management team as key assets as the brand aims for $1-billion in sales from an estimated $384-million today.

"In a global discretionary environment desperate for growth, we see multiple levers for a high-teens top line for the next 3-5 years, including: 1) highly-productive footage growth toward 30-50 stores longer-term (from 2 today); 2) double-digit e-commerce increases with the roll-out of additional country-specific sites; 3) 6-8-per-cent wholesale gains; 4) geographic expansion; and 5) category extensions. With secular concerns about the wholesale channel (estimated 75 per cent of fiscal 2017 sales), we look favorably on Canada Goose's taking control of its growth via its Direct emphasis (stores, online). We look for a 50/50 wholesale/Direct split by FY21."

However, Mr. Tunick said there could be "hiccups" to the company's expansion plans.

"Canada Goose has its hands full with executing its growth agenda, between: 1) opening up new retail locations (17 modeled by 2020 from 2 today); 2) rolling out ecommerce sites in additional countries; 3) balancing wholesale productivity against potential Direct/retail cannibalization; 4) expanding its geographic reach; and 5) extending into new categories and seasons," the analyst said. "These growth plans are also being put in place while the Canada Goose team manages its higher profile as a public company. Further, Canada Goose's category concentration (estimated 98 per cent at outerwear) is a risk factor to be aware of, particularly given the fiscal 2Q/3Q nature of the company's sales and earnings (80 per cent sales/over 100 per cent of earnings)."

In the near term, Mr. Tunik blamed category concentration as well as shifts in its wholesale revenue for "clunky and decelerating quarters." He expects both fourth quarter 2017 sales to be down 25 per cent year over year and first quarter 2018 sales to be flat.

"This wholesale lumpiness is owing to Canada Goose's visibility on wholesale orders (80 per cent of annual wholesale orders are booked prior to the beginning of the fiscal year)," he said. "Net/net, wholesale revenues are expected to be up in total 7 per cent in FY18, but notably Direct revenues are expected to improve each quarter. Owing to this revenue cadence, however, our GOOS model is projecting steeper net income declines for the next few quarters, with EPS growth finally expected in 3Q18."

However, he added: "In a softlines space desperate for growth, we see Canada Goose as a compelling growth story with multi-year top and bottom line drivers in the attractive, growing and profitable luxury outerwear market. Specifically, we see the combination of highly productive footage growth toward 30-50 units longer term (from 2 stores today), double-digit ecommerce gains, baseline 6-8 per cent wholesale gains, 100 basis points of EBITDA margin expansion/year, balance sheet deleverage, and a move towards a lower tax rate equating to a sustained 20-per-cent-plus bottom line growth profile for the next 3-5 years. Particularly in this volatile retail environment, we see strong brands with compelling product and authentic messaging as best positioned to weather the retail storm, and we see Canada Goose's positioning, 60 year heritage, and customer loyalty (84 per cent of customers willing to purchase again as per 2016 survey) as testaments to those qualities despite its still early stage of growth."

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He set a price target for the stock of $25. The analyst average price target is $24.56, according to Bloomberg.

Elsewhere, BMO Nesbitt Burns analyst John Morris said the company has "attractive growth vehicles" and initiated coverage with an "outperform" rating and $28 target price.

"Canada Goose offers an opportunity for investors to invest in a high-growth retailer at a reasonable price," said Mr. Morris. "We estimate the shares should be worth $28 per share looking out a year under our current, and somewhat conservative, assumptions. We believe the company will begin to pull multiple levers to drive results over the next couple years, and this should drive incremental top- and bottom-line growth beyond expectations. Moreover, our future gross margins increases are mostly driven by channel mix shift, which leads to upside from current estimates."

Canaccord Genuity analyst Camilo Lyon gave the stock a "buy" rating and $27 target.

