Inside the Market’s roundup of some of today’s key analyst actions
Seeing “reduced potential upside” for its stock in the short and medium term, Desjardins Securities analyst Maher Yaghi downgraded his rating for CGI Group Inc. (GIB.A-T) despite the release of in-line first-quarter results.
On Wednesday before market open, the Montreal-based IT services provider reported revenue and adjusted earnings before interest and taxes (EBIT) of $2.96-billion and $439-million, matching the expectation on the Street of $2.94-billion and $439-million.
Though he thinks the company continues to “reap the benefits” of a restructuring program announced last year, Mr. Yaghi emphasized a “change in tone on client confidence” as they adjust to a slower macroeconomic environment.
“We believe there is also a risk that clients with less visibility on their future performance will scale down expenses (including in digitization) to improve their balance sheets to brace for a potential downturn,” he said. “According to CNBC’s Fed survey, the odds of a recession in the next 12 months recently reached a three-year high, which could affect client budgets, in our view. We acknowledge the backlog’s strength should protect GIB’s financial results, even if demand fades momentarily. However, recall that many clients delayed signing new outsourcing contracts in 2009 and 2010. Overall, we believe that GIB is well-diversified across geographies and verticals, which should provide downside protection if economic conditions deteriorate. Still, a significant impact on the tech sector’s valuation is likely if such an event occurs.”
In moving CGI shares to “hold” from “buy,” Mr. Yaghi said the company’s valuation is now “flirting with historic highs,” which he feels could be pressure its share price moving forward.
“GIB’s valuation premium over its peers is not as large as it was on Dec. 31, but is still near recent historical highs,” he said.
"Isolating the relationship with Accenture (ACN-N not rated), GIB’s P/E valuation discount has declined to 2.4 times (from 4.1x) since our upgrade in October. The U.S. consulting giant reported results that disappointed investors in December, which helped narrow the valuation gap with GIB. Another reason is GIB’s improving organic growth profile. However, we note that GIB generated 3.0–3.5-per-cent organic growth in the quarter while ACN’s management indicated its organic growth was more than 8 per cent. Overall, there are good reasons why GIB’s valuation gap is historically high relative to its peers, including the lower risk associated with onshore operations. However, we believe it could be difficult for GIB’s valuation premium to remain above its historical range since we do not expect major shifts in the story in the short term.”
His target for CGI shares remains $94.50. The average target on the Street is $91.84, according to Bloomberg data.
“While we continue to believe GIB is a core holding of a tech portfolio, we expect the stock to trade sideways in the next few months given its elevated multiple in relation to its peers and historical levels,” he said. “The potential announcement of a sizeable accretive acquisition is a risk to our call, but the timing of an event like this is very difficult to predict at this point.”
Meanwhile, seeing “no real surprises” in the results, Canaccord Genuity’s Robert Young increased his target to $95 from $90 with a “buy” rating.
“We like the defensive nature of the name and believe valuation will continue to climb with the potential for revenue acceleration and margin expansion in 2019 and beyond,” said Mr. Young. “We expect CGI to benefit disproportionately from digital transition as large organizations move from smaller targeted IT projects towards enterprise-wide digital transformation mandates which are best suited for end-to-end IT Services vendors, like CGI, with a global footprint. CGI indicated it remains committed to its target to double the company over the next 5-7 years through its build and buy strategy, including metro market and transformative M&A which we look for as a catalyst in 2019.”
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As it aspires to be the “premier professional consultancy” in its industry by the end of 2021, Desjardins Securities analyst Benoit Poirier thinks WSP Global Inc.’s (WSP-T) newly unveiled, three-year strategic plan “should be achievable,” though he admits he remains “more conservative at this point.”
On Wednesday, shares of the Montreal-based engineering firm jumped 4.8 per cent, giving it a market cap slightly higher than that of peer SNC-Lavalin Group Inc. (SNC-T).
