Inside the Market’s roundup of some of today’s key analyst actions
Dollarama Inc. (DOL-T) is finding “more value in more corners,” according to Raymond James analyst Kenric Tyghe.
On Thursday, the Montreal-based discount retailer continues its streak of impressive financial results, reporting fourth-quarter fiscal 2018 earnings per share of $1.45, topping the Street’s expectations by 5 cents. Sales rose 9.8 per cent to $938.1-million (versus a consensus expectation of $937-million) and sales for stores open at least 12 months climbed 5.5 per cent (versus Mr. Tyghe’s 5.4-per-cent projection).
“While both SSS (on growth of 5.5 per cent) and new store adds (25) were in-line with expectations, new store productivity was lower than expected, contributing to the slightly weaker than expected sales growth,” said Mr. Tyghe.
“We believe that while Dollar City is performing well in both the context of its markets (and results in Colombia have been in line with results from the entrance into the first 2 countries), that it was a drag on sales in the quarter (compounded by a tough January in Canada). We are of the opinion however that the sequential traffic improvement (albeit of a negligible base) is of greater reference and that the new space productivity headwinds in F2018 were transitory in nature. The gross margin performance again surprised to the upside, which we suspect was largely driven by new shrink initiatives (smart cameras and better analytics of high risk areas), while the positive surprise on SG&A efficiency reflected traction of in-store mobile initiatives.”
Mr. Tyghe said he believes “strong” SSS growth and gross margin expansion suggests a stronger competitive position in the retail sector than the company’s guidance leads investors to believe.
“As such (while a conservative guide is prudent) we are modeling modestly higher gross margins (and lower SG&A margins) than F2019 guidance,” he said.
“The early traction of key shrink initiatives, handheld scanner technology, and in process new cash management processes further support our expectations.”
Mr. Tyghe raised his 2018 and 2019 EPS estimates for the retailer to $5.23 and $5.94, respectively, from $5.16 and $5.88.
Maintaining an “outperform” rating for its stock, he raised his target price to $167 from $165. The current analyst average target is $164.13, according to Bloomberg data.
Elsewhere, Desjardins Securities analyst Keith Howlett raised his 2019 EPS projection to $5.20 from $5.16.
He kept a “hold” rating and $165 target.
“Dollarama is performing exceptionally well as it passes $3-billion in annual revenue and heads toward $4-billion,” said Mr. Howlett. “Management succession has been handled smoothly, with founder Larry Rossy still making a gradual phased exit. He remains active in the business, but as Chairman Emeritus, is reducing his workload. The core senior operating team led by President and CEO Neil Rossy is highly experienced and proven. The company’s operating momentum remains impressive and devoid of visible missteps. Management has tempered expectations for FY19 due to wage pressures and other factors.”
CIBC World Markets analyst Mark Petrie increased his target to $178 from $168 with an “outperformer” rating (unchanged).
“Dollarama is the clear go-to name in Canadian consumer stocks and in our view, the Q4 results do nothing to change this position,” said Mr. Petrie. “Sales are strong, margins are healthy and the consumer proposition remains compelling.”
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Though bad news continues to swirl around Tesla Inc. (TSLA-Q), Jefferies analyst Philippe Houchois thinks there’s a high probability that its management and board will take significant action on its forward guidance and funding in order to restore credibility amid growing concern that the carmarker’s first-quarter production will fall short of expectations.
Believing there’s a “small possibility” that Tesla will release supportive data this week, Mr. Houchois raised his rating to “hold” from “underperform” with a target price of US$250 (unchanged), which remains below the average on the Street of US$326.79.
Elsewhere, Baird’s Ben Kallo thinks production relays are already priced into the stock, adding the stock’s volatility has presented investors with a buying opportunity in the past. He kept an “outperform” rating and US$411 target.
“While it seems a perfect storm is weighing on the shares, we are buyers into pressure as Model 3 production ramps,” said Mr. Kallo. “We like the set-up headed into Q1 deliveries as we believe sentiment is overly negative, and think [Tesla] may be able to exceed lower expectations.”
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The parent company of the Olive Garden chain of restaurants presents investors with quality, consistency and liquidity at a reasonable price, according to RBC Dominion Securities analyst David Palmer.
Believing a recent pullback in share price for Darden Restaurants Inc. (DRI-N) has created a compelling valuation, given his outlook for mid-single digit revenue growth and a double-digit total return, Mr. Palmer upgraded the stock to “outperform” from “sector perform.”
“We believe is a world-class management team and portfolio of full-service restaurant brands,” said Mr. Palmer. “At its current valuation of 16 times NTM EPS [next 12-month earnings per share], we believe Darden stock represents a favorable risk/reward, particularly heading into fiscal 2019.”
“At 16 times NTM earnings, Darden currently trades nearly two P/ E [price-to-earnings] turns below the market-cap weighted average of its peer group. This is despite a track record of top-line outperformance that includes industry-leading SSS [same-store sales] growth (behind Texas Roadhouse Inc.), better than average unit growth of 2–3 per cent, and solid double-digit total return prospects, coupled with an 3 per cent dividend yield.”
