Inside the Market’s roundup of some of today’s key analyst actions
After delivering “solid” third-quarter results and “good enough” guidance, RBC Dominion Securities analyst Steve Arthur said the valuation for Magna International Inc. (MGA-N, MG-T) “remains attractive.”
"MGA shares traded higher (up 5 per cent) following results [Thursday] morning and now trade at 4.8 times 2020 estimate EBITDA, above the peer group average of 4.3 times," he said. "Given MGA’s earnings growth outlook, diversification, global footprint, dividend, and balance sheet, we believe that MGA should trade at a modest premium valuation to the group."
On Thursday, Magna reported quarterly revenue of US$9.62-billion, up 8.5 per cent year over year and ahead of Mr. Arthur's US$9.48-billion forecast. Adjusted earnings per share of US$1.56 also topped the projections of both the analyst (US$1.52) and the Street (US$1.53).
At the same time, the company lowered its 2018 revenue guidance to US$40.3-billion-$41.4-billion from US$40.3-billion-US$42.5-billion. Production expectations also slid slightly.
Maintaining an "outperform" rating for Magna shares, Mr. Arthur raised his target price to US$72 from US$70. The average target is US$66.82.
“We expect continued solid execution (despite Getrag issues and NA production decline), leading to double-digit EPS growth and strong FCF,” he said.
Elsewhere, Citi analyst Itay Michaeli kept a "buy" rating, raising his target to US$63 from US$62.
Mr. Michaeli said: "Magna’s Q3 results contained various puts/takes but did stand out for having solid revenue growth-over-market (GoM), the absence of a more significant cut to guidance (vs. some peers & our model), aggressive share buybacks and somewhat more reassuring FCF commentary. Net-net, we think the core aspects of the Magna investment story—namely GoM & FCF growth—remain intact post Q3. ... We continue to see some downside risk to Magna’s prior 2020 targets—which are based on 3-per-cent annual industry production growth and some margin expansion from equity income—but still see an upward trajectory of earnings & FCF generation despite a tougher macro backdrop. Net-net, we still view risk/reward to be compelling when considering Magna’s GoM capability, scope for margin expansion, strong FCF generation, a 10-per-cent ‘18 estimated FCF yield (with aggressive buybacks) and further potential, in our view, to unlock additional shareholder value (our prior two-entity thesis)."
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Though Desjardins Securities' Benoit Poirier said he’s “surprised and disappointed” by the ramp-up issues at Bombardier Transportation, the analyst feels the “long-term story remains intact” for Bombardier Inc. (BBD.B-T).
"We continue to like BBD and see recent share price weakness as an attractive buying opportunity for long-term investors," said Mr. Poirier following Thursday's release of "mixed" third-quarter financial results.
Before market open, Bombardier reported adjusted earnings per share of 4 US cents, exceeding the 2-cent expectation of both Mr. Poirier and the Street. Revenue of US$3.6-billion fell just short of their projection (US$3.8-million).
With the results, the company lowered its free cash flow guidance for 2018 and 2019, a move Mr. Poirier called "disappointing."
“For 2018 and 2019, we calculate an FCF shortfall of US$900–million to $1-billion vs consensus (driven by the ramp-up in BBA and BT, including US$250-million of restructuring charges and a contingency of US$250-million to reflect working capital volatility due to the strong ramp-up of the Global 7500 program and at BT),” he said. "Nevertheless, management highlighted that FCF in 2019 should be supported by: (1) a reduction in capex following the Global 7500 EIS, (2) the working capital recovery from the ramp-up at BT (we estimate US$463-million in 2019), and (3) the improvement in profitability across the business.
"While we continue to believe in management’s strategy, we think investors will be skeptical about management’s ability to meet the 2020 guidance."
Based on the guidance update, Mr. Poirier lowered his FCF and revenue expectations through 2020, resulting in declining earnings per share projections for 2019 and 2020 (14 US cents and 28 US cents, respectively, from 17 US cents and 29 US cents).
He maintained a "buy" rating for Bombardier shares and lowered his target by a loonie to $5. The average on the Street is 9 cents higher.
Meanwhile, Raymond James' Steve Hansen increased his target to $6 from $5.25 with an "outperform" rating (unchanged).
Mr. Hansen said: “BBD management deserves more credit than the market offered yesterday, in our view, particularly as we enter the final (most attractive) stages of the firm’s turnaround plan. The most significant ‘heavy lifting’ is over, in our view, and management has delivered on nearly all key milestones. What’s more, we now see a leaner, more-focused organization poised to grow, deliver accelerating profitability, and generate long-awaited FCF. We view the recent sell-off as an acute over-reaction.”
