Inside the Market’s roundup of some of today’s key analyst actions
As gold prices continue to rally, equity analysts at Canaccord Genuity feel there’s plenty of upside potential remaining.
Following the U.S. Fed’s “dovish shift” and with the greenback breaking below its 200-day moving average, the firm raised its price deck for the precious metal in a research note released Tuesday.
"The gold price has rallied to $1,420/oz, a new cycle high, taking out the previous cycle high of $1,367/oz reached in July 2016," said analysts Carey MacRury, Dalton Baretto, Tom Gallo and Kevin MacKenzie. "We continue to believe gold started a new bull market in December 2015 with gold at $1,051/oz. For the year, gold is now up 11 per cent with gold equities outperforming, up 27 per cent year-to-date (in US$ terms). Since the FOMC announcement, the USD index is down 2 per cent and has now fallen below its 200-day moving average. We believe a weakening dollar sets the stage for gold prices to move higher.
"[Based on past historical gold price cycles], gold prices have gained 107 per cent on average during upcycles versus a 13-per-cent average decline in the U.S. dollar. The gold price is up 35 per cent so far this cycle, suggesting plenty of potential upside and gold equities have increased 77 per cent (in US$ terms) and the U.S. dollar is down 3.3 per cent."
The firm raised its 2019, 2020 and long-term gold price assumptions to US$1,353, US$1,424 and US$1,508 per ounce, respectively. That represents increases of 5.5 per cent, 8.2 per cent and 5.2 per cent from previous estimates.
"With average producer AISC [all-in sustaining costs] costs of $960-1,000/oz, a $1,420/oz gold price would drive AISC margins of $420-460/oz, a significant increase (up to 50 per cent) over the 2018 average margin of $300/oz," the analysts said. "An AISC margin of $420-460/oz would also be the highest average AISC margin since 2011 when the gold price averaged almost $1,700/oz. Our 2020 FCF (after sustaining capital) forecasts have increased by 20-25 per cent (based on the median) for gold producers and 9 per cent for the royalty/streaming companies.
"As a result of the changes to our price deck, our net asset value estimates have changed by 12-18 per cent on average for producers and 6 per cent on average for the royalty/streaming companies."
With those changes, the analysts raised their target price for stocks in their coverage universe.
Among royalty companies, Mr. MacRury made the following changes:
Wheaton Precious Metals Corp. (WPM-T, “buy”) to $41 from $38. The average on the Street is $37.68, according to Bloomberg data.
Franco-Nevada Corp. (FNV-T, “buy”) to $125 from $118. Average: $112.05.
Royal Gold Inc. (RGLD-Q, “buy”) to US$107 from US$98. Average: US$96.29.
Osisko Gold Royalties Ltd. (OR-T, “buy”) to $18 from $17. Average: $16.36.
Sandstorm Gold Ltd. (SSL-T, “buy”) to $9.50 from $9. Average: $8.59.
Among senior producers, Mr. MacRury made the following changes:
Newmont Goldcorp Corp. (NEM-N, NGT-T, “buy”) to US$48 from US$41. Average: US$41.07.
Barrick Gold Corp. (ABX-T, “hold”) to $19.50 from $18. Average: $19.29.
Kinross Gold Corp. (K-T, “buy”) to $6.50 from $5.50. Average: $5.49.
Agnico Eagle Mines Ltd. (AEM-T, “buy”) to $79 from $68. Average: $68.05.
Yamana Gold Inc. (YRI-T, “buy”) to $4.75 from $4. Average: $3.74.
B2Gold Corp. (BTO-T, “buy”) to $6.25 from $5.75. Average: $5.17.
Iamgold Corp. (IMG-T, “hold”) to $4.75 from $3.75. Average: $5.41.
Mr. Baretto increased Pan American Silver Corp. (PAAS-Q/PAAS-T, “buy”) to US$19 from US$18. Average: US$17.15.
Mr. Gallo raised Kirkland Lake Gold Ltd. (KL-T, “buy”) to $65 from $60. Average: $52.48.
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For the second consecutive day, an equity analyst on the Street downgraded Shopify Inc. (SHOP-N, SHOP-T) based on valuation concerns.
Though he likes the Ottawa-based tech company's long-term potential, Wedbush analyst Ygal Arounian moved the stock to "neutral" from "outperform" in the wake of its recent rally.
“While we continue to like Shopify’s positioning, vision, and competitive moat as it builds a strong retail operating system for merchants, we downgrade to NEUTRAL, as we believe shares appropriately reflect the opportunity ahead,” said Mr. Arouni.
Mr. Arounian said he sees the stock as a "core" holding, but he wants to "digest" the recent share price surge.
He raised his target to US$305 from US$270. The average is US$310.
“We take a step back on shares to digest the 125-per-cent year-to-date increase (vs 21 per cent for the Nasdaq), premium valuation, and new product announcements," he said. "Additionally, while we view the announcements at Shopify Unite last week as further improving and differentiating the platform, the most impactful announcement, Shopify Fulfillment Network (SFN) isn’t expected to generate profits until 2023,”
On Monday, Roth Capital Partners analyst Darren Aftahi dropped the stock to "neutral" from "buy" with a US$300 target (up from US$275).
