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A cannabis plant is shown in southwest Quebec on Oct. 8, 2013.Justin Tang/The Canadian Press

Inside the Market's roundup of some of today's key analyst actions

Shares of Canopy Growth Corp. (WEED-T) are rising "too fast, too furious" in the eyes of Beacon Securities analyst Vahan Ajamian.

Expressing concern over the cannabis company's current valuation, Mr. Ajamian downgraded his rating for its stock to "hold" from "buy" ahead of the release of its second-quarter 2018 financial results on Tuesday.

"Over the past two months Canopy's share price has increased 118 per cent, whereas the average cannabis investment has risen 'only' 54 per cent," he said. "Canopy's performance during this period is second only to CannTrust Holdings Inc. (TRST-CN), which is up 172 per cent. Canopy's share price is now well above even the most aggressive target prices on the Street."

Mr. Ajamian is projecting quarterly revenue for the Smith Falls, Ont.-based Canopy of a Street-low $17.9-million, below the consensus of $19.5-million. He noted the company has missed both his and the Street's revenue forecasts for the last three quarters.

"While one analysis below indicates that our forecast should be achievable, we are concerned about the potential for a 'profit taking led' pullback in the event the company misses consensus again (without an offsetting positive development)," he said. "We are also well below consensus for FY18 and FY19 revenue forecasts."

"Q1/FY18 revenue was impacted by the consolidation of the company's separate online stores (Tweed, Bedrocan, Mettrum) into one Tweed Main Street ecommerce platform. On the company's Q1/FY18 conference call, management indicated that 'I would say that probably all of April was not smooth and easy for orders, but there was really a specific window of 10 days where it was impossible or not really a transactional platform' and 'there were no customers being onboarded for those 10 days, no orders being processed. And then when you introduce a new store, people being people, it just takes a while to figure in and figure out that they need to log in. How does it -- how is it laid out? So I think that there were some days that followed as well that would have slowed the order process, but by the end of April, pretty much everybody was accustomed to how it was working and so it was back in business.' If we assume that 10 days were completely lost last quarter from this issue (and there was no other net impact), it would represent an 11% headwind on Q1/FY18 results. With an extra day in the calendar, we therefore calculate that if Q2/FY18 daily sales ran at the same rate as Q1/FY18 (excluding the 'lost' days), it would represent 14-per-cent sequential growth. Our forecast calls for 13-per-cent sequential growth. Consensus is calling for 23-per-cent sequential revenue growth.

Mr. Ajamian also expressed concern over the impact of the federal government's proposed tax on medical cannabis, introduced Friday, of $1 per gram. He feels Canopy could be affected given the importance of revenue of medical cannabis on its balance sheet and its large patient base.

He maintained a target price for Canopy shares of $16.50. The average target on the Street is $15.17, according to Bloomberg data.

"We remain very optimistic regarding the prospects for Canopy to further entrench its industry leadership position going into legal recreational sales," said Mr. Ajamian. "However … we are reluctant to recommend investors acquire more shares of Canopy at current levels. Accordingly, we are downgrading our recommendation to Hold (from Buy) in advance of the release of the quarter [Tuesday]."


The market's response to the third-quarter financial results of CES Energy Solutions Corp. (CEU-T) was an "overreaction," according to Industrial Alliance Securities analyst Elias Foscolos.

Classifying the results as "neutral" and seeing a buying opportunity following a 5.3-per-cent dip in price on Friday, which he attributed largely to a lack of a dividend increase, Mr. Foscolos raised his rating for the Calgary-based company to "buy" from "hold."

CES reported adjusted EBITDA of $41-million, according to the analyst's calculations, which met his expectation and beat the Street by $1-million. Revenue of $260-million topped his estimate of $245-million and exceeded the consensus of $257-million, due largely to a strong showing from its U.S. segment.

"With CEU posting an in line quarter, we were a little surprised by the market's reaction on Friday," said Mr. Foscolos.

He raised his target for the stock to $7.50 from $7.25. The average is $9.06.


