Inside the Market's roundup of some of today's key analyst actions. This file will be updated often during the trading day so check back for new details.
Following the $1.25-billion (U.S.) acquisition of DSS Group Inc. in November, 2014 , Mr. Dley said he believes Cott's management has transformed the company from one operating in a "declining legacy industry" into a "higher-growth, higher-margin business with the ability to generate meaningful free cash flow." Accordingly, Mr. Dley initiated coverage of the stock with a "buy" rating.
"Furthermore, the company has a strong pipeline of potential tuck-in acquisitions which should allow it to consolidate a highly fragmented [home/office delivery] water industry," the analyst said.
He pointed to five key investment drivers:
1. The shifting of its product mix to "higher-growth" categories with contract manufacturing offsetting declines in legacy categories.
2. The DSS acquisition as a "major inflection point" with increased earnings before interest, taxes, depreciation and amortization (EBITDA) margins of 300-400 basis points.
3. Contract manufacturing and a focus on cost control, creating more efficient capacity utilization.
4. Balance sheet deleveraging "to drive value for equity holders as the company deleverages from 4.6x net debt/EBITDA to 3.0x by 2018, following which we expect dividend increases to commence."
5. An attractive valuation based on earnings visibility and mid-teen free cash flow compound annual growth rate through 2018.
He set a price target of $18 (U.S.). The analyst consensus is $13.45, according to Thomson Reuters.
"We note that Cott currently trades at 7.6x our 2016 EBITDA estimate," said Mr. Dley. "Both Cott's current valuation multiple, as well as our target multiple, represent discounts to the company's beverage industry peers, which currently trade at 12.6x. We also note that we estimate Cott will have an attractive free cash flow yield of 13.9 per cent in 2017."
RBC Dominion Securities analyst Jonathan Atkin upgraded Rackspace Hosting Inc. (RAX-N) to "outperform" from "sector perform" based on the potential for 2016 revenue acceleration from its managed cloud segment.
"We believe enterprise cloud momentum is gaining for Microsoft Azure and Amazon Web Services (AWS)," he said. "In our view, part of the accelerated demand will be in the managed cloud segment, where RAX stands to gain by virtue of its growing ability to provide support on each of these cloud platforms, as well as its own OpenStack-based platform."
Mr. Atkin said the company's revenue growth rate could grow beyond its recent quarter-over-quarter average of 2.5 per cent. For the fourth quarter, he projects a growth rate of 3.0 per cent, the midpoint of the company's guidance of 2.5-3.5 per cent. Likewise, his EBITDA margin estimate of 33.6 per cent is between the guidance of 33-34 per cent.
He's projected 2015 revenue of $2-billion (U.S.) , which would represent an increase of 11.6 per cent year over year.
He added: "We believe Rackspace will outperform peers for the following reasons:
• The company is constructing a multi-platform capability for delivering managed cloud services, which distinguishes it from other cloud providers or services firms.
• Enterprise cloud adoption is still in the early phases, which we believe augurs favorably for a variety of service providers and cloud platform operators.
• Although margin enhancement may be impaired by Rackspace's support-intensive cost structure and lack of infrastructure ownership in its third-party managed cloud segment, capital intensity could well decline, enhancing the company's free cash generation.
• The company could have strategic appeal as an acquisition target for companies wishing to expand their cloud, hosting, and IT product and market reach."
Mr. Atkin maintained a price target of $36 (U.S.). The consensus is $39.
Projecting "very strong" earnings per share growth on "significant" margin expansion, analyst David Tyerman added Martinrea International Inc. (MRE-T) to the Canaccord Genuity Canadian Focus List.
"We continue to recommend investors buy MRE shares for strong EPS growth over the next 3 or more years from mid-single-digit revenue growth and a 50-per-cent increase in EBIT margins from 2014-2017," he said. "Margin growth is expected to come from operating improvements and eventually from lower launch costs."
Mr. Tyerman estimates EPS growth of 39 per cent in 2015 and 22 per cent in 2016 and 2017.
He justified the focus list addition due to: strong growth potential; a margin expansion program that has a demonstrated track record of success; recent "solid business wins" and the fact that the company's new chief executive officer, Pat D'Eramo, has a "strong operating background."
Maintaining a "buy" rating, he also touted the stock's "attractive" valuation.
"MRE is trading at 4.8x enterprise value/EBITDA and 6.3x price/earnings on our 2016E EBITDA and EPS, which is a discount to the 5.4x EV/EBITDA and 9.3x P/E that the shares have traded at on an [next 12 months] basis over the past 36 months," he said. "MRE is also trading at a discount to the sector average of 6.2x EV/EBITDA and 10.7x P/E on consensus 2016E EBITDA and EPS estimates."
His target price of $19 did not change. The analyst consensus is $17.07.
Based on an improved earnings outlook, RBC Capital Markets analyst Robert Kwan upgraded his rating for Valener Inc. (VNR-T) to "sector perform" from "underperform."
