Inside the Market's roundup of some of today's key analyst actions. This file will be updated often during the trading day so check back for new details.
The steep decline in the share price of Dollarama Inc. (DOL-T) following the release of its initial 2017 guidance in early December presents an opportunity for investors, according to BMO Nesbitt Burns analyst Peter Sklar.
The stock fell 14 per cent from $90 during a two-day span following the Dec. 9 release. The analyst noted the stock currently trades at 18.3 times his fiscal 2016 EBITDA estimate, compared to a high of 21.4 times leading into the release of third-quarter 2016 results and the guidance announcement.
Accordingly, Mr. Sklar upgraded his rating for the retailer to "outperform" from "market perform."
"We consider fiscal 2017 guidance to be largely in line with our expectations, as we believe fiscal 2017 will be a period of slower growth for the company as it laps the impact of favourably priced foreign exchange hedges that generated incremental gross margin well above the target run-rate in fiscal 2016," said Mr. Sklar. "In addition, we believe that Dollarama's net new store guidance of 60-70 new stores is conservative, and that the company will be able to comfortably achieve this target."
He added: "Following fiscal 2017, we expect a recovery to an EPS growth rate in the mid to high teens as the company continues to execute on its strategy of generating strong [same-store sales] through increased basket size resulting from the successful multi-price-point strategy, and incremental square footage growth from net new stores. In addition, we believe that the company will benefit from modest operating leverage improvement, and from the positive impact of share buyback."
Mr. Sklar raised his target price for the stock to $93 from $85. The analyst consensus price target, according to Thomson Reuters, is $90.25.
MEG Energy Corp. (MEG-T) is "poised to outperform" in 2016 amid an "improving" oil price landscape and "resolute" steps to strengthen its balance sheet, said RBC Dominion Securities analyst Greg Pardy.
Saying MEG is most appropriate for investors with an above-average risk tolerance and a time horizon of at least one year, he initiated coverage of the stock with an "outperform" rating.
"Anchored by top-quartile in-situ oil sands assets at Christina Lake, we peg MEG's 2016 production growth at 2 per cent to 81,500 barrels per day, while a WTI price of $55-$60 (U.S.) per barrel is required to fund the resumption of brownfield expansions at Christina Lake that would propel production into the 110,000-120,000 b/d range over time," said Mr. Pardy. "MEG has pre-funded its 2016 capital program of $328-million by way of $350.7-million of cash sitting on its balance sheet as of Sept. 30, recent $110-million sale of an undeveloped oil sands lease, and underlying cash flows. MEG is also advancing plans to monetize its 50-per-cent interest in the Access Pipeline (our estimated proceeds of $1.6-$2.1-billion), which could cut its admittedly high balance sheet leverage ratios roughly in half ... MEG has ample liquidity via an undrawn $2.5-billion (U.S.) revolving credit facility, and no debt repayments due until 2020."
Mr. Pardy called the potential sale of its 50-per-cent interest in the Access Pipeline "a potential game changer." He estimated the move could reduce its debt levels by 35-45 per cent and net debt-to-trailing cash flow ratio could fall from 16.9 times to 9.7x-8.0x in 2016, and from 10.3x to 5.9x-4.8x in 2017.
"In our view, there are no highly comparable companies for MEG Energy, given its singular focus as an in-situ oil sands producer," the analyst said. "That said, we have compared MEG to Cenovus Energy – an in-situ oil sands producer with a broader upstream portfolio, including conventional oil and natural gas, and two U.S. refineries. We have also drawn comparisons with Northern Blizzard Resources .... which possesses heavy oil properties. On this less-than-perfect comparable basis, MEG's balance sheet is also carrying much higher financial leverage."
He set a price target of $12. Consensus is $15.18.
"What stands out most from our comparable valuation analysis is that MEG is trading at a price to net asset value ratio of 0.51 times – a discount vis-à-vis our peer group average of 0.70x, reflective of its balance sheet leverage," he said. "We believe there is plenty of equity value within MEG (as illustrated in our NAV analysis), but market recognition of that value is dependent upon improving oil market fundamentals and substantially lower balance sheet leverage."
Noting the risk-reward profile for CAE Inc. (CAE-T, CAE-N) is "compelling" at current levels, CIBC World Markets analyst Kevin Chiang upgraded his rating for the stock to "outperformer" from "sector performer."
"The company remains in the penalty box in our opinion given concerns over management's ability to execute, but looking at recent metrics suggests a company starting to see an upward trend, even if the rate of change is slower than expected," said Mr. Chiang.
"In our view, the current multiple builds in a healthy level of skepticism and so the risk is that if the company does not execute (which primarily means the margins fail to move higher), we think investors are left with a stock that will trade at its current valuation of [approximately] 8 times, suggesting a downside value of $13.50/share. Conversely, assuming revenue growth in the high-single-digit percentage range reflecting the backlog in Civil and improving outlook for Defense, plus a 100-basis-points margin expansion, the upside is [about] $21/share. Overall, we do not see a significant amount of downside risk to CAE's overall earnings/free-cash-flow trajectory given its backlog and as it harvests its recent restructuring efforts to improve asset utilization."
Mr. Chiang said CAE is poised to benefit due to its lack of exposure to several of the issues hurting its industrial peers, including declining energy prices, a weaker loonie and the struggles of the Canadian economy. He said that should result in positive fund flow.
"We expect the weaker Canadian dollar to provide a nice tailwind to CAE's operating earnings over time as a significant portion of the company's revenue is in U.S. dollars, while more of its costs are denominated in Canadian dollars," he said. "For CAE, every $0.01 depreciation in the Canadian dollar impacts operating earnings by [approximately] $3-million (unhedged). With the Canadian dollar potentially being $0.07 weaker over the next 12 months, this could provide an eventual lift to EPS of up to [about] $0.07."
