Inside the Market’s roundup of some of today’s key analyst actions
Though its 2020 capital budget represents a “step up from 2019,” Industrial Alliance Securities analyst Elias Foscolos thinks Gibson Energy Inc.'s (GEI-T) plan remains a “work in progress.”
Accordingly, in the wake of a jump in share price of almost 20 per cent over the past six weeks, Mr. Foscolos lowered his rating for the Calgary-based midstream oilfield service company to “buy” from “strong buy" on Tuesday, pointing to a limited near-term expected return to his revised target price for the stock.
After the bell on Monday, Gibson announced the approval of a 2020 growth capital expenditure budget of approximately $300-million, which largely consists of sanctioned projects.
“The Company is expecting incremental Hardisty tankage to be sanctioned over the next month, and we are building in an additional $80-million in 2020 for currently unsanctioned tankage, taking our 2020 CAPEX forecast to $380-million,” said Mr. Foscolos.
Based on the release, Mr. Foscolos raised his earnings before interest, taxes, depreciation and amortization (EBITDA) estimates for 2019 through 2021, leading him to bump his target for Gibson shares to $30 from $29. The average target on the Street is $28.23, according to Bloomberg data.
Elsewhere, Canaccord Genuity analyst John Bereznicki said there were no surprises with the budget.
He raised his target to $30 from $28 with a “buy” rating (unchanged).
“Gibson expects to deploy growth capital of about $300-million next year, composed predominantly of sanctioned projects,” he said. “This figure is at the high-end of Gibson’s preliminary guidance and in line with our estimates. Not surprisingly, the majority ($220-million) of this spending is primarily targeting Gibson’s new DRU and storage capacity at Hardisty, with the U.S. and Edmonton accounting for the balance of the remainder. Gibson expects to remain fully funded on this program and is pursuing additional opportunities that will increase its sanctioned spending as 2020 unfolds. Gibson also expects to spend $25-million in sustaining capital next year (in line) and reports that its Marketing Segment should generate at least $40-million in segment profit in Q4/19 ($9-million ahead of our estimate). We are increasing our 2019 EBITDA estimate to reflect this guidance but are leaving our 2020 outlook largely unchanged.”
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While waiting for noticeable improvement in the performance of Tim Hortons, RBC Dominion Securities analyst Christopher Carril still sees “a lot to like” with Restaurant Brands International Inc. (QSR-N, QSR-T).
He initiated coverage of the company with an “outperform” rating on Tuesday , emphasizing the “strengthening” of both Burger King and Popeyes.
“Although 2018 showed some signs of improvement in Tim Hortons brand comps, 2019 has been choppier, and we expect some weakness to continue in the near term,” he said. "Recent drags on performance appear fixable, and we believe the combination of reimaging and innovation — along with improvements to the loyalty program — should help toward turning the brand around over time.
“With Burger King and Popeyes comp sales largely showing continued stability and/or acceleration — notably from recent successes in the Impossible Whopper and the Popeyes chicken sandwich — Tim Hortons same store sales remain weak. Lackluster Tims comps remain a key overhang for Restaurant Brands’ stock, despite a relatively attractive valuation and among best-in-class global unit growth (topics we delve into further in the following sections). Despite accounting for only 20 per cent of total system sales for RBI, Tims contributes roughly half of RBI’s operating profit — due in large part to the brand’s supply chain operations — magnifying the importance of the brand to the overall business.”
Though Tim Hortons same-store sales have remained “flattish,” Mr. Carill thinks recent performance drags, including the weakness of its cold beverage platform and the impact of the Tims Rewards program roll-out, “appear fixable with improved execution.”
“While Tim Hortons remains an incredibly strong brand in Canada, both from a business and cultural standpoint, we believe the competitive landscape is likely at least partly responsible for Tims’ recent weakness,” he added. “McDonald’s strength in recent years may very well be a part of Tims’ challenges, at least at the margin. From the period of 2013 through 3Q of 2018, McDonald’s Canada same store sales grew nearly 5 per cent annually — including nearly 3-per-cent traffic growth — while Tims comps grew roughly 2 per cent. During that same time period, McDonald’s Canada average unit volume grew from $2.7-million to $4.3-million.”
