Inside the Market’s roundup of some of today’s key analyst actions
Pointing to its “weak” first quarter, lack of near-term catalysts and lower valuation, Raymond James analyst Andrew Bradford thinks it’s “likely a good setting to begin or add to positions” in Mullen Group Ltd. (MTL-T).
On Wednesday after market close, the Okotoks, Alta.-based company reported earnings before interest, taxes, depreciation and amortization of $44-million, lower than Mr. Bradford's $50-million as well as the consensus of $45-million, which he noted moved sharply lower in the last three days. He pointed to “thinner” margins in both its Trucking/Logisitics and Oilfield Services segments in explaining the miss.
“This was a weak quarter punctuated with ambiguous outlook,” he said. “We expect modest near-term pressure on the stock as a result. Notwithstanding, we are maintaining our Outperform rating. While the Trucking segment may not be enjoying organic growth, Mullen is fairly effective at augmenting the segment with attractively-priced acquisitions, and in our view, the downside is limited from here.
“Similar with Mullen's OFS segment. While Mullen's $75-million capital budget should be considered a 'maintenance budget', the $20 mln of growth within it is planned for Envolve (fluids disposal south of Grande Prairie) and Canadian Dewatering. From our perspective, the Canadian oilpatch is rolling along a bottom, with the balance of risk tilted toward the upside.”
In reaction to the results, Mr. Bradford lowered his 2019 and 2020 earnings per share projections to 59 cents and 80 cents, respectively, from 73 cents and 89 cents.
He dropped his target for Mullen shares to $14.50 from $15.25, keeping an “outperform” rating. The consensus on the Street is $14.25, according to Bloomberg.
“Mullen's stock is down slightly year-to-date, which makes it a considerable underperformer vis-à-vis oilfield services stocks major stock indices,” he said. “We are constantly hand-wringing about MTL's high multiples of EBITDA, though the stock is now priced at 9.0 times our reduced 2019 estimate and 7.8 times 2020. These multiples are sufficiently below most of the last 3-4 years to provide potential for upside from even modest multiple expansion.”
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TFI International Inc. (TFII-T) “remains on the fast track with value creation as end destination,” said Desjardins Securities analyst Benoit Poirier following the release of its first-quarter results, which led to a 5-per-cent jump in share price on Tuesday.
Despite harsh winter conditions, the Montreal-based transportation and logistics company reported revenue for the quarter of $1.231-billion, meeting Mr. Poirier’s estimate of $1.237-billion, while EBITDA of $155-million, excluding gains from asset sales and IFRS 16 impacts, topped his projection of $149-million. Adjusted earnings per share of 77 cents were 13 cents higher than he predicted.
“TFII reported another solid quarter, with further operational improvements across key divisions,” the analyst said. “Management reiterated its 2019 outlook as it prefers to wait for additional clarity on market conditions given the softness associated with challenging weather. We remain confident in management’s ability to continue to create shareholder value and therefore maintain our bullish stance given the attractive potential return (34%) to our revised target of C$60 (was C$55).”
With his revised target, which exceeds the $53.85 consensus on the Street, Mr. Poirier maintained a “buy” rating.
“Overall, we continue to like the name given the recent improvement in market fundamentals across all divisions and its attractive valuation (we derive a FCF yield of 9–10 per cent excluding IFRS 16),” he said. “Management is building a solid foundation for its business across all segments both organically and via M&A. We believe it will continue to leverage its solid FCF to buy back stock and make strategic tuck-in acquisitions.”
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Though it is executing on its deleveraging strategy, valuation is now a headwind for Cenovus Energy Inc. (CVE-T, CVE-N), said Raymond James analyst Chris Cox.
On Tuesday, Cenovus reported first-quarter funds from operations of 85 cents, easily exceeding both Mr. Cox’s 63-cent estimate and the 69-cent consensus on the Street. However, Mr. Cox said the “significant” headline beat was due largely to one-time drivers, leading him to make only marginal adjustments to his forward projections.