Mr. Palmer said he’s bullish on Darden, which operates eight casual dining chains, entering fiscal 2019, noting: “1) improving industry macros (e.g., tax refund tailwinds, wage/job growth); 2) Darden’s recent investments in labor (at both Olive Garden and the recently acquired Cheddar’s); 3) improving Cheddar’s trends as the integration is completed in F4Q18; 4) stingy pricing at Olive Garden, which is already yielding improved value scores; and 5) improved execution and costs at Olive Garden after a reduction in promotion windows in FY18. While the reduction in the number of promotions should be a particular drag in fiscal 4Q (ending May), this has been embraced by Street estimates. Heading into fiscal 2019, Olive Garden execution and traffic should benefit from a simplified promotion schedule without the drag of fewer promotions (a factor in FY18). Lastly, we note that a combination of $15-million in incremental Cheddar’s synergies, $5-million lower interest expense (from recently refinanced debt), and $25-million-plus benefit from lower taxes minimizes the necessary organic EPS growth to 10 per cent to achieve consensus estimates.”
He raised his target price for Darden shares to US$97 from US$93 in order to reflect “higher visibility from recent initiatives and slightly higher (above-consensus) EPS estimates.” The analyst average target is US$100.95.
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Citing both the underperformance of its stock since last fall and higher financial estimates in the wake of U.S. tax reform, RBC Dominion Securities analyst Gary Bisbee raised his rating for Paychex Inc. (PAYX-Q), believing its more reasonably valued than it has been in several years.
“PAYX underperformed the S&P 500 by 7 per cent in 2017 and is down another 10 per cent year-to-date in 2018 (vs. S&P down 1 per cent),” said Mr. Bisbee, moving the Rochester, N.Y.-based company to “sector perform” from “underperform.”
“Combined with EPS estimates having been revised up 9 per cent since November to incorporate U.S. tax reform, PAYX’s forward P/E multiple has declined from 28 times last fall to the current 22 times, which now trails the 5-year average of 24 times. On a relative basis, PAYX trades at 133 per cent of the market multiple, below its 5-year average of 148 per cent.”
His target for Paychex shares remains US$63, which is below the average of US$65.02
“Paychex has a strong financial model, an overcapitalized balance sheet, and an attractive dividend yield, and it is compounding earnings at a solid but unspectacular rate,” the analyst said. “While the outlook for flattish operating profits in FY19 is disappointing, we believe that the recent valuation compression prices in much of this disappointment. We see a balanced risk-reward from here and major underperformance as less likely, which supports our new Sector Perform rating.”
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Mr. Bisbee sees an “improved growth story” and more reasonable valuation for Automatic Data Processing Inc. (ADP-Q), leading him to upgrade its stock to “outperform” from “sector perform.”
“ADP has faced several headwinds that have limited revenue growth and profitability over the past 18 months, including tough comps after strong ACA [Affordable Care Act] demand, drag from the HSA/COBRA [Health Savings Account/Consolidated Omnibus Budget Reconciliation Act] unit sale, and margin pressure from the ‘Service Alignment Initiative,’” he said. “As a result, operating income decelerated from 9–12 per cent annually to 7.5 per cent/5 per cent in FY17/FY18. The good news is that these challenges are being lapped and bookings have returned to year-over-year growth, which sets up easier comparisons and likely acceleration going forward.”
The analyst now sees a “favourable” valuation for the New Jersey-based human resources management software and services provider, noting a recent pullback and higher estimates following U.S. tax reforms leave it trading an “attractive” price-to-earnings multiple.
He raised his target for ADP shares to US$130 from US$119. The average is US$123.89.
“ADP is a quality defensive growth story with above-average predictability, leverage to rising interest rates, an attractive dividend yield, and a strong balance sheet,” said Mr. Bisbee. “The growth story is improving as headwinds are lapped, bookings growth has returned, and earnings are likely to compound in the teens in the next few years (boosted by tax reform in the short term, and accelerating margins in FY19 and beyond). We see a positive risk-reward and believe ADP is a good idea for large-cap growth investors.”
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Beacon Securities analyst Vahan Ajamian said Sunniva Inc. (SNN-CN) presents investors with rare exposure to two of the world’s largest cannabis markets – Canada and California.
He initiated coverage of Vancouver-based producer with a “speculative buy” rating.
“While there is no shortage of ‘we will grow weed and sell it’ stories out there, in our opinion, Sunniva clearly gains tremendous credibility and differentiates itself from the pack due to the following two main factors,” said Mr. Ajamian.
“First, ‘they have literally done this before.’ Dr. Anthony Holler, Sunniva’s CEO, was previously the Founder and CEO of ID Biomedical. ID Biomedical built the world’s largest flu vaccine manufacturing facility, presold its production, and sold the company to GlaxoSmithKline for $1.7-billion in 2005. Second, in February 2018, Sunniva announced a definitive take or pay supply agreement with Canopy Growth Corp. (WEED-T), to supply it with 45,000 kilograms of production from its B.C. facility a year for an initial term of two years – by far the largest transaction in legal cannabis history.”
