Inside the Market's roundup of some of today's key analyst actions.
Improved prospects for growth and a "solid" balance sheet justify an upgrade for Toromont Industries Ltd. (TIH-T), according to Desjardins Securities analyst Benoit Poirier.
After the company reported "solid" first-quarter 2016 results on Tuesday, Mr. Poirier moved his rating to "buy" from "hold."
Toromont logged adjusted earnings per share of 31 cents, topping the estimates of both Mr. Poirier and the consensus of 28 cents. The beat was due largely to higher-than-projected revenue of $378-million, also exceeding the analyst's expectation ($354-million) and the consensus ($359-million). It was a revenue increase of 11 per cent year over year, which Mr. Poirier attributed to its CIMCO industrial refrigeration segment, used equipment and product support growth.
"Although TIH maintained its prudent tone, the company's outlook seems more upbeat as the stronger backlog, growing demand for service and parts businesses, and the recent federal infrastructure budget should improve equipment group growth prospects in the near and longer term," Mr. Poirier said. "Meanwhile, TIH also maintained its positive outlook for CIMCO."
Mr. Poirier said the state of the company's balance sheet provides it a competitive advantage. He projects it could create almost $4 of value per share if capital is fully deployed toward either share buybacks or M&A activity.
"Net debt to capital was 10 per cent in 1Q16 (flat sequentially)," the analyst said. "Overall, we remain confident that TIH will generate strong FCF [free cash flow] in 2016 (we expect $193-million) driven by inventory reduction, strong margins and lower net rental additions, which will allow it to reduce debt or provide support for further growth investment."
Mr. Poirier raised his 12-month target price for the stock to $38 from $34. The analyst consensus price target is $34.38, according to Thomson Reuters.
"In light of the strong 1Q results and management's more positive tone, we are upgrading TIH," he said. "While its valuation is not cheap, we believe TIH should trade at a premium versus peers in light of management's strong track record and TIH's pristine balance sheet."
As a result of its recent share price performance, Canaccord Genuity analyst Rahul Paul sees limited return to his target price for Endeavour Mining Corp. (EDV-T).
Accordingly, he downgraded the stock to "hold" from "buy."
Endeavour shares have risen 102 per cent in the year to date, compared to a 45-per-cent rise for the S&P/TSX Gold Index.
"The outperformance is partly justified in our view by strong FY2015 operating performance, a much-improved balance sheet (following the cash infusion by La Mancha) and the de-risking/advancement of the Hounde project through an updated feasibility study/construction decision," said Mr. Paul. "While these factors are largely reflected in our increased price target, we believe the stock is approaching fair value (under our forward curve-based price deck). Endeavour trades at 0.95 times P/NAV [price to net asset value], a 6-per-cent premium to the mid-cap producer group.
"Longer term, we see the potential for an improved multiple pending a successful ramp-up at Karma (and potentially changing sentiment regarding the impact of the stream). With the strengthened balance sheet likely to support higher exploration spending, we also see longer-term valuation upside (pending exploration success) on the key assets.
In previewing Endeavour's first-quarter 2016 results, which will be released in early May, Mr. Paul said he projects earnings per share of 24 cents. The consensus expectation is 16 cents. He also expects production to rise 3 per cent from the previous quarter and all-in sustaining costs to decline by 3 per cent.
Mr. Paul raised his target price for the stock to $16.50 from $14. Consensus is $17.39.
He justified the increase by noting: "The increase in our target price is driven by 1) updated forecasts for Hounde following the results of the optimization study, i.e. lower capital and operating costs versus our previous forecasts, 2) removal of a 10-per-cent discount on Hounde reflecting greater clarity on financing/development timelines, and 3) increased target multiple (1.0 times from 0.9 times) reflecting a much stronger financial position. We note that Hounde is now the largest contributor to our valuation (39 per cent of operating NAV) followed by Agabou (25 per cent)."
In reaction to near-term challenges facing American Eagle Outfitters Inc. (AEO-N), BMO Nesbitt Burns analyst John Morris downgraded his rating for the U.S. retailer to "market perform" from "outperform."
"Until now our outperform rating was premised on 1) improvement in merchandise execution; and 2) market share opportunity from weaker competitors, while AEO curtailed promotions," said Mr. Morris. "Over the course of 2015, we witnessed these factors come to fruition. Under renewed executive and merchant leadership, the company delivered a year-over-year 180-basis point expansion in GM [gross margin], a 280-bp [basis point] expansion in the operating margin, and a 73-per-cent EPS increase in 2015."
