Inside the Market’s roundup of some of today’s key analyst actions
Canadian Pacific Railway Ltd. (CP-N, CP-T) was the hardest hit by weather and lagging volume among North American railroad companies in the first quarter, according to Citi analyst Christian Wetherbee.
In a research note released Tuesday, Mr. Wetherbee sliced his earnings per share projections for the sector by an average of 2.3 per cent with CP falling 6.7 per cent (to US$2.91 from US$3.12). The consensus projection on the Street is US$3.20.
"Although volume growth was weaker than expected, we believe yields will still be strong and allow for revenue growth overall," he said. "We believe that weakness versus our expectations was somewhat concentrated in intermodal, which could therefore provide a mix tailwind for yields. On average, we are lowering our 1Q19 EPS estimates by 2.3 per cent. Volume growth was 240 basis points lower than we had initially expected on average. After accounting for a positive offset from higher yield growth assumptions (a 120 basis point improvement vs. our previous target), our revenue growth expectations for 1Q19 declined by only 130 basis points to 4.4 per cent year-over-year on average. Largely due to the reduced volume, we also estimate that ORs [operating ratios] will be 40 basis points higher than we initially anticipated, coming in at 65.4 per cent on average for the Class 1s compared to our prior estimate of 65.0 per cent.
"The largest 1Q19 estimate revision occurred at CP, which was not only impacted by severe weather but also had to overcome a significant derailment."
Following his earnings revisions, Mr. Wetherbee now sits below the consensus on the Street for all six Class 1 rails.
"As consensus is updated going into the quarter to account for the weaker volume growth, EPS estimates should move down," he said. "Although we are currently below consensus, Norfolk may be the rail most likely to beat estimates. Norfolk’s volume growth was a bit disappointing, coming in at 0.5 per cent year-over-year compared to our prior estimate of 2.2 per cent year-over-year, however, its network may have avoided many of the issues that impacted the other Class 1 rails. Furthermore, service at Norfolk has improved in the quarter which may indicate that its PSR implementation is progressing faster than expected. If that is the case, we could see an EPS beat driven by its OR coming in below our expectations."
Keeping a "buy" rating for CP shares, he raised his target to US$240 from US$233. The average on the Street is US$227.31, according to Bloomberg data.
“We are increasing our price target to US$240, which is now based on a 17-times multiple applied to our 2020 C$ EPS estimate, translated to US$ at a 1.35 USD/CAD exchange rate,” said Mr. Wetherbee. “Our target multiple is 1.5 turns below its U.S. peers to reflect it being a more mature PSR [Precision Scheduled Railroading] implementation story and its reliance on top line growth given a more challenging macroeconomic backdrop (particularly within energy).”
The analyst lowered his EPS projections for Canadian National Railway Co. (CNI-N, CNR-T) to US$1.20 from $1.24. Consensus is US$1.21.
Keeping a "buy" rating, his target rose to US$103 from US$87, which exceeds the consensus of US$90.90.
"Volume was meaningfully lower than our previous target and we are increasing our OR estimate by 70 basis points to 65.6 per cent, but we also increased our yield growth estimate to 10.0 per cent from 7.3 per cent previously, which partially offset the weaker volume growth and worse cost management assumptions," said Mr. Wetherbee. "Looking ahead to 2019, we are lowering our 2019 EPS estimate by 10 cents to $6.25."
Mr. Wetherbee also made the following target price changes:
CSX Corp. (CSX-Q, “buy”) to US$86 from US$79. Consensus: US$77.
Kansas City Southern (KSU-N, “buy”) to US$135 from US$130. Consensus: US$126.47.
Norfolk Southern Corp. (NSC-N, “buy”) to US$225 from US$200. Consensus: US$194.96.
Union Pacific Corp. (UNP-N, “buy”) to US$195 from US$180. Consensus: US$176.46.
“We are raising our price targets across the rails as 1Q cross-currents do not de-rail our longer-term thesis surrounding broad OR improvement stemming from PSR implementation,” he said. “Near-term, however, we believe there could be some volatility as estimates are lowered and 1Q reports may be light on tangible benefits of change, but with end market demand and the economy still solid, we believe further upside is likely as the year plays out. Our current order of preference is NS, KSU, UP, CSX, CP, CN.”
Elsewhere, Morgan Stanley also dropped its target for CP to $272 (Canadian) from $277, pointing to weaker revenue ton-mile growth, difficult weather, and a large derailment early in the quarter.
The firm kept an “overweight” rating.
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Tesla Inc.'s (TSLA-Q) first-quarter vehicle production and deliveries report was “substantially worse than expected,” said JPMorgan analyst Ryan Brinkman in a research note released Thursday.
On Wednesday evening, the car maker reported it delivered 50,900 Model 3 cars, its best-selling vehicle in the first quarter, missing the expectation on the Street of 52,450. Overall, the company delivered 63,000 vehicles, a drop of 31 per cent year-over-year and below Mr. Brinkman’s estimate of 70,500 and the consensus of 74,930.
