Inside the Market's roundup of some of today's key analyst actions
Raymond James analyst Stephen Li believes the Street is not paying proper attention to Sierra Wireless Inc.'s (SWIR-Q, SW-T) recent design wins for internet connectivity in automobiles.
Projecting those opportunities alone could be worth $3 (U.S.) per share, he upgraded his rating for its stock to "outperform" from "market perform."
"SWIR shares have round tripped since we downgraded on March 27 (down 29 per cent versus NASDAQ up 18 per cent)," said Mr. Li. "That was not for a lack of execution as the past three quarters, the company posted earnings beats."
"While SWIR has never disclosed its mkt share in the auto vertical, we know SWIR has 33 per cent of the embedded modules market and surmise its auto share can't be too far off as auto is its largest vertical. Design win activity has been strong recently (3 with VW alone – and global in scope, Geely and others). As a bonus, Telit's troubles (one of its largest competitors) can only boost SWIR prospects in our view. What stood out from our analysis: 1) there is significant potential revenue contribution ($150-$230-million per year) – not all incremental but could easily add 5-plus points of organic growth. That could help drive upside surprises for a sustained period of time; and 2) discounting the potential cash flows from this auto opportunity gets us around $3/share."
Mr. Li maintained a target price of $30 (U.S.) per share. The analyst average price target is currently $28.08, according to Bloomberg data.
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Kirkland Lake Gold Ltd. (KL-T, KL-N) is "getting ready to rock again," according to Desjardins Securities analyst Raj Ray.
Following a site visit to its Macassa mine in Kirkland Lake, Ont., last week, Mr. Ray said the company to could be heading to "strong" operational performance at the facility with "noticeable" improvement in productivity alongside reduced costs.
"Combined with continuing strong operating results from the Fosterville operations, this should put KL Gold on an even stronger footing," he said.
That led him to raise his rating for its stock to "buy" from "hold."
"Management has undertaken a number of measures at Macassa, including development of bigger drifts in the lower South Mine Complex (SMC) and introduction of a larger fleet, which along with the wider and higher-grade characteristics of the lower SMC, is expected to drive significant improvement in production and cost reduction starting 2018," said Mr. Ray.
"While recent exploration results from the SMC continue to expand the mineralized footprint beyond current resources, following our recent site visit we are of the opinion that the productivity gains being realized currently and expected with the new shaft far outweigh the risks. However, in terms of potential timing, we estimate two years for permitting and another 2–3 years for development."
After incorporating estimates for a proposed shaft at Macassa into his estimates, Mr. Ray's cash flow per share projections for 2017, 2018 and 2019 rose to $1.45 (U.S.), $1.87 and $1.88, respectively, from $1.41, $1.69 and $1.88.
His target for its stock rose to $24 (Canadian) from $20. The average is $21.31.
"KL Gold is already up 152 per cent year-to-date, making it one of the best-performing gold stocks on the TSX in 2017," said Mr. Ray. "We believe there is additional potential upside to the share price as KL Gold could continue to surprise market expectations in the near term, driven by operational results from Fosterville and Macassa. In addition, positive results from the ongoing exploration and the Macassa new shaft study (expected in 2018) could further boost the share price."
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Raymond James analyst Jeremy McCrea added Bonterra Energy Corp. (BNE-T) to the firm's "Canadian Analyst Current Favourites" list, replacing Kelt Exploration Ltd. (KEL-T), citing relative upside.
"Despite the rally in Canadian crude pricing, BNE has lagged its oil weight peers," said Mr. McCrea.
"We suspect that the under performance is related to the perceived leverage concerns. As the higher Canadian crude pricing is built into investor assumptions, we suspect that BNE will see upward revision in cash flow estimates and improved debt metrics - providing a short-term catalyst for BNE. We believe that Bonterra is one of the few names that can check off most boxes on our five-point check list including 1) top quartile asset quality,2) PDP NAV[proved developed producing net asset value] per share growth, 3) undervalued undrilled land value 4) healthy debt/PDP, and 5) market timing with near-term catalysts."
Mr. McCrea currently has a "strong buy" rating and $24 target price for Bonterra shares. The analyst average target is $20.61.
He has a "strong buy" rating and $9.75 target for Kelt. The average is $9.15.
Analyst Stephen Li added Sierra Wireless Inc. (SWIR-Q, SW-T) to the list, dropping Open Text Corp. (OTEX-Q, OTEX-T).
