Skip to main content

The Globe and Mail

Monday’s analyst upgrades and downgrades

Costco shopping carts are shown at the entrance of Costco in Mountain View, Calif., Wednesday, May 28, 2008.

Paul Sakuma/AP

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

ProMetic Life Sciences Inc.'s (PLI-T) $53-million equity financing is dilute, but it strengthens its balance sheet, according to Canaccord Genuity analyst Neil Maruoka.

However, citing the dilution resulting from the financing and near-term uncertainty related to its plasminogen treatment, Mr. Maruoka lowered his target for the stock and removed ProMetic for Canaccord's Canadian Focus List.

Story continues below advertisement

On June 15, the Laval, Que.-based company announced a bought-deal offering, entering into an agreement with Cantor Fitzgerald Canada Corp. to buy 31.3 million shares at $1.70 each. Including a 15-per-cent overallotment option, gross proceeds could rise to $61-million.

"This deal bolsters ProMetic's balance sheet, bringing pro forma cash and equivalents to $125.7-million (as of Q1), provides a 15 month cash runway at current burn, and alleviates a key investor concern," said Mr. Maruoka. "However, we note that the deal is quite dilutive for shareholders (especially considering where the stock was trading earlier this year), and we believe the timing also creates some uncertainty as the FDA readies to accept the BLA [biologics license application] for plasminogen. Recall that we (and, we believe, the Street) expect plasminogen to receive a Priority Review from the FDA (reducing the review period from 10 months to six months); we believe that a longer review period, while not a major concern, could nonetheless be a disappointment for investors."

Mr. Maruoka anticipates plasminogen will receive approval in the second half of the calendar year.

"The plasminogen BLA is supported by strong clinical data, Orphan Drug designation, and an Accelerated Approval pathway. As such, we see a strong likelihood that plasminogen could receive a Priority Review from the FDA," he said.

The analyst maintained his "buy" rating for the stock and dropped his target to $4.50 (from $4.75). The analyst consensus is $4.89, according to Thomson Reuters data.

"We continue to see a number of catalysts lined up for ProMetic in coming weeks and months including the potential for an abbreviated Priority Review for plasminogen, and more clinical data from PBI-4050 in Alström syndrome," he said.

=====

Story continues below advertisement

BMO Nesbitt Burns analyst Kelly Bania said she did not see an acquisition of Whole Foods Markets Inc. (WFM-Q) by a large, traditional supermarket as a "viable fit."

Accordingly, she called Amazon.com Inc.'s (AMZN-Q) proposed $14-billion (U.S.) acquisition of Whole Foods a "great outcome" for the organic grocery chain, upgrading her rating for its stock to "market perform" from "underperform."

"While we believed Whole Foods fundamental outlook remained challenging on a stand-alone basis, the outlook could clearly be vastly different under the Amazon umbrella as Amazon will likely be able to not only make Whole Foods prices more competitive but also clearly bring industry-leading technology (eg., Amazon Go) to Whole Foods and allow WFM to re-focus on its core strength of innovation," she said. "We estimate that AMZN may already generate as much as $6-billion in natural/organic/specialty ("NOS") sales and was a growing source of competitive pressure for WFM. This means the combined AMZN/WFM organization could generate as much as $22-billion in NOS sales by our estimates."

She feels the deal will have "fear reaching consequences" throughout the entire retail sector, far beyond just grocery companies.

"While this announcement clearly has implications for grocery as now the highly competitive food retail space goes deeper into direct competition with Amazon," she said. "This is also perhaps somewhat defensive by Amazon as it is likely a blow to Instacart (which has a partnership with Whole Foods) but also validates that combined digital & brick and mortar presence may be essential to long-term success in grocery."

Ms. Bania raised her target to $42 (U.S.) from $30. The consensus average is $41.25.

Meanwhile, Pivotal Research Group LLC analyst Ajay Jain upgraded the stock to "hold" from "sell" and raised his target to $42 from $27.