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Goeasy Ltd.'s (GSY-T) third quarter was “a rare fumble from a solid company,” said Desjardins Securities analyst Gary Ho.
Shares of the Mississauga-based alternative financial company plummeted 14.4 per cent on Thursday despite releasing better-than-anticipated quarterly results, which were “overshadowed by some credit deterioration in the portfolio.”
“While 3Q’s credit quality is of concern, we believe the sharp share price decline is overdone,” he said.
Keeping a "buy" rating for its stock, he lowered his target to $53 from $58. The average is $62.67.
Mr. Ho said: "Our investment thesis is predicated on: (1) management executing on targets given its track record in meeting/exceeding past targets—2020 guidance sees the loan book doubling; (2) with the exit of two incumbents, the non-prime consumer lending market is underserved (particularly in Québec); (3) with scale, the business could generate 20-per-cent or more ROE [return on equity]; and (4) we expect double-digit dividend growth in the next few years."
Elsewhere, the results prompted Raymond James' Brenna Phelan to remove goeasy from the firm's "Canadian Analyst Current Favourites" list.
Ms. Phelan, who has an "outperform" rating and $65 target for the stock, said: "We think that goeasy's position in the underserved sub-prime loan market position it uniquely well to deliver outsized growth and ROE over the longer term. In the near-term, we believe some modest execution challenges in the company's growth plan will remain in focus. With the narrative now more of a show-me story, and the next major catalyst likely not until 4Q18 results in February, we are removing goeasy from the Analyst Current Favourite list at this time."
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At the same time, Raymond James' Kurt Molnar removed Paramount Resources Ltd. (POU-T) from the “Canadian Analyst Current Favourites” list, citing an expected slowdown in spending 2019.
“In the immediate term we will not be ‘replacing’ this name on the list due to the extreme negativity in the E&P space,” he said.
Mr. Molnar has an “outperform” rating and target of $24.50, which exceeds the average of $18.73.
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In the wake of lower-than-anticipated third-quarter financial results, Raymond James analyst Ben Cherniavsky downgraded Stantec Inc. (STN-T) to “market perform” from “outperform.”
On Thursday, the Edmonton-based professional services company reported earnings per share of 44 cents, missed the analyst's 58-cent estimate and 10 cents lower than the result a year ago.
Mr. Cherniavsky emphasized a drop in gross margins for each of the company’s consulting services segments, which he thinks is “another reason to be somewhat mindful of execution and earnings risk going forward, even without the Construction segment overhang.”
"The change in our thesis is not a function of any specific catalyst related to the company’s 3Q18 results; rather, it reflects a confluence of variables that have transpired since we upgraded our rating on this stock two and a half years ago," he said. "Since then, Stantec has consistently missed our forecasts and failed to deliver the growth, synergies, and returns that we expected, particularly from the MWH acquisition. 3Q18 was another case-in-point.
"Like water over rock, these disappointments have eroded our confidence in the company’s ability to execute its growth strategy and restore its industry-leading financial performance. We fully acknowledge that the Construction Services segment has accounted for many of the headwinds that have plagued Stantec’s recent performance, and that its divestiture should alleviate much of the pain. However, with the stock trading at 16x our 2019 EPS estimate, we feel these improvements are already priced-in. Furthermore, while the market always looks forward, we believe that the past must always be kept in mind. Hence, it is reasonable to expect the last two years of needless mishaps, costs, and distractions to have an impact on how investors discount the future."
Mr. Cherniavsky lowered his target price for Stantec shares to $35.50 from $37. The average is $38.64.
“As we see it, Stantec’s inability to retain its ‘Gold STNdard’ performance means that its stock no longer deserves a precious multiple. Thus, we are compelled to put this company in the ‘show me’ camp, preferring to buy its shares with lower valuation risk and/or better visibility,” he added.
Elsewhere, CIBC World Markets’ Jacob Bout lowered Stantec to “neutral” from “outperformer” with a $38 target.
Mr. Bout said: “Once again, STN missed market expectations during the quarter due to weak results from its construction business (now sold!) in Q3/18, with core consulting doing OK (EBITDA margin of 13 per cent). We continue to believe the divesture mitigates construction risk, turning the focus to design, and would expect more consistent and clean results moving forward.”
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Conversely, Mr. Cherniavsky raised his rating for Cervus Equipment Corp. (CERV-T) to “outperform” from “market perform” in reaction to “strong” quarterly results.
