Bombardier’s CRJ Facility in Quebec.
Inside the Market's roundup of some of today's key analyst actions
Following last week's so-called Three Amigos summit between the leaders of Canada, Mexico and the United States in Ottawa, Raymond James analysts remain optimistic about the possibility of a resolution to the softwood lumber dispute being reached.
In a research note on the forest products industry, they said the market is "strongly" discounting the possibility, citing the pricing in of 30-per-cent duties to lumber stocks. The group added they see upside in the shares "even under this 'worst-case scenario.'"
"Observers have interpreted market share related commentary in the post summit joint Canada/U.S. release as necessarily implying a 'hard cap' quota which has put further pressure on B.C. lumber company shares," they said. "We highlight this as incorrect. Market share has been a key feature of every past trade agreement with market share controlled by either volume or tax structures. While reaching a negotiated settlement is far from certain, there is still an opportunity for this to be achieved."
They added: "Progress on negotiations has been made; however, we understand issues remain with the U.S. pushing for a hard cap quota and Canada favoring "optionality" with Provinces choosing either an export tax or quota. While there can be no assurance of a deal we regard current valuations as presenting an asymmetric payoff as a settlement could still be reached before the deadline. Our current 2017 earnings estimates and target prices assume a negotiated settlement with a 'modernized' version of the 2006 SLA. If the current dispute ends in litigation, export taxes in line with Lumber IV (approximately 25-30 per cent) would result in a reduction of our 2017 EBITDA estimates. However, we still see an average 15-per-cent upside in lumber company shares assuming trade restraints result in higher US lumber pricing. We see an additional average 20-per-cent upside if we factor in the present value of potential duty deposit rebates."
The analysts upgraded a pair of stocks and made several target price changes in the note.
The ratings changes were:
- Acadian Timber Corp. (ADN-T) to "strong buy" from "outperform" with an unchanged target of $22. The analyst consensus target price is $19.60, according to Thomson Reuters.
The analysts said: "With shares off [approximately] 15 per cent from April 2016 highs and the yield increasing to 6 per cent (with a declining payout ratio) we are increasing our rating on Acadian Timber … We highlight Acadian's best in class performance (13-per-cent total return since inception) and note that we do not expect the lumber dispute to result in a material negative impact on Acadian earnings."
- Conifex Timber Inc. (CFF-T) to "strong buy" from "outperform" with a target of $4.50, down from $4.75. Consensus is $4.05.
They said: "Our company specific analysis assumes shipments by region remain at 2015 levels. While this is not likely accurate it is difficult to predict how regional shipments change with precision. This could have a more material impact on Conifex, as with only 500-million fbm [foot board measure] in production Conifex has the ability to be more nimble is shifting to more profitable regions. These price changes (plus a 30-per-cent duty on US shipments) results in EBITDA levels generally falling between the EBITDA levels implied by the current share prices and our current 2017 estimates (which assume a negotiated settlement)."
In explaining the target changes, they said: "Coinciding with the release of this Comment we have made several changes to our models for the lumber producers under coverage. The main adjustment is our go-forward assumption for the U.S. dollar/Canadian dollar FX rate. We assume a Canadian FX rate of $0.76 (U.S.) for the remainder of 2016 and through 2017, this is up from our previous 2017 assumption of $0.73. As a result, we see downward price target revisions to all companies highlighted due to the negative pressure a stronger USD has on companies' earnings."
The changes were:
- Canfor Corp. (CFP-T, outperform) to $17.50 from $19. Consensus is $42.06.
- Interfor Corp. (IFP-T, strong buy) to $15.75 from $16.50. Consensus is $15.69.
- West Fraser Timber Co Ltd. (WFT-T, outperform) to $49 from $54. Consensus is $52.57.
- Western Forest Products Inc. (WEF-T, strong buy) to $2.50 from $2.75. Consensus is $2.63.
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Advantage Oil & Gas Ltd.'s (AAV-T) operational update was "effectively a win for investors on all fronts," said Raymond James analyst Kurt Molnar.