“The bulk of the beat came in the Downstream segment (up 13 cents per share), supported by $143-million of FIFO-based inventory gains,” he said. “In the Deep Basin operations, stronger than expected gas price realizations of $2.89/Mcf drove 3 cents per share of upside to our forecasts as the company sold significantly more volumes into the spot vs. forward market during some exceptional cold snaps during February; and finally, royalties at Foster Creek came in $4.04/bbl lower than we had expected (5 cents per share impact), reflecting true-ups from an overpaid position with the Alberta Government exiting 2018.
“While many of these drivers of the 1Q19 beat may be one-time in nature, the effect on the de-leveraging profile is still evident. Cenovus delivered a robust $670-million of FCF after dividends during the quarter. This allowed the company to repurchase US$449-million of unsecured notes during the quarter, with an additional US$66-million repurchased subsequent to the quarter. While net debt decreased a more modest $244-million quarter-over-quarter, much of this is due to a $638-million increase in combined inventory and AR/AP balances vs. the end of 2018, with much of this expected to convert to cash as the year unfolds (inventory is likely to be drawn down in 2Q19 as the company completes a 23-day turnaround at Christina Lake).”
Keeping a “market perform” rating for the stock, Mr. Cox raised his target by a loonie to $14, which falls below the $15.66 consensus.
“This was a very strong quarter for Cenovus, with an incredible turnaround in financial performance following a very challenging 4Q18 print,” he said. “While a number of the drivers are somewhat one-time in nature, the impact on the balance sheet is nevertheless significant and the go-forward FCF profile is robust, providing a continued line of sight to meaningful de-leveraging. However, after a remarkable run with the stock outperforming peers by 25 per cent year-to-date, Cenovus has now fully closed its valuation gap to its peers, and then some. At strip pricing we peg CVE at a 0.5 times and 1.0-times premium to its peers on 2019 and 2020 EBITDA, despite the more defensive nature visible with many of the company's peers.”
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Pointing to the recent “strong” performance of many Canadian utilities infrastructure companies, Credit Suisse analyst Andrew Kuske downgraded a trio of stocks ahead of the sector’s fist-quarter earnings season.
“A few major themes this earnings season, include: (a) a continued public-private divide on asset valuation; (b) debt re-financings at very attractive levels; (c) certain egress issues creating outsized marketing opportunities; (d) any meaningful update on the major egress issues; and, (e) views on the shifting political sentiment across Canada (as measured by the most recent series of election results in multiple Provinces),” said Mr. Kuske.
He lowered the following stocks:
Enbridge Inc. (ENB-T) to “neutral” from “outperform” with a $55 target, which exceeds the consensus by a penny.
Brookfield Infrastructure Partners LP (BIP-N, BIP-UN-T) to “neutral” from “outperform” with a US$46 target. The average is US$45.08.
Gibson Energy Inc. (GEI-T) to “neutral” from “outperform” with a $26 target, which tops the consensus of $25.46.
“Among the Energy Infrastructure names, we continue to prefer Pembina Pipelines (PPL-T) and, amongst the Utilities, Brookfield Renewable Partners (BEP-UN-T) is our only Outperform rated stock,” he said. “Yet, BEP is clearly tied to news flow associated with TransAlta’s activists, related legal matters and an Alberta outlook on a near-term basis. Overall, we prefer Brookfield Business Partners (BBU-UN-T) and Brookfield Asset Management (BAM-A-T). Many factors affected sector performance, but yield curve moves were among the most predominate.”
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Boyd Group Income Fund (BYD-UN-T) sits in the “pole position” on original equipment manufacturer (OEM) certifications, according to Desjardins Securities analyst David Newman, leading him to raise his target for its stock ahead of the May 15 release of its first-quarter financial results.
