Inside the Market's roundup of some of today's key analyst actions
Though he believes Canadian grocers will not have to deal with an extended period of retail deflation, analyst Peter Sklar said BMO's grocery basket survey results from October indicate a continuing deflation trend.
In a research note on the industry, Mr. Sklar downgraded his ratings for Loblaw Companies Ltd. (L-T) and George Weston Ltd. (WN-T) to "market perform" from "outperform" to fall in line with their peers, Empire Company Ltd. (EMP.A-T) and Metro Inc. (MRU-T).
"Following our observation of slight grocery deflation at Walmart in both Toronto and Montreal and a subsequent response from other grocers in recent months as noted in our previous research, our grocery basket survey results from October appear to indicate a continuing deflation trend at the Canadian grocers," said Mr. Sklar. "Our survey results indicated deflation in both Toronto and Montreal at both discount and conventional banners, and the magnitude of the deflation is more pronounced than September. While we acknowledge the limitations of our survey results, since we only sample a relatively small basket of about 70 items in one neighbourhood in each of Ontario and Quebec for one flyer week every month. However, we believe our survey's results offer insights into the general direction of grocery inflation/deflation trends."
Mr. Sklar lowered his retail food inflation estimates to 0 per cent to 0.5 per cent in order to reflect a forecast of a no-to-low-inflation environment. His previous projection was for a low-inflation environment of 1 per cent.
"CPI grocery food inflation for calendar Q3/16 (for July, August and September) is 0.2 per cent," he said. "All three publicly-traded grocers (Loblaw, Metro and Sobeys) reported 1.5 per cent of retail food inflation in the previous quarter, calendar Q2/16. Similar to CPI food inflation, internal retail inflation as reported by the grocers has rarely experienced prolonged periods of deflation. The two periods of deflation shown in Exhibit 4 (i.e., for a few quarters in 2008 and for about 1.5 years in 2010-2011) followed a rapid appreciation of the Canadian dollar, which exacerbated food deflation as costs are primarily denominated in the U.S. currency. However, as we have mentioned before, the Canadian dollar appears to have stabilized and is not appreciating, which should ease deflationary pressures."
He added: "Furthermore, we have trimmed our gross margin expectations as we expect the grocers to increase promotional activity as they experience top-line pressure from the combined impact of the lack of inflation and continued food market share leakage to mass merchants."
Mr. Sklar also reduced his earnings estimates for the four companies. His earnings per share changes were:
- Metro: 2016 to $2.37 from $2.38; 2017 to $2.48 cents from $2.60 cents; 2018 to $2.69 from $2.82.
- Empire: 2017 to 97 cents from $1.06; 2018 to $1.07 from $1.17.
- Loblaw: 2016 to $3.91 from $3.93; 2017 to $4.12 from $4.21.
- George Weston: 2016 to $6.29 from $6.31; 2017 to $6.65 from $6.78.
Accordingly, he also lowered his target prices for the stocks. Those changes were:
- Metro to $43 from $46. The analyst consensus price target is $46.29, according to Thomson Reuters.
- Empire to $20 from $21. Consensus is $20.32.
- Loblaw to $71 from $80. Consensus is $78.62.
- George Weston to $115 from $128. Consensus is $126.57.
"We continue to believe that Canadian grocers, unlike their U.S. counterparts, will not experience a prolonged period of retail deflation; however, we are now expecting a no- to low-inflation environment," said Mr. Sklar. "Furthermore, with the Canadian grocers continuing to cede market share to Walmart and Costco, and now without the benefit of significant top-line inflation, the grocers will find it more difficult to grow sales, which could result in increased promotional activity thereby negatively impacting margin. While we do not believe that the Canadian grocery stocks can outperform given this backdrop, we suspect that the stocks will not suffer to the same extent as their U.S. counterparts. In addition, it is important to note that, historically, the Canadian grocery stocks have been resilient during previous periods of no- to low-inflation, and notwithstanding that operating income was under pressure during these periods."
