Inside the Market's roundup of some of today's key analyst actions
Ahead of the release of the Richmond, B.C.-based company's fourth-quarter financial results, scheduled for Feb. 9, he raised his rating for the stock to "outperform" from "market perform."
"Some of the transient factors that hurt 2016 have passed and comps look easier," said Mr. Li. "While this is not a call on the quarter, we think SWIR could surprise positively through the year. We are also intrigued by the new lower cost, lower power modules (M1, NB1 – M1 in carrier trials) that could open up high volume IoT [Internet of things] use cases and expect those to increasingly become part of the narrative (likely the second half of 2017 plus)."
Mr. Li is projecting quarterly revenue of $164-million (U.S.), an increase of 11 per cent year over year and higher than both the Street ($161-million) and the company's guidance ($157-million to $166-million). Similarly, his adjusted earnings per share estimate of 17 cents is a penny higher than the Street and in line with guidance (16 cents to 19 cents).
The analyst said: "2016 saw a couple headwinds (transient in our view) reverberate through the business (led them to lower guidance twice): 1. OEM. End-customer demand softness among a couple large OEM [original equipment manufacturer] customers plus tighter inventory management. We see buying patterns returning to normal in 2017. And with over 40 new OEM programs launched in 2016 and ramping, SWIR could even surprise vs. easier comps; 2. Enterprise (ES) rebounded a bit in 2016 but still was impacted by SWIR being late to market with its LTE [long-term evolution] products. They had a complete LTE refresh in 2016 (RV50, MP70, MG90, FX30) which should buoy growth in ES in 2017."
"SWIR has announced cellular modules for Cat-M1 and Cat-NB1 LTE networks. Cat-M1 is in carrier trials now (AT&T, Verizon & European operators) and sampling with lead customers. We expect revenue impact to be more in 2018 but this is an important development for the market. A quick primer: Cat-M1 caps data speeds at 375 kilobits per second (versus Cat-1 LTE in the market today at 10Mbps). Cat-NB1 is even lower at 20-65kbps. Lower data speed caps allow for lower cost, lower power usage and longer life allowing cellular to address a broader range of use cases and high volume applications (e.g. utility meters, smoke detectors, parking lot sensors, street lights, wearables, health and industrial monitors etc.). This could drive significantly higher volume of connected devices – a positive no doubt for SWIR even if it comes with some ASP erosion."
Mr. Li raised his target price for the stock to $20 (U.S.) from $16. The analyst consensus price target is $16.13, according to Thomson Reuters.
On Jan. 20, Amaya provided updated guidance for its 2016 financial results, which are expected to be released in March. The gambling website operator expects revenues to be in line with the Street's expectation. Mr. Yaghi noted "the mid-point of the new revenue guidance range is only 0.6 per cent above the Street's previous estimate for the year." The company said revenue improvement came due to better-than-estimated casino segment results in the casino segment and a relaunch in Portugal."
"The guidance update was more meaningful from a profitability standpoint, as adjusted EBITDA and adjusted EPS estimates from the company were 3.3 per cent and 7.7 per cent higher than the previous consensus, respectively," he said. "We believe the larger increase in profitability guidance was due to Amaya's implementing an operational excellence program aimed at rationalizing and optimizing operations. We also believe a decrease in marketing spending in 4Q16 helped profitability in the quarter. The company had also increased its guidance when it released its 3Q16 results although the increase was more modest at that time."
In a research note on the company, Mr. Yaghi expressed caution over the impact of U.S. president Donald Trump on Amaya's fortunes going forward.