“Our analysis of BYD’s U.S. network shows that 30 per cent of its locations have at least one OEM certification (including Fiat Chrysler Automobiles (FCA), Hyundai/Kia, Nissan/Infiniti and Ford (collectively representing 65 per cent of vehicles in the U.S.)), highlighting BYD’s efforts to tap into this growing trend,” said Mr. Newman. “For locations with OEM relationships, we estimate an average OEM penetration rate of 53 per cent on a per-store basis.
“We believe OEM certification creates a formidable barrier to entry for new entrants to the collision repair industry, with the large MSOs [multi-store operations] (such as BYD) able to deliver enhanced value (quality of service, cost-effective repairs, and investments in training and specialized equipment). BYD’s strong participation in OEM certification should bode well for its future organic growth, ongoing recruitment and retention efforts, as well as acquisitions, as the single shops and small MSOs are increasingly challenged.”
For the quarter, Mr. Newman is projecting revenue for the Winnipeg-based company of $548-million, slightly exceeding the analyst consensus of $540-million, and adjusted EBITDA of $50-million, matching the Street’s view.
“We anticipate strong 1Q19 results, driven by: (1) healthy organic growth (we forecast a conservative 2.5 per cent, compared with 4.0 per cent last year) despite ongoing technician shortages; (2) an acceleration in M&A (BYD was active on the acquisition front in 1Q19, adding an estimated 41 locations, including two sizeable regional MSOs, discussed below); (3) an FX tailwind (a stronger U.S. dollar vs the Canadian dollar); and (4) harsh weather conditions across North America, which drove demand for BYD’s repair services (somewhat constrained by technician shortages, although this is potentially easing),” said the analyst. “BYD’s organic growth is supported by its efforts to attract and retain technicians, underpinned by its enhanced employee benefits and investment in training, equipment and automation. While BYD’s backlog of unprocessed work was elevated at the end of 4Q18, we anticipate it likely remained comparable quarter-over-quarter.”
Maintaining a “buy” rating for the stock, Mr. Newman raised his target to $158 from $151. The average on the Street is $156.83.
“BYD is a leading consolidator of the collision repair market, with an attractive growth profile and a robust financial position,” he said.
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FirstService Corp. (FSV-Q, FSV-T) sits “well-positioned” to achieve its 2019 objectives, said RBC Dominion Securities analyst Matt Logan, pointing to “healthy” organic growth and recently completed acquisitions.
On Wednesday, the Toronto-based public real estate services company reported first-quarter results that largely fell in line with Mr. Logan’s expectations. Revenues of US$486-million topped both his US$475-million estimate as well as the Street’s US$471-million forecast, while earnings per share of 30 US cents met the consensus projection while falling 4 US cents shy of Mr. Logan’s forecast.
“Despite a 14-per-cent year-over-year decline in annualized housing starts, slowing home price gains and fewer renovation permits (see page five for details), we see several levers to drive continued growth such as: 1) a focus on larger communities, with more complex service requirements (e.g., high rise, luxury, active adult); 2) rounding out service capabilities for Century Fire; 3) centralized manufacturing for California Closets; and, 4) a national platform for PDR,” said the analyst.
With a “sector perform” rating, Mr. Logan raised his target to US$94 from US$92. The average is US$85.75.
“In our view, management has a credible plan to more than double the size of the business over five years (i.e., 2015–20),” he said. “The plan is predicated first and foremost on organic growth where management believes it can grow in the mid- to high-single-digit range as it has done over its long history. On top of this, management intends to continue its long standing strategy of supplementing organic growth with strategic acquisitions growth in the mid-single-digit range. Thanks to its capital-light business model, we believe the company can achieve its goals without issuing equity and without increasing its leverage ratios.”
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Wedbush analyst Daniel Ives downgraded Tesla Inc. (TSLA-Q) on Thursday, saying: “We no longer can look investors in the eye and recommend buying this stock at current levels until Tesla starts to take its medicine and focus on reality around demand issues which is the core focus of investors."
He moved the electric car maker to “hold” from “buy” in the wake of the release of its first-quarter results on Wednesday evening.