Meanwhile, RBC Dominion Securities analyst Irene Nattel upgraded Loblaw to "outperform" from "sector perform" and maintained her target price of $80.
A recent decline in the share price of Veresen Inc. (VSN-T) brings a "more reasonable" risk-reward profile, said Canaccord Genuity analyst David Galison.
In reaction to a 10.2-per-cent decline from its recent peak on Oct. 24, he raised his rating for the Calgary-based energy infrastructure company to "hold" from "sell."
"As we have highlighted previously, our current ... valuation for Veresen is predicated on the company successfully completing the sale of its Power Assets at [approximately] 11.0 times 2016 estimated EBITDA allowing management to fund the equity portion of its capital program and reduce debt levels," he said. "Should the divesture of the power business fail to materialize, VSN will need to consider alternative funding mechanisms, which could include equity funding and the potential reinstatement of the DRIP [dividend reinvestment plan] and PDRIP program."
On Tuesday, Veresen reported third-quarter 2016 funds from operations of $101-million, topping both Mr. Galison's estimate ($74.7-million) and the consensus ($85.3-million), which the analyst attributed to "strong" performance from its Alliance Pipeline.
"Veresen increased its 2016 distributable cash guidance to $1.12 to $1.16 per common share, up from $1.03 to $1.13 previously," he said. "However ... included in the FFO share guidance is the release of $8-million in distributable cash previously held in trust on the Alliance pipeline. Adjusting guidance for the $8-million release suggests FFO per share in the $1.09 to $1.13 range. As such we view the adjusted FFO guidance as essentially tightening up of previous guidance."
Mr. Galison maintained a $12 price target for the stock. The analyst consensus is $13.30.
Elsewhere, the stock was raised to "outperform" from "sector perform" by National Bank analyst Patrick Kenny. He maintained a target price of $14.
Analyst Steve Hansen said: "We believe that recent macro developments and SPB's own internal strategic initiatives have laid a solid foundation for the company's near to medium-term growth outlook. Firstly, management introduced a demonstrably upbeat 2017 outlook, with positive year-over-year growth expected to come via multiple sources, including: (1) management's decision to retire a large portion of its out-of-the money FX contracts; (2) the return of normalized winter weather conditions; and, (3) incipient signs of improvement in key specialty chemicals pricing/fundamentals. In addition, we also highlight that with a newly pristine balance (post CPD sale), management revealed that its M&A team is already "hard at work" evaluating any/all opportunities relating to retail propane distribution—big, small or otherwise— which represents an area of great potential given the company's newly reinvigorated operating platform and strong track record of integrating tuck-ins."
Mr. Hansen did not change his "outperform" rating for the stock or his $14 target. Consensus is $12.83.
He also kept his "outperform" rating and $7.25 target for CanWel. Consensus is $7.83.
"We are replacing CWX with SPB on the ACF list due to recent favorable improvements in SPB's outlook," he said.
At the same time, Cormark analyst Gavin Fairweather downgraded CanWel to "market perform" from "buy" and lowered his target price to $6.85 from $8.
Suncor Energy Inc.'s (SU-T, SU-N) decision to de-emphasize acquisitions removes an overhang from the stock with the focus moving to its re-rate potential and outperformance, said Morgan Stanley analyst Benny Wong.
He upgraded the stock to "overweight from "equal-weight" and raised his target to $53 from $43. The analyst average is $45, according to Bloomberg.
Following the release of its third-quarter results, Wajax Corp. (WJX-T) was raised to "buy" from "hold" by TD Securities analyst Michael Tupholme, citing its "improved comfort and attractive value."
On Tuesday, the Mississauga-based distributor engaged in the sale and service support of mobile equipment, power systems and industrial components reported quarterly earnings per share of 37 cents, well ahead of the consensus estimate of 19 cents due largely to to better-than-expected margins.
