Inside the Market’s roundup of some of today’s key analyst actions
Lululemon Athletica Inc. (LULU-Q) is a “brand still on the rise,” according to Paul Lejuez, who raised his rating for its stock to “buy” from “hold,” believing it has been unfairly punished by the Street in recent weeks.
"LULU has displayed the power of its brand with high teen comps several quarters in a row," he said. "But this was not about a certain product that drove these results, setting them up for difficult comparisons."
“LULU continues to post strong comps in developed categories (women’s bottoms), is developing loyalty with men, and has permission from women and men to expand into new categories. They have made the right investments over the past several years to put them in this enviable position today, and they continue to make the right investments to drive continued impressive comp/sales results in the future.”
Mr. Lejuez said it's been a "tough" earnings season for retailers with investors punishing many companies for lack of flow through on "decent" sales results. He thinks the Vancouver-based athletic apparel retailer has been unfairly included with this group.
“In recent months fears of a macro slowdown have taken the winning brands down with the rest of the group, seemingly painting all with the same brush,” he said. “LULU has been a victim, yet is a story of improving fundamentals and stand-out growth prospects, and now at a much lower price (down 28 per cent off its 9/28 high). We get the macro concerns (and have significant fears about many stocks within our group if the consumer slows), but we think this is a brand to own in uncertain times – one with the strongest brand positioning, comp momentum, international prospects, margins and ROIC [return on invested capital] in our coverage.”
Mr. Lejuez maintained a target price of US$152 for Lululemon shares. The average target on the Street is currently US$161.77, according to Bloomberg data.
"This isn’t a macro call but we should note that LULU is not seeing anything from its consumer that would even hint at a slowdown," he said. "But given the uncertainties in the global environment, it is something that we at least consider as we weight the risk reward."
The analyst added: "It doesn’t mean that a significant consumer downturn wouldn’t have a negative impact on results, but we believe LULU is better positioned currently to manage through such a period than ever before in the company’s history. And we believe the brand strength and loyalty will enable it to weather a tough period better than most."
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Citing a challenging margin outlook for 2019, Macquarie analyst Mike Rizvanovic downgraded Bank of Montreal (BMO-T, BMO-N) to “neutral” from “outperform.”
He sees BMO’s growth limited to low-single-digits in 2019 due to margins stemming from its U.S. business and rising provisions for credit losses.
Also expressing concern about the recent underperformance of BMO’s Canadian P&C banking and capital markets segments, Mr. Rizvanovic lowered his target for BMO shares to $101 from $111. The average target on the Street is $108.54.
Conversely, Mr. Rizvanovic upgraded Royal Bank of Canada (RY-T, RY-N) to “outperform” from “neutral” with the expectation of better margin expansion.
The analyst expects RBC to outperform peers in fiscal 2019 based on its superior deposit base, which he thinks should lead to margin growth.
He maintained a target of $104, which falls short of the consensus of $110.14.
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The clinical performance of Neovasc Inc.'s (NVCN-T) coronary sinus stent Reducer adds “optimism” to the company’s overall cardiovascular pipeline, said Echelon Wealth Partners analyst Douglas Loe.
Despite "lingering" financial risk facing the Richmond, B.C.-based company, Mr. Loe raised his rating for its stock to "speculative buy" from "hold" in the wake of Wednesday's release of 12-year follow-up data on the Reducer in patients with severe angina pectoris, citing recent share price compression.
“Reducer continues to demonstrate uniformly positive impact on mitigating refractory angina symptoms, and over clinically-meaningful time frame: To achieve sustained angina pain relief, it is almost a certainty that implanted Reducer stents would have been stably deployed into the coronary sinus over entire study follow-up, but this was confirmed with CT angiography anyway,” said Mr. Loe. “No Reducer shifting or migration or stent-associated blood clotting were observed, all encouraging secondary features of Reducer’s unambiguously positive impact on chronic refractory angina symptoms as demonstrated not just in this long-term study but in virtually all published clinical angina studies we have reviewed previously, including Neovasc’s own 104-patient sham-controlled COSIRA trial published in the New England Journal of Medicine back in Q115.”
Mr. Loe said Reducer's profile in medical literature "while always strong, took a magnum leap forward this year with multiple trials and review articles hitting the presses in 2018."
He maintained a $3 target for its stock. The average is now $6.11.
"There is no denying that with US$14.5-million in cash and US$28.5-million in convertible debt on the balance sheet, and with FQ318 operating cash loss of US$5.9-million suggesting Tiara/Reducer clinical activities are funded only into FQ219, Neovasc’s financial risk is clearly high and getting higher without new capital infusion from partners or capital markets in the near-term," he said. "The 115-patient TIARA-II trial alone is projected to require US$15-million in R&D capital to complete, even before considering funds required for downstream pivotal Tiara testing or for Reducer-I/COSIRA-II."
