Inside the Market's roundup of some of today's key analyst actions
It was a "nice, clean" first-quarter earnings beat for the "new new" Finning International Inc. (FTT-T), according to Raymond James analyst Ben Cherniavsky.
In reaction to Vancouver-based company's financial results, released Wednesday, Mr. Cherniavsky upgraded the stock to "outperform" from "market perform."
The heavy-equipment dealer reported earnings per share for the quarter of 28 cents, exceeding the analyst's projection of 22 cents and representing a 9-cent jump year over year.
"In some respects, we see this as 'the quarter that should have been' considering that our 1Q16 estimate was 27 cents," said Mr. Cherniavsky. "This effected a huge miss last year and, in turn, a relatively 'easy comp' for 1Q17. On a two-year stack, Finning's 1Q17 EPS is still down 15 per cent from 1Q15 and well below historical highs."
"Nevertheless, we know that expectations matter and that a stock often moves with the rate of change in the company's results. From this perspective, 1Q17 marked a number of important milestones, including the first year-over-year increase in both EPS and backlog since 4Q14. We also saw inventories fall y/y for the fifth straight quarter, while lower costs and favourable mix lifted Finning (Canada)'s EBIT margins to a two year high. Finally, 1Q17 was the first 'clean' (unadjusted) EPS reported since 2Q14."
Based on the results, he raised his full-year 2017 EPS estimate to $1.25 from $1.20 while maintaining his revenue projection of $5.765-billion. His 2018 projections remain $1.55 and $6.055-billion, respectively.
"Despite these favourable data points, the environment for Finning is still tough: 1Q17 machine and rental sales fell 18 per cent and 9 per cent respectively while gross margins remained under pressure," said Mr. Cherniavsky. "This is all consistent with our thesis that the heavy equipment markets are still imbalanced, particularly in Western Canada. That said, following five years of OEM capacity cuts and dealer inventory cleansing, the late innings of this prolonged supply glut are finally within sight. Our focus, however, remains on the aftermarket, which we still believe will define the next cycle. This was also evident in Finning's 1Q17 results, with CSS revenue rising 4 per cent and topping 60 per cent of mix for the first time on record."
He raised his target price for the stock to $29.50 from $25.50. The average is $29.38.
"While our thesis on Finning's fundamentals has not changed much, we have struggled with valuation recently," said Mr. Cherniavsky. "With the stock reaching unprecedented multiples last fall we constructed a long-term forecast to see if that could rationalize the price. Based on the company's extensive restructuring efforts, and assuming a parts-driven cycle, we projected 2020 'peak EPS' of $2.35 and then multiplied this by a normalized P/E [price-to-earnings] of 15 times to arrive at a 2020 valuation of $35.00. Last fall we discounted this back at 10 per cent over four years to determine a PV [present value] of $24.00, but the stock was trading a dollar above that. Since then we have bought some time and gained more visibility into the cycle while the stock has been generally range bound. Hence, the same math today — now discounted at only three years — yields a PV of $26.50. At the risk of splitting hairs, that is close enough to the current price of $26.77 to change our view on valuation and risk-reward."
As Air Canada prepares to launch its own loyalty program, BMO Capital Markets analyst Tim Casey downgraded the company that owns and operates its current Aeroplan rewards program.
Mr. Casey lowered his rating for Aimia Inc. (AIM-T) to "underperform" from "market perform."
On Thursday, Air Canada (AC-T) announced its plan, replacing Aeroplan, which is owned and operated by Aimia. It is targeted to begin in 2020.
Mr. Casey dropped his target for Aimia to $5 from $10. The average is $9.42.
Elsewhere, GMP analyst Martin Landry dropped his rating to "reduce" from "buy" with a target of $4, down from $10.50.
The challenges faced by Canadian mortgage lenders have caught up to Street Capital Group Inc. (SCB-T), said Industrial Alliance Securities analyst Dylan Steuart.
After a first quarter that failed to live up to his expectations, he downgraded his rating for the Toronto-based financial services company to "hold" from "buy."
"Given recent headlines regarding mortgage lenders specifically and the industry in general, sentiment in the sector is clearly challenged," said Mr. Steuart. "As such, we are reducing our target valuation multiple to 9.0 times (from 11.0 times). This is a premium to forward price-to-earnings (P/E) multiple of the mortgage lending peers (7.5 times) due to SCB's lack of credit exposure to the market and its sizeable tax loss carry forwards.