Mr. Lyon said: "We view GOOS as a unique brand that has created a niche for itself in the highly competitive outerwear market by marrying both function and fashion. Throughout its 60-year history, GOOS has been grounded in a function-first directive that has led to the brand attaining a distinctly authentic appeal with its core consumer. Under leadership from its third-generation CEO, Dani Reiss, GOOS has successfully navigated the evolving retail landscape to create and maintain an appetite for the brand by its consumers that has yet to reach satiation. It is this tight inventory supply discipline that we believe has preserved and will continue to extend the integrity and life cycle of the brand as it evolves from a product company to a lifestyle company. This transition, backed by both elevated sales growth and gross margin expansion, is what we believe will sustain its premium multiple and be the driver of share price appreciation."

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Cogeco Communications Inc. (CCA-T) had a "strong" second quarter with signs of progress in the turnaround for its business information and communications technology (ICT) segment, said CIBC World Markets analyst Robert Bek.

On April 6, Cogeco announced quarterly earnings per share of $1.55, ahead of the $1.41 projection of both Mr. Bek and the Street. Adjusted earnings before interest, taxes, depreciation and amortization of $253.8-million topped projections of $249-million from the Street and $247.4-million from Mr. Bek. Consolidated revenues of $560.9-million also exceeded the consensus expectation ($557.4-million) and the analyst ($551.1-million).

"Although the beat in FQ2 was largely driven by the core Canadian cable business, better-than-expected numbers from the troubled Business ICT segment also helped the causes," said Mr. Bek. "Granted, ICT results still implied a decline year over year, the declines eased quarter over quarter which is encouraging as it lends credence to management's turnaround efforts at the segment. That said, ICT is likely not to return to growth in 2017, with 2018 a more reasonable target."

Mr. Bek raised his 2017 and 2018 full-year EPS projections to $5.90 and $5.97, respectively, from $5.87 and $5.83.

He maintained a "outperformer" rating and raised his target to $78 from $75. The average is $78.08.

"The key Canadian Cable unit was nicely ahead and largely drove the beat, with the troubled ICT segment also rebounding from recent difficulties to post better numbers in Q2, which is positive for the CCA thesis," said Mr. Bek. "Indeed, we remain buyers of CCA coming out of Q2 as we continue to see the current valuation discount to peers (at 2.3 times 2017 estimated EBITDA) as excessive. Given we expect the company to continue to deliver consistent cable results, with some signs of turnaround progress at ICT, we see no reason for this discount not to narrow."

Elsewhere, the stock was downgraded to "underweight" from "equal-weight" at Barclays by analyst Phillip Huang. His target rose to $75 from $70.

BMO Nesbitt Burns analyst Tim Casey also raised his target to $75 from $70 with a "market perform" rating.

"Q2/F17 results represent a continuation of recent trends," said Mr. Casey. "The core Canadian Broadband business continues to manage profitability, while American Broadband continues to drive organic and M&A growth. A turnaround in the Business ICT segment remains a challenge, with no growth expected in the near term. We expect competitive conditions to continue to tighten."

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Despite ongoing industry challenges, there is long-term value in Hudson's Bay Co. (HBC-T) that is not currently showing in the stock, said BMO Nesbitt Burns analyst Wayne Hood.

Mr. Hood said the company's fourth-quarter results, released April 4, reflect those issues, with earnings before interest, taxes, depreciation, amortization and restructuring falling 9 per cent year over year based largely on lower same-store sales (down 3.7 per cent) and gross margin rate pressure (down 1.1 per cent).

"Management discussed the previously announced $75-million in annualized cost savings that are expected to realized beginning in the 1Q17," he said. "Further, there are additional savings across banners that expected to be realized and discussed in more detail in the coming quarters. At this juncture, we have assumed that a large part of the cost savings will be reinvested and look for SG&A dollars to increase 2.4 per cent in 2017. Further, we assume no material improvement in SSS [same-store sales] and look for a 0.2-per-cent consolidated decline. Collectively, there could be upside to these assumptions, but we see more upside potential in GM rate where there has been significant pressure from unplanned merchandise markdowns from elevated inventory. 2016 inventory declined $28-million year over year and 0.2-per-cent increase on a comp basis leaving room for further improvement.