Mr. Chiang said he views the company's 30-cent annual dividend as "safe and fully covered" and should provide further support to the share price. He expects the dividend to continue to grow with an improving free cash flow, noting the quarterly dividend has been raised four times since 2012.
He increased his price target to $17.50 from $16.75. Consensus is $16.93.
Downside to New Flyer Industries Inc. (NFI-T) remains limited despite "significant" share price appreciation, according to CIBC World Markets analyst Kevin Chiang.
Though the stock rose 103 per cent in 2015, Mr. Chiang said he still likes it in a "slow economic growth environment."
"New Flyer's internal changes are driving its improving margin and [free cash flow] profile," the analyst said. "As it integrates [recently acquired Motor Coach Industries] and moves to further diversify its revenue stream to higher margin after-markets services, this will drive earnings growth. As well, we believe the company's synergy targets as it integrates MCI are understated. In other words, improving earnings growth is not a function of the economy."
Mr. Chiang said the approval of the Fixing America's Surface Transportation Act (FAST) will prove to be a positive for bus demand as annual public transformation funding is expected to rise from $10.7-billion (U.S.) to $12.6-billion in 2020.
He said: "Essentially, with a new funding model in place, this should provide more certainty around transit bus demand and removes potential cyclicality and uncertainty in order flow. It also removes the 'black swan' event of having federal funding for transit buses all of a sudden disappear."
He maintained his "sector outperformer" rating, "reflecting the company's improving margin profile, valuation upside, increasing FCF conversion, and improving industry fundamentals."
Mr. Chiang raised his target price for the stock to $32 from $28.50. Consensus is $30.29.
On Dec. 23 after the markets closed, the B.C.-based auctioneer of industrial equipment reported reported fourth-quarter 2015 GAP fell 8.7 per cent year over year to $1.13-billion (U.S.). The result was below Mr. Powell's $1.24-billion projection. GAP for December was down almost 10 per cent year over year.
"What remains to be seen is if RBA can hold the revenue rate at the high end of the range in an environment where prices appear weaker and there will likely be more competition in the used market," said Mr. Powell. "2015 earnings so far have benefitted from stronger year-over-year improvements in the revenue rate, and solid GAP growth in the first nine months of the year. In our view, valuation is now looking attractive at just over one standard deviation from the mean price to earnings, but we believe there is potentially risk to the revenue rate, which can have a significant impact on earnings."
Maintaining his "market perform" rating, he lowered his price target to $26 from $29.The analyst average target, according to Bloomberg, is $28.86.
In other analyst actions:
Allison Transmission Holdings Inc. (ALSN-N) was downgraded to "neutral" from "outperform" at Robert Baird by equity analyst David Leiker. The 12-month target price is $28 (U.S.) per share.
Arista Networks Inc. (ANET-N) was raised to "outperform" from "market perform" at Oppenheimer by equity analyst Ittai Kidron. The 18-month target price is $90 (U.S.) per share.
Boston Properties Inc. (BXP-N) was downgraded to "outperform" from "top pick" at RBC Capital by equity analyst Michael Carroll. The 12-month target price is $155 (U.S.) per share.
Check Point Software Technologies Ltd. (CHKP-Q) was downgraded to "market perform" from "outperform" at Wells Fargo by equity analyst Gray Powell.
Chipotle Mexican Grill Inc. (CMG-N) was downgraded to "market perform" from "outperform" at Oppenheimer by equity analyst Brian Bittner.
Coach Inc. (COH-N) was raised to "hold" from "underweight" at BB&T Capital by equity analyst Corinna Freedman.
Deere & Co. (DE-N) was raised to "neutral" from "sell" at UBS by equity analyst Steven Fisher. The 12-month target price is $81 (U.S.) per share.
DreamWorks Animation SKG Inc. (DWA-Q) was downgraded to "neutral" from "buy" at B. Riley by equity analyst Eric Wold. The 12-month target price is $27 (U.S.) per share.
Callaway Golf Co. (ELY-N) was rated new "buy" at Ladenburg Thalmann by equity analyst Casey Alexander. The 12-month target price is $13 (U.S.) per share.
KeyCorp (KEY-N) was raised to "buy" from "hold" at Sandler O'Neill by equity analyst R Scott Siefers. The 12-month target price is $15.50 (U.S.) per share.
Magellan Midstream Partners LP (MMP-N) was raised to "strong buy" from "outperform" at Raymond James by equity analyst Darren Horowitz. The 12-month target price is $78 (U.S.) per share.
Netflix Inc. (NFLX-Q) was downgraded to "neutral" from "outperform" at Robert Baird by equity analyst William Power. The 12-month target price is $115 (U.S.) per share.
PACCAR Inc. (PCAR-Q) was downgraded to "neutral" from "outperform" at Robert Baird by equity analyst David Leiker. The 12-month target price is $55 (U.S.) per share.
Spectra Energy Corp. (SE-N) was raised to "strong buy" from "outperform" at Raymond James by equity analyst Darren Horowitz. The 12-month target price is $31 (U.S.) per share.
Skechers U.S.A. Inc. (SKX-N) was rated new "market perform" at Cowen by equity analyst John Kernan. The 12-month target price is $33 (U.S.) per share.
VF Corp. (VFC-N) was downgraded to "neutral" from "buy" at B. Riley by equity analyst Mitchel Kummetz. The 12-month target price is $64 (U.S.) per share.
Williams Partners LP (WPZ-N) was downgraded to "market perform" from "outperform" at Raymond James by equity analyst Darren Horowitz.
With files from Bloomberg News