"Well costs have come down while type well performance has been tracking in-line or above expectations," said Mr. Molnar on the update, released Wednesday. "Not surprisingly then, production is tracking modestly above our prior expectations with a healthy backlog of production effectively behind pipe providing solid conviction for continued growth with modest capital spending requirements. Already low operating costs were reduced to a new all-time low allowing total cash costs to similarly come in at all-time lows. It is our view that any time capital costs can be reduced at the same time that cash margins can be improved due to falling cash costs, the investor wins in the E&P business."
He added: "This further manifests itself in a 2016 financial and operating forecast that has the company delivering strong growth while still spending less than cash flow such that an already superior balance sheet can get just that much better. Success in multiple layers of Montney development at Glacier continues to be the primary driver of both near-term performance and long-term prospects (due to a very large drilling inventory at Glacier alone) but we also note our continued interest in the Valhalla block of Montney for Advantage as a potential source of future increased leverage to NGLs and condensate in particular."
In response to the results, Mr. Molnar lowered his 2016 cash flow per share projection by a penny to 81 cents, while increasing his revenue estimate by a million dollars to $212-million. He raised both forecasts for 2017 to $1.21 (from $1.13) and $286-million (from $272-million)."
Maintaining his "outperform" rating for the stock, he bumped his target price to $11 from $10. The analyst average is $9.68, according to Bloomberg.
"We would note that Advantage's stock has lagged some of its lean gas peers since April as investors sought out more 'beta' after Advantage had previously outperformed its peers as a more defensive stock," said Mr. Molnar. "We think investors have missed that point that Advantage offers plenty of beta on the back of growing returns on invested capital (through cost innovation and type curve improvements), derivative growth in production that may be accelerating at the same time that spending is below cash flow levels. Finally, an outstanding balance sheet provides ample room for Advantage to step on the accelerator at a time of their choosing. We expect this update will start the process of bringing Advantage back to front of mind for lean gas investors and that the recent lag in stock market relative performance is a highly appealing entry point."
Meanwhile, TD Securities analyst Aaron Bilkoski moved Advantage to "action list buy" from "buy," saying the "excellent" results are not reflected in the stock's valuation.
"We have always been attracted to Advantage's industry-low cost structure, predictable growth profile, corporate innovation that has led to steady increases in initial productivity rates, very low balance sheet leverage, and attractive valuation," he said.
"In spite of all these positive attributes, since the equity financing announced mid-February ($7.45 per share), the share price performance has been anemic relative to its gas-weighted peers. In our view, the strong operational performance, cost control, and growth potential outlined in today's press release underscores that: 1) Advantage is best-in-class and 2) the valuation does not, in our view, reflect its quality. For these reasons, we are increasing our rating to our highest conviction recommendation,"
He raised his target price to $10 from $9.50.
Elsewhere, Desjardins Securities analyst Jamie Kubik maintained his "buy" rating and $10 target, saying: "At its current trading valuation, Advantage offers a compelling combination of upside potential from better-than-average per share growth and reduced downside exposure through an exceptional cost structure and hedge book. We maintain our Buy –Average Risk rating and continue to see the name as a top idea."
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BMO Nesbitt Burns analyst Kelly Bania upgraded DavidsTea Inc.(DTEA-Q) after recent meetings with management, expressing confidence in her forecasts and a "and a deeper understanding of the company's positioning within the fast-growing tea/infused beverage category."
"We believe DTEA's modern in-store experience, innovative culture, attractive market positioning, and track record of strong new-store returns in Canada position the company well to achieve 25-per-cent long-term EPS growth," she said.
Moving her rating for the Mont-Royal, Que.-based company to "outperform" from "market perform," Ms. Bania added: "We see several catalysts for the company, including: 1) the opportunity for the company to refresh stores to improve transaction efficiency in the key beverage-only category, which could help improve customer traffic trends; 2) continued strength in higher-margin online sales (already 9.4 per cent of sales and growing 50 per cent) where we expect momentum could remain strong, supported by the introduction of an app in 2017 (online sales are included in DTEA comps); and 3) potential uses of cash ($69-million Canadian or $53-million U.S. on the balance sheet as of 1Q16) including the possibility of a dividend (not likely a share buyback given limited liquidity for the shares, in our view)."
Ms. Bania also emphasized an increasingly favourable cost of goods sold (COGS) outlook "given FX hedges that support an outlook for a flat FX impact to COGS in 1Q17 and favorable in 2Q17 (current spot rates suggest flat to slightly favorable COGS in 2H17, which we believe may also potentially be hedged in coming months)."
