Inside the Market’s roundup of some of today’s key analyst actions
Netflix Inc.’s (NFLX-Q) quarterly results elicited applause from both the Street and investors on Wednesday, sending its stock up almost 10 per cent in premarket trading.
However, one equity analyst thinks there’s little current upside to the media company’s share price, leading him to downgrade his rating to it “sector weight” from “overweight.”
“While we maintain a favorable view of Netflix’s strategic positioning, we believe improving investment efficiency or significant ancillary opportunities are needed to drive upside from current levels, and we don’t anticipate either over the next year,” said KeyBanc’s Andy Hargreaves.
He does see opportunities to build revenue through its “leadership position” in subscription video via consumer products, advertising, broad theatrical releases and mobile-only subscriptions.
But Mr. Hargreaves thinks that could take “several years to develop.”
"While we remain positive on Netflix’s opportunity to grow subscribers and revenue, we believe revenue growth and accelerating margin expansion are needed to drive substantial upside from here,” the analyst said. “The latter has not developed at a pace that exceeds our expectations, which suggests upside is more limited.”
His target for Netflix shares is now US$377, which falls below the average on the Street of US$397.36, according to Bloomberg data.
Elsewhere, the results brought a number of target price increases, including:
- RBC Dominion Securities’ Mark Mahaney to US$450 from US$440 with an “outperform” rating.
Mr. Mahaney: “Following a weak Q2, NFLX reported Beat and Raise Subs with robust contribution profit across domestic & international segments. Long-term fundamental trends remain very, very, very much intact. Streaming Revenue & Sub Adds still set to accelerate in ’18.”
- Citi’s Mark May to US$400 from US$375 with a “buy” rating.
Mr. May: “With global penetration of only 22 per cent (including less than 15 per cent outside the U.S.), meaningful pricing power, and (content) expense leverage, we forecast nearly $42-billion in revenue and $23 in GAAP EPS in 5 years (representing a 54-per-cent EPS CAGR). We believe this supports a 12-month new target price of $400 and, as a result, we maintain our Buy rating.”
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Mullen Group Ltd. (MTL-T) is likely to be a “prime contributor and beneficiary” of LNG-related development, according to Andrew Bradford.
“In the discussion around its 2Q results, Mullen identified a positive step in LNG as the most important macro development in Western Canada – we would agree with its assessment,” said Mr. Bradford in a research note previewing its third-quarter financial results. “Mullen will benefit from pipeline stringing, process of delivering pipe sections to their final locations along the construction right-of-way, dewatering, and general LTL, and heavy haul trucking.”
“Its trucking segment can conceivably supply every manner of required trucking – from heavy hauling equipment and accommodations to dry goods. Its oilfield services segment will almost certainly see increased demand for pipe stringing and dewatering. The market seemingly agreed, pushing Mullen up 5 per cent leading up to and immediately after the announcement (versus 2 per cent for the Canadian OFS industry.”
Mr. Bradford projects LNG-related contributions to its EBITDA of $16-million, which he said is “a figure we admit is highly contestable).”
Keeping a “market perform” rating for its stock, he raised his target to $15.60 from $14.85. The average is $17.44.
“We position Mullen as ‘well-priced,’” the analyst said. “That is, it is trading at 9.0 times 2019 estimated EBITDA, which is at the top-end of its own historical range.”
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Though he said Sleep Country Canada Holdings Inc. (ZZZ-T) remains “a strong growth story with numerous opportunities,” CIBC World Markets analyst Matt Bank lowered his earnings expectations for the retailer ahead of the release of its third-quarter results on Nov. 1, noting the closure of Sears Canada has not been “as helpful as hoped.”
“While some sell-off on a smaller Sears-related bump and economic/ housing concerns is fair, we remain positive on Sleep Country,” he said. “The company is adeptly competing online with its Bloom brand, and its retail and distribution networks are supportive of a leading omni-channel offer. The Canadian market is far more disciplined than the U.S. and we expect Sleep Country to continue to take share (as it has the past several years despite rapid direct-to-consumer (DTC) growth).
“We expect the rest of 2018 and 2019 to play out much like H1, with same-store sales of 4-5 per cent, revenue growth of 8-9 per cent, and EBITDA growth of 10 per cent. The company is on pace for its fastest-ever year of new stores, and returns remain impressive with cash paybacks.”
Mr. Bank’s 2018 and 2019 earnings per share expectations fell to $1.78 and $2, respectively, from $1.81 and $2.05.
He maintained an “outperformer” rating for the stock and lowered his target to $34 from $37, which sits below the average of $39.
“Sleep Country has solid margins and earnings growth compared to Canadian and U.S. growth comps, but trades at a lower multiple,” said Mr. Bank. “With this note, we trim our target multiple by 1 times to 18 times P/E, acknowledging diminishing sentiment, but view valuation as attractive vs. peers. While this business is economically sensitive, a strong balance sheet and returns on capital give us confidence in the company’s resilience.”
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The third-quarter results for CSX Corp. (CSX-Q) reaffirm the “the positive impact” of successfully implementing Precision Scheduled Railroading (PSR) principles, according to RBC Dominion Securities analyst Walter Spracklin, who sees benefits “coming in faster and with greater impact than previously expected.”
