Skip to main content

Gold bars are displayed at a gold jewellery shop in the northern Indian city of Chandigarh May 8, 2012.AJAY VERMA/Reuters

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

Brio Gold Inc. (BRIO-T) currently has a "significant" valuation discount to its peers, said Canaccord Genuity analyst Tony Lesiak.

Noting its stock trades at a 52-per-cent discount to mid-tier operating peers on a price-to-net asset value basis and over 50-per-cent discount on 2017/2018 estimated price-to-cash flow, he initiated coverage of the Toronto-based company, which was spun off from Yamana Gold Inc. in December, with a "buy" rating.

"Brio is now a stand-alone company with a fully independent management team and a solid operating base of three mid-sized Brazilian mines which include flagship Pilar, Fazenda Braziliero and RDM (producing 250 to 300,000 ounces per year) and a high internal rate of return (32 per cent) re-development project in Santa Luz (100,000 ounces per year). The Brio assets may have had a mixed history under previous operators, but the future appears much brighter, as we see it. The current market valuation reflects the past, not the potential future, hence the value proposition.

"Overall, despite the current market discount on Santa Luz (we assume 50 per cent), Brio is currently trading at 0.40 times our risked NAV, which assumes 60-per-cent resource conversion company-wide. Even if Santa Luz is fully stripped out of our valuation, we still see re-rating potential. To further highlight the value proposition, we note that Brio is even trading below the precious metals developers which currently trade at 0.6x P/NAV."

Though he said the strategic rationale for Yamana in spinning off Brio assets was "sound," Mr. Lesiak did say the outcome "was less than desirable." He added a near-term re-rating will be driven by operational excellence and resource conversion.

"Due to unfortunate market timing (gold price fell 10 per cent during the recent rights process), Yamana is left holding 84.6 per cent of Brio shares compared to the planned 46.3 per cent (as per the prospectus)," Mr. Lesiak said. "While a number of potential catalysts could help re-rate Brio, a full unlocking of value is not likely until the market becomes satisfied that the Santa Luz mine redevelopment (20 per cent of Brio NAV risked or 33 per cent unrisked) is successful, and moreover, the issues of a weak Brio free float and the Yamana share overhang are resolved. To what degree the current market discount of Brio is related to liquidity and overhang issues or asset skepticism is difficult to ascertain given limited precedence of companies in Brio's current situation. Barrick's (ABX-T, 'buy' rating) spin-out of 25 per cent of its African assets in 2010 via IPO in a more buoyant gold market resulted in a $900-million free float in African Barrick Gold compared to Brio at $42-million currently. Overall, we have assumed that given the current share overhang and weak liquidity the most Brio will be able to re-rate from operational execution and resource conversion is to 0.70 times NAV (from 0.40 times), still at a significant discount to its peers for which we assume an average target multiple of 0.95 times. Obviously given the lack of precedence, it is difficult to fully quantify the impact but we believe our target valuation discount appears reasonable."

Mr. Lesiak set a target price of $5 per share. The analyst consensus price target is $5.05, according to Thomson Reuters.

"On a P/NAV basis, Brio trades at the bottom of the range for companies under coverage; with a suite of well-performing operational assets, we argue this discount is unwarranted," he said. "A similar pattern is evident when looking at P/CF and EV/EBITDA [enterprise value to earnings before interest, taxes, depreciation and amortization], with Brio again trading at the bottom of the range. We believe the discount is largely reflective of the weak liquidity and share overhang. As Brio continues to deliver consistent operating results (3-4 quarters) from current operations and executes on the redevelopment of Santa Luz., we expect shares of Brio to re-rate and trade up to our target price, which assumes a 0.7 times target multiple versus peers at 0.95 times. A full rerating of shares to 0.9 times is likely possible only after the YRI ownership is dealt with in time or an accretive M&A liquidity event occurs."

====

Algonquin Power & Utilities Corp.'s (AQN-T) $3.2-billion acquisition of The Empire District Electric Co. is "transformative" and adds value for shareholders, said Accountability Research analyst Michael Ruggirello.

He raised his rating for the stock to "hold" from "sell."

"Further modeling of the transformative acquisition of Empire District has led us to a small increase in the value of the combined entity," he said. "Assuming Algonquin completes EDE's announced growth initiatives on time/budget and successfully integrates the company, we believe the deal has added roughly $2.00 per share in underlying value. This is still not a scenario where synergies justify the premium paid, in our opinion, and continues to be a case of bigger must be better thinking. Nevertheless, there appears to be some upside related to organic growth at EDE. Management also cited improved cost of capital due to larger scale, strengthened credit metrics (due to a shift towards more regulated revenues) in addition to the future growth opportunities as justification behind the acquisition.

