Inside the Market’s roundup of some of today’s key analyst actions
RBC Dominion Securities analyst Scot Ciccarelli said he remains “on the sidelines” for Walmart Inc. (WMT-N) despite “impressive” second-quarter results, believing its current valuation of “20-times [price-to-earnings] for flattish EBIT seems expensive.”
"Given Walmart’s improvements, we are looking for an opportunity to become more constructive," said Mr. Ciccarelli.
The analyst said his biggest takeaway from the quarterly report, released Thursday, was that the retail giant's core store-level business in the U.S. posted "impressive" comparable same-store sales growth of 3.5 per cent, leading to its strongest overall U.S. comp in 10 years (4.5 per cent).
Following a "modest" lift in the company's guidance, Mr. Ciccarelli raised his 2018 earnings per share projection to US$5.02 from US$4.92.
Maintaining a "sector perform" rating, he increased his target for the stock to US$102 from US$90 after raising his target multiple based on improved sales. The average target on the Street is US$101.80.
“We believe our investment thesis on profit growth has largely been accurate. However, we also recognize the significant changes that Walmart has made to its business, including a significantly better store environment (Clean, Fast and Friendly scores and improved labor model) and vast improvements to its e-commerce capabilities, leading to several quarters of consecutive positive comp and traffic growth. These changes led to a re-rating in WMT shares and while EBIT $s are still down nearly 20 per cent over the last 4 years, and earnings growth in the near/mid-term will likely be minimal, we believe Walmart is playing the long game (sacrificing current profits to improve its ‘Terminal Value’) and has been rewarded for it by the investment community. We still believe it will be difficult for WMT to outperform other leading stocks in our universe that have better growth to valuation profiles. However, we think investors are increasingly viewing WMT as reasonably valued versus other Consumer Staples companies (similar P/Es) and inexpensive relative to AMZN, which could cause a further re- rating of the stock.”
Elsewhere, believing its acquisition of Flipkart will weigh on future profits “for the next couple of years,” Raymond James analyst Budd Bugatch downgraded the stock to “outperform” from “strong buy” with a target of US$107, rising from US$100.
“Make no mistake, [the second quarter’s] sales and earnings were the best quarterly performance that management has delivered since the Great Recession,” said Mr. Bugatch. “Thursday’s [over 9 percent] move in Walmart was well-earned and a significant endorsement of the company’s strategy as well as the execution from both leadership and associates.”
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In a research note reviewing second-quarter earnings season in the oilfield services and pipeline sectors, Canaccord Genuity analyst John Bereznicki made target price changes to numerous stocks in his coverage universe.
"Permian egress and cost inflation were recurring themes through the course of Q2/18 earnings season," he said. "We believe the consensus view is that the rig count in this market will plateau through 1H19 as operators accumulate DUCs in advance of greater take-away capacity. In our view, those tied to Permian completion activity appeared to attract an outsized share of adverse investor scrutiny as the second quarter earnings season unfolded. We nonetheless believe a flattening Permian rig count could create near- to medium-term growth headwinds for the larger contract drillers in our coverage universe and potentially defer the return of industry pricing to new-build economic thresholds."
Mr. Bereznicki raised his target for the following stocks:
Ensign Energy Services Inc. (ESI-T, “hold”) to $6.50 from $6. Average: $7.53.
McCoy Global Inc. (MCB-T, “hold”) to $1.60 from $1.50. Average: $1.82.
Mullen Group Ltd. (MTL-T, "hold) to $17.50 from $16.25. Average: $16.95.
Total Energy Services Inc. (TOT-T, “buy”) to $17 from $16. Average: $15.97.
He lowered his target price for these stocks:
CES Energy Solutions Corp. (CEU-T, “buy”) to $7 from $7.25. Average: $7.88.
Calfrac Well Services Ltd. (CFW-T, “buy”) to $7 from $7.75. Average: $8.22.
Source Energy Services Ltd. (SHLE-T, “buy”) to $8.75 from $9.50. Average: $9.27.
