Wednesday's analyst upgrades and downgrades

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

There is still room for Dollarama Inc. (DOL-T) to mature, said Credit Suisse analyst David Hartley.

In a preview of its second-quarter financial results on Sept. 1, Mr. Harley is forecasting earnings per share of 83 cents, a cent less than the Street. He's projecting sales of $729-million and EBITDA of $160-million, versus the consensus of $728-million and $163-million, respectively.

"We believe that DOL has a greater chance for growth with less competitive overlap with above peers if it continues to source relevant products at higher price points in seasonal and general merchandise categories (62 per cent of sales), rather than in consumable categories (38 per cent)," the analyst said. "U.S. peers have greater exposure to consumables (49 per cent to 76 per cent of sales), and have had to migrate offering towards more consumable product categories with lower gross margins, like cigarettes.

"Our in-store visits to two large non-dollar store competitors and one specialty retailer suggest eye-popping average price gaps across the baskets being measured. However, a measurement of consumables-only suggests much smaller, albeit, still large gaps. On a weighted basis, ex-seasonal, price premiums at peers are 100 per cent at two large peers, but prices of the highest turn consumables at the peers average 18-32 per cent above similar items at DOL. Examples of high turn consumables are potato chips, household cleaners, paper towels, and soap. Examples of general merchandise items are paint brushes, muffin pans, measuring tape, and garden gloves. Some of the highest turning consumable items at peers 1 and 2 had prices in line or lower than of DOL. Peer 3 is a specialty store where there is significant price variation either below or above prices at DOL; however, comparability of items is more difficult and the item selection in our survey is very thin relative to comparisons with peers 1 and 2. Overall, identifying a broad average price difference between DOL and the peers is difficult given we haven't proper item sales weightings for comparisons. Furthermore, the peers have tiered pricing in select categories that compromises comparability. Finally, particularly where DOL offers national brands or higher turn consumable and seasonal items, there tends to be package size differences."

Mr. Hartley also emphasized a "consistent" contribution from new stores in comparison to "average older vintage" stores.

"Measuring a 'net' impact (includes unmeasurable sales cannibalization) from new store growth relative to existing stores may be helpful in understanding marginal growth opportunities," he said. "DOL has driven strong sales growth in the 11-15-per-cent range since 2009. CS/Street estimates assume 10-per-cent growth for each of the next 10 years. Is this reasonable as unit growth falls as a percentage of total store base? New stores are contributing an average of 75 per cent of older vintage stores and there is no suggestion yet that this is deteriorating."

Mr. Harley did not change his "neutral" rating for the stock, but he raised his target price to $98 from $90. The analyst consensus price target is $101.07, according to Thomson Reuters.

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CIBC World Markets analyst Robin Manson-Hing expects the share price for Avigilon Corp. (AVO-T) to move lower after disappointing second-quarter results, adding he recommends investors purchase the stock only following a "significant" pullback.

"For holders of the stock, earnings as a catalyst will likely not take place at least over the next quarter," said Mr, Manson-Hing, who downgraded the stock to "sector performer" from "sector outperformer."

Though Avigilon reported sales that topped the analyst's projections of 3 per cent, gross margin of 50.1 per cent fell below his expectation 55.1 per cent (and the consensus of 56 per cent). He pointed to that result as the primary reason the company's adjusted earnings per share of 6 cents fell below Mr. Manson-Hing's estimate (and the consensus) of 14 cents.

"AVO's statement was that its '16 adjusted EBITDA margin and adjusted EPS may be materially lower for '16 versus its prior guidance," he said. "Recall we warned that lower 2016 guidance was a real risk in our Q2 preview, driven primarily by an acceleration in the commoditization of network cameras."

"It appears the product mix (not disclosed) and price elasticity are increasing in importance with the maturation of the company. This makes it more difficult for us to estimate results below the revenue line, as we had previously forecast EBITDA through tracking sales manager hires and turnover."

Mr. Mason-Hing lowered his 2016 and 2017 adjusted EPS projections to 33 cents and 40 cents, respectively, from 73 cents and 98 cents.

His target price for the stock dropped to $14 from $20. Consensus is $14.50.

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Dick's Sporting Goods Inc. (DKS-N) is "hitting the sweetspot," said Canaccord Genuity analyst Camilo Lyon, calling the company's second-quarter earnings "stellar."

