Inside the Market’s roundup of some of today’s key analyst actions
Hexo Corp.'s (HEXO-T) second-quarter results “represented continued strong penetration into the Canadian recreational market,” according to Canaccord Genuity analyst Matt Bottomley.
On Thursday before market open, Quebec-based Hexo reported net revenues of $13.4-million for the quarter, slightly below the analyst's projection ($15.6-million) but up 137 per cent from the previous quarter.
"As per the Government of Canada website, we estimate that total industry sales volumes during the period were 26,000 kilograms (including bud and oil)," said Mr. Bottomley. "With 2,700 kg of cannabis product sold, we estimate that HEXO secured 10-per-cent Canadian market share in FQ2. Cash operating expenses were $13-million, which was under our forecast of $17-million due to a reduction in marketing costs quarter-over-quarter for one-time expenses in FQ1/19 in preparation of the Canadian rec market launch. As result, adjusted EBITDA loss in FQ2 of $6.1-million was more favourable than our forecast loss of $9.0-million."
In the wake of its proposed $263-million deal to buy Newstrike Brands Ltd. (HIP-X), Hexo released 2020 gross and net revenue projections from domestic sales of $479-million and $400-million, respectively.
"Although we believe its leading position in Quebec and the provincial POs received to date make achieving these levels possible, given the time needed for the market to continue to ramp up, we believe it will be challenging for HEXO to hit these levels for the 12-month period ending July 2020," said Mr. Bottomley. "Although not related to our view on HEXO's ability to execute, we believe the current status of the industry and the logistical hurdles still likely keeping potential consumers on the sidelines (lack of retail stores, legislation of additional product forms) are headwinds facing its guidance."
After increasing his 2020 revenue and EBITDA expectations, Mr. Bottomley raised his target for its stock to $10 from $7.50. The average target on the Street is $10.06, according to Thomson Reuters Eikon data.
"On continued execution of its production footprint, strong market share in the Canadian rec market out of the gate and the addition of Newstrike, we have updated our model and increased our assumed market share for HEXO to 12 per cent (up from 8.5 per cent) and decreased our discount rate by 100 basis points to 9 per cent," he said.
He kept a "speculative buy" rating.
Elsewhere, CIBC World Markets' John Zamparo hiked his target by a loonie to $9.50 with an "outperformer" rating.
Mr. Zamparo said: “The $400-million fiscal 2020 revenue guidance was materially above consensus forecasts, even after accounting for HIP. The sheer level of growth implied does concern us somewhat; a whole host of events (overly onerous Health Canada restrictions, crop failures, strategy missteps) could derail the plan, and setting such high expectations adds risk to the story. But we gain comfort from the increased distribution points, as well as HEXO’s innovation track record which should prove critical for the upcoming legalization of derivative products.”
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Despite the release of “mixed” first-quarter results, Desjardins Securities analyst Benoit Poirier thinks Transat A.T. Inc.'s (TRZ-T) valuation “remains attractive” for patient investors.
On Thursday, the Montreal-based company's stock dropped 9.4 per cent following the premarket earnings release that felt the impact of the implementation of a strategic plan.
Transat reported an adjusted loss of 96 cents per share was largely in line with the consensus expectation on the Street (a 93-cent loss) and was better than Mr. Poirier's projection (a loss of $1.05). Revenue of $648-million fell below estimates ($768-million and $763-million, respectively).
"The results ... were negatively impacted by the implementation of the strategic plan in relation to its fleet optimization initiative," said Mr. Poirier. "Nevertheless, we believe the process is necessary to improve its competitive offering and that it should help unlock better results in the future. In addition, we note the company’s encouraging comments on market conditions in 2H and its yield management initiative."
"TRZ expects 2Q FY19 adjusted EBITDA to be around negative $3-million (excluding yield management and cost savings, which should bring benefits similar to those in 1Q FY19). While it is still too early to draw conclusions for this summer (2H FY19), we understand that unit margins are expected to be similar vs last year, which would translate into an adjusted EBITDA of about $34-million (excluding yield management and cost savings initiatives, which we estimate at $30-million in 2H). In both cases, we believe TRZ should be able to generate better results from yield management (ie introduction of base fare booking for its transatlantic business) as well as to benefit from the introduction of new A321neo LR aircraft to its fleet."
