Inside the Market’s roundup of some of today’s key analyst actions
Though Dollarama Inc.'s (DOL-T) first-quarter 2020 financial results were “positive,” Desjardins Securities analyst Keith Howlett thinks the reaction from investors was “overdone,” leading him to downgrade his rating for the discount retailer’s stock to “hold” from “buy.”
On Thursday, Dollarama shares jumped 11.3 per cent on the release of better-than-anticipated results before the bell.
The company reported sales and comparable same-store sales growth of $828-million and 5.8 per cent, respectively, for the period, exceeded the Street’s expectation of $813-million and 2.9 per cent. Earnings per share of 33 cents was a penny less than the consensus forecast.
"Dollarama acted more rapidly than expected to reignite same-store sales growth," said Mr. Howlett. "While 1Q same-store sales growth of 5.8 per cent was bundled with a 170 basis points decline in gross margin, resulting in an EPS miss, management maintained its annual gross margin guidance. The sales result confirms the attachment consumers have to Dollarama, as well as management’s ability to modulate consumer demand. We expect management to continue to refine its analytics and merchandising."
Saying he's "positive" on the company's reaffirmation of its annual guidance and the "underlying evidence of the very healthy state of the consumer franchise," Mr. Howlett raised his target for Dollarama shares to $49 from $43. The average on the Street is $47.23, according to Thomson Reuters Eikon data.
Elsewhere, Raymond James analyst Kenric Tyghe hiked his target to $48 from $45 with an "outperform" rating (unchanged).
Mr. Tyghe said: “The traffic increase was the first since F4Q18 and we believe highlights not only the traction of increased consumables penetration in the mix, but also price savvy consumers responding to the increased relative value proposition of Dollarama’s offering. While the margin investment required to the quantum of growth in the quarter was higher than expected (for IFRS 16 adjusted gross margin compression of 166 bp), we believe its important to note that logistics costs and a low (to no) inflation competitive backdrop, weighed on margins. In late F2020E (and through F2021E) the logistics cost pressures are expected to abate (as the new Distribution Centre ramps), while in the short-medium term it would not be unreasonable to assume that key competitors blink (and we see more pronounced some pricing increases in market).”
CINC World Markets’ Mark Petrie moved his target to $48 from $45 with a “neutral” rating.
Mr. Petrie said: “Dollarama’s strong rebound in SSS growth drove the stock up 11 per cent despite modest earnings that were below expectations. We are comfortable DOL has re-established its value proposition, and thus downside is more limited. However, we believe it is premature to run-rate SSS growth at this elevated level, absent other catalysts. Our estimates edge up and we average F20/F21 and add $1 for Dollar City.”
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Seeing an improving supply backdrop, BMO Nesbitt Burns analyst Ketan Mamtora raised Norbord Inc. (OSB-N, OSB-T) to “outperform” from “market perform.”
“LPX and Norbord’s announcements to indefinitely idle OSB mills remove 5 per cent of industry capacity," he said. “This should alleviate supply overhang and aid OSB prices. A 75 basis points drop in mortgage rates should strengthen ‘cyclical’ housing demand as we move into H2.”
His target rose to US$28 target from US$26. The average is now US$33.15.
“Valuation appears very attractive at current levels (5.0 times our 2020 EBITDA), balance sheet is healthy (0.9-times net leverage), and Norbord has made solid progress in improving European performance,” said Mr. Mamtora. “At current levels, we believe risks are skewed clearly to the upside.”
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Ahead of the potential June 18 of its Crypto White Paper, RBC Dominion Securities analyst Mark Mahaney said Facebook Inc.'s (FB-Q) strategy could “prove to be one of the most important initiatives in the history of the company to unlock new engagement and revenue streams.”
"We believe Facebook will use crypto to facilitate a platform for: 1) Payments; 2) Commerce; and 3) Applications & Gaming," he said in a research note released Friday. "And we believe this strategy is a multi-step process, starting with a focus on user engagement through messaging and leading to further monetization with each subsequent, deeper step – a similar strategy that has worked well for Facebook’s Core Advertising business."