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Seeing its global growth story intact and emphasizing its strength in its home markets, Credit Suisse analyst Lauren Silberman initiated coverage of Restaurant Brands International Inc. (QSR-N, QSR-T) with an “outperform” rating on Tuesday.
“RBI is well positioned to generate global market share gains across its portfolio with contribution from SSS [same-store sales] and unit growth,” she said. “Increased confidence in accelerating SSS and sustainable global unit growth across the portfolio should support multiple expansion near the high-end of heavily franchised peers. We model EPS growth in the high-single-digits, with SSS outperformance, Tim Hortons unit growth acceleration and TH margin expansion as opportunities for upside.”
“RBI [is] well positioned in home markets. Burger King has plans to roll out the Impossible Whopper nationwide by the end of 2019, which could contribute at least 460 basis points to U.S. SSS (assumes 40 units sold per day per store). Digital enhancements and menu innovation support confidence in momentum at Tim Hortons Canada, with 50 per cent of customers already on loyalty and Beyond sausage expected to rollout across the system. We model accelerating (though potentially conservative) SSS for both brands in 2019, including 2% at BK US (1Q19 0.4 per cent) and 1.2 per cent at TH Canada (1Q19 down 0.4 per cent).”
Ms. Silberman expects global unit growth to accelerate to 5.5 per cent over the next four years from 5.2 per cent in the last four years, adding: “International master franchise joint venture (MFJV) agreements support confidence in the achievability of targets, largely driven by global strength at BK and whitespace potential for Popeyes in a growing chicken category. While TH has largely failed to grow outside of Canada, we do not have aggressive assumptions (3-per-cent 4-year unit CAGR and 10-per-cent growth contribution), and better-than-expected growth could represent upside.”
She set a target of US$78. The average on the Street is US$72.36.
Ms. Silberman initiated coverage of several other U.S. restaurant companies, including:
Dunkin Brands Group Inc. (DNKN-Q) with an “underperform” rating and US$70 target. Average: US$74.72.
Papa John’s International Inc. (PZZA-Q) with a “neutral” rating and US$45 target. Average: US$56.60.
Chipotle Mexican Grill Inc. (CMG-N) with an “outperform” rating and US$870 target. Average: US$688.52.
Yum! Brands Inc. (YUM-N) with a “neutral” rating and US$106 target. Average: US$105.05.
Starbucks Corp. (SBUX-Q) with an “outperform” rating and US$92 target. Average: US$79.50.
The Wendy’s Company (WEN-Q) with a “neutral” rating and US$20 target. Average: US$20.67.
Shake Shack Inc. (SHAK-N) with an “outperform” rating and US$77 target. Average: US$60.75.
Domino’s Pizza Inc. (DPZ-N) with an “outperform” rating and US$320 target. Average: US$302.05.
Jack in the Box Inc. (JACK-Q) with an “underperform” rating and US$75 target. Average: US$91.21.
McDonald’s Corp. (MCD-N) with an “outperform” rating and US$230 target. Average: US$215.62.
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With the market “starving” for quality copper projects, Industrial Alliance Securities analyst George Topping recommends investors buy Regulus Resources Inc. (REG-X) before the industry does.
In a research report released Tuesday, Mr. Topping initiated coverage of the Vancouver-based exploration company with a "buy" rating.
"It is no secret that large producers are on the lookout for large quality copper deposits to feed growing market demand but the supply of such projects is limited," he said. "We believe Regulus, with management’s track record, will be able to replicate its success of de-risking, growing, and eventually selling AntaKori to a senior producer within a one- to three-year time frame."
Mr. Topping said the company’s management team, which features the core group from Antares Minerals Inc., is looking to replicate its success at Regulus. Antares and its Haquira project in Peru was sold to First Quantum Minerals Ltd. for US$650-million in 2010.
"Management has done it before at Antares, and looks to do it again with Regulus," he said. "The first resource released in March 2019 offers a solid base for management to build out the deposit with increased confidence in the grades and tonnage. We look for the existing inferred resource to be converted up to the indicated category as new inferred resources are added to allow for technical work.
"Not only was management successful in growing the deposit more than 50 per cent to 8.0 billion pounds CuEq since acquisition, but land agreements put in place prior to exploration were a significant de-risking step for the deposit. “An additional 20,000-25,000 metres of drilling is on schedule to be completed in C2019 which will add to a new resource due out in 2020 with a PEA to follow. We believe as copper prices recover, Regulus will be a clear take-out target as it gets de-risked and will likely garner a similar US$0.05/lb which First Quantum paid for Haquira in a bull market.”
Emphasizing the upside potential from Regulus’ flagship AntaKori project in Peru is “substantially higher” than the existing resource, Mr. Topping set a target price of $3.40 for Regulus shares.