Mr. Poirier lowered his full-year 2019 EPS projection to a 51-cent loss from a 46-cent loss, while his 2020 estimate moved to 23 cents from 30 cents.
Keeping a "buy" rating, he lowered his target by a loonie to $12. The average is $8.61.
"Overall, while we remain confident that TRZ’s strategic plan should benefit shareholders, we believe that value-creation opportunities will arise over the longer term," said Mr. Poirier. "In the short term, we believe that its yield management and fleet optimization initiatives could provide some upside."
Elsewhere, Laurentian Bank Securities' Nauman Satti lowered his target by a loonie to $7.50, keeping a "buy" rating.
Mr. Satti said: “Historically Q1 (winter season) performance has remained moribund and the consensus was reflecting that softness. However, Q1/F19 results were below par to an already low expectation (LBS EBITDA decline estimate of 5 per cent vs. actual 31 per cent); resulting in a stock price decline of 9.35 per cent [Thursday]. Despite flat revenue, adjusted EBITDA declined by 31 per cent year-over-year due to higher fuel prices, costs relating to transition and optimization of fleet, and weakening of the dollar against US dollar. Furthermore, the outlook for Q2/F19 remains muted with continued expectation of higher costs relating to: a) fleet optimization; and b) costs relating to development of hotel division. Following the purchase of U$55-million land in 2018, TRZ acquired more land in Mexico for $15.8-million as it pushes for its hotelier strategy. The strategic shift bodes well for diversification and uplift of winter season profitability, albeit the related improvement remains too far out to be factored in our estimates. In the near term, management pointed to a potential outright hotel purchase to increase revenue stream.”
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General Electric Co.'s (GE-N) “game of inches” turnaround has begun, said RBC Dominion Securities analyst Deane Dray in the wake of Thursday’s “highly anticipated” outlook call with CEO Larry Culp.
"Delivering on his pledge to increase transparency at the company, the Outlook Call presentation was impressive in its breadth of disclosures, with a level of detail that GE has never provided previously," said Mr. Dray. "Admittedly, there was a lack of many specific quantitative targets beyond the headline EPS and FCF guidance, but we attribute this to Mr. Culp’s disciplined desire to commit only to targets that he is highly confident the business can achieve. In our view, the biggest feel-good was the better-than-feared 2019 industrial FCF guidance of ($2)-$0-billion, with line-of-sight on a significant improvement in 2020 and 2021. We also suggest that investors look past the below-consensus 2019 EPS guidance of $0.50-$0.60. In another bold break with GE’s past, Mr. Culp declared that he would not be managing the business around EPS targets and is instead prioritizing cash flows, returns, and growth.
"Going forward, we believe that GE’s annual EPS should be viewed as more of an outcome of its success in achieving FCF [free cash flow] generation, ROIC [return on invested capital], and organic growth improvements. On this point, investors should be braced for more quarterly earnings volatility as Mr. Culp navigates the company through the turnaround. Ultimately, GE will likely remain a battleground stock, but we believe that having Mr. Culp draw the line in the sand with his targets and vision should bolster the bull case."
Mr. Dray lowered his 2019 and 2020 EPS projections to 56 US cents and 69 US cents, respectively, from 71 US cents and 92 US cents.
Maintaining an "outperform" rating, he raised his target to US$13 from US$12. The average is US$12.34.
"GE’s 2019 industrial FCF target of ($2)-$0 bil was attributed to the supply chain finance transition, restructuring, Alstom 'inheritance taxes,' and some conservative built-in 'contingency,'" he said. "Importantly, GE is targeting a significant ramp in 2020-2021, consistent with our view that the company is a 2021 FCF recovery story and should not be valued on its 2019 trough."
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Citing operational moves to improve retail profitability that could drive mid-term earnings that exceed expectations on the Street, Keybanc analyst Edward Yruma upgraded Amazon.com Inc. (AMZN-Q) to “overweight” from “sector weight.”