"No one is paying much attention to SWIR recent design wins for internet connectivity in automobiles (3 with VW alone – and global in scope)," he said. "We calculate that the connected car opportunity alone could be worth $3 per share. The company is also in the midst of concluding the acquisition of Numerex (dilutive in year 1, accretive after). We believe the share pull-back has presented an entry point."
Mr. Li's rating for Sierra is "outperform" with a $30 (U.S.) target. The average is $28.09.
He also has an "outperform" rating for Open Text with a $40 (U.S.) target. The average is $40.17.
"We see greater near-term share price appreciation potential with SWIR," he said.
Analyst Brenna Phelan added ECN Capital Corp. (ECN-T) to the list. She rates the company an "outperform" with a $5 target. The average is $4.89.
"ECN is currently in late stages of its transition from a lessor of equipment and capital assets to a hybrid asset management and leasing company," she said. "Since its separation from Element Financial in October 2016, ECN has divested of its Commercial & Vendor Finance businesses for a 7-per-cent premium on net assets and sold 65 per cent of its railcar portfolio for a modest discount to book value. It has deployed $410-million into Service Finance Company, an originator that subsequently sells and services consumer installment loans to finance home improvement, and $125-million into Triad Financial Services, an originator of manufactured housing loans. Both acquired businesses are growing quickly, focus on prime borrowers, use a vendor relationship origination model and fund their loans by selling them to bank partners. We expect a third acquisition to be funded with some portion of ECN's $700-million of deployable equity in the near-term. We view the shares as undervalued relative to BVPS [book value per share], and we expect share price appreciation underpinned by ROE expansion and a transition to a P/E based multiple, supported by high-quality, fee-based earnings."
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Credit Suisse's global strategy team raised its copper price forecasts for 2018 and 2019 to $2.65 (U.S.) and $2.30 per pound, respectively, from $2.39 and $1.95.
That led analyst Anita Soni to raise her target price for a trio of mining stock.
With an "outperform" rating, her target for First Quantum Minerals Ltd. (FM-T) jumped to $21 from $17.25. The average on the Street is $18.79.
"We rate FM Outperform due to its strong copper growth profile through the Cobre Panama project," she said. "Commodity price risk, geopolitical risk, project delivery risk, and operations risk are key risks."
Her target for HudBay Minerals Inc. (HBM-T) rose to $12 from $11.50 with an unchanged "neutral" rating. The average is $12.29.
"Between fiscal 2017 and 2020, approximately 65 per cent and 22 per cent of HBM's revenues are exposed to copper and zinc, respectively," she said. "We have refreshed our outlook on zinc, as it has been performing positively amongst the base metals and has rallied to near 10 year highs. We have also refreshed our outlook on copper as China's consumption growth this year at 4.7 per cent has been stronger than we expected."
Her Lundin Mining Corp. (LUN-T) target is now $11.50 from $10.50 with an "outperform" rating. The average is $10.59.
Ms. Soni said: "We expect a new three year outlook for 2018-2020 (versus the 2017-2019 outlook provided on Nov. 30, 2016) to incorporate (i) higher copper production at Candelaria on an increased proportion of higher grade underground feed and potential for a further mill expansion by 10-15 per cent, in addition to higher capex to support a longer operating life; (ii) lower copper production from Neves Corvo to reflect underground throughput challenges; and (iii) higher zinc production from Neves-Corvo in 2019 with the zinc plant ramp up."
Meanwhile, Ms. Soni's target for Turquoise Hill Resources Ltd. (TRQ-T) fell to $5 from $5.50, due to "elevated" political risk. The average is $5.27.
"Our discount rate has been raised to reflect increased political uncertainty in Mongolia following the election of President Battulga on July 7 and the President's subsequent Oct. 2nd parliamentary address which stressed a renewal of Mongolia's mining policies," the analyst said. "We rate TRQ Neutral as we see the geopolitical overhang offsetting the potential positive catalyst of Rio Tinto's cost and schedule review for the underground expansion (which has been progressing well versus budget thus far) and TRQ's attractive long term NAV."
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There is "still plenty of Pop left" in Funko Inc. (FNKO-Q), said BMO Nesbitt Burns analyst Gerrick Johnson.
He initiated coverage of the Everett, Wash.-based toymaker with an "outperform" rating.
"Funko is the world's largest seller of pop culture collectibles, and is best known for its Pop! line of vinyl collectible figures," said Mr. Johnson. "Funko has benefited from trends towards the consumption and celebration of pop culture. Collectibles, meanwhile, is a strong and growing category, particularly in the toy market. Funko benefits from both trends."
"As pop culture collectibles have gone from nerd niche to mass market there has been a rapid expansion of distribution for Funko's products, particularly in the Unites States. More and more retailers like GameStop and Barnes & Noble see the category as a highmargin alternative to declining core product sale."
