Inside the Market's roundup of some of today's key analyst actions
In reaction to "blockbuster" second-quarter 2018 financial results, Desjardins Securities analyst Keith Howlett raised his rating for Dollarama Inc. (DOL-T) to "buy" from "hold."
On Thursday, the Toronto-based discount retailer reported quarterly diluted earnings per share of $1.15, exceeding the forecasts of both Mr. Howlett ($1.06) and the Street ($1.04). It was a jump of 30.7 per cent year over year, driven by a 1.28-per-cent increase in gross margin rate and 1.34-per-cent decline in expense rate.
"The introduction over time of products with higher price points (up to $4.00), which still offer compelling value, has been a resounding success," the analyst said. "Inventory velocity has gradually been increasing, even as sales mix shifts to the higher-price-point products."
With the results, management increased its guidance range for gross margin rate, as well as its EBITDA margin rate, by 50 basis points to reflect "strong" results to date with an eye toward the second half of the year.
The guidance changes led Mr. Howlett to increase his full-year 2018 EPS forecast to $4.48 (from $4.29) and his 2019 projection to $5.19 (from $4.95).
His target for the stock jumped to $154 from $134. The analyst average price target is currently $143.20, according to Bloomberg data.
"In the past, we have typically forecast EPS growth for Dollarama of 15–20 per cent, using what appear to be reasonable assumptions and with an eye on company guidance," he said. "The business has in fact delivered compound EPS growth in excess of 25 per cent over the last five years. We are increasing the price-to-earnings multiple we apply to forward EPS estimates to 30 times (from 28 times) to compensate for what almost appears to be systematic forecast error on our part. The consumer proposition continues to resonate with value-conscious Canadian consumers."
Elsewhere, Raymond James analyst Kenric Tyghe maintained an "outperform" rating for the stock and raised his target to $143 from $140.
"Dollarama delivered solid same-store sales growth of 6.1 per cent, underpinned by a 5.9-per-cent increase in average ticket (on top of a 4.6-per-cent increase in the prior year quarter) and a 0.2-per-cent traffic growth," said Mr. Tyghe. "The strong increase in basket size reflected a favorable mix impact (driven by strong demand for the higher price point items) and benefits from the acceptance of credit card payments. While more detailed data on the credit card transactions will be disclosed in F4Q18E, management has indicated that the initial response was in line with their expectations. The strong SSS growth (on increased traction of the higher price point items and strong merchandising), productivity gains and cost reduction initiatives continue to support our constructive thesis on Dollarama."
BMO Nesbitt Burns analyst Peter Sklar bumped his target to $150 from $141, maintaining an "outperform" rating.
"Overall, we would classify the quarter as a strong beat for Dollarama that reflects the company's continued success with offering its customers compelling value, as well as consistent execution in merchandising and operations," said Mr. Sklar.
"Following FY17, we expect an EPS growth rate in the mid-teens resulting from the generation of strong SSSG through increased basket size due to the successful multi-price point strategy and incremental square footage growth. In addition, we believe there will also be modest operating leverage improvement, and the positive impact of share buyback."
The firm's Top Picks list contains 123 stocks, or approximately 14 per cent of the 850 names covered by its analysts.
In the latest update to the list, released Friday, analyst Anita Soni upgraded First Quantum Materials Inc. (FM-T) to her top pick among industrial metals companies in Canada, removing Lundin Mining Corp. (LUN-T)
Ms. Soni has an "outperform" rating on First Quantum with a $17 price target. Consensus is $16.85.
"We are Outperform on FM based on its high-quality suite of copper operations and growth pipeline of greenfield projects (including Sentinel and Cobre Panama) providing increasing exposure to copper," she said. "FM continues to make progress strengthening the balance sheet as Sentinel ramps up and Cobre Panama construction continues, including a process to put up to $2.5-billion of project financing in place at Cobre Panama, while managing downside copper risk with hedges."
"With the closing of the TECO Energy acquisition," said Mr. Kuske. "Emera Inc. continues to progress on its Nalcor-related transmission projects supplemented with growth projects within TECO. The company's New England power portfolio could also benefit from power price improvements."
Mr. Kuske has an "outperform" rating and $58 target for Emera shares. The consensus is $53.50.
He has an "outperform" rating for Teck with a $36 target. Consensus is $34.59.
"We like Teck for its high leverage to the metallurgical coal market, which should drive strong EBITDA and FCF generation in FY17-18," said Mr. Woodsworth. "While we expect met coal prices to normalize after Q3, we see mid-cycle coal settling at higher level in the near future as the market should remain somewhat tight due to supply rationalization in China and less than expected swing supply from the U.S.. We forecast free cash flow per share of $4.23 in FY17 and $1.89 in FY18 for a combined yield of 20 per cent."
These U.S. stocks added to the list were: Advanced Disposal Services Inc. (ADSW-N), Alexion Pharmaceuticals Inc. (ALXN-Q), Expedia Inc. (EXPE-Q), Fastenal Co. (FAST-Q), Johnson & Johnson (JNJ-N), Mondelez International Inc. (MDLZ-Q), MSC Industrial Direct Co Inc. (MSM-N), Oracle Corp. (ORCL-N), Splunk Inc. (SPLK-Q), Sarepta Therapeutics Inc. (SRPT-Q) and Select Energy Services Inc. (WTTR-N).