She raised her target price for the stock to $16 (U.S.) from $13. The analyst consensus target is currently $18.05.
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Sandstorm Gold Inc. (SSL-T, SAND-N) continues to make progress at becoming a stronger, more diverse company, said Raymond James analyst Phil Russo.
Resuming coverage of the stock following the closing of its $57.5-million (U.S.) equity financing, Mr. Russo said he is forecasting a 50-per-cent increase in cash flow from 2016 to 2019 due to recently acquired cash flow streams being realized.
"The financing provides the company the needed balance sheet flexibility to pursue further potential acquisitions in the mold of those recently acquired over the last 12 months," said Mr. Russo. "Those acquisitions have been favourably received by the market and seen a restoration in sentiment towards the name. Coupled with some of its streams falling into stronger hands through sector M&A, the investment case for Sandstorm continues to strengthen, in our view."
Mr. Russo kept his "outperform" rating for the stock and raised his target price to $7.25 from $6.75. The average target is $6.88
Elsewhere, BMO Nesbitt Burns analyst Andrew Kaip maintained a "market perform" rating with a target of $5.50 (U.S.), up from $5. He said: "The offering enhances SAND's balance sheet and liquidity position, and provides improved transactional capacity."
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Bonavista Energy Corp. (BNP-T) is a "deep-value" stock challenged by the current commodity price environment, said CIBC World Markets analyst Adam Gill.
He initiated coverage of the Calgary-based company with a "sector performer" rating.
"While the company's balance sheet is far from broken and has improved with the recent $115-million equity deal (resulting in 16-per-cent share dilution), leverage still remains higher than most at 2.9x 2017 estimated D/CF [debt to cash flow] versus. the gas peer median of 2.1x," said Mr. Gill.
"Spending this year has fallen by 54 per cent from 2015, more than the gas-focused E&P peer average of 31 per cent, driving a 15-per-cent expected decrease in volumes versus peer average growth of 24 per cent. Given the lower growth and higher leverage, we believe the company will continue to trade at a discounted valuation. That said, if Bonavista could get a solid price for its NEBC assets, we could see debt levels normalize with peers and the ability to deploy more capital improved."
Mr. Gill noted Bonavista's shares have "materially underperformed" peers over the last six years. He pointed out the total return on equity is negative 84 per cent compared to the TSX Energy Index (down 14 per cent) and intermediate/junior E&P companies (down 39 per cent) since the 2008/2009 financial crisis.
He set a price target of $4. Consensus is $3.72.
"Given the increasing leverage and challenging record of value creation, the valuation on the company has fallen to a significant discount from peers and we believe this discounted valuation will be hard to shake off," said Mr. Gill. "We therefore apply a 2.5x price target discount valuation, which is in line with the discount from 2015-2016 year to date."
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Citing its current valuation, Citi analyst Michael Rollins downgraded AT&T Inc. (T-N) in a research note previewing second-quarter results for U.S. wireless operators.
Moving his rating to "neutral" from "buy," Mr. Rollins said the stock has benefited from a combination of low rates, favourable cost-cutting prospects from its acquisition of DirectTV and a solid dividend yield.
"Our prior buy-rated thesis on AT&T had been based on the prospects for solid financials, somewhat conservative FCF guidance, and upside from merger-related synergies," said Mr. Rollins. "We remain upbeat on AT&T's ability to generate solid financial performance and the opportunity to rekindle better volume metrics for postpaid wireless, aggregate video, and broadband ads through cross-selling. However, our EPS outlook is no longer meaningfully above the consensus for 2016 or 2017."
He added: ''Our lowered rating contemplates the investor demand for dividend yield, which has benefited the shares in recent periods and put valuation multiples near historic highs. We could be more positive if free cash flow growth is better than expected while we see debt levels as a risk should interest rates rise."
He did raise his target price for the stock to $46 (U.S.) from $42. Consensus is $40.13.