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Cargojet Inc. (CJT-T) represents “a unique Canadian play on the theme of increased share of retail wallet being driven on-line,” according to Canaccord Genuity analyst Doug Taylor.
In a research note released Wednesday, he initiated coverage of the Mississauga-based cargo airline with a "buy" rating.
"The forces driving retail sales through online channels and the requirements for companies to offer shorter delivery timelines to keep pace with Amazon, etc., are producing strong growth in the overnight air cargo market," said Mr. Taylor. "We view Cargojet as one of the few ways to effectively play this theme in Canada. We model all-organic top-line growth of 7–8 per cent in 2019 and 2020."
“Cargojet, as Canada’s largest overnight air cargo provider, is uniquely poised to benefit from the global uptick in e-commerce spending. Shipping preferences around the world continue to shift from brick-and-mortar retail to on-line, and customer expectations regarding delivery timelines are compressed. Such spending has driven volumes higher for a number of Cargojet customers, including Canada Post, Purolator, UPS, DHL and Amazon who hand off their overnight shipments to Cargojet’s domestic overnight network. We expect the company will continue to experience steady growth as Canada plays catch-up with more developed e-commerce investments. Domestic parcel volumes for Canada Post have grown at an 11-per-cent CAGR [compound annual growth rate] since 2011 and 22 per cent year over year.”
Mr. Taylor sees a "very wide" competitive moat for the company, noting it has developed a "commanding" market share of the Canadian overnight cargo market (almost 90 per cent). He feels several elements work to protect that dominance, including "foreign ownership regulations, high capital cost, long-term customer contracts and its strong reputation/performance history."
The analyst set a target of $90 per share, which sits below the consensus of $94.57.
"We believe the company’s prospects and growth profile should preserve its premium valuation," he said.
“Cargojet has seen its valuation expand in recent years, which we believe reflects increasing appreciation for the business growth prospects and competitive positioning, and the prospects of better FCF conversion in the years ahead after a few years of reinvestment. We therefore believe the company is likely to continue to trade at a premium valuation and the share price to be driven by a combination of growth and deleveraging. Our $90 target price is based on 12 – 13x EV/EBITDA applied to our forward estimates, one-year out. We believe that the company’s current dividend yield of 1.1 per cent is comfortably covered by adjusted FCF [free cash flow] and we expect consistent dividend growth in the coming years as the company’s FCF profile continues to improve.”
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In conjunction with adjustments to their forward commodity price assumptions, Raymond James equity analysts made a number of changes to their ratings for Canadian energy companies.
The firm lowered their crude oil price assumptions in-line with the move in forward prices, reducing their WTI projection for 2019 to US$53.88 per barrel from US$71.50 and introducing a 2020 estimate of US$54. Their long-term assumption rose to US$75 per barrel from US$70.
For Mixed Sweet Blend, their 2019 assumption fell to $54.44 (Canadian) from $79.48 with a 2020 assumption of $57.14. Their long-term assumption fell to $78.82 from $80.50.
“We have made a number of ratings changes in conjunction with our commodity update,” said analysts Kurt Molnar, Jeremy McCrea and Chris Cox. “The lower near-term and long-term commodity price assumptions have resulted in material reductions to our forecasts for our producers under coverage, resulting in reduced half-cycle well economics along with the expected pace of capitalization.”
With those changes, the following companies were downgraded:
Crew Energy Inc. (CR-T) to “market perform” from “outperform” with a $1.60 target, down from $3. The average is $2.54.
Delhi Energy Corp. (DEE-T) to “outperform” from “strong buy” with a target of $1, down from $1.50. Average: $1.10.
Granite Oil Corp. (GXO-T) to “market perform” from “outperform” with a $1.50 target, falling from $3. Average: $1.62.
NuVista Energy Ltd. (NVA-T) to “outperform” from “strong buy” with a $6 target, falling from $12. Average: $9.36.
Seven Generations Energy Ltd. (VII-T) to “outperform” from “strong buy” with a $18.50 target, down from $27.50. Average: $19.63.
At the same time, the analysts raised their ratings for a trio of companies, citing potential upside in the context of their long-term commodity calls, noting: “Although strip prices remain volatile, many share price valuations are still reflecting strip prices seen a couple weeks ago (that were much lower than the current strip price today).”
The following companies were raised to “strong buy” from “outperform” ratings:
Bonterra Energy Corp. (BNE-T) with a $14 target, down from $22. Average: $12.45.
TORC Oil & Gas Ltd. (TOG-T) with a $7.50 target, down from $10. Average: $9.21.
Tamarack Valley Energy Ltd. (TVE-T) with a $5 target, down from $6. Average: $5.53.