"Jeff Sessions, Donald Trump's choice to be the next attorney general of the U.S., said during his confirmation hearing that he would revisit the current online gambling situation in the U.S.," the analyst said. "Currently, states are allowed to set up state-ringed fences and allow gambling on a state level. It appears that if confirmed as attorney general, Mr/ Sessions would review the current interpretation of the Wire Act to allow online video poker. If this occurs, it could impact future growth opportunities for Amaya in the US market. Currently, the U.S. market is not a significant contributor to AYA's business, as large states do not allow online gambling yet. However, this could be a headwind for potential future growth of the business. In addition, one of President Trump's top contributors, according to the Washington Post, was Sheldon Adelson, a casino magnate who has advocated strongly against online gaming. We believe it is still too early to draw conclusions on the future of online gambling, but we will be monitoring the subject closely."
Mr. Yaghi raised his financial estimates for the company following the guidance update.
"We have maintained our revenue estimates as guidance was in line with expectations. However, we have increased our profitability forecast to reflect the revised guidance," he said. "We now forecast revenue growth of 8 per cent in 2016 and 11 per cent in 2017. We have slightly improved our EBITDA forecast to reflect the operational improvement initiative. We now forecast 15-per-cent EBITDA growth in 2016 and 13 per cent in 2017."
His 2016 and 2017 adjusted EBIDTA projections rose to $525.732-million and $595.779-million, respectively, from $508.858-million and $561.485-million. His earnings per share estimates moved to $1.89 and $1.94 from $1.78 and $1.90.
With a "hold" rating, his target price for the stock rose to $23.50 from $23. Consensus is $28.17.
"We believe the stock's current potential upside is not high enough to compensate for the elevated balance sheet leverage, even though prospects have recently improved," the analyst said. "We would wait for further steady quarterly results with improving FCF growth trends before becoming more bullish on the name."
Elsewhere, Canaccord Genuity analyst Kevin Wright kept a "buy" rating and $28 target for the stock.
Calling it an "undervalued stock," Mr. Wright said: "The company did not give a segment breakdown of performance so we are left to speculate somewhat but it appears that the casino segment could be performing slightly ahead of our expectations based on QAUs [quarterly real-money active uniques], and strong growth in registered users may imply that poker is stabilizing somewhat. While results are showing solid progress, our 2017E outlook remains reasonably intact amid regulatory changes and an expected ramp in spending on marketing, so we think that adjusted EBITDA margin is at a high point. Daniel Sebag announced his retirement as CFO and a search is underway for his replacement. In our view, the guidance update bodes well for the stock as it indicates that the still relatively new CEO, Mr. Ashkenazi, is delivering results."
Raymond James analyst Tara Hassan expects Integra Gold Corp. (ICG-X) to continue its "aggressive" exploration approach at its Lamaque project in Val-d'Or, Que., which she called "one of the most productive mining jurisdictions in Canada."
Also foreseeing key project updates in 2017 that will "confirm the potential for a larger, longer life and more economic operation" at the facility, Ms. Hassan initiated coverage of the stock with an "outperform" rating.
"Although Integra has adopted an aggressive approach to exploration over the last 36 months, the bulk of these efforts have been focused on expanding the resource at Triangle and satellite deposits that form part of the Lamaque South zone," she said. "With Triangle now well defined and reaching a critical scale to support a construction decision, Integra is now able to shift some of its exploration focus and dollars to satellite targets and the deep potential at Lamaque. As a result, we expect 2017 could be a pivotal year to demonstrate the potential of the larger property package.
"In 2016 Integra began to undertake a number of initiatives to highlight this potential and we expect to see results from these efforts beginning in 1Q17 when the company releases an updated resource focused on the upper 400 metres of the historic Sigma mine."
Citing its "sizable resource already defined, a permitted mill on site, significant exploration upside remaining and the potential for near term production," Ms. Hassan sees Integra as a prime takeover candidate going forward.
"Layering in the increased focus and premium for Canadian acquisitions, we believe Integra could attract a valuation well above what we model. Comparing Integra to producing gold mines in Canada, we note that it compares favourably on both grade and scale for assets with grades greater than 2 grams per tonne gold," she said. "Lamaque falls in the top 30 per cent on grade and top 40 per cent on scale when the base 3 g/t Au cut-off resource is considered. If the higher grade 5 g/t Au cut-off is considered, Lamaque would move up one ranking on grade to sixth in Canada."