On the sector, Mr. Rollins said: "We believe the competitive environment across the key customer segments are limiting the upside in fundamental performance over the next 12-months, especially while the wireless business is in transition, the consumer business needs further broadband investment, and the enterprise segment is under-pressure from fibercentric insurgents. We remain 2% below Street consensus 2016 EPS for Verizon and relatively in-line on AT&T, with the consensus trending towards our existing estimates. The Indexed Consensus EPS for 2016, seen in Figure 7, shows that the Verizon forecast has fallen 2 per cent in the last three months due likely to the union strike and other operational factors. The AT&T forecast has been roughly flat over the same time period, but has been trending modestly higher since late 2015. Given operational trends remaining difficult in the wireless category, and economic and competitive headwinds continuing in wireline, we find it difficult to believe these EPS estimate trends are likely to reverse."
He made the following target changes:
- Sprint Corp. (S-N, neutral) to $4.75 (U.S.) from $3.75. Consensus: $3.39.
- T-Mobile US Inc. (TMUS-Q, buy) to $52 from $51. Consensus: $47.33.
- Verizon Communications Inc. (VZ-N, neutral) to $58 from $53. Consensus: $52.61.
"Large-cap Telco stocks continue to benefit from a rate environment that is lower for longer. Verizon is trying to get paid for the growth in data consumption with new rate plan options after a relatively quiet promotional period for wireless," Mr. Rollins said. "Meanwhile, the device replacement cycle is approaching 30 months, which is helping churn and near-term financials for the category. However, we believe wireless competition remains significant and believe the use of low-band spectrum by T-Mobile and Sprint is narrowing the historical gaps in service quality."
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Citing positive feedback on its integration of TriVascular Technologies, Inc. and de-risking of the Nellix EndoVascular Aneurysm Sealing System, BMO Nesbitt Burns analyst Joannne Wuensch upgraded Endologix Inc. (ELGX-Q) to "outperform" from "market perform."
"Our October 2015 ELGX downgrade was based on the belief that the TRIV acquisition muddied a clean investment thesis, indicated that ELGX was not a near-term take-out, and added integration risk and dis-synergies," said Ms. Wuensch.
"With several months post-close (February 2016) and the Nellix IDE clinical data presented, we conducted a physician survey. We found: 1) 79 per cent of physicians are happy with the integration process; 2) over the next 12 months, physicians anticipate increasing Nellix utilization to 20 per cent of cases from 5 per cent currently (which is impressive initial uptake given we don't expect approval until the end of 2016/early 2017); 3) 46 per cent expect that Nellix will replace other EVAR devices, 17 per cent expect that it will replace only the Ovation and AFX cases (cannibalization), and 37 per cent believe that Nellix will shift more cases to minimally invasive procedures from open surgery; and 4) big picture – 38 per cent expect Nellix to increase the number of procedures, 21 per cent expect it to change patient follow-up, and 21 per cent believe it will provide peace of mind. The biggest concern is 83 per cent are still looking for more long-term clinical data (which the company will continue to build)."
Ms. Wuensch said the Nellix EVA device should drive double-digit revenue growth for "several" years.
With the rating change, she raised her target price to $16 (U.S.) from $11.50. Consensus is $15.
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In other analyst actions:
Scotia Capital analyst Turan Quettawala raised his rating for Bombardier Inc. (BBD.B-T) to "sector outperform" from "sector perform" with a target of $2.75 (up from $2). The average is $1.96.
Raymond James analyst David Long downgraded Wells Fargo & Co. (WFC-N) to "market perform" from "outperform." He did not specify a target price, while the consensus is $54.86 (U.S.).
Bank of America Corp. (BAC-N) was downgraded to "market perform" from "outperform" by Raymond James' Michael Rose without a target. The consensus is $17.23 (U.S.).
Deutsche Bank analyst Vishal Shah downgraded First Solar Inc. (FLSR-Q) to "hold" from "buy" with a target price reduction to $44 (U.S.) from $80. The average is $70.73.
Red Hat Inc. (RHT-N) was downgraded to "equal-weight" from "overweight" by Morgan Stanley's Keith Weiss. His target of $88 (U.S.) did not change, compared to the average of $87.85.
Goldman Sachs analyst Alexander Blostein downgraded Northern Trust Corp. (NTRS-Q) to "neutral" from "buy." Mr. Blostein lowered his target price to $71 (U.S.) from $82, versus the consensus average of $72.61.
David Leeder