Trican Well Service Ltd. (TCW-T, “buy”) to $4.25 from $4.50. Average: $5.
Western Energy Services Corp. (WRG-T, “hold”) to $1 from $1.20. Average: $1.38.
Mr. Bereznicki said: “With the Q2/18 earnings season behind us, we are refreshing several of our estimates and target prices while maintaining our existing recommendations. Our largecap oilfield focus ideas include SES [Secure Energy Services Inc.], CEU, TEV [Tervita Corp.] and TCW. Among our smaller-cap constituents we favour TOT and SHLE.”
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Fluor Corp.'s (FLR-N) backlog is “turning up while execution improves,” said Canaccord Genuity analyst Yuri Lynk, upgrading his rating for the Texas-based multinational engineering and construction firm following a recent non-deal road show in Montreal and Toronto.
"When we downgraded Fluor last May we feared ongoing execution issues could mar Q2 results and potentially Q3 while the new awards outlook, outside of LNG Canada, was cloudy," he said. "In hindsight, things have gone about as well as they could for Fluor causing us to reassess our recommendation."
In moving the firm's stock to "buy" from "hold," Mr. Lynk said Flour's underlying earnings power of almost US$1.05 per share in the second quarter was "surprisingly strong," calling overall execution "good."
He sees the opportunity for “meaningful” backlog growth in its energy and chemicals segment over the next year, including a joint venture with Japan’s JGC Corp. to be the engineering, procurement and construction contractor for the LNG Canada Project. The JV was selected in late April.
"All told, we believe backlog could increase to $36 billion (+16.4% y/y) by year-end," he said. "We assume Fluor books a risk-adjusted total of $11 billion into backlog in H2/2018, while burning $9.8 billion of revenue. We see backlog potentially climbing even higher in 2019, to $39.5 billion driven by the three large E&C contracts slated for award that year as well as a reasonable $20 billion in additional bookings."
Mr. Lynk increased his target for Fluor shares to US$63 from US$56. The average is US$58.57.
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Raymond James' David Quezada removed Algonquin Power & Utilities Corp. (AQN-N, AQN-T) from the firm’s “Canadian Analyst Current Favourites” list.
"We no longer believe AQN stands out in terms of near-term upside versus its peer group," he said.
The analyst as a "strong buy" rating and US$12.50 target for the company's shares. The average is US$11.98.
Though he did not identify a replacement for Algonquin, Mr. Quezada also has Boralex Inc. (BLX-T) on the list, which he also rates a “strong buy” with a $25 target.
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Mackie Research Capital analyst Stuart McDougall initiated coverage of Amarillo Gold Corp. (AGC-X) with a “speculative buy” rating and 80-cent target.
“Amarillo Gold has spent the better part of a year restructuring itself. With those efforts now successfully behind it, the Company has turned its sights back on Mara Rosa, with a goal of making a development decision in 2019,” he said. “We also like AGC for the potential of its standalone Lavras do Sul project, both in terms of event-driven catalysts and long-term growth.”
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CIBC World Markers analyst Dave Popowich initiated coverage of Frontera Energy Corp. (FEC-T) with an “outperformer” rating and $30 target, which is 63 cents below the consensus.
Mr. Popowich said: “Although the stock has largely flown under the radar of investors since its restructuring transaction closed in November 2016, a number of interesting corporate and operational catalysts should see Frontera competing for investor mindshare over the next year. Assuming a stable to rising oil price backdrop, we foresee a relatively clear path to multiple expansion if Frontera can continue to shed burdensome costs from its income statement, while drilling success and asset sales have the potential to become immediately accretive to our NAV valuation.”
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In other analyst actions:
Calling it a ‘show me’ story, Bank of America Merrill Lynch raised its rating for Enbridge Inc. (ENB-N, ENB-T) to “buy” from “hold,” citing progress with its Line 3 pipeline, asset sales and funding. The firm raised its target to $50 from $49. The average is $52.73.
TD Securities initiated coverage of Cott Corp. (COT-N, BCB-T) with an “action list buy” rating and US$22 target, exceeding the average of US$19.13.
David Leeder