The increase came in response to the release of its strategic objections, which include increasing net revenue to $8-$9-billion (from $6-billion in 2016) with an adjusted EBITDA margin of 11.5-12.5 per cent (from 11 per cent in 2018).
“Since launching its previous strategic plan in 2015, the company has been able to diversify its exposure to the public sector due to the nature of its work (strong demand for transportation and infrastructure) and some M&A opportunities,” said Mr. Poirier. “WSP now derives 58 per cent of total revenue from the public sector (vs 36 per cent in 2015), which tends to be more resilient and provide more stability than the private sector. In our view, WSP is well-positioned to meet its 2018 ambitions across all metrics. Consequently, management’s solid track record gives us confidence in its ability to achieve its 2021 ambitions.”
Based on his analysis, Mr. Poirier believes WSP should be able to achieve his revenue target without equity financing, noting: “Considering the latest acquisition of Irwinconsult, only $600-million of acquired revenue needs to be achieved under the current plan, which is low compared with WSP’s achievement in the previous plan. Based on our 2021 numbers, our three-year targets would range from $86.82–91.81 under our three scenarios, providing a CAGR [compound annual growth rate] of 10 per cent or more over the period (including dividends), which is attractive.”
Based on that stock price projection, Mr. Poirier upgraded his rating for WSP shares to “buy” from “hold,” calling it “a defensive E&C firm with a strong FCF profile, track record and predictability, which support a bullish view.”
His target for WSP shares remains $76. The average target on the Street is $75.18.
Elsewhere, Laurentian Bank Securities' Nauman Satti raised his target to $82.50 from $81 with a "buy" rating.
Mr. Satti said: “Although there was some initial investor apprehension that plan targets would be ‘soft,’ we were surprised by the bullish 50-per-cent EBITDA growth target, alongside 33 per cent to 50-per-cent revenue growth and a 35-per-cent headcount increase. We believe that the 2021 plan cements continued commitment to growth and pushing the envelope to become the premier industry leading firm. Given management’s track record it ultimately erases uncertainty surrounding future performance. We reiterate WSP Global as our 2019 preferred pick.”
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In a research report previewing fourth-quarter earnings season for Canadian energy companies, equity analysts at Desjardins Securities said “significant differentials volatility escalates uncertainty going into year-end reporting.”
“While 4Q results are typically straightforward from a production standpoint, we see the potential for greater uncertainty surrounding cash flow expectations given the significant variability in price differentials,” said analysts Justin Bouchard, Kristopher Zack and Chris MacCulloch.
“Specifically, this includes major differences in regional prices for both crude oil and natural gas, along with severe weakness in Canadian spot NGLs (particularly butane). We expect CFPS [cash flow per share] for our coverage universe to decrease by 25 per cent on average relative to the prior year (4Q17). While the challenging environment should already be well-understood by the market, it could set the stage for some difficult headlines and emerge as another headwind to improved stock performance in the absence of broader commodity price support.”
The analysts said they are “taking a more conservative stance on oil” after a collapse in prices “cast a long shadow over the market with a crippling effect on producer netbacks” at the end of 2018. They lowered their WTI price forecast for 2019 to US$55 per barrel (from US$65) to “better reflect the increased market uncertainty, noting that it also closely matches the current strip.”
With that decline, the analysts lowered their target price for shares of most companies in their coverage universe.
As well, Mr. Bouchard downgraded AltaGas Ltd. (ALA-T) to “hold” from “buy” with a $16 target, down from $18 and below the $18.89 average on the Street.
Among large cap stocks, Mr. Bouchard also lowered his targets for the following:
Canadian Natural Resources Ltd. (CNQ-T, “buy”) to $47 from $50. Average: $44.96.
Husky Energy Inc, (HSE-T, “hold”) to $19 from $22. Average: $18.55.
Imperial Oil Ltd. (IMO-T, “hold”) to $38 from $42. Average: $40.13.
Suncor Energy Inc. (SU-T, “buy”) to $54 from $55. Average: $52.63.