"Over the last 2 years, acquisitions of North American, and in particular, Canadian assets, have picked up. In 2016 alone, companies with assets in Canada represented 41 per cent of the transactions and 74 per cent of the transaction value. Analysis of these acquisitions shows that there has been an average acquisition P/NAV [price to net asset value] multiple of 1.1 times with a range of 0.49x-1.86x and an average EV/oz [enterprise value per ounce] takeout valuation of approximately $65 U.S./oz with a range of $19/oz-$110/oz. These takeout valuations are well above what we consider to reach our target price and compare favourably to global takeout valuations which have averaged 0.81 times NAV and $54/oz."
Ms. Hassan set a price target of $1.15 for the stock. Consensus is $1.17.
Acumen Capital analyst Brian Pow raised his target price for stock of Park Lawn Corp. (PLC-T) following its acquisition of four Ontario funeral homes.
On Jan. 19, the Toronto-based company announced the purchase of operations in Barrie, Bracebridge, Gravenhurt and Innisfil for a total of $6.8-million, utilizing funds from a November financing.
"Park Lawn did not provide any transaction details. We estimate that Park Lawn paid at the high end of its target range of 4–6 times EBITDA for the four funeral homes," said Mr. Pow. "Based on Park Lawn's current trading metric of 9.5 times 2017 estimated adjusted EBITDA, we see the transaction as being immediately accretive."
Mr. Pow projects the regions around the facilities will add 1,000 incremental deaths per year.
"Management indicated that they expect synergies to come from cremation services, vehicle sharing, and staff sharing. Synergies are expected to be realized in 12 – 24 months," he said.
With the purchase, Mr. Pow increased his 2017 and 2018 earnings per share projections to 60 cents and 69 cents, respectively, from 56 cents and 60 cents.
Maintaining a "buy" rating for the stock, he bumped his target to $19.50 from $18.50. Consensus is $19.81.
"We view Park Lawn's acquisition of the four funeral homes favorably," said Mr. Pow. "While the acquisitions are immediately accretive, we see additional upside as synergies from operations are realized over the next 12 – 24 months."
Based on higher coal and metal price estimates, FBR analyst Lucas Pipes upgraded Teck Resources Ltd. (TECK.B-T) to "outperform" from "market perform."
Mr. Pipes raised his 2018 met coal price projection to $140 per tonne from $130. His copper price rose by a dime to $2.55 per pound, while his zinc estimate rose 15 cents to $1.20 per pound.
Raising his target price for the stock to $38 from $33, Mr. Pipes said Teck now has 21-per-cent upside potential to his target and recommends investors accumulate shares at the current level.
The analyst average target price is $38, according to Bloomberg.
The risk/reward for CSX Corp. (CSX-Q) is "attractive even following recent strong performance," according to BMO Nesbitt Burns analyst Fadi Chamoun.
He raised his rating for the Jacksonville, Fla.-based railway company to "outperform" from "market perform."
"Our constructive thesis is predicated on Mantle Ridge LP being successful in its effort to install Hunter Harrison as the CEO of CS," said Mr. Chamoun. "We believe that the probability of this event occurring is fairly high without going down the road of a bruising proxy battle. CSX is already at the cusp of a CEO transition, and we sense that bringing Hunter Harrison's seasoned leadership and proven operating model for a three–four-year period represents an opportunity for the shareholders and also for the currently lesser experienced but very capable management team at CSX."
He added: "Similar to what we saw implemented at CP Rail by Pershing Square (Paul Hilal leading the file at the time for Pershing), we expect to see an incentive plan that is aligned with shareholders' medium-to-long-term goals. We anticipate that the plan will make significant payouts later in CSX's transformation on the basis of achievement of specific targets."