He said the results suggest "materially less 1Q revenue, margin, and free cash flow."
"We believe the market postulated that if Tesla were to miss, it would be due solely to a materially greater than expected number of vehicles in transit (vehicles that could be sold in early 2Q, suggesting little need to lower full year estimates), but this appears to be only partly the case, with vehicles in transit at quarter-end totaling 10,600 vs. our estimate of 10,000, in our view implying lower underlying domestic demand," he said.
"While most attention is being paid to the Model 3 ramp, deliveries of the higher price Model S & X declined substantially in 1Q, totally just 12,100 between them — less even than the Model S alone used to sell in some quarters preceding the full production ramp of the Model X, again in our view implying a deceleration in underlying demand unrelated to temporary delivery difficulties (maybe due to tax credit expiration?)."
With an "underweight" rating, Mr. Brinkman dropped his target to US$200 from US$215. The average on the Street is US$315.65.
Elsewhere, Canaccord Genuity's Jed Dorsheimer lowered his target to US$391 from US$450 with a "buy" rating.
"While we were disappointed in the shortfall of deliveries in Q1 versus expectations, we continue to believe that the new lower-priced Model 3 variant will spur additional demand," he said. "Importantly, the company cited roughly two weeks of inventory in North America which may help temper concerns of an inventory build. ... We maintain our BUY rating given the overall opportunity that we see for Tesla and EVs in general, but are lowering our PT to $391 which is based upon 30x our new FY20 EPS of $13.05."
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Roots Corp.'s (ROOT-T) fourth-quarter results reflect a “stabilization” of its underlying performance following recent softer-than-expected results, said RBC Dominion Securities analyst Sabahat Khan.
On Wednesday, the retailer reported sales of $130.8-million for the quarter, rising 0.6 per cent year-over-year and topping the forecasts of both Mr. Khan ($128-million) and the Street ($128.8-million). Same-store sales growth of 3.1 per cent also exceeded the analyst's projection (a drop of 4 per cent).
“We believe the 4.5-per-cent decline in share price [Wednesday] is reflective of the strong run-up in the share price YTD (up 34 per cent) and some profit-taking, rather than investor sentiment regarding the Q4 results (which were in line/ahead of expectations across the major I/S metrics),” said Mr. Khan. “Having said that, management noted the potential for weaker margins in Q1 and Q2 as they look to clear some seasonal merchandise (30 per cent of product mix). With regards to the overall outlook, the company reiterated its 2019 guidance for financial metrics, but lowered the number of planned renovations/expansions and U.S. stores openings. Although the smaller number of renovations/expansions and U.S. store openings may not impact results in the current year, it could potentially moderate the outlook for earnings growth in 2020 and beyond.”
After raising his revenue and EBITDA expectations marginally, Mr. Khan increased his earnings per share projections for 2019 and 2020 to 50 cents and 55 cents, respectively, from 46 cents and 53 cents.
With a "sector perform" rating, his target for Roots shares rose to $5 from $4.50. The average target is $5.56.
Elsewhere, CIBC World Markets’ Matt Bank also increased his target to $5 from $4.50 with a “neutral” rating (unchanged).
Mr. Bank said: “Roots returned to comparable sales growth, but the broader backdrop makes it difficult to get overly excited. The company still has work to do after a malaise in brand resonance, and needs to demonstrate its ability to release relevant, seasonally-robust product through a full year, all while navigating a macro environment at risk of turning. We remain at the low end of guidance ranges.”
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In a separate note, Mr. Khan lowered his target for shares of Hudson’s Bay Co. (HBC-T) after its quarterly results fell short of forecasts.
"HBC's Q4 results reflected lower-than-expected sales and weaker-than-expected gross margins, which drove Adjusted EBITDA well below our and Street forecasts," he said. "The sales weakness reflected much weaker-than-expected sales at the Hudson's Bay banner being partially offset by another strong same-store sales print from Saks Fifth Ave. (Q4 SSS was up 3.9 per cent). Looking ahead, we expect investor focus to remain on the progress the company is making to improve results across its banners, and efforts to reduce its leverage. Although there is still significant work ahead for the company, we view the rationalization of the Lord & Taylor and Saks OFF 5TH networks, and the planned closure of Home Outfitters as steps in the right direction."
Keeping a "sector perform" rating, Mr. Khan's target dipped to $10 from $11, which remains ahead of the consensus of $9.42.
Meanwhile, CIBC World Markets’ Matt Bank lowered his target to $10 from $12, keeping a “neutral” rating.
“HBC’s Q4 results reflect damaging inventory clear-outs, while same-store sales (SSS) growth was mixed and generally as expected,” he said. “GM% should improve with better disciplines, but the broader outlook remains cloudy despite new management’s much improved controls. Our valuation is unchanged though a lower EBITDA forecast drops our price target ... Upside could be substantial if HBC can monetize some of its vast real estate holdings, but a massive improvement in retail is still the most necessary step, and though there is progress, it is still early.”