The following companies were dropped from the list: Apple Inc. (AAPL-Q), Aetna Inc. (AET-N), Brookfield Infrastructure Partners LP (BIP-N), Cigna Corp. (CI-N), Commercial Metals Co. (CMC-N), Cisco Systems Inc. (CSCO-Q), Eaton Corporation PLC (ETN-N), Hormel Foods Corp. (HRL-N), Nutanix Inc. (NTNX-Q), Priceline Group Inc. (PCLN-Q), PepsiCo Inc. (PEP-N), UnitedHealth Group Inc. (UNH-N), Westco International Inc. (WCC-N) and Weatherford International PLC (WFT-N).
Citing its "well thought-out turnaround strategy" and potential stemming from its recent acquisition of the El Mochito mine in Honduras, Echelon Wealth Partners analyst Matthew O'Keefe initiated coverage of Ascendant Resources Inc. (ASND-T) with a "speculative buy" rating.
"With zinc prices on the rise as lack of new supply comes to bear, pure-play zinc investments are few," he said. "We highlight Ascendant Resources as a new, pure-play zinc producer currently overlooked by the market. With its recent acquisition of the El Mochito mine in Honduras, the Company is on track to bring the mine back to its former glory."
Mr. O'Keefe called the company's 100-per-cent owned El Mochito mine, acquired in 2016, "a turnaround story with growth upside."
"As a noncore asset of Nyrstar's from 2011-2017, El Mochito was underfunded such that when Ascendant purchased the asset, it had fallen behind on mine development, exploration, and maintenance," he said. "The capital raised by ASND is being used to catch up on development, exploration, and upgrading the aging mining fleet. Exceptional progress has been made on the operations side under the direction of COO Neil Ringdahl, which has greatly helped in increasing throughput to the plant. The bottlenecks that the company remains focused on are: i) Sourcing and replacing underground equipment, and ii) Exploration and development of new ore in proximity to existing workings. We visited the mine in May 2016 and were impressed; the surface infrastructure is in excellent shape and travel to the site was very easy on well-maintained paved roads. The town of Las Vegas, which grew around the mine, has supplied several generations of miners and continues to host supporting businesses and is consequently very supportive of the mine and its continued operation."
He set a price target for the stock of $1.50. Consensus is $1.53.
"While Ascendant acquired the mine in a state of neglect, the new management and operations team have identified key areas for improvement, are making good progress, and are on track to reach free cash flow in early 2018," he said. "The valuation is compelling as the stock is currently trading at 0.4 times our fully funded NAV versus producing peers at 1.0 times."
Saying he's "awaiting a more attractive entry point," BMO Nesbitt Burns analyst Nikolaus Priebe initiated coverage of TMX Group Ltd. (X-T) with a "market perform" rating.
"In our view, TMX offers an attractive business model with limited or no competition in a number of its core markets (e.g., listings, clearing, and derivatives)," he said. "It also offers a largely fixed cost structure, which provides strong operating leverage in periods of more robust capital markets activity. The company has been executing on a re-alignment strategy focused on reducing operating costs, de-leveraging, and restoring positive earnings growth. These initiatives appear to be yielding results, with TMX shares trading 96% higher than their late-2015 lows. The company also recently announced two dividend increases, including the first since the Maple Transaction.
"However, competition remains a prominent investor concern. Since the advent of a multiple marketplace environment in Canada, TMX has experienced a gradual, long-term decline in cash equity trading market share (from 100 per cent in 2007 to 66 per cent year to date). NASDAQ's recent entrance and uncertainty surrounding its Canadian strategy may further provoke concerns regarding the long-term competitive outlook."
Mr. Priebe set a target of $70. The average is $76.
"We remain cautious on the competitive structure of the Canadian exchange space and the near-term outlook for the mining sector," he said. "Furthermore, the overhang associated with concentrated institutional ownership may limit multiple expansion in the near term. We await more constructive signals to revisit our thesis on the company, including evidence of positive momentum in the mining sector, increasing volatility levels, a stabilization of market share, or more compelling valuation. We view shares of TMX as fairly valued."
Expressing increased caution about the U.S. beverage market, Credit Suisse analyst Laurent Grandet said he's "stepping aside" from PepsiCo Inc. (PEP-N).
Mr. Grandet said the beverage giant's risk-reward is now balanced after an 11-per-cent rise in share price for the last year, leading him to downgrade his rating to "neutral" from "outperform."
"PepsiCo's U.S. beverage retail sales trends have deteriorated significantly year-to-date, diverging from its primary non-alcoholic competitors," he said. "What's new is that its leading noncarbonated beverage (NCB) portfolio is now also in decline and no longer compensating for the carbonated soft drink (CSD) weakness. We estimate that about half of declining sales are cyclical and can be recovered next year while the other half is more structural in nature.