"With nearly $10-billion in planned spending through 2021 we maintain a wait and see approach with AQN. We recognize that the company has cleaned up a number of issues we have had with its financial reporting in the past. For this we give management credit and have raised our earnings quality rating on the company accordingly. However, a large and looming issue that remains is how Algonquin will handle the acquisition of Empire District. As we have highlighted on a number of occasions recently, we are seeing inflated goodwill balances related to acquisitions in utilities and pipelines. We are awaiting the first quarter AQN statements to examine the issue."

Mr. Ruggirello did note the expecting value of the acquisition, which was finalized on Jan. 1, "is contrasted against a continued lack of transparency, high debt load, and elevated execution risk (integrating EDE)."

"We continue to see better risk/reward opportunities elsewhere in the sector," he said.

Mr. Ruggirello's target for the stock is $11, up from $9.50. Consensus is $14.20.

"Despite the growth outlook and opportunities, we believe AQN is reasonably priced at current levels, and that execution risk may not be adequately considered by the rest of the Street," he said. "AQN currently trades above industry average EV/EBITDA multiples compared to its utility peers and slightly below average versus its independent power producer peers. We believe an average valuation is justified given its increasing deficit and debt load, transparency issues, and relatively high execution risk in terms of the large, recently closed acquisition."

===

The 2017 outlook for Boeing Co. (BA-N) appears to be conservative, said Canaccord Genuity analyst Ken Herbert.

On Wednesday, Boeing reported better-than-anticipated fourth-quarter 2016 financial results and its 2017 guidance.

Earnings per share of $2.47 (U.S.) topped Mr. Herbert's projection of $2.29, while the company also displayed strong margin performance in both its commercial airplanes and defence, space and security segments and in-line free cash flow.

"Boeing demonstrated better-than-expected execution in the quarter, reflected in the margins, which has contributed to stronger investor confidence," he said.

Its 2017 revenue and EPS guidance fell slightly below expectations, while a 7-per-cent increase in FCF "was well received by investors."

"The Q4/16 FCF was $2.2-billion and $7.9-billion for the full year 2016," said Mr. Herbert. "This was $700-million better than the full-year guidance. Q4/16 margins in the Commercial Airplane business were 10.6 per cent, excluding a pretax $243-million charge associated with the KC-46 tanker. This provides increased confidence in the margin upside, but we believe incremental improvements will be more difficult. Margins in the Defence business were 11.8 per cent (12.8 per cent excluding the KC-46 $69-million charge), also strong. We believe that post 2017 (which will be pressured on the top line due to no C-17 shipments) the fundamentals in the defense business could improve faster than anticipated, and the company went out of its way to stress that it welcomes the potential changes under a Trump administration, and expects these to benefit both its commercial and defense businesses."

"We believe investors have increased confidence in the 2017 FCF, which the company has guided to $8.5-billion. Moreover, the company is on track to deploy another $7-billion in share repurchases, which will contribute to the FCF/share and EPS upside in 2017. We now model in shares outstanding dropping to under 600 million by 2017 and then to 566 million in 2018. We currently model in 2017 FCF of $8.4-billion."

Mr. Herbert lowered his 2017 EPS projection to $9.20 from $9.50 to reflect lower sales but better margins. However, his 2018 estimate rose to $10.20 from $10.

"Another highlight of the Q4/16 results was the initial detailed look at the full-year 2017 guidance. Boeing had previously provided some initial thoughts on its 2017 outlook at a high level, indicating that revenues would be basically flat (guidance is slightly worse here) but that it would see margin expansion and FCF grow," he said. "Note that surprisingly, the outlook for the 787 is less of a factor now in discussions and analysis on the stock. Boeing has now delivered 500 aircraft, and the $215-million decline in the deferred balance sequentially from Q3/16 to Q4/16 represented a nice improvement. We do not believe BA will ultimately hit 14/month, and believe there could be incremental pricing pressure on the 787-9s and -10s to be delivered in 2018-2020. We continue to believe there will ultimately be a charge on the 787 program, but as the underlying performance continues to be strong, the negative impact of a 787 charge appears to be less of a factor for investors."

With a "hold" rating, he raised his target to $162 from $150. Consensus is $161.70.

"Our $162 price target is based on the blend of a 10 times EBITDA multiple (unchanged) and a 16.5 times EPS multiple (was 15.0x) applied to our 2017 estimates," he said. "We believe these multiples reflect the late stage of the commercial cycle, and the expected upside in FCF. Note that our 2017 FCF/share is now estimated at $14. The stock reacted well to the better-than- expected near-term upside in FCF, but we believe BCA segment profit will hover in the 10-per-cent range, as increases in the 737 and 787 are offset by lower 777 contributions. Moreover, we believe any incremental risk to the 737 will be a material negative catalyst. However, we believe the services business could see faster-than- anticipated growth through M&A, and there is still risk from rising interest rates, a stronger U.S. dollar, and geopolitical risk (specifically in China) that could have a significant impact on demand. It is clear that the stock is now benefiting from better execution and lower expectations heading into 2017, but we see little room for error in the long-term assumptions (margin expansion, FCF upside) which prevent us from chasing the stock."