Mr. Morris said he sees room for improvement in the company's margins. However, he does not identify near-term catalysts for the stock.
"Based on our data-mining and field research, we now expect Q1 merchandise margins to be flat to slightly down versus management's guidance of up slightly," he said. "This could be due in part to a more challenging start to the season, noting for instance a pickup in markdowns in the swim category driven by weather patterns and higher promotional activity across the space. We also believe competitors, notably Abercrombie and Hollister, have sharpened their product offering, making the competitive environment less favorable for AEO.
"Accordingly, we are lowering our Q1 gross margin forecast to 38.3 per cent. Given the company's cost controls, outlook for lower product costs, and sizeable stock buyback, we do not see significant downside risk to consensus earnings. We expect the stock to be relegated to a trading range for the time being."
Mr. Morris reduced his 2016 and 2017 EPS projections to $1.20 (U.S.) and $1.34 from $1.31 and $1.52, respectively.
He also reduced his target price for the stock to $14 from $22. Consensus is $17.76.
Grenville Strategic Royalty Corp. (GRC-X) faces challenging conditions in the small-medium enterprise (SME) market, said Raymond James analyst David Quezada.
He downgraded the Toronto-based company to "market perform" from "outperform."
"While we believe Grenville has identified a legitimate market niche in royalty financing for the SME marketplace, we believe the departure of President and CEO, Bill Tharp, as well as management guidance that economic conditions in the SME marketplace have softened heading into 1Q16 leads us to believe the company's growth may decelerate in the near term," said Mr. Quezada.
Grenville reported fourth-quarter earnings before interest, taxes, depreciation and amortization of $4.2-million on Tuesday. The result was below Mr. Quezada's estimate of $5.2-million and the consensus of $5-million. It also indicated first-quarter 2016 results could be affected by difficult market conditions.
"Grenville expects challenging conditions in the SME marketplace to result in sequentially lower results in 1Q16," the analyst said. "We note Dec. 2015 average royalties per $1-million invested came in at $220,000, which compares to $237,000 in 3Q15 and $249,000 in 2Q15 a reduction management noted is a reflection of these macro conditions. While revenues per $1-million invested were $366,000 on a rolling 12-month basis including contract buyouts, these are hard to forecast and therefore not included in our forward looking estimates. The company also disclosed a potential 50-per-cent reduction in fair value of a $3.7-million investment as of year-end."
Mr. Quezada lowered his 2016 EBITDA forecast to $12-million from $15.1-million. He also reduced his target price for the stock to 85 cents from $1.10. Consensus is $1.03.
The share price for network solutions company EXFO Inc. (EXFO-Q) is not "fully accounting" for its ability to see revenue, earnings and free cash flow growth through 2016 and 2017, said CIBC World Markets analyst Robin Manson-Hing.
He upgraded the Quebec-based company to "sector outperformer" from "sector performer."
Following a recent investor day, Mr. Manson-Hing said he expects EXFO to benefit from an increase in spending by customers in key product areas.
"We foresee North American spending levels moving from slightly negative growth to positive growth in 2016," the analyst said. "We see European declines in fibre spending steadying. Finally, we foresee Asian spending as higher but down in EXFO's product areas, driven by declines in China. In particular, FTTH was noted as becoming more economical in terms of return on investments with some network operators. Fibre was also being used increasingly for backhaul and for densification on top of the much-hyped 100G use, which benefits EXFO to some extent, we believe."
He added: "The biggest takeaway from the investor day was the current COO/ future CEO priority list. He noted that he expects to undergo a "complete transformation of the go-to-market" model, increasing EXFO's visibility in the market and improving the company's sales efficiency. In particular, he is looking to increase sales at top accounts. We have always noted this to be a weakness of the company and some low-hanging fruit. The acknowledgement of necessary areas of improvement is a start in any turnaround for the company."
Mr. Manson-Hing raised his target price for the stock to $4.75 (U.S.) from $3.50. Consensus is $4.33.
Noting the video game industry is currently undergoing "transformational" changes, BMO Nesbitt Burns analyst Gerrick Johnson initiated coverage of Electronic Arts Inc. (EA-Q) with a "market perform" rating.
Mr. Johnson said one of the most significant shifts is digital distribution of games, which he said assists EA's gross margin expansion. He added it also provides opportunities for "efficiency, engagement, smoothing of income and incremental add-on sales."
