Inside the Market’s roundup of some of today’s key analyst actions
Though The North West Company Inc.’s (NWC-T) outlook remains “stable to positive,” Industrial Alliance Securities analyst Neil Linsdell downgraded its stock after the release of “mixed” first-quarter 2020 financial results.
On Wednesday, the Winnipeg-based retailer reported revenue rose 6.2 per cent to $494.5-million, exceeding Mr. Linsdell’s $477.1-million estimate. However, adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $37.3-million, excluding a $7-million benefit from IFRS 16, fell short of his expectation ($39.3-million). Adjusted earnings per share of 30 cents met his forecast but fell 4 cents year-over-year.
“The company is facing higher recurring costs including a new training facility in Winnipeg that is now open (annual cost run-rate of $1.5-million), and an increase in utility costs and insurance premiums ($4.0-million per year, $1.4-million in Q1) following hurricanes and fires over the last two years,” the analyst said.
He added: “Near-term sentiment is stable to positive in most of the Company’s markets, with the northern Canada economic outlook being positive in 2019 due to government investments, continuing recovery in Alaska, and a mixed environment in the Caribbean with posthurricane reconstruction offsetting tourism downturns. However, Western Canada remains challenging for the Giant Tiger business, with higher shrink and increased discount food competition.”
Mr. Linsdell said the results pushed him to be “Slightly more cautious as we continue to watch efforts to tackle expense challenges.”
Moving the stock to “hold” from “buy,” his target fell to $31 target from $32.50. The average target on the Street is currently $31.67, according to Bloomberg data.
“Comparables have traded at an average of 9 times enterprise value-to-EBITDA (pre-IFRS 16) over the last five years,” he said. “We believe that NWC should trade at a similar multiple going forward (now 8 times following IFRS 16 implementation).”
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Lululemon Athletica Inc. (LULU-Q) is “firing on all cylinders and making it look easy,” according to Citi analyst Paul Lejuez.
On Wednesday after the bell, the Vancouver-based apparel maker and retailer reported first-quarter earnings per share of 74 U.S. cents, exceeding Mr. Lejuez’s 72-U.S.-cent estimate and the company’s guidance of 68-70 U.S. cents. Comparable same-store sales growth of 16 per cent also easily topped the analyst’s forecast (12.5 per cent).
“Momentum was broad based with store traffic up 8 per cent and all categories comping positively, even in theoretically more mature areas such as women’s bottoms (which comped 19 per cent),” he said. “Management is getting ahead of any problems with congestion related to List 4 tariffs by airfreighting in fall product ($0.04-0.05 headwind in F19). And even if worst case scenario with tariffs plays out, we believe LULU is one of the best positioned of all our companies to take price. With no signs of a slowdown in momentum and opportunity for more top line beats ahead, we reiterate our Buy rating.”
With the results, the company raised its fiscal 2019 EPS guidance to US$4.51-$.459 from US$4.48-$4.55. The Street is projecting US$4.62.
Based on the quarterly beat, Mr. Lejuez increased his 2019 and 2020 EPS estimates to US$4.74 and US$5.81, respectively, from US$4.70 and US$5.77.
He maintained a “buy” rating and US$205 target. The average on the Street is currently US$187.86.
“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,” said Mr. Lejuez. “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, RBC Dominion Securities’ Kate Fitzsimons raised her target to US$200 from US$190, keeping an “outperform” rating.
Ms. Fitzsimons said: “LULU’s 16-per-cent CC comp demonstrates it’s continuing to rise above apparel peers seeing challenged results. Slight raise to 2019 outlook in line with 1Q beat suggests updated guidance remains conservative given momentum, with 5-year plan of $6-billion in sales and $8-9 in EPS off to a strong start. Shares look expensive but rightly so given consistency of quality, strong results.”
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Pointing to “extreme valuation” and the potential for the release of a weak third-quarter outlook with its results next month, MoffettNathanson analyst Michael Nathanson cut his target price for shares of Twitter Inc. (TWTR-Q) to a new low on the Street on Thursday.
“Now seems to be an especially opportune time to sell Twitter," he said.
Emphasizing slowing growth and rising costs “could be a burden on Twitter for years to come,” Mr. Nathanson sliced his target to US$25 from US$28 with a “sell” rating. The average on the Street is US$39.26.
"Twitter still does not seem to be doing enough to secure its platform, while its valuation remains as stretched as ever,” he said.
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Citi analyst Adam Ilkowitz expects “steady” third-quarter results from Shaw Communications Ltd. (SJR-B-T) when it reports before the bell on June 27.
“We are updating our model for the sale of the equity stake in Corus and the actual 600 MHz spectrum auction results, which have an offsetting balance sheet impact, while we lower our EPS estimates due to the removal of equity income,” he said in a research note released late Wednesday. “Our headline financial estimates are similar to consensus, and we are expecting positive Consumer Internet net adds. We see upside to the consensus 55k postpaid wireless net add forecast; our estimate is 65k.”
Mr. Ilkowitz is now forecasting earnings per share of 35 cents, falling from 39 cents after removing the Corus equity income but above the 32-cent consensus. His $1.33-billion revenue projection matched the Street.
