Production at HudBay mine.
Inside the Market's roundup of some of today's key analyst
actions
Shares in HudBay Minerals Inc. sunk more than 7 per cent today,
one day after the company reported a sharp drop in quarterly revenue and profit
and hinted it may have to suspend its dividend.
Even before the results,
which included news that capital costs at its Lalor project will rise by
$90-million to $794-million, HudBay shares were under pressure from a
downturn in industrial metal prices. For the week, shares are off nearly 15 per
cent.
Minutes released this week from the Federal Reserve's latest
monetary policy meeting, which unexpectedly showed some appetite among Fed
officials for withdrawing bond-buying measures even before the labour market
gets fully back on its feet, has diminished the appetite for the economically
sensitive metals like the copper HudBay produces.
But HudBay has its own
problems, including the additional costs at Lalor in Manitoba and a nine-month
extension of its construction schedule. The company also said rainfall disrupted
work at its Peruvian project.
The possible cut to its payout may be a
particular concern for investors. HudBay said it's "uncertain" whether its
10-cent semi-annual dividend can be maintained until the company's new mines
achieve production. HudBay is aiming to more than quadruple its copper
production by 2015.
Dundee Securities analyst David Charles noted that in
order to declare a dividend, debt covenants require HudBay to retain a ratio of
consolidated debt-to-EBITDA of 2.5 times or less. But the company is facing a
short-term revenue shortfall because of the production gap between the closure
of its Chisel North and Trout Lake mines and the ramp up of production at
Lalor.
"Management clearly stated that their goal is not to cut the
dividend, but if a decrease cannot be avoided, it would be temporary until
revenues grow back up in 2014. The outcome depends on negotiations with the note
holders," he said.
He thinks the dividend worries, however, are overdone:
"We do not believe that investors own HBM for the dividend and believe that with
the (nearly) 8 per cent decline in the share price today, a dividend decrease is
already partly discounted," he said.
Upside: Mr. Charles maintained a
"buy, high risk" rating with a target of $15. Desjardins Securities analyst John
Hughes maintained a "buy" rating but trimmed his target to $13.35 from
$13.65.
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Herbalife International Inc.'s fourth-quarter
results "offered more consistency, no surprises and at least a brief refocus on
business fundamentals" after the well-publicized clash of views on the company
from activist investors Bill Ackman and Carl Icahn, said Canaccord Genuity
analyst Scott Van Winkle.
Mr. Ackman is short the stock and calls it a
pyramid scheme, something Herbalife – a direct seller of dietary supplements -
vehemently denies. Mr. Icahn has taken a 13 per cent stake in the company,
believing it has significant growth potential.
Herbalife reported profit
in its latest quarter of $117.9-million (U.S.), or $1.05 a share, up from
$105.4-million, or 86 cents a share, a year earlier. Sales jumped 20 per cent to
$1.06-billion.
Mr. Van Winkle affirmed his belief that Mr. Ackman has
made a big mistake.
"Our position that Herbalife's multi-level marketing
sales model is legitimate and well managed and that the risk of some
catastrophic regulatory action is remote is completely unchanged," he
said.
"We believe HLF is a sustainable growth company given its
favourable positioning from product (weight loss), sales method (direct selling
is ideal for weight loss products), geographical exposure (emerging market
exposure) and business model (high ROIC and free cash flow)
standpoints.
Upside: Mr. Van Winkle reiterated a "buy" rating and
cautioned it's a pick only for long-term investors. But he cut his price target
to $63 (U.S.) from $76, noting that multi-level marketing firms, as a group,
have settled into a modest valuation range after two months of
volatility.
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The consensus forecast for Mullen Group Ltd.
's earnings is too high and the stock – after gaining 5 per cent since
mid-January – is priced at the upper end of the company's historical trading
range based on valuations, said Raymond James analyst Andrew
Bradford.
"Based on this pattern, we believe the stock is likely to
retrace its recent gains," Mr. Bradford said as he downgraded the oilfield and
trucking services firm to "underperform" from "market perform."
Downside:
Mr. Bradford has a $22.50 price target.
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Several growth and
margin headwinds that dragged Softchoice Corp. 's results down in 2013 have
started to abate, Raymond James analyst Steven Li said after the software firm
delivered "a clean beat" in its fourth-quarter earnings and revenues this
week.
Softchoice raised its dividend by 2 cents to 9 cents, but that
implies a payout ratio of only 17 per cent, and the company's balance sheet
"remains pristine," with net cash of $68-million and no debt.
Upside: Mr.
Li raised his price target to $16.50 from $13.50 and reiterated an "outperform"
rating.
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Canam Group Inc.'s improved risk controls, a better bidding discipline among industry participants, and a brighter macro picture for the U.S. commercial construction sector all point to further volume and margin gains ahead for the steel fabricator, according to analyst Frederic Bastien of Raymond James.
Upside: Mr. Bastien reaffirmed an "outperform" rating and raised his price target by $2 to $9.
Darcy Keith