Citing a favourable outlook and attractive valuation, TD Securities analyst Michael Tupholme upgraded Stuart Olson Inc. (SOX-T) to "buy" from "hold" in the wake of "encouraging" third-quarter financial results.

On Nov. 9, the Calgary-based commercial and institutional building construction company reported adjusted EBITDA for the quarter of $11.7-million, topping the projections of both Mr. Tupholme ($9.6-million) and the consensus ($10-million). He attributed the beat largely to better-than-anticipated margins.

"Industrial and Commercial Systems margins were the bright spots relative to our expectations (two segments where performance had lagged in recent quarters)," he said. "Industrial posted a 9.8-per-cent EBITDA margin (TD at 7.5 per cent), as results benefited from robust revenue growth and cost savings initiatives. Commercial Systems EBITDA margin was 7.0 per cent (TD at 4.2 per cent).

"Although consolidated backlog of $1.8-billion declined 6.8 per cent quarter over quarter, encouragingly, Commercial Systems backlog reached a record level, while management highlighted a healthy prospect pipeline across the business."

Expressing increased confidence that Stuart Olson's financial performance will continue to improve in 2018, Mr. Tupholme raised his target for the stock to $7 from $6. The average is $6.50.

"Driven by very healthy FCF [free cash flow] of 79 cents per share … SOX meaningfully reduced its leverage (net debt/trailing 12-month adjusted EBITDA now at 2.4 times versus 3.2 times in Q2/17)," he said. "The stock's dividend yield is 8.8 per cent, which is attractive relative to historical levels (5-year avg. is 7.0 per cent). Considering SOX's improving outlook and declining leverage ratio, we view the current dividend as sustainable."

Elsewhere, National Bank Financial analyst Maxim Sytchev upgraded the stock to "sector perform" from "underperform" with a target of $5.50, up from $4.50.

"Work-in-hand declined 9 per cent year over year while revenue rebounded 22 per cent," said Mr. Sytchev. "Typically, the two go hand-in-hand (revenue momentum should flatten relatively soon). Management was confident on the call that backlog replenishment is around the corner which is not an unreasonable assumption with better mood in Alberta (on oil & gas) and SOX's determined approach to penetrating the Ontario market in all of its verticals. The company also reaffirmed its comfort level with $34-million EBITDA this year. With Q3 coming in $2.4-million ahead of the Street, that does imply lack of positive surprise in Q4/17E, all things being equal. However, at least the estimates are no longer declining.

"SOX shares have gotten cheaper vs. the construction peers (5.2 times 2018 estimated enterprise value/EBITDA vs. BDT at 8.3x) due to material underperformance vis-a-vis ARE and BDT this year; since we went to Underperform on SOX in Jan 2017, it has declined 7 per cent versus respective increases of 31 per cent and 12 per cent for Aecon and Bird. At this point we do not see much downside for SOX shares; more than anything else it should keep pace with the peers on going-forward basis. By anchoring to 2019 estimates, we are adjusting our target price on the name to $5.50 from $4.50 and upgrading."


As a "recovery remains elusive," Industrial Alliance Securities analyst Elias Foscolos downgraded McCoy Global Inc. (MCB-T) to "hold" from "speculative buy."

Last Thursday, the Edmonton-based company, which provides equipment and technologies used for making up threaded connections in energy industry, reported third-quarter revenue of $10.6-million, meeting expectations. EBITDA fell below the analyst's projection, however, due largely to lower-than-expected gross margins.

"MCB's year-over-year increase in revenue seems to be mostly driven by the 3PS acquisition in Q1/17 and an uptick in drilling," said Mr. Foscolos. "On a quarter-over-quarter basis, revenue improved but EBITDA did not. We continue to attribute the anemic revenue to the weak price of commodities that has caused customer anxiety in ordering."

"We believe MCB will make strides to hit breakeven EBITDA with only $10-million in revenue per quarter but this may take a few more quarters to accomplish."

He lowered his target price for McCoy Global shares to $2 from $2.30, which is below the consensus of $2.17.


