Inside the Market’s roundup of some of today’s key analyst actions
Industrial Alliance Securities analyst Elias Foscolos believes “wider” Western Canadian Select (WCS) crude pricing is likely to result in capital uncertainty among North American Exploration and Production (E&P) companies, leading to lower drilling activity for the remainder of 2018 and 2019.
In a research report previewing third-quarter earnings season for Canadian energy services companies, Mr. Foscolos lowered his rig count projections for both Canada and the United States for that period, leading to revised earnings expectations and several target price changes for stocks in his coverage universe.
“In our view, additional drilling activity in Canada continues to be dependent on both industry confidence and cash flow,” he said. “Confidence was clearly shattered with the court ruling on the Trans Mountain Pipeline expansion, which has delayed that projection for at least one year. Partially offsetting this news was the announcement by LNG Canada to proceed with the construction of Canada’s first LNG export terminal. While this announcement adds confidence, the financial impact is unfortunately outside the valuation window for most of our stocks.”
Mr. Foscolos upgraded his rating for Badger Daylighting Ltd. (BAD-T) to “strong buy” from “buy” after increasing his EBITDA expectations for the third-quarter and through 2019 “based on a continued strong U.S. economy in which Badger continues to grow its Hydrovac fleet.”
He added: “We expect that BAD will not directly increase its truck build for 2018 (currently 160-200 Hydrovacs), but rather tightening that guidance range to 180-200. The strong fundamentals in the U.S. economy backed by an indirect increase in median truck build leads us to believe that BAD will post a record quarter. As a result of share price depreciation and our upwardly revised $38.00 target, we are increasing our rating.”
Mr. Foscolos’s target rose to $38 from $36.50. The average target on the Street is currently $34.33, according to Thomson Reuters Eikon data.
“Since mid-August, Badger’s stock has declined 17 per cent despite the lack of news,” he said. “We believe investors should view this as a buying opportunity.”
The analyst’s other target price changes were:
CES Energy Solutions Corp. (CEU-T, “strong buy”) to $6.50 from $7.25. Average: $7.40.
Pason Systems Inc. (PSI-T, “hold”) to $20 from $20.50. Average: $22.67.
Pulse Seismic Inc. (PSD-T, “buy”) to $3 from $3.30. Average: $3.30.
High Arctic Energy Services Inc. (HWO-T, “buy”) to $5 from $5.25. Average: $4.98.
Computer Modelling Group Ltd. (CMG-T, “buy”) to $9.75 from $10. Average: $9.59.
Secure Energy Services Inc. (SES-T, “strong buy”) to $12.25 from $12.50. Average: $11.95.
Mullen Group Ltd. (MTL-T, “buy”) to $17.25 from $18.25. Average: $17.07.
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Canadian Pacific Railway Ltd.'s (CP-T, CP-N) third-quarter financial results reaffirm that it is “firing on all cylinders,” said RBC Dominion Securities analyst Walter Spracklin, pointing to the railway company’s “robust volume, healthy pricing, improving margin and EPS growth that is exceeding that of its peers.”
Maintaining his “outperform” rating and reaffirming CP as his “preferred name” in the sector, Mr. Spracklin bumped his target to $331 from $329. The average on the Street is $313,22.
“The shares are trading at an attractive discount to peers, making the CP investment opportunity in our mind very compelling,” he said.
Meanwhile, National Bank Financial analyst Cameron Doerksen upgraded CP to “outperform” from “sector perform” with a target of $303 (unchanged).
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Boyd Group Income Fund (BYD.UN-T) should be able to double the size of its business over the five-year period ending in 2020, implying a 15-per-cent annual growth rate, said Desjardins Securities analyst David Newman.
He initiated coverage of the Winnipeg-based company, which is one of North America’s largest operators of collision repair centres, with a “buy” rating.
"Boyd’s enviable track record of growth should continue as it consolidates the fragmented collision repair market and drives organic growth through greater participation in insurer direct repair programs (DRPs), superior operational execution, investment in productive capacity (training, equipment) and deployment of its unique dealer intake model in selected markets," said Mr. Newman. "Boyd’s ability to strike highly accretive deals, given the benefit of significant valuation arbitrage and subsequent synergies, and invest in its scalable and replicable business model should lead to strong earnings and cash flow growth and superior returns, as evidenced by its average return on invested capital (ROIC) of 27 per cent over the past five years."
Given its relatively small market share in U.S. (3-4 per cent), Mr. Newman thinks a Boyd has a "significant M&A road ahead," even though it has already spent $623-million in acquisitions since 2012.
"Over the past five years, Boyd has increased its revenue at a CAGR of 29 per cent, with 24 per cent related to acquisitions (remainder from organic growth)," the analyst said. "Its location count has grown at a CAGR of 18 per cent. The Big 4 continue to pursue consolidation, given they collectively operate ~5–6% of all industry locations, corresponding to 15–16 per cent of total industry revenue (the other large MSOs account for another 8–10 per cent of industry revenue; the remainder are mostly single shops). Boyd’s small share of the fragmented U.S. market (32,000 shops in the U.S.) implies significant road ahead for acquisition opportunities, hopefully with no accidents! Boyd’s corporate development team has been able to source new opportunities for accretive acquisitions, given its disciplined approach and significant valuation (multiple) arbitrage."
He set a price target of $144 for Boyd, exceeding the average of $130.
“BYD offers a potential total return of 15 per cent, with an attractive growth profile and a robust financial position,” said Mr. Newman.
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Raymond James analyst Daryl Swetlishoff does not expect the third-quarter results of Canadian forest products companies to act as a catalyst for their stocks.
