Inside the Market's roundup of some of today's key analyst actions
More bad news for oil drillers, but where there is pessimism there can be opportunities.
Andrew Bradford at Raymond James Ltd. lowered his rig counts for the third quarter to 181 from 184 and to 203 from 234 for the fourth quarter. This is the second time he has lowered his rig count estimates this summer.
As a result, he cut his target prices on the drillers he follows and lowered his rating on one of them. His new targets are as follows, with ratings as well:
- Ensign Energy Services Inc. (ESI-T) target cut to $7.20 from $9, and the rating lowered to “market perform” from “outperform”
- Precision Drilling Corp. (PD-T) target lowered to $5.75 from $6.50, with the rating kept at “strong buy”
- Trinidad Drilling Ltd. (TDG-T) target lowered to $2.80 from $3.80, with the rating kept at “strong buy”
- Western Energy Services Corp. (WRG-T) target lowered to $1.40 from $1.85, with the rating kept at “market perform”
"The contract driller group is about as far out of favour with investors as it gets – indeed by some measures it is setting new lows. But as much as the market punishes these stocks on the downside, the contract drillers are usually among the best performing energy sub-groups in a recovering market."
How much pessimism is there right now?
"The contract driller group has been decretive for investors through much of 2017," the analyst wrote. "Precision Drilling and Western Energy Services are each setting new 52-week lows, and both are trading at levels not seen since the depths of the 2009 market. PD and WRG stocks have each given up 27 per cent so far this quarter, while TDG isn't far behind at 20 per cent. ESI's stock is a standout for having lost the least by a considerable margin, down 5 per cent quarter to date (probably backstopped somewhat by its current 7.3 per cent dividend yield)."
Mr. Bradford's reasons for optimism include his belief that oil will break through $50 (U.S.) per barrel and that for Precision and Trinidad, they will continue to gain market share in the United States.
Precision and Trinidad have more debt than he would like to see, but they're both financed with long-dated senior notes. Higher-leveraged stocks fall heavily in down times, but they also have the most room to rise when the market turns around so he continues to be most positive on these two names.
Western Energy also has high leverage ratios, but it's debt is due in under a year and a half. "With this degree of leverage, WRG clearly stands to regain considerable ground in a recovery, though its relatively short-dated debt makes the timing of that recovery much more important for equity investors today," he said.
Ensign has the lowest debt exposure, he said, meaning it has fallen the least and stands to regain the least ground when the market recovers, which is why he is neutral on that stock.
Transat A.T. (TRZ-T) surged on Monday to its highest level on three years after the company said its third-quarter earnings would be "significantly" higher than the previous year.
Laurentian Bank Securities Inc. analyst Mona Nazir took her rating on the stock to "buy" from "hold." She increased her earnings for the third quarter to 70 cents per share, from 13 cents per share previously. Her fiscal 2018 earnings estimate increased to 76 cents per share, from 21 cents per share previously.
Her price target also rose to $10.50 from $7.
"We view the strong improvement in profitability and pivot to positive earnings for the year positively highlighting the company's earnings capability in a given period," the analyst wrote in a research note. "While 2018 results are expected to be impacted by the recent divestiture of the Ocean hotel JV, TRZ earnings are likely to benefit from the Canadian dollar appreciation versus the U.S. dollar as 35 to 40 per cent of operating expenses are in U.S. dollars. The combination of more than $450-million in cash, a return to positive earnings, alongside strong tailwinds heading into the fourth quarter and fiscal 2018, causes us to shift to a Buy rating and take our target price up to $10.25."
CIBC World Markets Inc. analyst Kevin Chiang also weighed in on Transat. "We raise our estimates to reflect the stronger operating environment and increase our price target from $9.50 to $11.00 but maintain our Neutral rating," he wrote in a research note. "While TRZ is benefiting from a number of industry tailwinds and its restructuring efforts are starting to materialise on the bottom line, our Neutral rating reflects the significant volatility in its underlying earnings and the increasing competition from Air Canada and Westjet."
Credit Suisse Securities (Canada) Inc. analyst Andrew Kuske lowered his rating on Brookfield Infrastructure Partners LP (BIP-N) to "neutral" from "outperform" as the stock has reached his target price of $44 (U.S.).
"In roughly two months, Brookfield Infrastructure Partners, LP delivered a 11.3 per cent return and more than 37 per cent in the last nine months," the analyst wrote in a research note. "Against a number of benchmarks the outperformance was impressive. With the stock trading above our target price, we are compelled to downgrade the stock to Neutral from the prior Outperform."
"Interestingly, we continue to believe there are some near-term trading positives arising from a potential index inclusion. Such an inclusion could further aid stock performance, however, on a more fundamental basis the current valuation is less attractive versus a number of other stocks in our coverage universe."
Mr. Kuske believes the stock could soon be added to Canada's main benchmark, the S&P/TSX composite index. "That outcome is likely to have a meaningful impact on unit demand that could be equivalent to more than 10 days of total trading around the third quarter index revision announcement in September," he said. "Based on our client connectivity, we do not believe the full extent of the index potential is fully appreciated and priced in by the market."
Morgan Stanley & Co. analyst John Glass cut his price target on Starbucks Corp. (SBUX-Q) to $62 (U.S.) from $68, while keeping his "overweight" rating.
"While investors continue to debate the new long-term growth rate for SBUX, our work shows that the market has already quietly adjusted to a more moderate 12 to 17 per cent," the analyst wrote in a research note. His new target is 25 times his calendar year 2018 earnings estimate and he said this target is also supporting by the company's strong return on invested capital (ROIC).
"While earnings growth is important, the other part of the valuation equation––ROIC, or the ability to reinvest shareholder capital at a high rate––is equally important," he said. "On that score, SBUX rates highly, with an ROIC of 25%+, the highest in restaurants excluding the all-franchised businesses. ROIC has also been rising, driven by strong new store productivity, and should continue to rise even under our lower growth scenarios."
Troy MacLean, analyst at BMO Capital Markets, trimmed his target on Agellan Commercial REIT (ACR.UN-T) units to $12.25 from $12.40 and kept his "outperform" rating.
"We continue to like the REIT's discounted valuation, and attractive about 7 per cent yield," he wrote in a research note. "We have modestly reduced our FFO [funds from operations] estimates for 2017 and 2018 to reflect new foreign exchange assumptions. Our 2018 AFFO [adjusted funds from operations] estimate is also revised due to changes in our foreign exchange assumptions and higher straight-line revenue. Our NAV [net asset value] estimate is unchanged at $12.25/unit."