On Tuesday, the Jacksonville-based company reported earnings per share for the quarter of US$1.05, exceeding the expectation on the Street of 94 US cents and a jump from the 51-cent result a year earlier. Revenue of US$313-billion also beat the consensus projection (US$3.04-billion).
Calling it “another strong quarter with signaling of more to come,” Mr. Spracklin raised his target to US$84 from US$80, keeping an “outperform” rating. The average is US$80.13.
“Our numbers (and target price) are up again, as we continue to be impressed by the financial results,” he said. “Expect the shares to react well today.”
Elsewhere, Citi’s Christian Wetherbee maintained a US$85 target and “buy” rating.
Mr. Wetherbee said: “For the second quarter in a row CSX’s 3Q18 results exceeded elevated expectations, as better yields combined with continued cost momentum to drive a sub-60-per-cent operating ratio. It’s now becoming clear that management is on pace to hit its 60-per-cent OR target this year, two years ahead of schedule, which begs the question what is next in 2019 and 2020? We think further progress beyond 60 per cent into the upper-50s is likely as the restructuring of CSX’s intermodal franchise has just begun and it is targeting a ‘corporate average’ margin for the segment. Nevertheless, it’s prudent to be somewhat cautious given the contribution from export coal, which is inherently volatile.”
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Increases in jet fuel prices and a more bullish view of oil are weighing on airline equities as third-quarter earnings season arrives, said CIBC World Markets analyst Kevin Chiang in a research report released late Tuesday.
However, he thinks airlines will continue to raise fares to off-set increased input costs, believing they will be “benefiting from a strong demand environment.”
“We are confident that the sector will be able to recoup the lost margins from higher jet fuel prices,” he said.
He added: “Given airfare and jet fuel prices are highly correlated, the ability to maintain ex. fuel cost discipline is key to the North American airlines maintaining their structurally higher margins.”
After adjusting his estimates “primarily reflect a more bullish outlook on oil and changes to our FX assumption,” Mr. Chiang made several target price changes to stocks in his coverage universe, including:
- Bombardier Inc. (BBD.B-T, “outperformer”) to $5.75 from $6. Consensus: $5.95.
- CargoJet Inc. (CJT-T, “outperformer”) to $90 from $77. Consensus: $86.60.
- Chorus Aviation Inc. (CHR-T, “outperformer”) to $10.50 from $11. Consensus: $10.64.
- Transat AT Inc. (TRZ-T, “neutral”) to $8 from $8.50. Consensus: $10.21.
- Westjet Airlines Ltd. (WJA-T, “underperformer”) to $16 from $17. Consensus: $19.20.
“Overall, given the more volatile macro environment, our preferred names are CJT (for its volume visibility and pricing power), CHR (for its strong growth pipeline and margin certainty), and BBD.B (for a compelling valuation and increasing confidence it can hit its 2020 targets),” he said.
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Taking a “more balanced view” on the U.S. Home Improvement retail space following an “extended period of superior returns,” Credit Suisse analyst Seth Sigman downgraded his ratings for Home Depot Inc. (HD-N) and Lowe’s Companies Inc. (LOW-N) to “neutral” from “outperform.”
“While still structurally our best sector, recent results and stock prices have disconnected from housing and many of the indicators that have supported them in the past,” he said. “There has been good reason for that, as we detail, but it’s difficult to assume that continues. Overall, while we still see EPS growing, we see less upside over the next 12 months relative to current estimates, while key valuation supporters also have turned less favorable (see stock vs. comps, home prices, affordability, interest rates). As such, we would be looking for a better entry point.”
“Our key concern is that home prices will continue to moderate, at least temporarily, as higher rates weigh on affordability, and inventory creeps up. That’s supported by an analysis of various housing data points, market-level analysis for HD/LOW stores that shows increasing home price cuts coinciding with higher interest rates and a narrower gap between HD/LOW markets, and our Homebuilding team’s Survey of Real Estate Agents indicating buyers' greater “wait and see approach”, a risk to home improvement demand on a lagged basis.”
Mr. Sigman’s target for Home Depot is now US$204, down from US$222. The average is US$213.83.
His target for Lowe’s fell to US$111 from US$115, which sits below the average of US$120.50.
“This is not a short-term call, and we don’t expect anything to ‘unravel,’” he said. “HD remains one of our best positioned retailers, with a superb management team, clear long-term path and there may be more upside from initiatives than we appreciate. LOW offers significant optionality, with plenty of low hanging opportunities for improvement over the next year. And, there are some catalysts ahead: a new category 4 hurricane with high store overlap for HD and LOW, and Sears' Chapter 11 filing. That said, based on our math all of these factors would only support current consensus estimates, not necessarily the upside needed to drive stock outperformance, particularly given weakness in other parts of the housing supply chain.”
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In other analyst actions:
Scotia Capital initiated coverage of Canopy Growth Corp. (WEED-T) with a “sector perform” rating and $61 target. The average target is currently $64.
The firm also initiated coverage of Aphria Inc. (APH-T) with a “sector outperform” rating and $25 target, which falls 56 cents below the consensus.
Peters & Co Ltd analyst Jeff Fetterly downgraded Horizon North Logistics Inc. (HNL-T) to “sector perform” from “sector outperform” with a target of $3.75. The average is $3.56.
Mr. Fetterly also downgraded CES Energy Solutions Corp. (CEU-T) to “sector perform” from “sector outperform” with a target of $5.50, falling from $6.50. The average is now $7.
David Leeder