Elsewhere, RBC Dominion Securities analyst Matthew McConnell raised his target to $138 from $136 with an "underperform" rating (unchanged).

"Boeing's 4.2-per-cent rally on an in line core EPS outlook highlights the importance of the cash outlook (which was stronger) and a more cautious investor sentiment than we had previously appreciated," said Mr. McConnell. "We maintain our view that Boeing is setup to face unexpected margin pressures (as it has in prior periods of declining Production Maturity) and reiterate our underperform rating."

=====

EBay Inc. (EBAY-Q) displayed "stable" fundamentals in the fourth quarter, but there's "a long road ahead," said RBC Dominion Securities analyst Mark Mahaney.

"Q4 results were largely neutral in our view, although we do note incremental improvement in a few key metrics," he said. "Q1 and FY17 guidance is mixed but does imply modest marketplace volume acceleration versus FY16, although uncertainty exists."

On Wednesday, the online retail giant reported quarterly revenue of $2.4-billion (U.S.), an increase of 6 per cent excluding forex year over year, which was ahead of both Mr. Mahaney's projection ($2.36-billion) and in line with the Street. Earnings per share of 54 cents beat the 53-cent estimate of both the analyst and the Street, which Mr. Mahaney attributed to revenue growth from a "strong" holiday season and continued share repurchasing.

"We are unchanged in terms of our stock view," he said. "We did see an improvement in arguably the most important part of the EBAY story – U.S. Marketplace GMV [gross merchandise volume] (ex-StubHub) – but the acceleration to 2.5 per cent year-over-year growth on an easy comp in a relatively strong online holiday shopping period doesn't seem thesis-changing impressive to us.

"Our long-term investment opinion is unchanged. The key investor decision remains whether eBay is a Cash Cow, a Cash Cube (as in the melting kind), or recovering Cash Cougar. Our Sector Perform rating is based on the belief that one of the first two is most likely. We believe eBay will continue to face increasingly powerful headwinds from competition with Amazon, a series of innovative vertical marketplaces, and massive 'Net platforms (Google, Facebook) with "Buy Button" potential. On valuation, we see EBAY trading at 20 times 2017 GAAP EPS or 16 times 2017 Non-GAAP EPS for what appears to be sustained 7-per-cent EPS growth. That doesn't seem compelling, although we fully respect the momentum pitch that improving fundamental stories trade up."

Mr. Mahaney raised his target price for the stock to $34 (U.S.) from $32. Consensus is $32.51.

"Our Sector Perform rating reflects our view that eBay continues to show signs of a platform turnaround and has successfully established several new growth opportunities (Offline Payments, BRIC expansion, eBay Now)," he said. "After losing share to Amazon and other competitors in earlier years, we believe that eBay is proving out a successful pivot, wherein it has fundamentally turned around its Marketplaces segment."

Meanwhile, BMO Nesbitt Burns analyst Daniel Salmon raised his target for the stock to $33 from $28 with "market perform" rating (unchanged).

Mr. Salmon said: "While 4Q results were mixed, they showed signs of improvement in the important areas of investor focus and in particular the company's FY17 guidance, which calls for a material acceleration in the company's core Marketplace business. Specifically, guidance calls for a 200 basis points acceleration in Marketplace volumes and 6 per cent to 8 per cent CC overall revenue growth. Business trends are improving, but we continue to caution that re-platforming the business takes time and believe the current valuation properly reflects the near- to mid-term risk/reward associated with it."

=====

The fourth-quarter earnings miss for Mattel Inc. (MAT-Q) is a "set back, but not the end of this toy story," according to BMO Nesbitt Burns analyst Gerrick Johnson.

"We are optimistic that new management at Mattel is facilitating needed changes in culture, product development, and partner relationships to help drive renewed sales and earnings growth," said Mr. Johnson. "And, despite a disappointing fourth quarter, we believe new products and core brands are gaining traction. While the disappointing results make shake some investor confidence, we still believe the company's turnaround is on track. We would take advantage of share price weakness today as an opportunity to accumulate shares."

On Wednesday, Mattel reported, a week ahead of schedule, earnings per share of 52 cents (U.S.), a fall of 11 cents from the previous year and well below the estimates of both Mr. Johnson (80 cents) and the analyst consensus (72 cents). Sales fell 5 per cent year over year to $1.83-billion, also below Mr. Johnson's expectation (a 1.1-per-cent decline to $1.98-billion) and the consensus ($1.97-billion).