He added: “With the acknowledgement that Tims’ comps may remain under pressure in the near term, we see a path to improvement under the current brand leadership team, which includes key team members in Burger King’s own turnaround years earlier. Continued store remodels should provide a stronger foundation for Tims to add to its dominant market share in its home market, where competition has sharpened its focus in recent years. Furthermore, we see adjustments to the recently launched Tims Rewards program — such as transitioning members to the digital platform — as important to unlocking the long-term value of the loyalty program.”
Though sales improvement at Tim Hortons remains a primary catalyst for QSR shares moving forward, Mr. Carill pointed to several factors for a stock that he thinks remains “attractively valued.” They include: “near best-in-class unit growth,” momentum at Burger King and Popeyes and “significant scale and potential to add brands in the future.”
He set a target price of US$77 per share. The average target on the Street is currently US$78.48.
“While QSR is up 25 per cent year-to-date, there remains a persistent valuation gap to global, large cap allfranchised restaurant peers,” he said. “Although QSR has historically traded at a premium to peers MCD and YUM (on EV/EBITDA), that gap has closed despite relatively strong system sales and unit growth. We think part of this has been driven by the multiple expansion rewarded to fast food operators which have engaged in significant refranchising in recent years, including YUM and MCD. The valuation gap remains pronounced, however, when comparing QSR’s free cash flow yield versus peers, particularly when considering relative fundamental growth metrics (e.g., unit, system sales and revenue growth). In our view, a key unlock for the QSR story is evidence of sustainable improvement in Tims same store sales.”
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Separately, Mr. Carill initiated coverage of several other fast food companies on Tuesday.
He gave “outperform” ratings to the following stocks:
McDonald’s Corp. (MCD-N) with a US$218 target. The average on the Street is US$221.97.
Analyst: “With performance lagging year-to-date (up 10 per cent, vs. S&P 500 25 per cent) and relative valuation (NTM P/E [next 12-month price-to-earnings] vs. S&P) below one- and three-year averages, we see MCD at current levels as an attractive opportunity given: 1) the substantial investments made behind its domestic business (e.g. Experience of the Future, Dynamic Yield) that we expect will continue to drive same store sales momentum; 2) free cash flow that is poised to accelerate as capex declines materially in 2021; and 3) an improving earnings growth outlook, following flat-toslightly down EPS in 2019. While recent management change has created some near-term questions, we are confident in current leadership’s ability to guide MCD through any short-term disruption and believe overall strategy — marked by asset base and technological improvements—will remain intact.”
Starbucks Corp. (SBUX-Q) with a US$97 target. Average: US$93.52.
Analyst: “While there are numerous growth opportunities across the consumer investing landscape, SBUX is among only a handful of $100-billion-plus market cap consumer companies expected to drive double-digit EPS growth over the next three years. We see the recent pullback given the expectation of below-double-digit EPS growth in FY20 (following two years of 17-per-cent growth) as providing a compelling entry point. And while FY20 is expected to come in below SBUX’s ongoing/long-term target, we see guidance as achievable — and potentially conservative — and setting up for double-digit growth beyond this year.”
Darden Restaurants Inc. (DRI-N) with a US$135 target. Average: US$126.74.
Analyst: “We expect DRI to continue to drive consistent positive comp growth at its key brands (Olive Garden, LongHorn) and leverage the strength of its platform to gain share organically + through acquisition. We also view the Cheddar’s brand as a source of potential margin and EPS upside over time.”
Domino’s Pizza Inc. (DPZ-N) with a US$337 target. Average: US$288.
Analyst: “DPZ will likely remain among the most debated names in our coverage heading into 2020, but we like the setup given easier comparisons and potential for incrementally less impact from third-party delivery competition. Best-in-class unit growth plus a more achievable SSS outlook also support our view of continued share outperformance.”
Mr. Carill gave “sector perform” ratings to the following companies:
Chipotle Mexican Grill Inc. (CMG-N) with a US$890 target. Average: US$842.34.