"Meanwhile, the growth of mobile gaming offers new opportunities for traditionally console-based software companies like EA," he said. "However, these industry tailwinds are well-known and likely already factored into the company's share price, In fact, we are concerned that the market's expectations for growth in digital and mobile could be too optimistic. We like the company's positioning, however, with compelling strategies to enhance recurrent in-game spending (Ultimate Team). We also believe the company's portfolio of sports games, known licenses, and recurrent spending make the company the relatively safest play in the video game space. However, we would prefer to buy the shares at a lower price, believing that, trading at 19 times FY2017 EPS estimates, the shares are currently fairly valued."
Mr. Johnson set a price target of $64 (U.S.). The analyst consensus is $82.53.
"While we believe shares are close to fairly valued in the near term, we see the company's business as being stable and would encourage investors to buy shares if presented with a lower price, perhaps closer to $55," he said.
At the same time, Mr. Johnson initiated coverage of Take-Two Interactive Software Inc. (TTWO-Q) with an "outperform" rating and a $46 (U.S.) target. Consensus is $40.75.
"We believe TTWO shares are undervalued owing to a misperception that the company is overly reliant on Grand Theft Auto as well as what we think is an underappreciation of the company's strong pipeline of new products," he said. "We believe the company's disciplined focus will generate better returns on invested capital over time. With $1.2-billion ($11 per share) of net cash on its balance sheet, we think Take-Two is uniquely positioned to take advantage of any accretive acquisition opportunities that may arise."
He gave Activision Blizzard Inc. (ATVI-Q) a "market perform" rating and a $32 (U.S.) target. Consensus is $38.56.
"The company owns some of the most iconic game franchises in the industry, which can be extended into mobile games and monetized through new initiatives such as entertainment, eSports, and consumer products," said Mr. Johnson. "However, these industry tailwinds are well-known and likely already factored into the company's share price. In fact, we are concerned that the market's expectations for growth in digital and mobile are perhaps too optimistic. Moreover, 75 per cent of the company's revenues are generated from four key brands that all appear to be in various stages of cyclical decline. The company is attacking ancillary streams of income like eSports and entertainment. However, these payoffs are still far out and uncertain."
In other analyst actions:
Ally Financial Inc (ALLY-N) was downgraded to "market perform" from "outperform" at Wells Fargo by equity analyst Joel Houck.
Capital One Financial Corp (COF-N) was raised to "buy" from "hold" at Sandler O'Neill by equity analyst Christopher Donat. The 12-month target price is $88 (U.S.) per share.
Crane Co (CR-N) was downgraded to "neutral" from "buy" at UBS by equity analyst Shannon O'callaghan. The 12-month target price is $57 (U.S.) per share.
Crocs Inc (CROX-Q) was downgraded to "hold" from "buy" at Stifel by equity analyst Jim Duffy.
Holly Energy Partners LP (HEP-N) was downgraded to "underperform" from "market perform" at Raymond James by equity analyst Darren Horowitz.
H&R Block Inc (HRB-N) was downgraded to "market perform" from "outperform" at Oppenheimer by equity analyst Scott Schneeberger.
JetBlue Airways Corp (JBLU-Q) was raised to "outperform" from "market perform" at Cowen by equity analyst Helane Becker. The 12-month target price is $24 (U.S.) per share.
Michael Kors Holdings Ltd (KORS-N) was raised to "overweight" from "neutral" at Piper Jaffray by equity analyst Erinn Murphy. The 12-month target price is $67 (U.S.) per share.
Nevsun Resources Ltd (NSU-T) was raised to "outperform" from "sector perform" at RBC Capital by equity analyst Sam Crittenden. The 12-month target price is $6 (Canadian) per share.
PACCAR Inc (PCAR-Q) was raised to "outperform" from "neutral" at Robert Baird by equity analyst David Leiker. The 12-month target price is $66 (U.S.) per share.
Pentair PLC (PNR-N) was raised to "buy" from "neutral" at UBS by equity analyst Shannon O'callaghan. The 12-month target price is $70 (U.S.) per share. It was raised to "outperform" from "market perform" at Bernstein by equity analyst Steven Winoker with a 12-month target price of $71.00 per share.
ResMed Inc (RMD-N) was downgraded to "neutral" from "overweight" at Piper Jaffray by equity analyst Matthew O'brien. The
Twitter Inc (TWTR-Q) was downgraded to "Neutral" from "Overweight" at JPMorgan by equity analyst Douglas Anmuth. The 12-month target price is $18 (U.S.) per share.
With files from Bloomberg News