"While upside is evident at SCB's current reduced valuation, it is difficult to see a significant near-term catalyst to valuation given the continued noise surrounding the housing market. As such, we are reducing our recommendation."
On Wednesday, Street Capital, formerly Counsel Corp., reported operating earnings per share of nil, a penny below Mr. Steuart's 1-cent projection, due largely to "disappointing" revenue development. Revenues of $26.9-million also missed his estimate ($30.8-million) as mortgage sales missed his expectations. Mortgage originations of $1.5-billion fell below his $1.7-billion estimate.
"While mortgage production of $1.5-billion was in line with the same quarter a year ago, management significantly reduced its 2017 outlook regarding the origination of new prime mortgages," the analyst said. "SCB is now expecting year-over-year volume declines in new prime originations of 20-30 per cent from 2016 levels. This is reduced from an expectation of 'up to a 10 per cent year-over-year' decline expectation guided towards last quarter. The main difference is a loss of funding on prime uninsured mortgages (mainly refinancings and rental properties that were excluded from insurance eligibility when the government introduced new insurance rules in October of 2016). Through to Q1/17, SCB was able to continue to originate and sell off this class of prime loans to one of its five institutional funders, but has been notified that this availability is being tapered, which is expected to hurt 2017 volumes going forward. Given the uncertainty in the overall market, management removed its guidance towards EPS development as well."
Mr. Steuart lowered his 2017 EPS projection to 9 cents from 15 cents. He said the move was "baking in an expected reduction to mortgage production tied to the new mortgage origination rules and assuming a sustained loss of funding on uninsured prime mortgages."
His 2018 EPS estimate is now 17 cents (down from 21 cents), as he expects new organizations to stabilize.
Mr. Steuart's target for the stock fell to $1.50 from $2.25. The analyst consensus price target is $1.69, according to Thomson Reuters data.
"Confirmation of 1) a return of funding for prime, uninsured mortgages, 2) signs of a sizeable pick up in the renewal volumes as expected, and 3) an overall stabilization of the housing market would lead us to get more constructive at current valuation levels," he said. "However, a return to positive momentum in valuation is likely to take some time given the reduced outlook by SCB management and other industry players."
Citing a recent pullback in share price, Accountability Research analyst Harriet Li upgraded her rating for Teck Resources Ltd. (TECK.B-T, TECK-N) to "buy" from "hold."
"Although steelmaking coal prices have retreated from recent highs, the latest spikes in coal prices have significantly improved the company's cash flows," she said. "As a result, Teck has continued to strengthen its balance sheet by retiring $1-billion (U.S.) of debt last quarter, bringing the company much closer to its goal of lowering total debt to $5-billion. The Fort Hills oil sands project is on track to produce first oil by the end of the year, with continued ramp up expected in 2018."
In reaction to Teck's first-quarter financial results, released on April 25, Ms. Li raised her 2017 earnings estimate to $4.66 per share, "driven by stronger iron ore prices resulting from robust demand and supply disruptions." She introduced a 2018 projection of $3.04, noting the year-over-year decline is due to "an expected reduction in realized coal prices as the supply/demand balance eases."
Ms. Li maintained a target price of $30.50. The analyst average is $38.01.
"Kelt has been one of the exceptional performers in terms of share price performance YTD in Canadian energy (down 2 per cent versus TSX Capped Energy Index down 11.4 per cent)," said Mr. McCrea. "There are four key items investors to focus on that should continue to build momentum heading into 2018 and continue to drive its outperformance. 1) Increase in spending for 2017; 2) Some of the best well results KEL has seen from its higher intensity fracked wells at Pouce Coupe; 3) Initial flow-back result from its Montney well at Oak that proves up hydrocarbons; 4) a 1Q17 beat on FFO that should be a signal that higher productivity well results and efficiencies are coming through. With 29.1 net wells planned to be completed in 2017 (with the last 8 wells in BC/Alberta showing IP30 oil/condensate volumes averaging 950 barrels per day), the company should show some of the highest liquids growth from 4Q16 to 4Q18 in the sector at 50 per cent year-over-year."