"Management reduced its capital spending budget by $150-million from 2016 as they focus on the highest return projects under way, including growth in Europe, store renovation programs and automated fulfillment technology at its Pottsville distribution center. We estimate the company remaining FCF [free cash flow] negative in 2017 and 2018 and see the company's funded debt remaining largely unchanged at $3.2-billion, absent the potential sale of certain assets ($1-billion availability on global ABL facility)."

Under the assumption current trends "remain weak," Mr. Hood lowered his same-store sales estimate to negative 0.2 per cent from a rise of 1.6 per cent. His EBITDAR estimate fell to $1.475.1-billion from $1.485.0-billion. His earnings per share projection fell to a loss of $1.28 from a 57-cent loss.

With an "outperform" rating (unchanged), his target fell to $31 from $35. Consensus is $14.89.

"We continue to see a long-term four-pronged value creation strategy (operating and acquiring global iconic branded department stores, creating cross-synergies via M&A and surfacing the value of the underlying real estate) that is not fully reflected in the stock and maintain our rating," he said.

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RBC Dominion Securities analyst Brian Tunick said "less bad is still a 'Way Forward'" for Ralph Lauren Corp. (RL-N) as it attempts to turn around its fortunes.

In June of 2016, Stefan Larsson, the company's outgoing president and chief executive officer, revealed to investors a new "Way Forward" initiative, aimed at delivering "sustainable, profitable sales growth and long-term value creation for shareholders." The plan involved both fiscal restructure and the desire to "evolve its product, marketing and shopping experience to increase desirability."

"We believe one of the most intriguing parts of RL's Way Forward plan is that it is not necessarily dependent on top-line improvements, at least for the first two years of the plan," said Mr. Tunick. "Indeed, we expect RL's proactive initiatives to rationalize its distribution and lower the sales base (through store closures and wholesale sales reductions) to be drivers of margin expansion and earnings stabilization. As such, over the next three years we expect RL's global net revenues to decline by additional $600-700-million while margins improve [approximately] 100 basis points and EPS CAGR [earnings per share compound annual growth rate] is 1 per cent. We believe this is particularly notable and unique in our coverage where most retailers suffer similar top-line pressures with no tangible offsets to margin declines."

Saying the retailer's turnaround "poses an intriguing setup," Mr. Tunick initiated coverage of the stock with a "sector performer" rating.

"The brand is currently re-basing its global sales in an effort to restart growth, while gross margin improvements somewhat support earnings in the near term," he said. "However, given the lack of visibility regarding potential top-line recovery, we think it will be difficult for the stock to break above its trading range solely on margin recapture without meaningful earnings growth."

He called the company's desire to improve margin expansion one of its "most significant" opportunities over the next three years, adding he's "encouraged that RL has a number of margin-driving initiatives that are less dependent on a meaningful sales turnaround."

"In fiscal 2013-16 RL's gross margins declined 300 basis points, primarily as a function of: 1) mismanaged inventories (inventory grew 26 per cent while sales only increased 7 per cent); and 2) 150 basis points negative FX impact," the analyst said. "As we look out, we remain confident that RL has a number of tangible initiatives to undo some of its self-inflicted merchandise margin erosion & improve supply chain. We expect 200-300 basis points GM improvement from: 1) lead time reduction (15 months to 9 months); 2) more prudent inventory management (inventory down 23 per cent end of Q3'17); 3) SKU [stock keeping unit] count rationalization (eliminating approximately one third of unproductive tail); and 4) mix shift to retail (contributes 80 basis points)."

Mr. Tunick set a target price for the stock of $84 (U.S.). The analyst consensus price target is $78.06, according to Thomson Reuters.

"Our primary holdback is uncertainty around return to meaningful revenue growth/stabilization following the reset of global sales," he said. "Should we see signs of revenue stabilization starting in fiscal second half of 2018 (as RL laps 50 store closures and 20-per-cent-plus reduction in wholesale sales) and a more concrete road map for global revenue growth (potentially with the new CEO announcement) we would look to get more constructive.