In the wake of better-than-expected fourth-quarter 2015 results, the energy company raised its quarterly dividend by a penny to 27 cents per share. It is projecting 4-per-cent compound annual growth rate for dividends over the next two years.
Noting the dividend yield is higher-than-average for a regulated utility stock, Mr. Kwan said: "We expect the above average dividend yield coupled with modest dividend growth (4 per cent CAGR to 2018) to provide a reasonable total return profile for a regulated utility stock. While the core growth rate is likely to be lower than the peer group, we expect the higher degree of current yield to result in a fairly similar total return profile."
Due primarily to an better outlook for its Quebec gas distribution business, Mr. Kwan increased his fiscal 2016 and 2016 EPS estimates to $1.16 and $1.20 from $1.01 and $1.05, respectively.
He also increased his price target for the stock by a loonie to $18, which is the consensus among analysts.
"Our new price target is driven by our higher EPS estimate for fiscal 2017 applied to a 15x price/earnings multiple (our old target was based on 16x 2017E EPS)," the analyst said. "Our valuation multiple is at the low end of the range that we use for the other regulated utility companies and specifically at a 1x discount to a peer that also has relatively low trading liquidity. We believe the discounted valuation is appropriate given the relatively small size of the float, low trading liquidity and more modest growth relative to the peers."
BMO Nesbitt Burns analyst Gerrick Johnson said Thor Industries Inc. (THO-N) recorded "THOR-oughly impressive" first-quarter 2016 results.
The recreational vehicle manufacturer reported earnings per share of 97 cents (U.S.), an increase from the 73-cent result from the same period a year ago and ahead of both Mr. Johnson's projection (78 cents) and the consensus (83 cents). Sales of $1.030-billion was a 12-per-cent increase year over year, ahead of both the analyst's and the Street's expectation of 10-per-cent growth.
"The RV industry is strong, and we think the market will be relieved to see Thor once again participating in the industry's growth (after a 4Q15 decline in sales)," he said. "Even more impressive than double-digit sales growth is the company's strong gross margin expansion of 200 basis points. It was just a few short quarters ago that we, and the Street, were concerned about rising labour and warranty expense that was compressing gross margin. With labour costs stabilizing, the company is now passing through leverage and lower materials costs to investors in the form of higher EPS."
The analyst raised his 2016 and 2017 EPS projections to $4.40 and $5 from $4.35 and $4.85, respectively. He also initiated a 2018 estimate of $5.50.
Maintaining his "outperform" rating, Mr. Johnson increased his target price to $70 (U.S.) from $60. The analyst average, according to Bloomberg, is $67.67.
In other analyst actions:
Avago Technologies Ltd (AVGO-Q) was rated new "positive" at Susquehanna by equity analyst Christopher Caso. The 12-month target price is $160 (U.S.) per share.
CBOE Holdings Inc (CBOE-Q) was downgraded to "market perform" from "outperform" at Raymond James by equity analyst Patrick O'shaughnessy.
Chimerix Inc (CMRX-Q) was rated new "neutral" at Janney Montgomery by equity analyst Debjit Chattopadhyay. The 12-month target price is $50 (U.S.) per share.
CSRA Inc (CSRA-N) was rated new "outperform" at Wells Fargo by equity analyst Edward Caso.
Concho Resources Inc (CXO-N) was raised to "strong buy" from "outperform" at Raymond James by equity analyst John Freeman. The 12-month target price is $146 (U.S.) per share.
Blackhawk Network Holdings Inc (HAWK-Q) was rated new "overweight" at First Analysis by equity analyst Lawrence Berlin. The 12-month target price is $58 (U.S.) per share.
Leucadia National Corp (LUK-N) was rated new "outperform" at Oppenheimer by equity analyst Christopher Kotowski. The 12-month target price is $27 (U.S.) per share.
Match Group Inc (MTCH-Q) was rated new "buy" at Guggenheim Securities by equity analyst Jake Fuller. The 12-month target price is $17 (U.S.) per share.
Pioneer Natural Resources Co (PXD-N) was raised to "strong buy" from "outperform" at Raymond James by equity analyst John Freeman. The 12-month target price is $190 (U.S.) per share.
Ultragenyx Pharmaceutical Inc (RARE-Q) was rated new "buy" at Stifel by equity analyst Adam Walsh. The 12-month target price is $125 (U.S.) per share.
Questar Corp (STR-N) was rated new "neutral" at UBS by equity analyst Shneur Gershuni. The 12-month target price is $19 (U.S.) per share.
Starwood Property Trust Inc (STWD-N) was rated new "market outperform" at JMP Securities by equity analyst Steven Delaney. The 12-month target price is $24 (U.S.) per share.
Vertex Pharmaceuticals Inc (VRTX-Q) was rated new "buy" at Stifel by equity analyst Adam Walsh. The 12-month target price is $160 (U.S.) per share.
With files from Bloomberg News