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Exteriors of the Lululemon shop at 153 Cumberland St. in Toronto's Yorkville neighbourhood on Feb. 6, 2014.Fred Lum/The Globe and Mail

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

Lululemon Athletica Inc. (LULU-Q) has shown its ability to innovate despite difficulty industry trends through its recent success with denim, according to Canaccord Genuity analyst Camilo Lyon.

In the wake of "solid" third-quarter financial results and a full-year guidance raise, Mr. Lyon upgraded his rating for the Vancouver-based apparel maker to "hold" from "sell."

"Our sell thesis was predicated on a surging denim cycle that would take wallet share from a long-in-the-tooth athleisure cycle," he said. "While the denim trend continues to gain momentum across apparel retail, LULU's Q3 results, and specifically the 24-per-cent comp in women's pants, demonstrate the company's ability to innovate through industry headwinds, something we underestimated and for which we give the company a great deal of credit. Moreover, LULU's supply chain-driven gross margin realization story appears to have more chapters to it as evidenced by the 100 basis points of gross margin expansion in Q3 (versus flat guidance) and a similar rate of expansion expected in Q4. Overall, Q3 results were strong with little to poke at (comp at high end of whisper range, robust margin expansion, inventory in check, new $200-million buyback)."

On Wednesday, Lululemon reported comparable same-store sales growth of 7 per cent for the quarter, exceeding Mr. Lyon's 4-per-cent projection. Earnings per share of 56 cents (U.S.) also topped his estimate (52 cents). He pointed to higher sales and gross margin as the chief contributors to the beat.

With the results, the company raised its 2017 EPS guidance to $2.45-$2.48 from $2.35-$2.42, which is based on mid-single digit comp growth (up from low single digit).

Accordingly, Mr. Lyon hiked both his 2017 and 2018 EPS expectations to $2.49 and $2.86, respectively, from $2.33 and $2.35.

His target price for the stock rose to $70 (U.S.) from $43. The analyst average target price is currently $73.87, according to Bloomberg data.

"Why not upgrade to BUY?" said Mr. Lyon. "After raising our 2018 estimates to $2.86 and our valuation multiples, the stock is already ahead of our new $70 price target. The company is performing well and subverting many issues in retail, but we are reluctant to chase the stock here at a healthy 26 times price-to-earnings multiple. As such, a HOLD rating is appropriate."

Elsewhere, RBC Dominion Securities analyst Brian Tunick raised his target to $77 from $66 with an "outperform" rating (unchanged), saying the company has exhibited momentum heading into the fourth quarter.

"LULU's strong 3Q and conservative 4Q outlook serve as a proof-point that the company's product innovation, stores, and digital experience focuses can push the brand towards $4-billion in sales by 2020 from $2.6-billion today despite a normalizing athletic category," he said.

BMO Nesbitt Burns analyst John Morris increased his target to $64 from $55, keeping a "market perform" rating.

Mr. Morris said: "LULU continues to benefit from strength in its men's category as it increases and improves the assortment in the category. New system investments and inventory normalization should see gross margin expansion. Despite these positive trends, currency headwinds and accelerating competition in the performance apparel category raises caution."


Raymond James' Ken Avalos added InterRent Real Estate Investment Trust (IIP.UN-T) to the firm's "Canadian Analyst Current Favourites" list, replacing Tricon Capital Group Inc. (TCN-T).

"We think [InterRent] is the only REIT in our coverage universe that has the ability to generate double-digit same-property net operating income (SPNOI), funds from operations (FFO) and net asset value (NAV) growth over the next few quarters," said Mr. Avalos. "The apartment sector is showing unprecedented strength right now, and InterRent is benefiting from still falling cap rates in their markets (periphery GTA, Montreal and Ottawa). Their trophy asset [LIV Apartments in Ottawa] will enter the same-property portfolio in the middle of next year, boosting the opportunity for them to possibly triple up peers from an SPNOI growth perspective. Moreover, the company has excess land for 1,500 suites and will begin development, we think, on its initial projects in the new year."

Mr. Avalos currently has an "outperform" rating and $9.50 target for InterRent stock. The average target is $9.82.

He rates Tricon a "strong buy" with a target of $13.75, which is the current consensus.

"We are removing Tricon from the RJL Analyst Current Favourites as we believe InterRent represents a more attractive near-term trade given strong upcoming quarters," he said.


The upside potential currently outweighs the risk associated with McCoy Global Inc. (MCB-T), according to Industrial Alliance Securities analyst Elias Foscolos.