“In our 20 years of covering tech stocks on the Street we view this quarter as one of top debacles we have ever seen while Musk & Co. in an episode out of the Twilight Zone act as if demand and profitability will magically return to the Tesla story,” said Mr. Ives.
He added: “The demand story at Tesla is quickly changing and the company has unfortunately not adjusted to an evolving [electric vehicle] landscape (especially in the US) with the well thought out marketing and distribution logistics needed to manage this difficult and complex hand holding process for customers, employees, and investors.”
The analyst dropped his target for Tesla shares to US$275 from US$365. The average is currently US$297.44.
“At this point the writing is on the wall that Tesla will likely have to raise over $3 billion of capital in the near term to sustain its capex and debt needs given its current profitability path, which is another black cloud over the name with an inexperienced CFO now at the helm,” said Mr. Ives. "We continue to feel robotaxis, insurance products, and other endeavors are distractions from the growing demand woes that are not being addressed which is a critical worry of ours at this juncture.”
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Lululemon Athletica Inc. (LULU-Q) now sits in “rare company as a global lifestyle brand,” according to Citi analyst Paul Lejuez.
“With LULU’s strong positioning in the women’s athletic apparel category and continuing to gain traction with men, we believe they are in a great position to grow existing categories and expand into new ones,” said Mr. Lejuez following Wednesday’s Investor Day, which was the company’s first since April of 2014.
He called the company’s five-year financial targets achievable and in-line with his own forecast, which implies fiscal 2023 revenue of US$6-billion and earnings per share of US$9.50 (versus US$3.84 in fiscal 2018).
Mr. Lejuez raised his target for the Vancouver-based company’s shares to US$205 from US$180. The average is US$179.40.
“We rate shares of lululemon ‘Buy,’ he said. “Comp momentum has been among the best in retail and we believe it can continue. Product innovation continues to drive strong results in seemingly developed categories such as women’s pants, the men’s business is a big opportunity, and the customer has given LULU license to broaden into new categories. LULU is one of the more attractive square footage growth stories in softlines retail and there is no sign of a slowdown in momentum, and we expect shares to move higher.”
Elsewhere, Credit Suisse analyst Michael Binetti increased his target to US$195 from US$190 with an “outperform” rating.
Mr. Binetti said: “LULU’s thoughtful category/channel/geo expansion plans should support an enviable LT revenue profile vs retail peers, but we’re encouraged LULU didn’t assume higher margins given high absolute growth targets & increasing complexity in the plan.”
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A delayed spring season in the United States and weaker nitrogen prices are likely to prove to be considerable headwinds for Nutrien Ltd.’s (NTR-N, NTR-T) first-quarter results, said RBC Dominion Securities analyst Andrew Wong.
“Unfavourable weather in North America delayed pre-plant activity and applications, having a negative impact on Retail similar to last year,” said Mr. Wong in a research note released Thursday. “Nitrogen prices were also weaker than expected due to delayed US spring demand and lower cost curve support from marginal producers using inexpensive international nat gas.”
After lowering his estimates for both the quarter and the full fiscal 2019 and 2020 years, Mr. Wong moved his target for Nutrien shares to US$63 from US$65, maintaining an “outperform” rating. The consensus is US$61.70.
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In other analyst actions:
Edward Jones analyst Jennifer Rowland downgraded Canadian Natural Resources Ltd. (CNQ-T, CNQ-N) to “hold” from “buy.”
GMP analyst Robert Fitzmartyn upgraded Leucrotta Exploration Inc. (LXE-X) to “buy” from “hold” with a $1.40 target. The average is $1.85.
Haywood Securities analyst Pierre Vaillancourt initiated coverage of Osisko Metals Inc. (OM-X) with a “buy” rating and 90-cent target, falling short of the $1.18 consensus.
“Osisko Metals has made significant progress in the development of its Pine Point and Bathurst Camp projects,” said Mr. Vaillancourt. “While we recognize production is a long way off, we are confident in the Company’s ability to continue adding value to the deposits.”
David Leeder