"The copper market deficit continues to grow with not enough new supply being able to meet growing demand (Industrial Alliance calendar 2020 estimate: 250,000 ton Cu deficit)," he said. "Juniors, while riskier, offer the best torque to the copper price, which will rebound and edge higher as the market deficit becomes too big to ignore."
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Citing “management’s strong execution-to-date along with greater visibility into near-term operational results,” Beacon Securities analyst Gabriel Leung raised his rating for Vancouver-based Well Health Technologies (WELL-X) to “buy” from “speculative buy.”
The upgrade comes in the wake of a June 13 closing of a $10.5-million convertible debenture financing, which will be used to fund the $10.75-million acquisition of Kai Innovations, a Toronto-area based OSCAR server provider (OSP).
"We view the pending acquisition of KAI as representing a key milestone for Well as it catapults the company into the third largest EMR provider in Canada behind Telus Health and Loblaws/QHR," said Mr. Leung. "It also expands Well’s corporate footprint into Ontario, which we believe will lead to additional acquisitions in the region (most likely healthcare clinics)."
The analyst raised his target for Well Health shares to $1 from 90 cents.
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In a research note titled “The pathway to an $85 stock,” Canaccord Genuity analyst Yuri Lynk said Badger Daylighting Ltd. (BAD-T) has “substantial” growth opportunities in the United States, seeing the potential for doubling its business south of the border between 2019 and 2024.
“In our view, Badger has one of the best organic growth opportunities in the industrial space,” he said. "Badger is the market leader in hydrovac excavation, which is seeing rapid adoption due to its safety and efficiency advantages. The company has seen revenue grow at a CAGR of 18 per cent since 2009 primarily driven by its ability to introduce hydrovac technology into new markets in the U.S.. While Badger’s primary end-market was once oil & gas (51 per cent of 2014 revenue), it has diversified profoundly since the oil downturn in 2014 and, as such, non-oil & gas end-markets represented 73 per cent of total revenue in 2018.
"While Badger’s growth profile to this point has been extremely impressive, we believe there are still years of growth ahead. In 2019, the company is calling for $180 million in EBITDA at its midpoint of guidance, representing 11-per-cent year-over-year growth. Importantly, the company designs and builds its hydrovac assets and is generally capable of self-financing its growth, allowing it to efficiently respond to the organic growth opportunity presented by the under-penetrated U.S. market and, in 2019, the company is calling for net new builds of 155 trucks. Longer term, the company has laid out several strategic milestones it intends to achieve."
Despite "impressive" growth, Mr. Lynk thinks Badger is "nowhere near fully penetrated in the U.S."
"Badger is already over 75 per cent of the way toward completing [its goal of doubling its U.S. business again within 3-5 years (from 2016 levels], with 2018 U.S. revenue of US$359 million representing a 77-per-cent increase from the US$203 million reported in 2016," he said. "TTM [trailing 12-month] U.S. revenue as of Q1/2019 was US$375 million, and we estimate that Badger will complete this goal in 2019, at which point we wouldn’t be surprised to see management set the goal of doubling the U.S. business again."
“At the end of Q1/2019, Badger had 357 trucks in its Canadian fleet. According to the 2016 Canadian census, the population of Canada in 2016 was 35.2 million. Meanwhile, the population of Quebec was 8.2 million, an important consideration since Badger currently has no material presence in Quebec. Excluding this province from the total population number yields an effective Canadian population served by Badger of 27.0 million. By means of comparison, the U.S. census bureau estimates the U.S. had a population of 327.2 million in 2018, making the U.S. 11 times more populated than Canada, excluding Quebec. To account for potential increased competition in the U.S. and in the interest of being conservative, we use a 10x multiple on the fleet size in Canada, yielding a potential fleet of 3,570 in the U.S. At the end of Q1/2019, Badger had 884 trucks in the U.S., representing an estimated penetration rate of 25 per cent. Clearly there is ample room for Badger to continue its U.S. expansion."
Mr. Lynk maintained a "buy" rating and $53 target for Badger shares. The average on the Street is $54.
"We believe Badger should be a core holding in the capital goods space due to its compelling EPS/DPS growth outlook, its financial flexibility, and its strong management team," he said.
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In other analyst actions:
Macquarie analyst Giasone Salati lowered Thomson Reuters Corp. (TRI-N, TRI-T) to “neutral” from “outperform” with a US$55.50 target. The average on the Street is US$63.18.
TD Securities analyst Cherilyn Radbourne lowered ATS Automation Tooling Systems Inc. (ATA-T) to “hold” from “buy” with a $24 target, which falls 75 cents below the consensus.
National Bank Financial analyst Dan Payne cut Crew Energy Inc. (CR-T) to “sector perform” from “outperform” with a $1.20 target, down from $2 and under the $1.85 consensus.
Mr. Payne raised Storm Resources Ltd. (SRX-T) to “outperform” from “sector perform” with a target of $2.75, falling from $3.25. The average is $3.64.
Scotiabank analyst Ovais Habib initiated coverage of Equinox Gold Corp. (EQX-X) with a recommendation of “sector outperform” rating and $2 target. The average is $1.99.
With files from Bloomberg News
David Leeder