The analysts said: “Our best ideas remain unchanged for 2019. We continue to favour CNQ and SU, as both companies are expected to be net beneficiaries of the Alberta government curtailment program. We also recently upgraded MEG, which was a tactical call with the view of capitalizing on the stock’s sharp sell-off in the wake of HSE’s abandoned takeover bid. Among the mid-caps, we continue to like ERF for its diversified price exposure and strong balance sheet; meanwhile, VET provides significant leverage to stronger Brent-linked oil and European natural gas prices and a highly compelling 8.7-per-cent yield for income-oriented investors. TOG and TVE are our favourite names within the Canadian light oil space due to their disciplined operating strategies and strong balance sheets, which should provide meaningful downside protection in the event of another pullback in prices. We would also remain defensive in the natural gas space despite the extremely cold temperatures in large parts of North America in recent days, particularly TOU and AAV, while long-term investors could capitalize on attractive entry points with respect to ARX. Lastly, we highlight NVA and VII, as condensate prices are expected to remain well-supported even through the curtailment period.”
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“2.7 billion can’t be wrong,” said RBC Dominion Securities analyst Mark Mahaney in response to Facebook Inc.’s (FB-Q) “solid” fourth-quarter results.
On Wednesday after market close, the social media giant reported revenue jumped 33 per cent year-over-year to US$16.91-billion, exceeding the projections of both Mr. Mahaney (US$16.17-billion) and the Street (US$16.39-billion). Operating income and earnings per share of US$7.82-billion and US$2.38 also topped the analyst’s expectations (US$6.38-billion and US$1.91).
Monthly active users and daily active users both grew 9 per cent year-over-year to 2.3 billion and 1.52 billion, respectively, which also beat the Street’s estimates.
“2.7B users globally in December and 2B daily users across FB, WhatsApp, and Messenger, on an unduplicated basis,” said Mr. Mahaney. We view these numbers as a positive. Google is the only other global media company with properties with over 1 billion daily users. And look at how big their market cap is.”
He added: “At the margin, we are incrementally positive. We feel we could be in a period of sustained rerating as the worst FB fears appear not to have been realized. We feel the current Revenue growth deceleration is modest (35-per-cent year-over-year growth in Q3 to 33 per cent in Q4 … very modest), and believe DAU’s increasing in the U.S. for the first time in 3 quarters is a positive sign.”
Keeping his estimates largely unchanged, Mr. Mahaney raised his target for Facebook shares to US$200 from US$190 with an “outperform” rating. The average is US$191.43.
He pointed to “an intrinsically very attractive valuation (19 times 2020 estimated GAAP P/E), very strong fundamentals ($15-billion in FCF even in deep investment mode), and a compelling value proposition to both consumers (2.7 billion and counting .. .) & advertisers (Google-like ROI).”
Elsewhere, taking a “more optimistic outlook,” Citi’s Mark May hiked his target to US$185 from US$175 with a “buy” rating.
Mr. May said: “Following a 3Q18 report that we characterized as ‘better than feared’, Q4 results were above expectations and more in-line with the recent bullish checks.”
“While we continue to expect 2019 EPS growth to be depressed due to recent and ongoing investments, we still forecast a 20-per-cent 3-yearr revenue CAGR and stabilizing margins in 2020, and shares currently trade at 20 times 2019 estimated GAAP P/E (18 times cash P/E).”
Canaccord Genuity’s Maria Rippa raised her target to US$200 from US$180, keeping a “buy” rating.
Ms. Rippa said: “Q4 results brought stable user trends, stronger advertising growth, and solid operating leverage (3 per cent revenue beat drove 7-per-cent OI upside). Management’s view on revenue growth slowing through 2019 is predicated on (1) transition to Story monetization, (2) likely impact from privacy and regulation, and (3) the possibility of a softer macro environment, and likely bakes in a lot of conservatism. Meanwhile, Facebook continues to take a more proactive approach to platform safety and security, reiterating its 40-50-per-cent OpEx growth outlook for 2019. Given that it’s still early days for Story monetization, along with the format’s attractive pricing and high-engagement, fully-immersive nature, we think that Facebook may be able to increase monetization faster than most investors expect. We continue to like the long-term growth outlook.”