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With his 2019 outlook for U.S. real estate investment trusts and lodging companies, Citi analyst Michael Bilerman downgraded a quartet of U.S. stocks, citing “a more cautious view on lodging primarily driven by heightened macroeconomic concerns, tepid RevPAR expectations & a challenging environment for operating margin.”
Mr. Bilerman lowered his rating to “neutral” from “buy” for these four equities:
Marriott International Inc. (MAR-Q) with a target of US$117, down from $144. The average target on the Street is US$135.95.
“Despite significant year-to-date underperformance, we believe meaningful multiple expansion will be challenged given heightened macroeconomic growth concerns, uncertainty around recent data breach, and ongoing concerns regarding integration of rewards programs,” he said.
Hyatt Hotels Corp. (H-N) with a US$77 target, down from US$95 and below the average of US$81.32.
“Our downgrade is based on substantial completion of asset sale program, integration risks to Two Roads acquisition, and narrowing of valuation gap between H vs. MAR & HLT,” he said.
Host Hotels & Resorts Inc. (HST-N) with a US$19.50 target, falling from US$24. The average is US$21.70.
“We believe meaningful expansion in valuation multiples from current levels is unlikely given continued portfolio disruption, tougher margin comps from tax abatement benefit in 2018 (17 basis points), and a challenging RevPAR environment,” he said.
Federal Realty Investment Trust (FRT-N) with a target of US$146 (unchanged). The average is US$139.64.
“We’re downgrading our absolute rating on FRT to Neutral following outperformance this year and a premium valuation versus peers,” he said.
Conversely, Mr. Bilerman upgraded Realty Income Corp. (O-N) to “neutral” from “sell” with a target of US$67, rising from US$56. The average is US$65.
“The valuation remains rich on an absolute basis, but in the current environment (which remains favorable for spread investment) we see that premium valuation as a cost of capital advantage to drive future cash flow growth,” the analyst said.
At the same time, Mr. Bilerman added Invitation Homes Inc. (INVH-N) to Citi’s “Best Ideas Focus List,” replacing his 2018 selection of Duke Realty Corp. (DRE).
“INVH is well positioned to drive cash flow through both internal and external growth. We favor the single family rental sector as we view it as providing both defense and growth,” said Mr. Bilerman, who has a “buy” rating and US$26 target for the stock (versus the average of US$25.37).
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Canaccord Genuity analyst Yuri Lynk lowered his target price for shares of Finning International Inc. (FTT-T) in reaction to its $260-million acquisition of 4Refuel, despite seeing “compelling aspects to its business.”
On Tuesday, Vancouver-based Finning announced the deal for Toronto-based 4Refuel, which is the leading mobile on-site refueling company in Canada.
“Finning paid ~$260 million or 7.8 times 2018 estimated EBITDA, pre-synergies, for the business,” said Mr. Lynk. "We peg the EBIT multiple paid at 11.3 times. These multiples are slightly in excess of where Finning presently trades but are justified, in our view, by the company’s highly recurring and resilient revenue base as well as the revenue synergy potential.
“We assume the acquisition closes at the end of January and therefore include only two months in Q1/2019. As such, our EBITDA estimates increase to $804 million in 2019 and $868 million in 2020, from $773 million and $831 million, respectively. We calculate the acquisition to be 4-per-cent accretive to EPS in 2019, bringing our estimate to $2.30. Meanwhile, our 2020 EPS estimate increases 6 per cent to $2.50. Recall, next year, Finning should benefit from the rolloff of significant ERP implementation costs in South America, a right-sized operation in Argentina, the commencement of construction activity on LNG Canada, and product support growth.”
Maintaining a “buy” rating for Finning stock, Mr. Lynk dropped his target to $33 from $38, which falls below the consensus of $35.25.
“Over the last year or so, forward valuation multiples for heavy equipment companies have contracted from 20.0 times to, in the case of Caterpillar, Komatsu, and Toromont, 11.7 times,” he said. “Our prior 16.5-times target P/E multiple for Finning looked increasingly rich and we take this opportunity to reduce it to 13.5 times, which we continue to apply to our Q4/2019 through Q3/2020 EPS estimate. Our new target implies a 36-per-cent return, inclusive of a 3.2-per-cent dividend yield.”
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In other analyst actions:
Citing share price appreciation having delivered a total return of 39 per cent over the past three months, RBC Dominion Securities analyst Nelson Ng downgraded Just Energy Group Inc. (JE-T) to “sector perform” from “outperform. He raised its target to $5.50 from $5 to reflect high margin customer additions and a likelihood that it will achieve its 2019 EBITDA guidance. The consensus is $5.78.
Barclays analyst James Durran upgraded North West Co. Inc. (NWC-T) to “overweight” from “equal-weight” and bumped his target to $34 from $31. The average is $33.20.
With files from Bloomberg News and Reuters
David Leeder