Mr. Johnson did express concern over Funko's reliance on the popularity of its Pop! product line, which has driven "strong" sales growth. He anticipates demand will be "satiated" at some point due to market saturation.
"Currently, though, we see that prices for Pop! figures on the secondary market are up 25 per cent over the last six months," the analyst said. "This indicates that the collectibles market for Pop! is still very healthy and that we could still be in the early stages of this phenomenon.
"While we have a high degree of confidence in solid near-term growth for Funko, over the longer term we believe the company will be forced to diversify. The company has begun this process by making two bolt-on acquisitions and by also obtaining master toy licenses for niche intellectual properties that overlay well with its current target market, like Five Nights at Freddy's and Rick and Morty, which, according to Nielsen, is the most popular comedy series for adults 18-34."
He set a price target of $10 (U.S.) for Funko shares. The average is $11.50.
"Valuing Funko poses unique challenges," said Mr. Johnson. "As a recent IPO, there is no historical average P/E or EV/EBITDA to use as a guide. Also, Funko lacks any direct publicly traded competitors, though has by far the most similarity with the toy group, which includes Hasbro, Mattel, Spin Master, JAKKS Pacific, and Build-A-Bear Workshop. Funko sells into many of the same channels as the toy companies and shares a lot of overlap with its target market."
"Historically, the valuation of toy companies has averaged 15 times forward estimates on a price-to-earnings basis, with a range from 10 times to 20 times. On an EV/EBITDA basis, the average has historically been around 8 times on a forward basis, ranging from 4 times to 12 times. We note that current valuations in the toy group are on the high side. Hasbro and Spin Master trade at peak levels owing to solid recent execution driving strong value in its owned brands. Mattel is a turnaround story with a potential takeover premium (there are reports that Hasbro has offered to acquire the company)."
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Laurentian Bank Securities analyst Marc Charbin recommends Equity Financial Holdings Inc. (EQI-T) shareholders tender to the latest offer from Smoothwater Capital Corp.
Early Monday, Smoothwater increased its offer for Toronto-based Equity Financial to $10.25 per share from $9.75.
"EQI's BVPS [book value per share] excluding out-of-the-money options was $9.74 as of Q3/17, therefore the increased bid represents a 5-per-centpremium to BVPS," said Mr. Charbin. "The agreement between the two parties has also been amended to terminate EQI's right to solicit superior proposals and a $3-million termination fee payable to Smoothwater has been added."
Based on the new offer, Mr. Charbin raised his target price for shares of Equity Financial, which offers residential mortgage loans through its subsidiary, Equity Financial Trust Co., to $10.25 from $9.75 with a "tender" rating.
"We value EQI at the offer price of $10.25 (up from $9.75 previously, reflecting the original offer from Smoothwater)," he said. This valuation calculates to 1.05 times price-to-book value, which is consistent with the valuation currently garnered by Equitable Group (EQB-T, "buy" recommendation, $72.00 target). EQB is a much larger company with a longer history of operations. EQI has been profitable for just over a year and has yet to reach full profitability. For example, we calculate EQI will earn an estimated ROE of 7.0 per cent in 2017, increasing to 10.8 per cent in 2018, compared to the 15.3% EQB is expected to earn this year. Considering the transaction price values EQI inline with EQB given the materially higher profitability of EQB, indicates to us that the transaction price is fair."
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In other analyst actions:
TD Securities analyst Brian Morrison upgraded Roots Corp. (ROOT-T) to "action list buy" from "buy" with a $16 target. The average target is $13.80.
Clarus Securities analyst Jamie Sparatt initiated coverage of Leagold Mining Corp. (LMC-T) with a "buy" rating and $5.25 target, which is 2 cents more than the consensus.
BTIG LLC analyst Mark Palmer downgraded Square Inc. (SQ-N) to "sell" from "neutral" with a $30 (U.S.) target. The average is $39.64.
Loop Capital Markets analyst Rick Paterson downgraded Norfolk Southern Corp. (NSC-N) to "sell" from "hold" with a target of $120 (U.S.), falling from $133. The average is $134.04.
MoffettNathanson analyst Craig E Moffett upgraded T-Mobile US Inc. (TMUS-Q) to "buy" from "neutral" and raised his target to $73 (U.S.) from $69. The average is $70.79.
Raymond James analyst Beryl Bugatch upgraded Lowe's Companies Inc. (LOW-N) to "outperform" from "market perform" with a $87 (U.S.) target. The average is $88.19.