Royal Bank of Canada, the most efficient bank, has not taken restructuring charges related to expenses in recent quarters. Nonetheless, if it did improve its level of efficiency in line with its peers, it would theoretically boost its profit by a ho-hum 5.3 per cent.Mark Blinch/Reuters
Inside the Market's roundup of some of today's key analyst actions
Financial services company Royal Bank of Canada (RBC-T) is a "roller coaster worth the ride," says Desjardin Capital Markets analyst Doug Young. The bank reported its third quarter results, with the cash earnings per share beating Mr. Young's estimate. "Cash EPS of $1.76 was above our estimate of $1.68 and consensus of $1.71 (ex. $0.16 gain on sale of RY's general insurance operation)."
The strong results were "primarily driven by capital markets and Canadian P&C [personal and commercial] banking, which in turn both benefited from lower PCLs [provision for credit losses] versus what we had anticipated. While the credit experience was encouraging, we do not believe this level of PCLs is sustainable over the near term (which management did not disagree with)," he said.
Mr. Young said his reasons for maintaining the "buy" rating include: "the CNB (City National Bank) acquisition increases its exposure to U.S. markets/interest rates and should help to boost wealth management margins over time. Second, RY has scale, which we believe should allow it to better manage costs in a slower-growth environment, specifically in Canadian banking. Third, in our opinion, RY has the strongest wealth management franchise among the banks. Last, while deteriorating credit losses will clearly be an ongoing theme for all the Canadian banks, we believe this is a manageable headwind for RY."
The analyst also increased his price target slightly to $86 from $85. The consensus is $81.44, according to Thomson Reuters.
CIBC analyst Robert Sedran also boosted his price target to $84 from $82 and kept his "sector outperformer" rating on the stock.
"Partly owing to the expansion of the corporate loan book in the United States and partly owing to this bank really being the first to see a spike in loan losses related to its energy book, we have watched the loan loss line for this bank more closely of late. This makes the noteworthy sequential decline in loan losses all the more important … not because we think it signals the end of the energy issue, but because it increases our confidence in our estimates and suggests that assumptions around the limited impact of this issue are realistic. This, in turn, allows more attention to be turned to the rest of the business, which is doing well," he said.
"Total revenues came in ahead of estimates and even though expenses came in a little hot this time, we note that Canadian Banking showed solidly positive operating leverage even without the benefit of the restructuring charges taken by each of the other Canadian banks. The contribution from City National continues to grow (and the price paid for this asset is now far less of a discussion point, though it is largely responsible for the lower adjusted ROE [return on equity]). On balance, the changes to our model were minor, with a slight decline in forecast loan losses leading to a slight increase in estimates. For F2016, we are now at $6.80 (was $6.74); for F2017, we are now at $7.06 (was $7)."
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FBR Capital cut its price target on Express Inc. (EXPR-N) to $13 (U.S.) from $18 after the company reported disappointing earnings, with earnings per share coming in at 13 cents per share, compared to consensus forecasts of 17 cents. However, FBR Capital kept its "market perform" rating.
FBR Capital analyst Susan Anderson said the lower earnings were "driven by declines in traffic and lack of clarity across the assortment." As well, "EXPR launched new order management, retail management, and enterprise planning systems, which should benefit inventory management and lay the foundation for omni capabilities (ship from store, reserve in store, pick up in store, etc.). Management also just announced another $30-million to $40-million of annualized savings. However, we believe traffic will continue to pressure in the second half of 2016, which is reflected in the 3Q16 and 2016 guidance that came in well below consensus. We remain on the sidelines until we see a rebound in SSS [same-store sales]/traffic, consistent execution, and earnings growth," she said.
UBS downgraded Express to "sell" from "neutral" and slashed its price target to $10 from $16. UBS analyst Michael Binetti warned of downside risk in the second half of the year for the fashion retailer.
The downgrade and cut in target price is "based on our view that EPS risk remains skewed to the downside despite the lowered guidance bar. While our base case assumes 2016 EPS of $1.08 (guide: $1.00- $1.14), we see downside risk based on: 1) traffic deteriorating while the industry accelerated (EXPR decelerated when rest of the sector improved in June, peers Urban [Outfitters] & AEO [American Eagle Outfitters] are seeing positive trends in August); 2) our sense that EXPR's August trends are running at the low-end of 3Q SSS [same-store sales] guidance of –HSD/-LDD, and we believe September [comparables] are tougher than August; 3) Product issues that could take more than 1-2 quarters to fix (EXPR should be doing well considering several peers are seeing strong denim trends); 4) potential for margin pressure to increase as EXPR steps up direct mail marketing in the second half of the year," said Mr. Binetti.
Meanwhile, Stifel cut its price target on Express to $15 from $18 but maintained a "buy" rating. Wedbush downgraded Express to "neutral" from "outperform."