On Tuesday, the U.S. retailer reported comparable same-store sales growth of 2.8 per cent, both "far" exceeded the expectations of Mr. Lyon (negative 1 per cent) and the Street (negative 2.2 per cent) as well as the company's own guidance (negative 4 per cent to negative 1 per cent). Its earnings per share of 82 cents (U.S.) also topped projections.

"The beat was largely driven by two factors 1) faster completion of TSA [Sports Authority] liquidations and 2) a strong licensed business that benefited from the Cavaliers and Penguins championships," said Mr. Lyon. "Importantly, we believe Q2 was just a sample of the long market share gain opportunity in front of DKS as the stores that operated in the same market as closing TSA stores outperformed the rest of DKS fleet. In addition, e-commerce (up 26 per cent) also accelerated in Q2, gaining market share, we believe.

"While management was prudently conservative with its largely unchanged second-half outlook due to the potential for sales to have been pulled forward during the liquidations, updated full year comp guidance of 2 per cent to 3 per cent implies a decelerating two-year comp trend in 2H. We see upside to guidance as we believe the boost DKS is getting from the TSA sales recapture coupled with the TSA IP/customer data that has yet to be leveraged is only going to boost comps at an accelerating pace going forward."

The company raised its full-year comparable same-store growth guidance to 2 per cent to 3 per cent from negative 1 per cent to 1 per cent. EPS guidance rose to $2.90-$3.05 from $2.60-$2.90.

In reaction to the results, Mr. Lyon raised his 2016 and 2017 EPS estimates to $3.05 and $4.14, respectively, from $2.96 and $4.04.

He maintained a "buy" rating for the stock. His target rose to $70 from $64. The analyst consensus price target is $56.28.

Elsewhere, Goldman Sachs downgraded the stock to "neutral" from "buy," saying its valuation has now caught up to earnings forecasts and predicting a more limited upside going forward. They raised their price target to $61 from $56.

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Home Depot Inc. (HD-N) posted "solid" second-quarter results in the face of a "tough" setup, said RBC Dominion Securities analyst Scott Ciccarelli.

"Despite a difficult broader retail backdrop, some concerns over promotional intensity and what seemed to be a relatively slow start to the quarter, HD delivered a solid 4.7-per-cent comp [comparable same-store sales growth], roughly the midpoint of investor expectations," he said.

Mr. Ciccarelli noted U.S. comps, excluding forex, were 5.4 per cent, at the high end of investor expectations, adding 3-year stacked results were "relatively" consistent (17.5 per cent versus 17.8 in the first quarter). He said that speaks to the company's "top-line" consistency.

Earnings per share of $1.97 (U.S.) represented an increase of almost 15 per cent year over year, and topped Mr. Ciccarelli's projection by 2 cents.

"On [Tuesday's] call, management pointed out that higher-spending Pros [professionals] were the primary driver behind the outperformance of the group versus DIY [do-it-yourself]," the analyst said. "What we found particularly interesting was that within Pro, while the higher-spending Pro drove the outperformance, the growth gap versus lower-spending Pros is also narrowing, suggesting an increasingly healthy backdrop (more people doing more projects). Additionally, newer initiatives like 1) extending credit terms for Pros (60 days, no pay) with credit check (rolled out six months ago), 2) fuel rewards, 3) 365 day returns, and 4) tighter delivery windows for a fee (2-4 hours) should help the company continue to gain share with the higher spending Pro category over time, in our view."

The company raised its full-year earnings guidance, bumping its EPS projection to $6.31 (U.S.) from $6.27. Its sales growth (6.3 per cent) and comp growth (4.9 per cent) estimates remained the same.

Mr. Ciccarelli said macro factors remain "supportive" to the retailer. He raised his 2016 and 2017 EPS estimates to $6.32 and $7.15, respectively, from $6.30 and $7.12.

"While the outlook for GDP growth in the US has moderated somewhat since the beginning of the year, the housing backdrop remains positive for Home Depot," he said. "Still moderate home inventory levels (currently 4.6 months) remain supportive of home price appreciation, and people tend to spend more on their homes when they are going up in value (viewing that spending as an investment vs. an expense when values are falling). Further, an aging housing stock in the U.S. (65 per cent of the housing stock is 30+ years old, versus just 47 per cent back in 1995) should continue to fuel home maintenance spend, since houses (like cars) need more maintenance investment as they age. These trends bode well for the balance of 2016 and 2017. We would also note that (1) PFRI [private fixed residential investment] as percentage of GDP is still only back to where the ratio has historically bottomed during prior downturns; and (2) the number of stores in the NAICS 444 (building and garden supply stores) continues to shrink even as industry sales continue to grow (although not all stores are created equal)."