"On the other hand, if sales declines remain in high single digit in F2H18 (despite lapping the beginning of quality of sales initiatives), and /or the company does not announce a CEO (and reiterate commitment to Way Forward plan), and margins don't show improvement due to sales shortfall, we would be more skeptical of an eventual success of the turnaround."

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BMO Nesbitt Burns analyst Alex Terentiew's net asset value estimate for HudBay Minerals Inc.'s (HBM-T) Rosemont project in Arizona fell by 66 per cent in reaction to a technical update, citing higher capex and lower annual production.

"We note that Hudbay estimates a NAV for the project (10-per-cent discount rate, 80-per-cent ownership, mirroring our estimates) of $397-million, which is calculated three years prior to start-up," he said. "If we similarly assume a three-year development period instead of our 2023 start-up, we calculate a NAV estimate of $415-million, highlighting the significant value improvement potentially realized by moving the project along quickly. Our Rosemont NAV includes the streaming revenue for gold and silver, however, does not include the upfront stream payment of $230-million, which is in addition to our Rosemont NAV and captured in our Corporate adjustments, for a total NAV of $6.07. As management has noted that it would like to see a $3 per pound or higher copper price (and have confidence of it being sustained) before proceeding full speed on the project, we view our 2023 start-up date in line with our copper price forecast and hence management's expectations (BMO forecast calls for $2.85 per pound in 2019, and $3.05 per pound 2020+)."

"Since the acquisition of Rosemont in 2014, Hudbay's update provided the first production and cost estimate under its ownership, and therefore substantial changes were expected. While the project's start-up capex has seen meaningful increases, with capex originally budgeted at $0.9 billion in 2009, followed by $1.2 billion in 2012, and now to $1.9 billion, the rise is larger than the $1.7 billion we had been anticipating. With two years of additional engineering and design completed, and 15% contingency included, Hudbay is confident, however, that its new cost estimate is very achievable and potentially conservative. In addition, Hudbay plans to use the same development team to build Rosemont that built Constancia, a very similar project, reducing execution risk."

Contingent on permitting, Mr. Terentiew said he is forecasting a start-up for the project of 2023, noting the company's guidance on operating costs are 5 per cent better than his projection while capital costs "significantly" exceeded his estimate.

Also calling the reserve update for its 777 and Reed mines "disappointing," he dropped his target to $11 from $12.50 with a "market perform" rating. Consensus is $8.86.

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In other analyst actions:

Tesla Inc. (TSLA-Q) products "have a captivating impact on consumers and shareholders alike," said Piper Jaffray analyst Alex Potter, upgrading the stock to "overweight" from "neutral." " In many ways, TSLA seems to play by its own rules." He raised his target to a Street-high %368 (U.S.), up from $223. The average is $274.86.

Raymond James analyst Chris Cox lowered Veresen Inc. (VSN-T) to "market perform" from "outperform" with a target of $16, up from $14. The average is $15.42.

Mr. Cox upgraded Imperial Oil Ltd. (IMO-T) to "outperform" from "market perform."

Raymond James' Jeremy McCrea downgraded Penn West Petroleum Ltd. (PWT-T) to "market perform" from "outperform" with a target price of $2.50, down from $2.75. The average is $2.78.

Mr. McCrea upgraded Freehold Royalties Ltd. (FRU-T) to "outperform" from "market perform" with a target of $15.50. The average is $16.79.

Canadian Western Bank (CWB-T) was upgraded to "buy" from "hold" by Laurentian Bank Securities analyst Marc Charbin, who raised his target price to $36 from $30. The analyst average is $31.23.

Ritchie Bros Auctioneers Inc. (RBA-T) was downgraded to "sector weight" from "overweight" at KeyBanc by analyst Joe Box without a specified target. The average is $50.47.

Needham & Co analyst Kerry Rice upgraded Amazon.com Inc. (AMZN-Q) to "buy" from "hold" with a target of $1,100 (U.S.). The average is $970.15.

Wells Fargo & Co. (WFC-N) was raised to "neutral" from "underweight" at Piper Jaffray by analyst Kevin Barker. His target rose to $55 (U.S.) from $52. The average is $59.96.

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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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