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After a low-key fourth-quarter earnings release, Canaccord Genuity analyst Jed Dorsheimer nudged higher his target for Tesla Inc. (TSLA-Q) shares.
“Tesla reported a relatively uneventful Q4 which was not unexpected given the business update in early January had provided sales details, and gave rough guidance of 360,000-400,000 vehicle deliveries for 2019 that should provide some comfort for investors,” he said.
“The critical Model 3 cost structure appears to be improving with both scale and manufacturing experience, with the company expecting a 25-per-cent Gross Margin ‘at some point’ during 2019. In addition, management stated that demand was in fact still quite robust, somewhat contradicting what we had thought was indicated by the message from the early January business update.”
With a “hold” rating (unchanged), Mr. Dorsheimer increased his target to US$330 from US$323, which exceeds the consensus of US$312.43.
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The growth drivers for Pfizer Inc.’s (PFE-N) “next era” look encouraging, said Credit Suisse analyst Vamil Divan, who raised his rating for the pharmaceutical giant to “outperform” from “neutral.”
“We have been waiting for further clarity on Pfizer's 2019 outlook as they feel the initial impact from Lyrica's loss of exclusivity,” he said. “With 2019 guidance behind us, we now look for growth to be driven in the 2020-2025 timeframe by marketed products such as Ibrance, Xeljanz and Xtandi, as well as pipeline assets such as tanezumab, tafamidis and vaccines. In addition, we are encouraged that Pfizer appears to be targeting pipeline-boosting bolt-on acquisitions over larger deals that are often disruptive, given the multiple products that have the potential to further improve Pfizer's growth outlook in the coming years.”
Touting its “attractive” risk-reward proposition for investors, Mr. Divan increased his target to US$47 from US$45. The average on the Street is currently US$45.67.
“Pfizer has been working through a dark period with extensive patent expirations that have hampered the company’s ability to grow,” he said. “That period is now nearing an end and, combined with a new product story with multiple marketed and pipeline assets that we believe may be underappreciated, leads us to upgrade PFE shares.”
Elsewhere, Argus Research Corp analyst David Toung upgraded Pfizer to “buy” from “hold” with a US$55 target (unchanged).
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In a separate report, Mr. Divan downgraded Allergan PLC (AGN-N) to “neutral” from “outperform” in reaction to what he deemed to be “underwhelming” guidance for 2019 and amid “additional questions we have on the strength of their business.”
“The 2019 ‘performance net income per share’ (PNIPS) guidance is indeed above 2017 as the company previously guided, but that is with a meaningful benefit from a lower tax rate and lower share count, while the actual revenue guidance was lighter than we expected,” he said.
“Company commentary also leaves us more cautious on pipeline depression drug rapastinel (which we had viewed as a key 2019 catalyst to regenerate interest in the stock) and the $2.9-billion impairment charge on the General Medicine business unit (not counting the $622-million allocated to Anti-Infectives) raises more questions with us on the visibility we have into the strength of Allergan’s underlying business and financials. There is likely still value from certain pipeline assets, but at this point we have seen too many disappointments along the way to give much credit to these assets until they mature. We also believe Allergan’s best-in-class core aesthetics franchise may continue to perform well, but we do not see enough value or visibility beyond that franchise to continue recommending Allergan shares.”
Mr. Divan dropped his target to US$161 from US$197, which falls well short of the US$194.31 average.
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In other analyst actions:
Eight Capital analyst Ralph Profiti upgraded Labrador Iron Ore Royalty Corp. (LIF-T) to “buy” from “neutral” with a target of $40, rising from $32. The average is $30.33.
National Bank Financial analyst John Sclodnick initiated coverage of Argonaut Gold Inc. (AR-T) with an “outperform” rating and $3.50 target. The average is $3.21.
David Leeder