=====

Deutsche Bank analyst Paul Trussell is the second analyst to downgrade Costco Wholesale Corp. (COST-Q) in response to Amazon.com Inc.'s (AMZN-Q) proposed acquisition of Whole Foods Markets Inc. (WFM-Q).

Mr. Trussell moved Costco to "hold" from "buy," suggesting positive catalysts for the Issaquah, Wa.-based company have diminished and emphasizing rising competitive pressures from both Amazon and Wal-Mart Stores Inc. (WMT-N).

Calling Amazon's deal a "game changer," he sees Costco's "competitive moat" in the grocery segment under threat. He also feels the company has fallen behind peers digitally, which could hurt membership levels going forward.

Story continues below advertisement

Moving to the sidelines due to a "balanced risk/reward," he lowered his target for the stock to $172 (U.S.) from $187. The analyst average is $186, according to Bloomberg data.

On Friday, following the announcement of the deal, Goldman Sachs analyst Matthew Fassler downgraded the stock to "neutral" from "buy" with a $176 target, down from $197. He also removed the stock from the firm's conviction list.

Mr. Fassler suggested the company's valuation may be capped and noted its "fading fundamental catalysts."

=====

Exxon Mobil Corp.'s (XOM-N) announcement that it has made a final investment decision to proceed with the first phase of development for the Liza offshore oil field proves "deepwater economics can be just as attractive as and competitive with the Permian," said BMO Nesbitt Burns analyst Brendan Warn.

Exxon owns a 45-per-cent stake and is the operator of Liza, a significant discovery near Guyana. Hess Guyana Exploration Ltd. holds a 30-per-cent interest, while CNOOC Nexen Petroleum Guyana Limited owns 25 per cent.

Touting the project's "attractive" economics, Mr. Warn projects Phase 1 will deliver an IRR (internal rate of return) of 33 per cent and will be break-even economically with oil down to $30 (U.S.) per barrel.

"Exxon's commitment to Liza Phase 1 was anticipated and will remain within its previous capex guidance of $22 billion for 2017 and $25-billion for 2018-2020," he said. "Along with the Liza/ Guyana commitment, Exxon is taking advantage of its unconventional opportunities, and is increasing its spend on 'short-cycle' investment opportunities, namely its Permian positioning."

Mr. Warn maintained a "market perform" rating for Exxon stock and raised his target to $80 (U.S.) from $76. Consensus is $87.04.

"ExxonMobil is the gold standard major for project delivery, efficiency, and its chemicals business," he said. "XOM is more defensive as a stock supported by the balance sheet quality and cash flow diversity; however, XOM shares trade on an excessive premium, relative to its peer group, that is increasingly difficult to justify. We recognize better value, FCF growth elsewhere."

=====

The steep drop in share price suffered by Teck Resources Ltd. (TECK.B-T, TECK-N) on Friday was an overreaction and presents a buying opportunity for investors, said BMO Nesbitt Burns analyst Alex Terentiew.

Teck shares dropped 8.6 per cent in reaction to Thursday's announcement that it now expects its second-quarter average realized coal price to be between $160 and $165 (U.S.) per ton, versus a $190 quarterly benchmark price.

Mr. Terentiew said the move brought a "potential misunderstanding" from investors, leading to a "unnecessarily weighing down the stock."

"Teck is not selling its coal at a greater discount to benchmark than it has historically," the analyst said. "The lower realized price in Q1 and Q2 is a function of timing of sales on the spot market, with few sales realized during higher-price periods, and more sales during lower-price periods. We expect the historical (since 2010) discount of 8 per cent to be maintained, but spot market price volatility has, on a quarterly average period, caused a greater discount to the benchmark to be realized in H1/17. We note that when spot prices were rising in Q2-Q4/16, Teck's discount was less than the historical range, and was actually a premium in Q4.

"Implied met coal price of $110 (U.S.) per ton presents little downside risk, in our view. With the spot price currently around $140 per ton and our forecast for 2018 of $130 per ton, the current implied price we think is overly bearish, and doesn't take into account Teck's strengthening balance sheet and operating and project asset diversity."