In a research note released Thursday, he lowered his 2019 price assumptions for spruces, pines and firs (SPF) and southern yellow pine (SYP) by 7 per cent to US$465 and US$490, respectively. His northern bleached softwood kraft (NBSK) pulp by US$100 to US$1,250/mt.
"After the moves, we believe stocks remain in bargain territory, with the average building materials stock in our universe trading at 3.6 times and the average Pulp & Paper at 4.5 times," said Mr. Swetlishoff. "Earnings season kicks off next week and while we expect sequentially weaker results across the board, we don’t expect a durable share price impact."
He added: "Benchmark SPF lumber pricing is off 50 per cent from June 2018 highs, with lumber leveraged names off similar amounts. In retrospect, the early summer rally was overdone - setting the stage for the dramatic equal but opposite sell-off over the summer (which we view as similarly overdone). In this note we lay out the case for higher building materials pricing in coming quarters, with current cash losses setting up for a severe supply response. While downward earnings revisions are on tap, history shows building materials’ shares exhibit a much tighter correlation to spot commodity pricing. Hence, with a strong case for a higher forward pricing curve, we contend investors willing to pick amongst the wreckage for bargains will be rewarded over the next 6-12 months. We expect fund flows to accrue first to the large cap names like West Fraser, however, based on our estimates we see more upside in the smaller cap names: Interfor, Conifex. With more than 20-per-cent historic commodity lumber exposure, we also highlight Western shares as being unfairly punished."
Mr. Swetlishoff upgraded a pair of stocks ahead of their earnings releases based on his increased pulp price forecast.
He raised Canfor Pulp Products Inc. (CFX-T) to “outperform” from “market perform” with a $28 target, rising from $25. The average is $26.70.
Mr. Swetlishoff also upgraded Mercer International Inc. (MERC-Q) to “strong buy” from “outperform” with a target of US$25, increasing from US$22.50 and 50 US cents higher than the average.
“We expect the pulp industry will continue to benefit from steadily increasing demand and a gap in supply capacity additions over the mid-term. Mercer should benefit specifically from an increased operating platform with their recent expansion in Western Canada,” the analyst said.
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Fundamental headwinds remain for Canadian integrated oil companies, said Citi analyst Prashant Rao in a research note released late Thursday.
"Our Canadian coverage has sold off 6 per cent month-to-date, underperforming the TSX by 50 basis points," he said. "But taken in context of a 390 basis points erosion in the Loonie versus USD, the sector had held up relatively well against a 4.8 per cent move down in the XLE. That said, with WCS-WTI near US$50 at present plus pressure on Canadian light grades, questions regarding risks to 2019 production loom at the margin. While the heavy diff is partly temporal on refining turnarounds, we widened our longer-term WCS differential assumptions earlier this week, settling at US$23 to Maya in 2020, and now read this through into valuation. In this environment, the value of downstream integration should be emphasized; we reiterate our Buy on Suncor and note upside to Imperial results."
Mr. Rao lowered his target price for shares of Cenovus Energy Inc. (CVE-T, CVE-N) to $13 from $15 with a “neutral” rating (unchanged). The average is $16.56.
He said: "With CBR contracts signed and the Pipestone asset sale accomplished, the company has made good progress on its longer-term plan of action. We believe one more asset sale should emerge before mid-2019, putting leverage solidly below 2.0 times on our estimates. That said, with 50-per-cent open exposure to WCS ex-hedges, estimates move down on our new commodity price assumptions."
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In other analyst actions:
Goldman Sachs upgraded Imperial Oil Ltd. (IMO-T) to “buy” from “sell.”
JPMorgan downgraded both Calfrac Well Services Ltd. (CFW-T) and Trican Well Service Ltd. (TCW-T) to “underweight” from “neutral.”
Barclays analyst Kannan Venkateshwa upgraded Walt Disney Co. (DIS-N) to “overweight” from “equal weight” with a target of US$130, up from US$125. The average is US$120.49.
RBC Dominion Securities analyst Mark Mahaney raised his rating for Roku Inc. (ROKU-Q) to “outperform” from “sector perform,” in order to “take advantage” of its recent more than the 25-per-cent correction in its share price recently. His target jumped to US$70 from US$48, versus the average of US$69.08.
"Near-term, we see ROKU as one of the three small-cap Net Stocks with the least fundamentals risk – i.e., best opportunity for upwards estimates revisions," he said. "Long-term, we view ROKU as one of the best plays on Ad-Supported OTT."
Citi analyst Paul Lejuez upgraded American Eagle Outfitters Inc. (AEO-N) to “buy” from “neutral” with a target of US$27 (unchanged). The average is US$26.27.
Mr. Lejuez said: “AEO is down 30 per cent since reporting 2Q earnings on 8/29, and has recently been painted with the same brush as most stocks within our universe. But AEO has something that others don’t – one of the most attractive growth concepts in retail (Aerie). Aerie is taking market share in the lingerie market with consistent DD comps and significant growth potential. And with the recent sell-off, we believe the market is not giving AEO the credit it deserves for Aerie. We believe Aerie is worth $2-billion, implying the core AE biz is valued at 3.1 times EV/EBITDA, which we believe is overly pessimistic.”
In a research note entitled “This HOG’s Not Bringing Home the Bacon,” BMO Nesbitt Burns analyst Gerrick Johnson upgraded Harley-Davidson Inc. (HOG-N) to “market perform” from “outperform” with a target of US$45, falling from US$52. The average is US$46.43.
“We are downgrading because things that we thought would happen to drive growth in sales and earnings did not occur. And we are now reversing that bad call,” he said.
David Leeder