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Gaming technology company Gaming Nation Inc. (FAN-X) has "a lot of balls in the air" after reporting financial results that were "a touch shy of our estimates but not enough to raise our ire," says Canaccord Genuity analyst Kevin Wright. "The second quarter is a seasonally slow quarter so we are looking for a return to growth in the business in the next two quarters as the cadre of sports in full swing expands from MLB to include NFL, NBA and NHL. While the financial results are not a significant concern for us, we do think that there is a lot going on in the company which could pose risk of distraction and contribute to potential delays in execution."
As to why he is lowering his target price, the analyst noted a discounted cash flow with a weighted cost for capital of 13.8 per cent and a terminal growth rate of 3 per cent. "To be clear, this is not a reflection on the opportunities ahead of the business just the uncertainty of timing to deliver on some interesting initiatives, in our view," he said. These include "1) progress deploying in NCAA with JMI, 2) deploy 50/50 to U.K. teams, 3) sell or shutter Fantasy Feud, 4) sales of NASCAR games, and 5) rapidly grow Guru subscriptions. In our view, evidence that the company is 'checking the boxes' on its strategic initiatives could help the stock to rerate."
Clarus Securities analyst D. Joseph MacKay said the results were below his estimates. "Revenue in the quarter came in at $2.46-million, $200,000 below our estimate, while adjusted EBITDA [earnings before interest, taxes, depreciation and amortization] in the quarter came in at a loss of $341,000, below our estimate for positive EBITDA of $100,000. The revenue miss was driven by lower Sports Intelligence business due to seasonality while the EBITDA miss was driven by lower Sports Intelligence EBITDA, lower gross margins within 50/50 Central and higher than expected corporate costs. Cash on hand at the end of the quarter stood at $10.4-million and represented $0.23/diluted share."
Mr. Wright kept his "speculative buy" rating and Mr. MacKay's "buy" rating also remains.
Mr. Wright lowered his price target to $1.50 from $1.75. Mr. MacKay also lowered his price target to $1 from $2. The consensus is $1.88.
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Mining company Eldorado Gold Corp. (ELD-T, EGO-N) "offers patient investors with an attractive risk/reward opportunity," says RBC Capital Markets analyst Dan Rollins. "While we did contemplate lowering our rating on Eldorado to 'sector perform' given the potential overhang caused by the suspension of development activities in Greece, we decided to maintain our 'outperform' recommendation given our view the upside potential outweighs the downside risk." Mr. Rollins also said the company's risk/reward potential is further reinforced by its solid operational performance, healthy balance sheet, resolution to Greek impasse, divestment of China assets and its Kisladag expansion.
The analyst lowered his price target to $4.25 (U.S.) from $5. The consensus is $5.86.
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CIBC analyst Prakash Gowd has a positive view of ProMetic Life Sciences Inc.'s (PLI-T) deal to buy Telesta Therapeutics for 14 cents a share in an all-share transaction valued at $42-million.
"We believe the transaction is a win-win for both Prometic and Telesta. The transaction includes $34 million in cash, $50-million in tax attributes, and a 150,000 sq. ft. high-quality manufacturing facility in Belleville, Ont. The facility can be modified to fit Prometic's purposes for downstream processing of plasma proteins as well as fill/finish capabilities, which currently need to be outsourced. There is also a 25,000 sq. ft. GMP facility in Montreal which could either be used by Prometic or sold for cash," he said.
"The transaction value of approximately $42-million in Prometic shares translates to roughly a 2.5-per-cent dilution to Prometic shareholders, but we believe the assets are being acquired at an attractive valuation, particularly considering that the Belleville facility originally cost $30-million to build."
He kept his "sector outperformer" rating on the stock but reduced his target price to $4.85 from $5. The consensus is $5.22.
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In other analyst actions:
Buckingham Research downgraded Sprint (S-N) to "underperform" from "neutral" with a price target of $5 (U.S.).
Piper Jaffray boosted its price target on Workday (WDAY-N) to $80 (U.S.) from $74 and reiterated its "neutral" rating after the company reported its second quarter results, with revenues and billings coming in higher than expected.
B. Riley upgraded Guess (GES-N) to "buy" from "neutral."
RBC Capital downgraded Tableau Software (DATA-N) to "sector perform" from "outperform" with a price target of $65 (U.S.)
William Blair upgraded Netflix (NFLX-Q) to "outperform" from "market perform."
Morgan Stanley raised its price target on Best Buy (BBY-N) to $35 (U.S.) from $28 and reiterated an "equalweight" rating for the retailer after it posted strong results earlier this week.
CapitalOne upgraded FMC Technologies (FTI-N) to "overweight" from "equalweight" with a price target of $36.
Editor's note: In error, an old report was sent to The Globe and Mail from RBC Capital Markets on Thursday. Don Rollins' current rating on Eldorado Gold is "outperform" with a $7 (U.S.) price target.