Analyst: “With the stock up 90 per cent year-to-date and trading at 47 times NTM [next 12-month] EPS — well above its historical lifetime average (37 times) — CMG’s recent strong fundamental performance and upside potential is already embedded in current valuation, in our view. Key positives for the CMG story include: 1) highly visible top-line drivers on a path back to prior peak average unit volume (‘AUV’) of $2.5-million, including digital, menu innovation and growing marketing spend; 2) room for significant margin expansion; and 3) among best-in-class unit growth potential (RBC estimates 6 per cent). All together, we estimate these elements should help to drive an EPS CAGR of nearly 25 per cent through 2023/ A lot to like, but we initiate coverage at Sector Perform given current valuation levels.”
Brinker International Inc. (EAT-N) with a US$45 target. Average: US$48.45.
Analyst: “Despite recent top-line improvement and seemingly achievable targets, we see EAT shares as fairly valued given limited upside to current comp expectations and relatively muted unit growth. Margins, which have been impacted by rising labor costs and sales deleverage in recent years, may hold some upside."
Dunkin’ Brands Group Inc. (DNKN-Q) with a US$79 target. Average: US$79.90.
Analyst: “While its top-line growth has been fairly modest in recent years, DNKN has been able to grow operating profits and EPS at 4 per cent and 13-per-cent CAGRs, respectively, from 2015 through 2019, a testament to its 100-per-cent-franchised, asset-light business model. This model’s ability to drive such profit growth has been a key element in DNKN’s multiple expansion in recent years, in our view, helping to move its valuation higher alongside that of the ‘all-franchised’ peer group average. However, moving forward, we see limited upside given the combination of DNKN’s elevated valuation and its relatively muted unit + system sales growth outlook.”
Texas Roadhouse Inc. (TXRH-Q) with a US$60 target. Average: US$58.90.
Analyst: “TXRH remains a rarity in casual dining, posting consistent positive traffic along with near best-in-class unit growth. Already trading at a premium to casual-dining peers, we see risk from continued labor pressures and view consensus labor estimates for 2020 as potentially too optimistic."
The Wendy’s Company (WEN-Q) with a US$22 target. Average: US$22.58.
Analyst: “We view shares as fairly valued given the current risk-reward skew, though note potential for significant upside or downside given the possible outcomes of WEN’s U.S. breakfast launch, as well as its efforts to drive unit development abroad.”
Yum! Brands Inc. (YUM-N) with a US$107 target. Average: US$111.91.
Analyst: “YUM remains an innovative leader in global fast food with a compelling long-term growth model, but we view Pizza Hut challenges coming into greater focus as a potential overhang for shares, despite the recent pullback. Taco Bell remains a key source of upside, with potential to drive global unit growth long-term.”
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CSX Corp. (CSX-Q) has enjoyed a “great run, but 2020 may not be fun,” according to Citi analyst Christian Wetherbee.
Seeing increasing growth risks, he lowered his rating for the Jacksonville-based railway company to “neutral” from “buy.”
“CSX has been a great turnaround and earnings growth story over the last three years, but as headwinds build in 2020, we believe there is real risk to year-over-year earnings growth,” the analyst said. “Export coal has grabbed the most attention recently, but broader volume weakness and a diminishing well of cost takeout opportunities suggests that revenue and EBIT falls next year, placing our EPS estimates below the low-end of the consensus range. FCF remains at/near best in class, but it may not be enough to push shares higher.”
Mr. Wetherbee lowered his 2020 earnings per share projection to US$4.20 from US$4.45, noting it now sits well below the consensus on the Street and represents flat earnings year-over-year.
“We believe over the next month estimates will begin to fall more broadly for 2020, as the reality of persistently weak volumes in 1H20 gets factored into sell-side models,” he said. “Export coal could be a $200-million headwind to EBIT in 2020, which will couple with weak merchandise volume, lower other revenue, and lower expected gains on sales, to produce a low single-digit year-over-year” decline in operating profit. Share buybacks will cushion the blow to EPS, but we still see a very challenging path to consensus’ $4.43 estimate."
Mr. Wetherbee cut his target for CSX shares to US$75 from US$80. The current consensus on the Street is US$76.55.
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Seeing the rising possibility of subscriber losses as competitive pressures in the online streaming space intensify, Needham analyst Laura Martin lowered Netflix Inc. (NFLX-Q) to “underperform” from “hold.”