Keeping his "outperform" rating, he raised his target price for the stock to $155 from $150. Consensus is $149.36.

"Our price target is based on a 23.0x P/E multiple applied to a blend of our 2016 EPS estimate of $6.32 and our 2017 EPS estimate of $7.15, supportive of our outperform rating," he said. "This multiple is roughly in line with the company's historical market relative premium of 25 per cent, which we believe is warranted given the company's strong leverage to a U.S. housing market that continues to improve, the likelihood that earnings estimates will continue to be revised higher over time, and investors' increased willingness to pay higher multiples for companies with leverage to U.S. housing."

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Storm Resources Ltd. (SRX-X) should be considered a core holding for gas-biased investors who want a small-cap "lean" gas name in their portfolio, said Raymond James analyst Kurt Molnar.

On Tuesday, Storm, based in Calgary, reported second-quarter production of 12,852 barrels of oil equivalent per day (boed), topping Mr. Molnar's forecast of 12,500 boed. Its cash flow of $5.8-million was in line with his expectations.

"Storm has intentionally been holding back on growth in 2016 due to the low returns on capital offered under weak Canadian natural gas pricing," the analyst said. "But the company has started to return to a growth bias with improvements in the gas macro that have been particularly constructive to the outlook for 2017 natural gas prices."

He added: "First formal guidance for 2017 is now suggestive of a production range of 15,000– 17,000 Boed relative to an $80-million capital program. Both of these numbers were higher than our old model where we had assumed 14,450 Boed coming from a $700million capital program. We are updating our 2017 estimates with this guidance while we note we are still assuming a conservative average production number in 2017. Even with this conservatism our model has exit debt in 2017 below $70-million while Storm has a current bank capacity of $13- million. In short there is plenty of room for more upside to the new 2017 forecast we are adopting."

Mr. Molnar maintained his "outperform" rating for the stock and raised his target to $5.25 from $4.90. Consensus is $5.03.

"In our view, this is a great business model with a highly disciplined management team that executes very well while maintaining a conservative financial position," he said.

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Raymond James analyst Phil Russo raised his target for IAMGOLD Corp. (IAG-N, IMG-T) in reaction to the closing of its $230-million equity financing.

"IAMGOLD continues to make progress on executing its longer-term plan to lower costs across its portfolio," said Mr. Russo. "With cash and restricted cash estimated at $700-million (U.S.) post-financing and repayment of $150-million of debt, we believe IAMGOLD retains sufficient liquidity to continue lowering unit costs through the remainder of the year, and is now poised to commence the Sadiola mine expansion pending project approval from joint venture partner AngloGold Ashanti and the Government of Mali."

Maintaining his "market perform" rating, he bumped his target to $5.50 (U.S.) from $4. Consensus is $5.90.

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Morgan Stanley analyst David Risinger said Valeant Pharmaceuticals International Inc. (VRX-N, VRX-T) has a "clearer vision under new CEO Joe Papa" and upgraded the stock to "overweight" from "equalweight."

"We expect management to successfully renegotiate debt covenants for a small amount (est. $60-million extra annual interest expense), improve operating income & cash flow, and pay down debt," Mr. Risinger said. "As the company delevers, this can drive significant equity value accretion."

He raised his target price to $42 (U.S.) from $33. The analyst average is $36.47, according to Bloomberg.

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In other analyst actions:

Jefferies analyst Daniel T Binder downgraded Best Buy Co. Inc. (BBY-N) to "hold" from "buy" with a target of $36 (U.S.), down from $39. The analyst average is $32.96.

Urban Outfitters Inc. (URBN-Q) was raised to "buy" from "hold" by Evercore ISI analyst Omar Saad, who raised his target to $45 (U.S.) from $33. The average is $36.26.

Susquehanna Financial analyst Donald D. Carson downgraded Mosaic Co. (MOS-N) to "neutral" from "positive." His target fell to $28 (U.S.) from $30. The average is $25.19.