Mr. Ajamian noted the pricing realized from the Canopy agreement will be governed by a revenue share, thus Sunniva’s take remains uncertain. However, he said he cannot envision a scenario where it would receive less than $3 per gram from sales.
“This would thus generate a minimum of $135-million of sales for Sunniva in each of the two years,” he said. “A group of U.S. cannabis operators currently trade at an enterprise value-to-calendar 2019 estimated sales multiple of 2.0 times. Applying this multiple on the aforementioned $135-million of sales (even though these are entirely Canadian sales for Sunniva, and no U.S. operator has anywhere near such committed volumes – never mind to Canopy, which we consider to have extremely low credit risk) results in an implied EV of $270-million versus an EV of $266-million or all of Sunniva. Accordingly, we argue that investors are essentially paying for the value of Sunniva’s contract with Canopy and thus getting the other three businesses for free (i.e., California greenhouse, NHS and VC – plus whatever else the company can produce and sell from its B.C. greenhouse).”
Currently the only analyst covering the stock, according to Bloomberg, Mr. Ajamian set a price target of $16.50 per share.
“While we anticipate that there will initially be shortages of low cost, high quality and pesticide free legal product, we believe the industry could eventually see a surplus,” the analyst said. “We believe Sunniva stands to benefit under such a scenario from its focus on low cost production at scale – as well as the diversification of the markets it serves (i.e., both Canada and California).
Sunniva has been trading for less than three months – during a period largely marked by a pullback in the sector (average stock is down 33 per cent). Until today Sunniva had no analyst coverage and, fresh off its $28-million oversubscribed financing, we believe investors will quickly and increasingly take note of this name. We recommend investors acquire shares aggressively at current levels.”
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ProMetic Life Sciences Inc. (PLI-T) shares are high risk but possess the potential for high returns, said Echelon Wealth Partners analyst Douglas Loe.
“ProMetic (PLI) reported FQ417 results for the December-end period, but we would be burying the lead, if we dwelled too extensively on the quarter itself with so many (largely negative) operational updates provided in parallel, including anticipated delay on FDA review for flagship plasminogen formulation Ryplazim until at least F2019 and termination of a cash-contributing alliance in China-based Shenzen Royalty Asset Management,” said Mr. Loe. “Financial risk continues to be considerable for the firm through a combination of high EBITDA losses and the requirement for new sources of capital to fund all product development initiatives embedded in our model.”
He lowered his rating for the Laval, Que.-based biopharmaceutical company to “hold” from “buy” and dropped his target to $1 from $3.75. The average target is currently $3.06.
“We advise caution on PLI based on operational update and streamlining of pipeline priorities, but scientific/medical justification for pipeline advance is as strong as ever,” he said.
“While our revised HOLD rating and PT of $1.00 represents a shift in our investment thesis in the medium term, we remain positive about the firm’s core technical capabilities in capture affinity resin-based affinity purification of plasma proteins and in developing small-molecule anti-fibrotic therapies, and both categories have well-advanced assets in plasminogen and PBI-4050. Regardless of how disappointed we are in timelines to FDA review on one of these (plasminogen) and how capital-constrained imminent Phase III testing could be on the other (PBI-4050 in idiopathic pulmonary fibrosis [IPF]), we see strong value creation for both programs over time, while advising investors of our longer-term positive view of the scientific underpinnings of both of these lead programs.”
Elsewhere, CIBC World Markets Prakash Gowd lowered the stock to “underperformer” from “neutral” with a 60-cent target, falling from $2.15.
Mr. Gowd said: “The lengthy delay (~one year) in potential RYPLAZIM approval has made a precarious cash situation worse. While regulatory delays are not uncommon in biotech development (we had originally assumed a six-month delay), we are concerned that the increased balance sheet risk makes for a negative scenario for PLI shares. While PLI’s drug assets have value, the company does not currently have the funding available to move them forward appropriately. If the company is unable to raise capital, it may be forced to partner or sell these assets from a weak negotiating position.”
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In other analyst actions:
Cormark Securities analyst Brent Watson initiated coverage of AltaGas Ltd. (ALA-T) with a “market perform” rating and $28 target, which is 75 cents less than the average.
Canaccord Genuity analyst Dalton Baretto upgraded Hudbay Minerals Inc. (HBM-T) to “buy” from “hold” with a target of $11.50. The average is $13.64.
Citing a positive outlook for near-term lumber prices, RBC Dominion Securities analyst Paul Quinn upgraded Western Forest Products Inc. (WEF-T) to “outperform” from “sector perform” with a target of $3, which is 22 cents less than the consensus.
Cormark Securities Inc. analyst Tyron Breytenbach upgraded Asanko Gold Inc. (AKG-T) to “buy” from “market perform” with a target of $2.50, up from the current consensus of $1.50.
David Leeder