He raised his rating for the Edmonton-based company, which provides equipment and technologies to the energy industry, to "speculative buy" from "hold" following a 21-per-cent drop in share price after the Nov. 9 release of its third-quarter financial results.

"The recent price weakness in MCB's stock provides risk neutral investors an opportunity as we are upgrading our rating to Speculative Buy, while maintaining our $2.00 target price," he said. "Given that the company has not yet turned the corner in generating positive EBITDA, an investment in MCB stock at this point definitely has a speculative component, however, we believe that the upside outweighs the downside."

McCoy Global reported revenue for the quarter of $10.6-million, which was in line with Mr. Foscolos's projection and its result of the last several quarters.

"However, cash gross profit suffered along with gross margin," the analyst said. "We calculated the Company's quarterly cash gross profit at $2.7-million (26-per-cent margin). The negative variance was due to an unfavourable product mix and a stronger Canadian dollar. Q3 EBITDA of a loss of $1.6-million was below our projection of a $300,000 loss. The miss was almost entirely due to the lower-than-expected gross margin."

He kept a $2 target for its shares. The average on the Street is currently $1.97.

"MCB has cash and is trading at a discount to its tangible book value," said Mr. Foscolos. "At the end of the quarter, MCB had $14.4-million in cash which was offset by $5.2M in debt leaving $9.2-million in net cash. The Company is now trading at 90 per cent of its tangible book value ($1.65 per share). The working capital surplus is $1.30 per share with property and equipment making up the balance."


Emphasizing "return of the netback," BMO Nesbitt Burns analyst Joe Levesque said he no longer sees shares of Athabasca Oil Corp. (ATH-T) as overpriced, citing the company's current valuation multiples.

Following the release of its 2018 corporate outlook on Wednesday, which featured a capital spending budget of $140-million and production guidance of 38,500-41,000 barrels of oil equivalent per day, he raised his rating for the Calgary-based company to "market perform" from "underperform."

"The company currently trades at 4.5 times, representing a steep discount to the Canadian small- to mid-cap peer average of 7.0 times," said Mr. Levesque. "We have previously viewed the magnitude of discount inadequate to accurately reflect the company's depleting liquidity and marginal netbacks. Now, higher spot WTI prices have facilitated FCF generation with healthier netbacks, and consequently our outlook on the company is more optimistic. The company still has a debt-laden balance sheet and struggling netbacks from Hangingstone; however, the current environment provides the company with the running room to develop its lucrative Light Oil assets, which are yielding impressive results in the field. Under our updated cash flow forecast, we expect D/CF to normalize to 2.5 times by the end of 2018."

"We concur with the current discount and believe the shares fairly priced. We also believe there is more upside to the company now that there is a clear line of sight to steady cash flow growth. We support the company's decision to keep capex within cash flow, and metrics subsequently improve by the end of 2018. The company continues to reap the benefits of its Kaybob capital carry, and if well results continue to exceed expectations in Placid, ATH shares could see some price appreciation in the medium term."

His target for the stock remains $1.30. The average is $1.63

 "We believe the company is now on solid footing, with thermal break-even costs well below forecast commodity prices and a growing contribution to cash flow from the Light Oil division," he said. "Debt remains the largest concern, with debt metrics well above peers. Continued cash flow budgets are expected to improve metrics over time with production growth in the Light Oil division."


The challenges of the current retail environment were displayed in Hudson Bay Co.'s (HBC-T) third-quarter financial result, said CIBC World Markets analyst Mark Petrie.

He said declines in same-store sales and gross margins were "compounded by self-inflicted operational issues in the digital business."

"FQ3 revealed stagnant or negative SSS growth across all banners, with some posting material declines (Off Price down 7.6 per cent versus a 2.6-per-cent estimate, DSG down 3.7 per cent versus an estimate of a 0.9-per-cent drop) but Saks and Hudson's Bay holding positive," said Mr. Petrie. "Gross margin was better than we had expected but still 60 bps below that in FQ3 last year, reflecting continued promotional investment.

"Management signaled a successful Black Friday and that the holiday period is off to a good start, which is encouraging since 80 per cent of the company's EBITDA is generated in FQ4. However, it is still difficult to forecast a fundamental rebound in the retail operations overall. Distributing Lord & Taylor through could be accretive in the near term, but we don't view this as a bullish long-term step for the brand."

Keeping a "neutral" rating for the stock, Mr. Petrie lowered his target to $12 from $14. The average is $13.61.

"Though real estate values are as material as ever, and we do not underestimate the possibility of accretive transactions, our valuation of the retail operations now detracts from our overall value for HBC," he said.