The online retail giant has now earned a buy-equivalent rating from every analyst on the Street currently covering the stock.
"We see an inflection point in Amazon's profits over the next three years driven by improving retail margin expansion coupled with the mix shift to higher margin AWS and advertising segments that combined could top $100 billion by 2022 (25 per cent of sales) vs. $10 billion in 2015," he said.
Mr. Yruma set a target of US$2100, which tops the current average on the Street of US$2,080.05.
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While near-term headwinds persist, the long-term outlook for Premium Brands Holdings Corp. (PBH-T) remains “positive,” said Canaccord Genuity analyst Alexander Diakun, following Thursday’s release of weaker-than-anticipated fourth-quarter results.
"Despite Premium Brands’ inability to deliver EBITDA in line within its guidance in 2018, we remain confident in management’s ability to execute against its pipeline of organic growth initiatives while continuing to generate industry-leading organic revenue growth," said Mr. Diakun. "During the quarter, the company announced its PB Ecosystem initiative, which includes a variety of objectives aimed at achieving $6-billion in sales and $600-million in EBITDA by 2023. While acquisitions are expected to account for 30-40 per cent of this revenue growth, we believe this initiative implies $2-billion of organic sales growth over the next five years. We estimate this relates to approximately 10-per-cent organic sales growth annually, which we believe to be achievable given the company’s strong momentum in the United States."
Mr. Diakun lowered his 2019 earnings per share projection to $4.54 from $4.68, but he raised his 2020 expectation to $5.65 from $5.29.
Keeping a "buy" rating, his target for Premium Brands shares dipped to $90 from $100. The average is $90.50.
"Despite results being below our expectations, as well as management's, Premium Brands continues to generate industry-leading organic revenue growth," he said. "Given the company's strong momentum in the U.S. and robust pipeline of organic growth initiatives, we remain positive on Premium Brands' long-term growth trajectory."
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National Bank Financial analyst Maxim Sytchev said he’s “sticking with” WSP Global Inc. (WSP-T) despite a 19.7-per-cent rebound thus far in 2019.
"WSP has shown impressive year-over-year EBITDA margin progression this year," said Mr. Sytchev in a research note reviewing Thursday's release of in-line fourth-quarter results.
"When combined with 3.5-per-cent organic growth in 2018 (2-5-per-cent range in 2019), further profitability upside (mid-range of 12.0-per-cent EBITDA by 2021) and M&A optionality that we capture in our NAV, we are ready to pay premium valuation (11.3 times 2019 estimated EV/EBITDA vs. STN at 9.9 times) on a story that
continues to exhibit positive earnings revisions. Compounding really does work, especially if we assume that WSP will get to 65,000 personnel target in 3-years time."
Keeping an "outperform" rating, Mr. Sytchev raised his target to $75.00 from $71.50, which remains below the current average of $77.29.
"While 8.5-per-cent upside does not sound all that much, given the alternatives with potentially more impressive appreciation, we are sticking with a more forecastable WSP model," he said.
Elsewhere, Desjardins Securities' Benoit Poirier hiked his target to $80 from $76 with a "buy" rating (unchanged).
Mr. Poirier said: “We maintain our bullish stance on the name in light of the potential value-creation opportunities arising from the 2019–21 strategic plan (potential stock price of $87–92 by 2021 assuming management achieves its target without equity issuance). We thus recommend investors revisit the story.”
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In other analyst actions:
TD Securities analyst Daryl Young downgraded NFI Group Inc. (NFI-T) to “hold” from “buy” with a target of $35, dropping from $46. The average on the Street is $44.71.
Jefferies analyst Brad Handler downgraded Precision Drilling Corp. (PD-T) to “hold” from “buy” with a $2.60 target, down from $3. The average is $4.57.
Citi analyst Jason Bazinet lowered Live Nation Entertainment Inc. (LYV-N) to “neutral” from “buy” with a target of US$63, rising from US$59. The average is US$62.13.
Mr. Bazinet said: “We continue to like Live Nation’s business model and long-term growth prospects. But, valuation appears full, M&A may be less likely and macroeconomic forces may conspire against the firm.”
David Leeder