“We have been watching the company’s Transportation segment closely and, after beating our forecasts handily for the third quarter in a row, we believe that the operation has turned a corner and will contribute positively to growth and profitability into F19,” the analyst said. "Due to Cervus’ high degree of operating leverage, the improving Transportation results reflect very positively on the earnings power of the consolidated business. Meanwhile, the stock has declined 9 per cent year-to-date (vs. a 5-per-cent decline for the TSX) and currently trades below book value (0.93 times).
“Compared to our last downgrade 18 months ago, the share price is roughly unchanged but the valuation is much more attractive and the operations are cleaner. Finally, subsequent to quarter end, Cervus began repurchasing and cancelling shares, which, in our view, represents a good use of capital at these levels. We believe all this leaves investors with a very favourable risk-return set up as Cervus ‘trucks’ into F19.”
His target rose to $19.50 from $16.50. The average is now $17.88.
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In reaction to Wednesday’s release of its second-quarter 2019 results, Echelon Wealth analyst Amr Ezzat upgraded his rating for Andrew Peller Ltd. (ADW.A-T) to “buy” from “hold” based on its “compelling valuation and continued strong execution.”
"The results continue to showcase the benefits of the company’s premiumization strategy with adjusted gross margins reaching an impressive 45.2 per cent (excluding D&A and non-cash fair value adjustment for acquired inventory)," the analyst said. "SG&A expenses are higher sequentially, which pushed adjusted EBITDA margin lower than our expectations, but nothing too drastic. We believe that the Company’s strong execution is by no means a one-off quarter, but the unfolding of a deliberate strategy to drive better product mix and sell through higher-margin distribution channels.
"We had downgraded the stock post FQ418 results (at $18.10/shr) on the exceptional stock performance since our December 2017 initiation. We noted at the time that our downgrade was strictly valuation driven and does not reflect a knock on our investment thesis nor the long-term fundamentals of the Company."
Mr. Ezzat maintained a $19 target for Andrew Peller shares, which falls 92 cents lower than the current average.
“We continue to be big fans of the Company and the management team, and feel there is more upside to be had beyond our one-year target,” he said. “The recent acquisitions kill two birds with one stone and pave the way to $1-billion-plus equity valuation, in our opinion.”
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Citing “some concerning trends in both its Canadian and U.S. pressure pumping businesses,” BMO Nesbitt Burns analyst Michael Mazar lowered Step Energy Services Ltd. (STEP-T) to “market perform” from “outperform” and dropped his target to $4.25 from $12. The average is $9.72.
“While STEP’s valuation remains attractive, we think a neutral posture is appropriate for now given structural challenges in the Canadian market and until the U.S. pressure pumping business demonstrates financial performance closer to the expectations in place at the time of the acquisition,” he said.
National Bank Financial analyst Greg Colman downgraded Step to “sector perform” from “outperform” with a target of $11, down from $12.
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Citing its declining ability to meet financial obligations and deteriorating conditions in industrial units, JP Morgan analyst Stephen Tusa dropped his target price for General Electric Co. (GE-N) to a Street-low US$6 from US$10. The average target is US$14.34.
He maintained an “underweight” rating for the stock.
“The outcome of GE results was worse than expected on almost all fronts," said Mr. Tusa. “While liquidity is certainly debatable, we believe this is not really about liquidity, it’s about a deterioration in run rate fundamentals.”
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In other analyst actions:
Reducing its 2018 and 2019 outlooks due to slowing sales and lower margins, CIBC World Markets analyst Todd Coupland cut Sierra Wireless Inc. (SWIR-Q, SW-T) to “underperformer” from “neutral” with a target of US$19, down from US$20. The average target is US$21.75.
CIBC’s John Zamparo lowered Freshii Inc. (FRII-T) to “underperformer” from “neutral” with a target of $2.75, falling from $5.25. The average is $4.39.
Baird cut Freshii stock to “neutral” from “outperform” and sliced its target to $3 from $12.
RBC Dominion Securities raised Industrial Alliance Insurance and Financial Services Inc. (IAG-T) to “outperform” from “sector perform.”
Canaccord Genuity analyst John Bereznicki lowered Trinidad Drilling Ltd. (TDG-T) to “hold” from “buy” with a target of $1.68, falling from $2.25. The average is $2.27.
Mr. Bereznicki raised Precision Drilling Corp. (PD-T) to “buy” from “hold” with $4.75 target, which sits below the $5.89 average.
David Leeder