Mr. McCrea has a "strong buy" rating and $10 target for the stock. The analyst average target is $8.93, according to Bloomberg data.
He has an "outperform" rating for ARC stock with a $26.50 target. The average is $25.02.
"We are replacing ARC as our Analyst Current Favourite due to the stronger relative upside we see in Kelt," he said.
Elsewhere, TD Securities analyst Juan Jarrah raised his target for Kelt to $9.50 from $9 with an "action list buy" rating following their first-quarter results.
"The most recent Montney oil wells at Pouce Coupe (five new wells from an existing pad) have produced some of the highest IP30 rates we have seen from Kelt from the Alberta Montney. These wells have produced IP30 rates of 1,476 BOE/d [barrels of oil equivalent per day], on average, and most importantly, oil/NGLs have averaged 919 bbl/ d (62 per cent of total production)," he said.
With Yellow Pages Ltd. (Y-T) taking "too many transitions," Beacon Securities analyst Vahan Ajamian said he's "moving to the sidelines" and downgraded his rating for its stock to "hold" from "buy."
On Wednesday, Yellow Pages reported quarterly revenue of $189.5-million, topping Mr. Ajamian's expectation of $184.9-million though below the consensus of $196.1-million. Earnings before interest, taxes, depreciation and amortization of $46.5-million topped his projection of $41.6-million and the consensus of $46.2-million.
Mr. Ajamian expressed concern over the company's announcement of a new strategy involving five key initiatives and its claim that it "may continue to experience downward pressure on these performance measures [of revenue, EBITDA and free cash flow] during the transition occurring over the next 18 to 24 months."
"We launched coverage of Yellow Pages in February 2016," he said. "At the time we were just over halfway through the company's four-year Return To Growth Plan, which called for the company to return to EBITDA growth in 2018. We then argued that it was a good time to acquire shares – as the company had posted two years of evidence of key metrics trending in the right direction (i.e., you weren't just 'buying a plan on Day 1'); however, as the ultimate objective had still not been achieved, it was not necessarily completely obvious that the plan had already worked (i.e., the shares hadn't yet run away from you). Over the ensuing period, as the company began posting solid quarter after solid quarter, investors gained confidence that we might indeed see EBITDA growth in 2018, and sent the shares higher.
"The wheels then inexplicably fell off the bus seemingly all at once, and our 2018 EBITDA forecast now calls for an 8-per-cent decline year over year (albeit an improvement from 27 per cent in 2017). We are now back in transition mode, with equity investors being asked to 'buy a plan' again. While the company may ultimately be successful in its new strategy, we expect the impact of its main drivers will not be seen in results for some time. In short, it may take several more quarters for investors to once again slowly regain confidence in management's ability to turn this ship around – and for us to reach the sweet spot where there is sufficient credible evidence that the strategy is working, but it is not yet obvious."
Mr. Ajamian dropped his target price for the stock to $5.50 from $16. The average is $9.90.
"For the past year we had calculated that even if the shares' trading multiple stayed flat over the subsequent 12-month period, the company's free cash flow generation / debt repayment would have required a healthy share price return in the 16-29-per-cent range," he said. "Given the decline in EBITDA / free cash flow generation we are now expecting, this is no longer the case (i.e., that cushion has disappeared)."
Despite a first-quarter earnings miss, TD Securities analyst Tim James raised his rating for Exchange Income Corp. (EIF-T) due to recent share price weakness.
"We believe that Exchange represents a good investment opportunity for yield-focused investors based on its forecast FCF, low payout ratio, and management's track-record of maintaining a disciplined approach to acquisitions and expenditures at accretive valuations," said Mr. James, who moved the stock to "buy" from "hold." "In addition, we believe that the company's financial results are demonstrating the stability inherent in many of its underlying businesses and the benefits of diversification."
On Tuesday, the Winnipeg-based company reported quarterly earnings before interest, taxes, depreciation and amortization of $43.3-million, down 2 per cent year over year and below his Mr. James's forecast of $49.2-million as well as the $50-million consensus. Adjusted earnings per share of 25 cents were also below his estimate (39 cents) and the consensus (41 cents), dropping 18 cents from the same period a year ago.
Mr. James raised his target by a loonie to $45. The average is $45.80.