Meanwhile, RBC Dominion Securities analyst Sabahat Khan dropped his target by a loonie to $11 with a "sector perform" rating (unchanged).

"Although we see potential for sequential improvement in trends in Q4/17, we believe investor focus will primarily be on potential transactions that could surface value from the company's real estate," said Mr. Khan.


Though its "strong" third-quarter financial results came with "cautious" fiscal 2019 guidance, Desjardins Securities analyst Keith Howlett hiked his target price for Dollarama Inc. (DOL-T) shares, calling it the "best organic growth story" in his coverage universe.

On Wednesday, the discount retailer reported quarterly earnings per share of $1.15, up 25 per cent year over year and exceeding the projections of both Mr. Howlett ($1.13) and the Street ($1.11). Same-store sales growth of 4.6 per cent fell below the analyst's 5.5-per-cent expectation, while 10 new store openings also missed his forecast (18 stores).

Mr. Howlett called the company's "cautious" fiscal 2019 guidance, which includes a decline in EBITDA margin, "the year of living dangerously."

"The guidance is based on same-store sales growth of 4–5-per-cent and assumes that competitors will for the 'most part' absorb the cost of the minimum wage increase in Ontario, and will not pass it through to consumers," he said. "The top and bottom ends of EBITDA margin guidance for FY19 are each 100bps below the parallel amounts for EBITDA margin guidance for FY18, as updated yesterday. Management is prudent in its forecasts and in how it operates the business. We view this approach positively, given the challenges of predicting the multitude of factors at play, including consumer purchasing behavior in relation to new products, new price points and new payment options. The power (and simplicity) of the Dollarama business model also continues to surpass the expectations of even the most seasoned retailers, including, in our view, the founders and management.

"In the last few years (since guidance was introduced), management's annual forecast guidelines for EBITDA margin have increased as the fiscal year progressed. This is definitely preferable to the reverse."

Mr. Howlett is projecting a EBITDA margin for 2019 of 25.1 per cent, which is flat from the previous year while 107 basis points above the company's guidance range (22.5–24.0 per cent).

"All other factors constant, if we used the top end of management guidance, our FY19 EPS estimate would be 25 cents lower," he said. "Management operates its business conservatively and also approaches forecasts with the same prudence, adjusting them upward as the facts warrant it."

His 2019 earnings per share estimate fell by 3 cents to $5.16.

However, based on the results, Mr. Howlett's target for Dollarama shares rose to $165 from $154. The average is $160.19.

"The 3Q FY18 MD&A states that new stores reach $2.2-million of sales within the first two years of operation, with an average capital payback of two years," he said. "The company continues to open 60–70 new stores per year and drive same-store sales growth in the 4–5-per-cent range. After years of steadily increasing EBITDA margin, management's initial guidance calls for a decline in FY19. With respect to the prior two fiscal years, management's EBITDA margin guidance proved to be conservative by up to 270 basis points. We have stepped outside management's guidance, forecasting a flat EBITDA margin in FY19."

Elsewhere, Canaccord Genuity analyst Derek Dley lowered his target to $175 from $178 after lowering his 2019 EPS estimate to $5.02 from $5.10. He kept a "buy" rating.

Mr. Dley said: "In our view, Dollarama offers investors the most visible growth profile in the Consumer Products universe. Given Dollarama's robust network expansion ability, lack of meaningful competition, industry leading profitability and free cash flow generation, and healthy ROIC, we believe Dollarama is deserved of a premium valuation."

Industrial Alliance Securities analyst Neil Linsdell kept a "hold" rating and raised his target to $148 from $133.

"Although revenue was lighter than expected (against difficult comps), profitability was strong, with improved margins and continuing efficiency improvements providing a bottom line beat and an increase in F2018 guidance," said Mr. Linsdell. "F2019 guidance was also presented, laying out continued solid growth expectations."


Canaccord Genuity analyst Raveel Afzaal lowered his rating for Automotive Finco Corp. (AFCC-X) following the release of its financial results for the four months ending Sept. 30.

On Nov. 29, the Toronto-based specialty finance company, which focuses exclusively on the auto retail sector, released the results after changing the end of its fiscal year from February to December. Though they met Mr. Afzaal's expectations, he said they were not comparable to his previous forecasts.

Expressing concern about its elevated payout ratio and a lack of visibility on both the timing and magnitude of access to new capital and the issuing of loans to third-party dealerships, he downgraded the company's stock to "hold" from "speculative buy."