Though he called Dream Global Real Estate Investment Trust's (DRG.UN-T) in-line third quarter an "important event," Desjardins Securities analyst Michael Markidis downgraded his rating for it to "hold"  from "buy" on the back of a "substantial" period of outperformance versus its peers.

"Two notable achievements over the past six months are: (1) the favourable resolution of the DP leases that were scheduled to expire in 2018, and (2) execution of the $1-billion Merin acquisition, which provided DRG with a turnkey platform in the Netherlands and has driven substantial FFO [funds from operations] accretion," said Mr. Markidis. "Our outlook has the FFO payout declining to 80 per cent in 2019 (versus 100 per cent in 2016). Hence, we believe any lingering concerns regarding the long-term sustainability of DRG's distribution have now been put to bed.

"The mantra for 2018 [is] integrate and operate. Over the next several quarters, we believe DRG will remain highly focused on further integrating the recently acquired assets/team in the Netherlands with the rest of the business. Via establishment of a partnership with a local firm, DRG is also taking greater control over management of its properties in Germany (currently outsourced to six different third-party companies). This initiative should provide DRG with better information and enable it to improve the overall level of service to its tenants."

Mr. Markidis raised his target for the Toronto-based REIT to $11.75 from $11.50. The average is $11.87.

"DRG has enjoyed a stellar run in 2017; its total return of 29 per cent far exceeds the 9 per cent generated by the S&P/TSX Capped REIT Index," he said. "Although the stock was off by 2 per cent on Friday (Nov. 10), it is essentially sitting at an all-time high. In order to reflect the REIT's improved financial profile (lower payout ratio, lower leverage, stronger access to capital), we have adjusted our risk qualifier to Average Risk (versus Above-average Risk previously). At the same time, we have downgraded our rating to Hold (from Buy) to account for the lower (10 per cent) potential total return to our revised target price."


Calling it an "iconic brand platform that has a distinctively high level of brand equity that separates the retailer from the rest of the specialty apparel pack," BMO Nesbitt Burns analyst John Morris initiated coverage of Roots Corp. (ROOT-T) with an "outperform" rating.

"We know of few, if any, specialty apparel retail brands that can sell such a wide array of categories (from leather handbags to fleece sweatshirts) to an age range spanning kids to adults," said Mr. Morris. "This is what makes Roots unique and is, in fact, a testament to its strong brand identity and that brand-platform's potential. By product mix: 57 per cent is in apparel, 13-per-cent leather, 13-per-cent accessories, 3-per-cent footwear, 13-per-cent kids. By channel: 16.5 per cent is in e-comm. Geographically: 29-per-cent of system-wide sales is outside of Canada across 55 countries (when including the franchise sales)."

Mr. Morris sees multiple growth vehicles that are likely to support 15-per-cent "sustainable" top line as well as potential upside.

He pointed to: "1) expanding retail stores in Canada and the U.S. at a 7-per-cent CAGR [compound annual growth rate] on a base of 116 stores; 2) potential to grow the e-comm business at a CAGR of greater-than 32 per cent over the next five years as e-commerce grows to 25 per cent of the mix from 16 per cent; 3) expand the product mix in the heritage leather and footwear categories to over 21% combined mix from 16 per cent; 4) further international overseas expansion beyond existing base of 140 in Taiwan and China; and 5) stores have good unit economics with a payback period of around 17 months and a store-level ROI of greater-than 60 per cent with a four-wall EBITDA margin of about 27 per cent in Year 1. All told, we project Roots could be a $650-million brand in five years."

Mr. Morris set a price target of $13 for the stock.

Other analysts initiated coverage of the retailer Monday included:

  • RBC Dominion Securities’ Sabahat Khan with a “sector perform” rating and $11 target.

    Mr. Khan said: “Roots Corporation is executing on a number of strategic initiatives that could drive mid-double-digit annual EBITDA growth from fiscal 2016-2019; however, we note that the company's growth targets could be difficult to deliver against given a challenging operating backdrop facing apparel retailers. We also note that the valuation of its closest peer, Aritzia Inc., has moderated in the recent months.”