"While Frito-Lay is currently compensating for the weaker beverage results, we think it's a stretch to assume that the snacks business can continue to over-earn for an extended period of time. Best-in-class organic growth of 3 per cent-plus and operating margins approaching 31 per cent is likely a ceiling for the snacks category, in our view."
Expecting lower revenue going forward, Mr. Grandet dropped his 2017, 2018 and 2019 earnings per share projections to $5.13, $5.46 and $5.82, respectively, from $5.15, $5.56 and $ 5.95.
His target for the stock fell to $124 (U.S.) from $126. The average is $124.02.
"While we estimate that a portion of the declines will come back, we struggle to see how the company can fix some of the more structural issues without making significant investments behind the brands," he said. "We think the sell-side has generally been slow to react to these changing dynamics, which we expect will weigh on the shares as consensus eventually revises downward."
Calling its current valuation "too compelling" as revenue per available room trends "accelerate," Canaccord Genuity analyst Ryan Meliker upgraded RLJ Lodging Trust (RLJ-N) to "buy" from "hold."
"We are incrementally more optimistic about RLJ's RevPAR growth and the broader industry's in 4Q and 2018," said Mr. Meliker. "As we forecast an acceleration in growth, we believe sentiment toward the group will improve and expect RLJ to be a primary beneficiary of that, given outsized acceleration and a discounted valuation. While we acknowledge that the market has not viewed the [FelCor Lodging Trust Inc.] acquisition favorably, we believe the current valuation reflects that view and upside from multiple expansion seems likely driven not just by RevPAR growth accelerating but execution on the asset sale front as well."
He raised his target price for the Bethesda, Md.-based REIT to $23 from $21. Consensus is $23.69.
RBC Dominion Securities analyst Arun Viswanathan initiated coverage of DowDuPont Inc. (DWDP-N) with a "top pick" rating.
"We have been on the DOW train for some time now and the deal close marks the primary catalyst to our positive thesis," he said. "Over the next few months, we look towards synergy capture, a revised spin strategy, and good volume growth to support the stock. Over the next 18 months, we point to meaningful growth projects, the pipeline, FCF, shareholder returns, and value-creating spins."
Mr. Viswanathan set a price target of $80 (U.S.). Consensus is $75.88.
He said: "The following factors support our rating: 1) $3-billion of cost synergies and potential for $1-billion of revenue synergies over the next 18 months; 2) potential for additional spins out of the Specialty business (market has seen successful pure plays such as AXTA, CC, and TSE come out of DOW and DD over the last few years); 3) $4-billion worth of organic growth projects from the legacy DOW business over the next 5 years (Freeport, Sadara, expansions); 4) potential for significant FCF once transaction costs and growth project costs roll off (could go towards large buyback); and 5) increased scale which has resulted in less leverage to cyclical end markets (auto, legacy DOW commodity chemicals)."
In other analyst actions:
TD Securities analyst Bentley Cross downgraded Stingray Digital Group Inc. (RAY.A-T) to "hold" from "buy" with a target price of $10 (up from $9.50). The analyst average target is $10.05.
CIBC World Markets analyst Scott Fromson upgraded Winpak Ltd. (WPK-T) to "outperform" from "neutral." He lowered his target to $55 from $58. The average is $60.25.
Berenberg analyst Fawzi Hanano downgraded Lundin Mining Corp. (LUN-T) to "hold" from "buy" with a target price for the stock of $10 (up from $9.25). The average is $10.20.
Scotia Capital analyst Orest Wowkodaw upgraded Nevsun Resources Ltd. (NSU-T) to "sector outperform" from "sector perform" with a target of $3.50 (unchanged). The average is $3.58.
TD Securities analyst Daryl Young lowered Major Drilling Group International Inc. (MDI-T) to "hold" from "buy" with a target price for the stock of $9, falling from $9.50. The average is $8.50.
Cowen analyst Andrew Charles downgraded Chipotle Mexican Grill Inc. (CMG-N) to "underperform" from "market perform." Mr. Charles dropped his target for the stock to $250 (U.S.) from $370. The average target is $381.68.
Morgan Stanley analyst Betsy Graseck downgraded Capital One Financial Corp. (COF-N) to "equalweight" from "overweight" with a target of $83 (U.S.), down from $97. The average is $95.67.
Credit Suisse analyst upgraded Moshe Orenbuch upgraded Navient Corp. (NAVI-Q), Wilmington, Del.-based company that services and collects on student loans, to "outperform" from "neutral" with an unchanged target of $16.50 (U.S.). Consensus is $17.72.
Mr. Orenbuch said: "We upgrade shares of NAVI … after its sell-off (down 20 per cent year-to-date), a refreshed cash flow analysis ($16.50 per share), and a handful of positives including (a) strong cash flows and capital return in '18 (b) gov. loan margin supported by better 3/1 month libor spread (c) modest benefits from private student loan originations and/or fee business acquisitions (d) reduced regulatory risk (e) a call option on tax reform."
Vining Sparks analyst Marty Mosby upgraded M&T Bank Corp. (MTB-N) to "strong buy" from "market outperform" with a target of $180 (U.S.). The consensus average is $161.58.