“We downgrade NFLX because it has consistently stated it will not have advertising, which we believe will result in U.S. sub losses,” she said.
Ms. Martin thinks the company “must add a second, lower priced, service to compete with Disney+, Apple+, Hulu, CBS All Access and Peacock,” predicting it could sustained a U.S. subscriber decline of almost 4 million if changes aren’t made.
Believing its balance sheet cannot “withstand” lower revenue, the analyst said the company should create a tier with a lower monthly rate that is sustained by advertising costs.
“Netflix’s premium price tier of $9 to 16 per month is unsustainable,” she said.
Ms. Martin did not specify a target for Netflix shares. The average on the Street is US$353.40.
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Following meetings with a trio of BRP Inc.'s (DOO-T) executives, Desjardins Securities analyst Benoit Poirier said he’s increasingly confident in the recreational vehicle maker’s ability to deliver on its five-year strategic plan, which he thinks will provide “significant upside potential from current levels.”
Mr. Poirier said the management team, including president and CEO José Boisjol, reiterated its path to $9.5-billion in revenue by fiscal 2025, seeing “many” growth opportunities ahead and a “favourable” retail environment.
“BRP grew revenue in 3Q FY20 by 29 per cent year-over-year,” the analyst said. “The increase was attributed to the introduction of the Ryker and higher SSV volume. Management noted that demand for its products remains strong across all three subsegments (refer to our note here for more details). For 4Q FY20 specifically, BRP dealers are busier than usual given the early snowfall and the strongest spring bookings in five years. Management is confident that it can win further market share in snowmobiles for the upcoming season despite its lower availability of non-current inventory early in the season (vs peers).”
“To achieve its target, BRP aims to grow its Can-Am business to $5.0-billion in revenue (from $2.8-billion currently), driven by (1) continued market share gains in the SSV segment (target to double its market share to 30 per cent by FY25), (2) market share gains in the ATV segment driven by the momentum in SSV, and (3) doubling the 3WV business from the FY20 level. In addition, the new five-year strategic plan also aims to double its Marine business to generate more than $1.0-billion of revenue. Management expects to maintain its momentum in market share gains with seasonal products (PWC and snowmobile). In addition, the PAC segment is expected to grow as management launches new accessories and products. Management also attributes some growth to new ventures already in place (eg direct-to-consumer initiatives) and future opportunities (eg Project M, potential launch of a new product line and electrification of products).”
Mr. Poirier maintained a “buy” rating and $75 target for BRP shares, which exceeds the current consensus of $72.43.
“Despite its recent price performance (up 62 per cent year-over-year vs 19 per cent for the S&P/TSX), we still see potential upside for the stock at current levels given the robust retail sales growth across all markets globally,” he said. “We remain confident that BRP’s proven track record of market share gains through innovation will continue to unlock significant value for shareholders.”
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Following the release of “strong” fourth-quarter results, Laurentian Bank Securities analyst Yashwant Sankpal said Mainstreet Equity Corp. (MEQ-T) is “delivering sector-leading FFO [funds from operations] growth despite mediocre economic conditions.”
“MEQ continues to deliver strong operating results, announcing its sixth consecutive quarter of double digit year-over-tear FFO/share growth, a feat very few Canadian real estate companies have been able to pull,” he said. "And this growth is achieved when MEQ’s largest market, Alberta is experiencing a relatively lukewarm economic environment, highlighting the success of MEQ’s unique capital allocation and repositioning strategy. The AB rental market continues to improve, albeit slowly but surely, and should accelerate MEQ’s FFO growth further. .... And in spite of MEQ’s historical track record of value creation, MEQ trades at a 5 times discount to its peers because of its low trading liquidity, smaller market cap, and its exposure to Western Canada."
With an unchanged “buy” rating, Mr. Sankpal hiked his target to $81 from $68. The average on the Street is $71.50.
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In other analyst actions:
* Stifel Canada analyst Michael Dunn raised PrairieSky Royalty Ltd. (PSK-T) to “buy” from “hold” with a $17.50 target, rising from $14.25. The average on the Street is $17.01.
David Leeder