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Seeing “material” net asset value accretion and “neutral” free cash flow changes stemming from its acquisition of Goldcorp Inc. (G-T, GG-N) and joint venture in Nevada with Barrick Gold Corp. (ABX-T, ABX-N), Desjardins Securities analyst Josh Wolfson initiated coverage of Newmont Mining Corp. (NEM-N) with a “buy” rating.
“Overall, we see each transaction as neutral/positive for NEM,” he said. “Combined, the announcements increase our NEM NAV by 17 per cent and change NEM’s FCF/EV [free cash flow to enterprise value] by 0.1 per cent over a five-year period. These changes reflect a net NAV/FCF impact from the JV of 2 per cent/0.0 per cent and a GG impact of 15 per cent/0.1 per cent. Key potential upside surrounds the achievement of indicated synergies and savings, which are not fully incorporated into our estimates. Key risks include NEM’s optimistic pro forma cost reduction targets, integration and management transition uncertainties, and risks related to a potential capital spending burden after factoring in NEM’s indicated pipeline (Tanami expansion 2, Ahafo North, Yanacocha sulphides) and new ABX/GG-related items (Coffee, Goldrush, Pueblo Viejo expansion).”
Calling its relative valuation "fair" and FCF profile "favourable," Mr. Wolfson set a target of US$43 per share, which tops the consensus of US$40.76.
"At spot gold, we calculate NEM shares trade at a P/NAV of 1.9 times vs the large-producer group average of 1.8 times," he said. "For 2020/21, we calculate NEM FCF/EV of 4.6 per cent/4.1 per cent, above the peer average of 3.5 per cent/3.5 per cent. Longerterm, NEM maintains a more sustainable production and FCF outlook than peers, despite our conservative capital and operating cost profile."
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Expecting investors to “continue to gain comfort with the incremental financial risk created by content and privacy concerns,” Guggenheim analyst Michael Morris upgraded Facebook Inc. (FB-Q) to “buy” from “neutral.”
"At the same time, we believe usage trends have remained solid (domestic blue app maturity offset by Instagram and global growth) and see the potential for commerce and messaging monetization opportunities as attractively priced within shares," he said. "We still view the company’s video strategy as un-developed and see the economic opportunity as limited without uniquely recognizable content and a presence on the television screen to complement the mobile experience.”
Mr. Morris raised his target for Facebook shares to US$200 from US$175. The average is US$197.02.
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Calling it an “emerging player” in the cannabis industry, Mackie Research analyst Greg McLeish initiated coverage of Delta 9 Cannabis Inc. (NINE-X) with a “buy” rating.
“Delta 9’s proprietary production methodology involves the use of a modular, scalable, and stackable production unit called a Grow Pod,” he said.” The company creates Grow Pods by retrofitting standard 40 ft. high cube shipping containers, which ensures compliance with Health Canada and good production practices, as well as optimal conditions and layouts for large scale production of cannabis products. Grow Pod technology is a proprietary system developed with scalability and cost efficiency in mind. The systems are modular for ease of assembly, and stackable up to three units high, allowing for more efficient use of available floor space. In some cases, Grow Pods can more than double production capacity.”
“Delta 9 is currently working on the Phase 2 expansion of its Winnipeg facility. Phase 2 will retrofit a 135,000 square foot facility with 450 grow pods that will add additional cannabis production capacity of 12,500 kg/year. First cultivation is expected in Q3/F19 and full operational capacity is projected for Q1/F20. The total cost of Phase 2 is approximately $25.5 million and it is expected to be completed in Q4/19.”
Mr. McLeish set a target of $4. The average is $2.40.
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Believing its “highly differentiated” business model is positioning it for success, AltaCorp Capital analyst David Kideckel initiated coverage of Hexo Corp. (HEXO-T) with an “outperform” rating.
“As the market dynamics of the cannabis industry continue to evolve towards a focus on derivative products, including CPG products and pharmaceuticals, we believe that HEXO’s business model, prioritizing operational scalability, product innovation and brand leadership, will ultimately position them as a trusted partner to Fortune 500 companies,” he said. "The company’s trend-setting partnership with Molson Coors is a major step in HEXO’s quest towards enhanced market leadership.
“HEXO sees opportunities for major additional partnerships across various industries (e.g. pharmaceuticals, tobacco and beverages). However, unlike the cannabis sector, these are mature industries with well-established players and as a result, the barriers to entry are significantly high in comparison. By pursuing partnership opportunities with leaders in these respective industries to develop products derived from cannabis supplied by HEXO, the Company effectively penetrates multi-billion dollar markets, creating a top cannabinoid-derived product with the ‘Powered by HEXO’ brand.”
Mr. Kideckel set a target of $10.50. The average on the Street is $10.94.
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In other analyst actions:
Tudor Pickering & Co analyst Aaron Swanson downgraded Advantage Oil & Gas Ltd. (AAV-T) to “hold” from “buy.”
Tudor Pickering’s Jordan McNiven upgraded Whitecap Resources Inc. (WCP-T) to “buy” from “hold,” while Matthew Portillo raised EOG Resources Inc. (EOG-N) to “buy” from “hold.”
David Leeder