  • Canaccord Genuity’s Camilo Lyon with a “buy” rating and $13 target.

    Mr. Lyon said: “ROOT is a distinctly Canadian apparel, footwear, and accessories vertical retailer that has a deep heritage grounded in quality and authenticity. We would venture to say that the Roots brand is known by most (if not all) Canadians yet the company’s revenue base is just $320-million. Therein lies the opportunity. We believe the company, under a new leadership team with vast branded retail experience, can leverage a brand, that for years had been sub-optimally managed, to achieve solid mid-teens revenue and EBITDA growth annually over the next three years. Moreover, we see a path for ROOT to improve its EBIT margin structure from 12 per cent today to 15 per cent over the next five years (consistent with other vertical retailers) as growth strategies take hold.”


In other analyst actions:

J.P. Morgan analyst John Bridges downgraded Eldorado Gold Corp. (ELD-T) to "neutral" from "overweight." He did not specify a target. The average target is $2.59.

"When it was just delays in Greece, the stock could have bounced back quickly if we are right in our view of the arbitration process, but the problems at Kisladag seem bigger," the analyst said.

BMO Nesbitt Burns analyst Ambrish Srivastava raised NVIDIA Corp. (NVDA-Q) to "market perform" from "underperform" with a target of $200 (U.S.), up from $135. The average is $220.69.

Mr. Srivastava said: "We have had calls in the past that have not worked out and we are likely going to have calls in the future that may not necessarily work out. We have been reluctant to change our view, but now recognize that our Underperform call did not work out, either. NVDIA has demonstrated a far stronger DCG business than we had been forecasting and the leverage in the model is far greater than what we had anticipated. We are thus raising our rating."

Crombie REIT (CRR.UN-T) was upgraded to "buy" from "hold" with a target price of $15.50, rising from $14.50, by TD Securities analyst Sam Damiani. The average target on the Street is $15.25.

TD Securities analyst Damir Gunja upgraded Ag Growth International Inc. (AFN-T) to "action list buy" from "buy" and lowered his target to $68 from $72. The average target is $64.63.

GMP analyst Michael P Dunn upgraded Baytex Energy Corp. (BTE-T) to "buy" from "hold" and raised his target by a loonie to $5. Consensus is $3.91.

Cormark Securities Inc. analyst Jeff Fenwick upgraded Equitable Group Inc. (EQB-T) to "buy" from "market perform" and hiked his target to $73 from $60. The average is $70.71.

Goldman Sachs analyst Matthew Reustle initiated coverage of Canadian Pacific Railway Ltd. (CP-T) with a "neutral" and $228 target. The average target is $236.66.

Mr. Reustle initiated coverage of Canadian National Railway Co. (CNR-T) with a "buy" rating and $109 target. The average is $109.27.

TD Securities analyst Aaron MacNeil initiated coverage of Enerflex Ltd. (EFX-T) with a "buy" rating and $24 target. The average target is $22.67.

Macquarie analyst Matt Murphy upgraded Nevsun Resources Ltd. (NSU-T) to "outperform" from "neutral" and bumped his target to $4 from $3.20. The average is $4.10.

First Shanghai Securities Ltd initiated coverage of Tesla Inc. (TSLA-Q) with a "buy" rating and $352.59 target. The average target is $338.03.

Echelon Wealth Partners Inc. analyst Frederic Blondeau reinstated coverage of Cominar Real Estate Investment Trust (CUF.UN-T) with a "buy" rating and $14.50 target. The average is $14.35.

CIBC World Markets analyst Matt Bank upgraded AutoCanada Inc. (ACQ-T) to "outperform" from "neutral" and raised his target to $29 from $22. The average is $24.50.

AltaCorp Capital Inc. analyst Thomas Matthews upgraded Obsidian Energy Ltd. (OBE-T) to "outperform" from "sector perform" with a $2 target, up from $1.65. The average is $1.68.

Canaccord Genuity analyst David Galison downgraded Alterra Power Corp. (AXY-T) to "hold" from "buy" with a target of $7.50. The average is $8.38.