He lowered his full-year EPS expectations for 2019, 2020 and 2021 to $1.36, $1.45 and $1.55, respectively, from $1.41, $1.52 and $1.61.
Mr. Ilkowitz maintained a “sell” rating and $24 target, which is the lowest on the Street. The average on the Street is $29.42.
“Shaw has faced increased competition in its cable footprint from its Telco competitor which is investing in fiber to the home and IPTV,” he said. “In addition, the acquisition of Wireless has led to greater growth expectations that we view as difficult to achieve. Our Sell rating is largely based on an expensive valuation relative to peers without superior growth or capital returns to shareholders. However, a reduced valuation or better growth than expected could lead us to revisit our thesis.”
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Citi analyst Eric Petrie assumed coverage of Methanex Corp. (MEOH-Q, MX-T) with a “neutral” rating, pointing to macro concerns, slower-than-anticipated methanol-to-olefins (MTO) projects and fallout from the U.S. trade dispute with China.
“MTO is the largest demand driver for methanol however, project ramps slower-than-expected and trade/China volatility remain risks,” he said. “Our S&D model assumes 2 mmt of incremental methanol demand from MTO in 2019, or 2.5-per-cent global utilization, which equates to roughly one world scale methanol plant. MEOH management from its 1Q call expects two new MTO plants in China to startup this year. The U.S.-China trade war could slow the pace of new US greenfield methanol projects, unless integrated downstream, as most tons would be exported and Asia accounts for ~75% of global demand.”
“Lower oil equates to more advantaged naphtha in Asia, which competes with methanol as a feedstock for MTO (15 per cent of demand) to produce olefins and downstream derivatives. The US-China trade war and resulting slower macro environment could negatively impact traditional end uses (55 per cent of demand) including formaldehyde and acetic acid with demand profiles typically tied to GDP. Citi’s Commodity Strategy team is bullish near-term Brent crude prices, but expects lower prices in the out-years averaging $56 per barrel in 2020 and $50 in 2021. Higher oil prices could result in an improved methanol price outlook.”
Mr. Petrie lowered the firm’s target for Methanol shares to US$49 from US$58. The average on the Street is US$60.71.
“MEOH shares have declined 7 per cent year-to-date following lower methanol prices and oil prices,” he said. “We trim our 2Q EPS estimates as contract methanol prices slipped in June following spot price trends. Remain Neutral despite the share pullback due to: 1) Slowing macro; 2) Lower oil prices; and 3) Potential CTO/MTO project delays on more competitive naphtha feedstock.”
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Following Wednesday’s release of “mixed” quarterly results, RBC Dominion Securities analyst Sabahat Khan expects Roots Corp. (ROOT-T) to exhibit improved year-over-year trends in the second half of the year.
“Q1 Adjusted EBITDA was below RBC/consensus forecasts as the expected promotional activity during the quarter had a greater-than-anticipated impact on margins,” he said. “Looking ahead, we expect similar trends in Q2, with continued promotional activity expected to negatively impact margins in another seasonally small quarter. For full-year 2019, our forecasts reflect modestly lower year-over-year (YoY) gross margins (weak YoY margins in H1 being partially offset by improved margins in H2) and modest YoY improvement in SG&A as a percentage of sales. Following lower-than-expected Q1 results, we have revised our 2019 Adjusted EBITDA estimate to modestly below the low end of the guidance range of $46-$50-million.”
He maintained a “sector perform” rating and $4.50 target, which falls short of the $5.31 consensus.
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Stantec Inc. (STN-T) is now a “a cleaned up (post construction) entity,” said National Bank Financial analyst Maxim Sytchev following the company’s Investor Day event on Wednesday in Edmonton.
Noting its shares have remained “relatively flat” over the last five years, Mr. Sytchev said: “As a result, there is a catch-up appeal if one assumes 2-3-per-cent% organic growth, 7-9-per-cent M&A and flat margins. Q1/19 (downward) expectations by management also did not appear to detract from the story. On a relative basis, however, we are seeing some better risk-adjusted opportunities elsewhere while fully acknowledging that the tough days are largely behind the company. Going forward, a breakout from very low-single digit organic growth is required to re-ignite investor interest in the name (and that’s especially true for company’s Infra and Buildings practices). Compression of 15 per cent through-the-cycle top line target appears inevitable to us, especially as the company is not looking to do larger transactions. In our view, focusing M&A squarely on U.S. would also be more accretive from synergies perspective. Buying 2,000 employees in Asia Pacific is not the same as buying 2,000 engineers in the U.S. where back-office functions and real estate rationalizations can be material. Difficulty sourcing employees also flies against margin enhancement even though the company is driving tech tools such as parametric design to alleviate resource pressures.”
He called Stantec “a solid asset,” however he added: “We are not (yet) seeing positive earnings revision dynamic in this name.” Accordingly, he maintained a “sector perform” rating and $31 target. The average is $37.45.
“Recall that capital allocation over the last 10-12 years has been spotty for STN (urban land, oil over-commitment and MWH); we believe assigning similar multiples to Stantec as some of the faster growing peers is premature at the moment,” the analyst said.
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With files from Bloomberg News
David Leeder