He added: “If Facebook’s foray into crypto proves to be successful, we believe a potential existential risk may arise from a rapid, global consumer adoption of crypto tokens for payments and commerce. Specifically, we believe this could become an existential risk for banks and other traditional, centralized platforms. Depending on the cryptoeconomics outlined in the upcoming White Paper, the transaction history of each token (and wallet) may be available to node operators (banks, governments, corporations, etc.). This may face consumer backlash in the long run.”
Mr. Mahaney maintained an "outperform" rating and US$250 target for Facebook shares. The average on the Street is US$222.30.
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The sale of the company remains the “best avenue” for Transat A.T. Inc. (TRZ-T) to unlock its full potential, said Desjardins Securities analyst Benoit Poirier following the release of its second-quarter results on Thursday, which he deemed “decent” despite a “soft” fiscal 2019 outlook.
Mr. Poirier said he continues to see a strong rationale for the sale of the company to a strategic partner, like Air Canada (AC-T).
"We remain confident that an agreement will be reached, as two weeks still remain on the exclusivity agreement (ends on June 26, 2019)," he said. "Assuming a transaction takes place, it will be interesting to see if AC increases its offer given that major shareholders have publicly stated that they intend to vote against the transaction because the price offered is too low. Interestingly, Group Mach intends to submit a formal offer before the exclusivity agreement with AC ends, which could accelerate the sales process with AC and put pressure on its offer as well."
Though he said the company's outlook for the second half of 2019 fell short of his expectations and caused him to lower his earnings per share projections for both this fiscal year and 2020, Mr. Poirier raised his target for Transat shares by a loonie to $14. The average is $12.50.
“[We]t remain on the sidelines due to the limited potential return to our target,” he said.
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Though its third-quarter results fell short of expectations, Desjardins Securities analyst John Chu said he’s “gaining more confidence” in Hexo Corp. (HEXO-T).
On Wednesday after the bell, the Gatineau, Que.-based company reported sales and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $13-million and a loss of $9.2-million, respectively. Both fell short of the consensus forecast on the Street ($14.7-million and a $6.9-million loss).
However, Mr. Chu emphasized the expansion of the company's greenhouse and Belleville facilities remains on track. He also pointed to good sales visibility.
"On the back of a 20,000 kilogram supply contract with Québec (SQDC) for year 1 and a 35,000-kilogram contract for year 2, we have greater confidence in HEXO’s sales outlook than others. With Québec implementing longer retail store hours (both longer operating hours per day and opening seven days per week vs four days previously plus new stores), HEXO adding new stores and its exposure to the Québec market (it has the fourth highest number of products available online, accounting for 14 per cent of all products available), Québec-related sales growth should be very solid. The production ramp-up at HEXO’s greenhouse facility should also help drive sales significantly, as it should start to ship flower to provinces outside of Québec (it was shipping only oil and sprays previously). The company also plans to introduce some new products, which should help drive sales. New retail stores in Ontario and Alberta should also help boost HEXO’s sales."
Mr. Chu maintained a “buy” rating and $14 target for Hexo shares, which exceeds the consensus of $10.59.
“We believe signs point to industry sales improving on the back of increased distribution in Québec, Ontario and Alberta, which should benefit HEXO given its production ramp-up,” he said. “We also believe it will be one of the few players to be ready for edibles legalization, which should give it a significant first-mover advantage.”
Meanwhile, AltaCorp Capital analyst David Kideckel trimmed his target to $10.40 from $10.50 with an "outperform" rating.
Mr. Kideckel said: “We have revised our estimates in light of the financial results reported by the Company during this quarter and as a result of management’s guidance. We have reduced our revenue and margin estimates over the coming quarter as a result of lower than expected average selling price for dried flower in the adult-use market and higher than expected operating cost due to organizational growth. Our reduction in share price was solely driven by the changes in our expectations over the near-term. However, we strongly believe that the mid to long-term outlook of the Company continues to remain strong and we anticipate significant margin improvement and topline growth over this period. We remain very bullish on HEXO.”
David Leeder