"AFCC ended the quarter with cash and working capital of $2.6-million and $48,000, respectively," he said. "Management has previously stated it aims to secure low cost debt from a strategic partner which could serve as a material valuation catalyst. We were previously forecasting AFCC to make $60-million in new loans to dealerships in 2018. We have eliminated this assumption as we do not yet have visibility on timing and nature of new capital infusion."

Mr. Afzaal added: "We believe the sale of variable rate debt financing products tied to KPI metrics of third-party dealerships resulting in organic revenue growth for AFCC will be required (1) for the market to value AFCC using an enterprise value-to-EBITDA valuation approach, and (2) to achieve multiples similar to those awarded to restaurant royalty companies (13.0 times to 15.0 times) which have a long-term track record of organic revenue growth driven by samestore sales. Management is optimistic that it will be able to deliver on these milestones and secure long-term debt-based capital in the intermediate term. However, until then, we believe AFCC's valuation will be anchored to its book value, now $2.15 per share."

Mr. Afzaal's target for the stock fell to $2.25 from $3. He's currently the lone analyst on the Street covering the stock, according to Bloomberg.

"We are changing our valuation methodology from a 50/50 weighting of 13.8 times enterprise value-to-EBITDA and 1.0 times book value to a straight 1.0 times book value," the analyst said. "We believe with the low visibility on new loans to third-party dealerships, which are tied to KPI metrics resulting in organic growth, and lack of capital availability, a book value valuation is more appropriate. This change along with the elimination of a $60-million investment from our estimates has lowered our target price from $3.00 per share to $2.25 per share"


TransAlta Corp. (TA-T, TAC-N)  is "approaching the turning point," said Credit Suisse analyst Andrew Kuske following the company's Investor Day in Toronto on Wednesday.

Mr. Kuske said the company provided some "positive news flow with self-help remedies to restore Alberta's supply-demand balance."

"In our view, the Alberta power market's overall regulatory uncertainty is starting to climb out of the valley of darkness," he said. "With the lifting of the fog surrounding the market, TA focused on their accelerated transition to clean energy.' That plan was not overly surprising, but clearly helps on multiple fronts potentially improving the top line and cost structure. On a relative basis, the Alberta power market remains one of the most uncertain areas of investment. Yet, the environment is clearly improving."

"Some key points include: (a) plans to construct a natural gas pipeline based on a Letter of Intent with Tidewater Midstream to allow an accelerated coal-to-natural gas conversion: (b) convert Sundance Units 3-6 and Keephills 1 and 2 in the 2021-2022 timeframe (1 year earlier than prior plan); (c) slightly more details on the Brazeau Pumped Storage project; and, (d) TA expects 2018 free cash flow to be in line with the 2017 expected FCF despite a number of negative issues in 2017."

Mr. Kuske maintained an "underperform" rating for TransAlta shares, however he raised his target by a loonie to $8. The average is $8.38.

"TA's Alberta's power market position is poised to benefit from self-help remedies along with the amount of capacity market uncertainty gradually being reduced," he said. "The negative overhang surrounding the stock looks to be lifting with more positive power market dynamics."

Elsewhere, Industrial Alliance Securities analyst Jeremy Rosenfield bumped up his target to $9 from $8.25 with an unchanged "hold" rating, believing the company's coal-to-gas transition strategy supports its long-term cash flow outlook.

"TA offers investors (1) a balanced mix of contracted cash flows and merchant power exposure, plus (2) upside from rising power prices, margin expansion from coal-to-gas conversion projects, and renewable development opportunities, and (3) a discounted relative valuation vs. Canadian IPP peers (8 times 2018 estimated enterprise value-to-EBITDA versus 10 times for peers). We are increasing our price target to reflect the supportive strategic initiatives outlined by TA, although we believe that greater clarity on underlying market conditions in Alberta will take time to play out."


In other analyst actions:

Cormark Securities Inc. analyst David Tyerman upgraded WestJet Airlines Ltd. (WJA-T) to "buy" from "market perform" with a target of $30, up from $28. The average target on the Street is currently $28.07.

TD Securities analyst Graham Ryding downgraded Genworth MI Canada Inc. (MIC-T) to "hold" from "buy" with a target of $46, rising from $45. The average is $45.33.

Scotia Capital analyst Ovais Habib downgraded Belo Sun Mining Corp. (BSX-T) to "sector perform" from "sector outperform" with a 65-cent target. His previous target of $1.35 was higher than the consensus of 76 cents.

National Bank Financial analyst Shane Nagle also lowered his rating for Belo Sun to "sector perform" from "outperform" with a 45-cent target, falling from $1.

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