Calling its valuation "attractive," Mr. Terentiew kept an "outperform" rating and $41 target for the stock. Consensus is $35.14.

"While mining industry valuations as a whole have come down, Teck is now trading at some of the lowest price/cash flow and enterprise value/EBITDA multiples over the past decade," he said. "Even if coal rapidly declined to $85 per ton, Teck's 2018 multiples still remain attractive. Building more Cu-focused growth into its portfolio (QB2 and Nueva Union), and benefitting from higher Zn prices, we anticipate Teck's valuation to regain lost ground."

=====

Touting its "many paths to grow," Credit Suisse analyst John Nadel upgraded Athene Holding Ltd. (ATH-N) to "outperform" from "neutral."

"We see multiple paths for balance sheet and earnings growth organically and via M&A. Despite DOL-driven pressure on FIA sales industrywide in recent quarters, ATH has demonstrated its ability to pivot toward institutional products with over $1-billion of FABN issuance," he said. "We expect ATH to be better positioned to participate in the growing pension risk transfer opportunity. Finally, ATH's significant capital flexibility combined with deep mgmt strength positions the company well for further industry restructuring of spread-based liabilities (acquisitions of fixed annuity blocks, for example)."

He raised his target for Bermuda-based insurance holding company to $66 (U.S.) from $55. Consensus is $58.45.

"We see the probability increasing that the company will seize upon block acquisition opportunities to accelerate balance sheet and EPS growth, deploying sizeable excess capital to drive ROE [return on equity] higher," he said.

=====

Citing a deteriorating earnings profile, Credit Suisse analyst Paul Bieber downgraded TripAdvisor Inc. (TRIP-Q) to "underperform" from "neutral."

"We are lowering our rating of TripAdvisor to Underperform given our view that EBITDA and EPS will likely decline in 2018 given management comments in May that 2018 TV ad spend will likely reflect more 'consistent' levels versus the 2017 guidance of $70-80-million for 6 months of 2017," said Mr. Bieber. "We now expect 2018 TV ad spend of $150-million versus our previous estimate of $115-million. For context, TripAdvisor plans to invest in TV advertising to support the relaunch of the TripAdvisor site. We are also cautious on the 3Q set-up as TripAdvisor needs to drive acceleration in branded click based and transaction revenue growth in 2H17 to meet its guidance of double digit growth for the year given recently announced headwinds in early 2Q. Also, uncertainty exists regarding the return on TripAdvisor's investment in TV advertising given that competitors are significantly outspending TripAdvisor in both online and TV advertising, which could make it challenging for TripAdvisor to drive attractive returns owing to a crowded advertising market for the category."

After lowering his 2018 financial projections, Mr. Bieber's target for the stock fell to $34 (U.S.) from $40. Consensus is $46.05.

"TripAdvisor bulls may argue that we are late in the downward estimate revision cycle to downgrade, which is a valid point," he said. "However, we expect 2018 Street estimates to come down over the coming months, and we think strategic asset value could erode given strong execution by competitors (ie. Priceline and Trivago), which warrants the Underperform rating, in our view."

=====

In other analyst actions:

Macquarie analyst Michael Siperco initiated coverage of Falco Resources Ltd. (FPC-X) with an "outperform" rating and $2.15 target. The average is $2.02.

Report an error Licensing Options
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

Comments

The Globe invites you to share your views. Please stay on topic and be respectful to everyone. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.

We’ve made some technical updates to our commenting software. If you are experiencing any issues posting comments, simply log out and log back in.

Discussion loading… ✨

Combined Shape Created with Sketch.

Combined Shape Created with Sketch.

Thank you!

You are now subscribed to the newsletter at

You can unsubscribe from this newsletter or Globe promotions at any time by clicking the link at the bottom of the newsletter, or by emailing us at privacy@globeandmail.com.