"We are increasing our target price …. due to a higher forecast dividend and the shift forward of our valuation period by one quarter, partially offset by slightly lower forecast EBITDA and net debt," he said. "Our EPS forecasts decline due to higher forecast D&A, resulting from greater-than-expected capex in Q1/17 and increased capex assumptions going forward. We have no reason to question the company's ability to recover the earnings shortfall in Q1 relative to our forecast over the rest of the year. In our view, the earnings and cash flow potential of Exchange remains strong with relatively low risk."
The recent sell-off in Yelp Inc. (YELP-N) is overdone, according to Citi analyst Mark May.
Calling its current valuation "attractive," Mr. May upgraded the stock to "buy" from "neutral."
The San Francisco-based social media company's share price dipped 18.4 per cent on Wednesday, a day after the company reported earnings that fell well below the Street's expectations and dropped its full-year revenue guidance.
Mr. May said: "We are upgrading YELP to Buy for five main reasons: 1) at 2 times enterprise value/revenues, a 5-6-per-cent FCF [free cash flow] yield and $2-billion EV for a 20-per-cent grower and leading mobile Internet media brand, we view the valuation as attractive and near the low-end of its recent trading range; 2) our review of the circumstances, including a conversation with the company, suggest the factors leading to a 3-4-per-cent revision in calendar 2017 revenue guidance is due to factors that are isolated, have been identified and addressed, that have recently stabilized, and that should produce more normalized reported results by 2H17; 3) given that i) churn-reduction initiatives have been effective and have produced improved results in March/April, ii) that salesforce hiring, retention and productivity have all rebounded, and iii) given the timing of the client addition surge in 2016 (1H16), we do not believe there is further risk to estimates in CY17; 4) Yelp's recent benefit from a Google search algorithm change not only benefits traffic growth and potentially revenue, but speaks to the value of its content and potentially an improving relationship with Google; and, 5) we continue to view Yelp as one of the most attractive acquisition targets in our universe, which should provide additional valuation support."
Mr. May did lower his full-year EPS projection to $1.09 (U.S.) from $1.24. His 2018 estimate dropped to $1.26 from $1.54.
His target price for the stock is now $35, down from $39. The average is $32.
"We believe that the factors resulting in a 3-4-per-cent downward revision to revenue guidance have largely stabilized and that the risk of further material negative revisions near term are modest," said Mr. May. "Our 12-month price target is $35, which represents 22-per-cent upside potential and is below where the stock has traded for much of the last 52-weeks."
Following the release of "strong" first-quarter financial results, CIBC World Markets analyst Jeff Killeen upgraded Argonaut Gold Inc. (AR-T) based on expanded option value.
On Tuesday, Argonaut reported earnings per share of 3 cents and cash flow per share of 9 cents, both topping Mr. Killeen's projections of 1 cent and 5 cents, respectively.
"We see Q1 as an outlier relative to the remainder of 2017 as AR limited capital spending and pushed stacked ore tonnes above our expectation," he said.
"While we model available cash declining through 2017, if San Agustin can match AR's estimates then there is potential for cash on the balance sheet to increase in 2018 back to current levels. Although AR's ability to generate FCF appears limited at current spot prices, recent exploration has shown potential for mine life extensions at both El Castillo and La Colorada, which should extend AR's option value to higher gold prices in the future."
He maintained a target of $3.25. Consensus is $4.16.
"AR is set to pour first gold from San Agustin in late Q3 and a new feasibility study for the El Castillo/San Agustin complex incorporating 2017 drilling is expected in Q1/18, which could provide a further catalyst for AR shares," said the analyst.
In other analyst actions:
TD Securities analyst Sean Steuart downgraded Cascades Inc. (CAS-T) to "hold" from "buy" with a $18 target. The average is $17.75.
DHX Media Ltd. (DHX.B-T) was cut to "hold" from "buy" by GMP analyst Deepak Kaushal with a target of $7, falling from $9.60. The average is $8.27.
Iamgold Corp. (IMG-T) was raised to "buy" from "market perform" by Cormark analyst Richard Gray with a target of $7.75. The average is $6.95.
Intact Financial Corp. (IFC-T) was upgraded by TD Securities analyst Mario Mendonca to "buy" from "hold" with a target of $105, rising from $97. The average is $103.50.