Mr. Chamoun raised his target price to $55 (U.S.) from $38. Consensus is $39.58.
"Prior to the Mantle Ridge/Hunter Harrison news, we estimated that CSX shares were worth $38 and up to $41-42 including benefits from tax reforms," he said. "To the extent that Mantle Ridge is not successful in placing Hunter Harrison as a CEO, the stock could trade back to around $35-36. On the other hand, in the high likelihood scenario that Mantel Ridge L.P. is successful and Hunter Harrison becomes the CEO at CSX, we believe the stock offers upside to $55-60 in the next 12 months and further to $80-87 over the medium term assuming success in achieving the 60-58% O.R. [operating ratio] goal."
Molson Coors Brewing Co. (TAP-N) has a "challenged" growth outlook, said Credit Suisse analyst Laurent Grandet.
Noting its retail portfolio has declined by 1 per cent annually since 2012, he initiated coverage of the stock with a "neutral" rating.
"On a fundamental basis, following the recent acquisition of MillerCoors, Molson Coors is predominately a U.S. business," said Mr. Grandet. "We find that the MillerCoors' gross margin structurally lags ABI in the United States (broadly considered the best-in-class benchmark). We think this is due in less part to a disadvantaged cost structure, but rather more likely due to the lower price point of the U.S. portfolio owing to its large exposure to the domestic Light and Economy beer segments. For that reason, we think it will be difficult for the company to fully close the gap with ABI, as the bull thesis suggests it can do by increasing the synergy target. We conclude that there is likely minimal upside to the already announced $275-million synergy target ($550-million including on-going cost savings) and that gross margin will remain structurally lower unless the company undertakes more aggressive efforts to premiumize its U.S. portfolio."
He added: "In Canada, the company has a strong number two presence with around 34-per-cent market share, led by the Coors Light and Molson Canadian brands (numbers two and four, respectively). However, Canada is a relatively small country in the global scheme of things, so future growth opportunities for Molson Coors will therefore be limited."
Mr. Grandet set a price target of $106 (U.S.). Consensus is $120.02.
"Our sales and EPS estimates are below consensus, and we think the stock is not as cheap as it may appear owing to a recent change in how the company calculates EPS," the analyst said. "We think top-line growth opportunities are limited by the current brand portfolio and geographic footprint, neither of which the MillerCoors acquisition solves. In addition, we see little upside for management to deliver above and beyond the announced synergy target, which seems to be a key element of the bull thesis on the stock. We could become more constructive if the company takes more decisive action to improve the mix of the portfolio that would help drive margins higher."
In other analyst actions:
Peyto Exploration & Development Corp. (PEY-T) was downgraded to "equal- weight" from "overweight" at Barclays by analyst Grant Hofer. His target fell to $34 from $46. The average is $40.86.
Mr. Mehta raised Husky Energy Inc. (HSE-T) to "buy" from "neutral" with a target of $20 (from $18). The average is $19.50.
Gluskin Sheff + Associates Inc. (GS-T) was lowered to "hold" from "buy" by TD Securities analyst Graham Ryding with a $19 target (unchanged). The average is $19.43.
Milestone Apartments Real Estate Investment Trust (MST.UN-T) was downgraded to "sector perform" from "outperform" by National Bank analyst Matt Kornack with a target of $21.75 (unchanged). The average is $21.91.
Qualcomm Inc. (QCOM-Q) was downgraded to "neutral" from "buy" by Nomura analyst Romit Shah with a target of $70 (U.S.). The analyst average is $72.62.
BMO Nesbitt Burns analyst Danilo Juvane upgraded Williams Partners LP (WPZ-N) to "outperform" from "market perform" with a target of $47 (U.S.), up from $44. The average is $41.92.
Wells Fargo Securities analyst Jennifer Fritzsche downgraded Verizon Communications Inc. (VZ-N) to "market perform" from "outperform." She did not specify a target, while the consensus target is $53.95 (U.S.).