"The source of the miss was a late arriving Christmas retail selling season, both in the U.S. and in developed markets," said Mr. Johnson. "While October and November were said to be up, the gain was less than expected. And sales in the first three weeks of December were extremely poor. The week leading up to Christmas, however, was in our view superb, and included two extra shopping days that fell on Friday and Saturday. Early December weakness was evident in our research, but it did not set off alarm bells with us as we were confident retail sales would eventually surge owing to: 1) Hanukkah being three weeks later this year; 2) Christmas being on a Sunday; 3) two extra shopping days ahead of Christmas that fell on Friday and Saturday; 4) a trend towards retail sales occurring later each year; and 5) gift cards that make up a bigger portion of sales, making the week after Christmas just as important as the week before. And we were satisfied when NPD reported the last week ahead of Christmas saw a 26% surge in US toy industry retail sales on a year-over-year basis.

"But in retrospect, the boost was too little, too late. Retailers had already begun discounting, necessitating additional sales allowances. And with the surge occurring so close to Christmas, it did not provide ample time for reorders. We wonder if we under-estimated the impact the shocking results of the U.S. presidential election would have on retail buying patterns, especially considering that most toy buyers are women."

Despite the disappointing results, Mr. Johnson said the company's turnaround is on track. He said many metrics are "heading in the right direction."

"Global POS, or retail takeaway, was up mid-single-digit (excluding Disney Princess)," he said. "Though with 3Q shipments (ex-Disney Princess) up double-digits percent, the plan was for retail to be even better. The result of the shortfall is that Mattel ended the season with "pockets" of carry over inventory, but management assured the levels were 'manageable' and of good quality. Regardless, this will still pressure 1Q shipments of new Spring and Easter-related product and perhaps incur further sales allowances. There may be concern amongst investors that given sales allowances increased 350 bps to 12.0 per cent from 8.5 per cent in the quarter, Mattel may have bought their shipments and their retail comps. We are less concerned about that, as we think these are the necessary actions to take in a turnaround situation focused on regaining market share. From a longer-term perspective, we are still very much encouraged by the company's new product development, marketing initiatives, and better overall execution. We are especially encouraged by the continued growth in Barbie, which offers the company extremely high incremental margins. While worldwide gross sales for Barbie were down 2 per cent year over year, the brand saw 1-per-cent growth in local currency (up against a 8-per-cent comp in 4Q15), and retail point of sale in the quarter, and year, was up double-digit percent. For the full year, Barbie sales were up 7 per cent and 5 per cent in local currency. Looking forward, shelf space is expected to increase again in 2017 following increases in 2016."

Mr. Johnson did not change his "outperform" rating, but he lowered his target to $36 from $40. The analyst average price target is $32.30, according to Bloomberg.

"After this miss, questions regarding the sustainability of the $1.52 dividend (5.4 per cent yield) will most likely resurface," he said. "And bears will be emboldened. We think uncertainty around potential Trump tariffs and taxes will also likely keep a lid on multiple expansion, at least in the near term, putting the onus on earnings growth. But by pre-announcing a sizable miss on the most important quarter of the year, we understand why investors might not have a lot of confidence at the moment. But we still see Mattel as a core holding for a 2-4 year time period. We like the direction the company is headed, from culture to relationships to product. We like the management team, now be led by Google exec Margaret Georgiadis, with product still being executed by COO Richard Dickson, and finance covered by stalwart CFO, Kevin Farr. And we feel the dividend is safe, as Mattel has proven in the past it can still generate cash in good times and bad. We suggest collecting the 5-per-cent yield and waiting it out; we don't think the wait will be long."

Elsewhere, MKM Partners analyst Eric Handler downgraded Mattel to "neutral" from "buy" and lowered his target to $27 (U.S.) from $36.

=====

In other analyst actions:

Analyst Kerry Smith at Haywood raised Integra Gold Corp. (ICG-X) to "buy" from "hold" with a target price of 90 cents (unchanged). The analyst average is $1.17.

Haywood's Geordie Mark raised Lucara Diamond Corp. (LUC-T) to "buy" from "hold" with a target of $3.50, rising from $3. The average is $3.69.

Mr. Mark downgraded Tahoe Resources Inc. (THO-T) to "hold" from "buy" and lowered his target to $14 from $25. The average is $18.16.

Mr. Mark also lowered Asanko Gold Inc. (AKG-T) to "hold" from "buy" with a target of $5.50, falling from $6.50. The average is $6.03.

Industrial Alliance analyst Brad Sturges rated WPT Industrial Real Estate Investment Trust (WIR.U-T) a new "buy" with a $13.25 target. The average is $12.65.

GMP analyst Stephen Harris cut AutoCanada Inc. (ACQ-T) to "hold" from "buy" with a $30 target (unchanged). The average is $24.25.