"Encouragingly, Q3/16 results highlighted the benefits of Wajax's cost-saving efforts, as evidenced by another solid quarter of over 7-per-cent margins in the Equipment segment and a return to profitability in Power Systems," said Mr. Tupholme.
"We view Wajax's outlook as incrementally more positive than it was in the last quarter. Despite still challenging market conditions in western Canada, Wajax is seeing improved activity in certain sectors, including coal mining and power generation. In addition, we were encouraged to see parts and service revenue within the Equipment segment rising on a year-over-year basis for the first time since Q2/14 (though only slightly)."
Mr. Tupholme's target rose to $21 from $16. The average is $19.20.
"Our previous concerns regarding the sustainability of Equipment segment margins and the risk around an eventual margin recovery in Power Systems have been largely put to rest following the Q3/16 results," he said. "We have increased confidence in the margin improvements that Wajax expects to generate, which we believe will lead to healthy earnings growth in 2017. We view Wajax's valuation as attractive in both absolute and relative terms."
Raymond James analyst Ben Cherniavsky maintained a "market perform" rating for the stock and raised his target to $18 from $15, calling the results "a welcome positive surprise."
"While we applaud management's efforts to reduce costs, lower debt, and stabilize margins, we still struggle to see a strong growth catalyst on the near-term horizon," said Mr. Chernoiavsky. "The payout ratio remains uncomfortably high, in our view, and expectations have now been reset up following the stock's rally off a 3Q16 earnings beat. With a relatively balanced risk-reward profile, we see no reason to chase the stock here."
A "confluence of headwinds" is hitting MacDonald Dettwiler & Associates Ltd. (MDA-T) in the near term, according to Raymond James analyst Steven Li.
"Commercial satellite market has been soft 2 years running and recent events do not help (SpaceX explosion, Ex-Im, fixed satellite operators struggles)," said Mr. Li. "RCM [RADARSAT Constellation Mission] project (about $700-million) starts to wind down in 2017. The classified U.S. government opportunity is incremental but won't likely contribute meaningfully until 2018 at the earliest."
He lowered his 2017 revenue and earnings per share projections to $2.047-billion and $5.52, respectively, from $2.286-billion and $6.69. The consensus projections are $2.24-billion and $6.62.
Maintaining a "market perform" rating for the stock, he lowered his target to $84 from $92. Consensus is $93.13.
"Management has acknowledged the shortfall and is focused on improving the cash conversion," said Mr. Li. "This should be reflected in MDA's valuation in our view as it can make a huge difference in terms of the amount of shareholder value created over time as the company reinvests its cash flows. We note other tech companies (i.e. CGI, OpenText) convert cash flow at almost 2 times the rate (70-80 per cent), trading at lower/similar EBITDA multiples."
In other analyst actions:
WestJet Airlines Ltd. (WJA-T) was cut to "hold" from "buy" by TD Securities analyst Timothy James. He lowered his target to $26 from $27, compared to the average of $24.28.
Aecon Group Inc. (ARE-T) was downgraded to "market perform" from "outperform" at Raymond James by analyst Frederic Bastien. His target fell to $17 from $19. The average is $20.62.
Detour Gold Corp. (DGC-T) was cut to "neutral" from "outperform" by Credit Suisse analyst Anita Soni. She lowered her target to $35 from $45. The average is $38.42.
Athabasca Oil Corp. (ATH-T) was raised to "buy" from "speculative buy" by GMP analyst Stacey MacDonald with a target of $2.50 (unchanged). The average is $1.99.
Ms. McDonald cut Leucrotta Exploration Inc. (LXE-X) to "hold" from "buy" with a target of $2.10 (unchanged). The average is $2.57.
BMO Nesbitt Burns analyst Alex Arfaei downgraded Pfizer Inc. (PFE-N) to "market perform" from "outperform," noting: "we see strengthening headwinds, increased uncertainty about the pipeline, and increased probability of more expensive deals." He lowered his target price to $33 (U.S.) from $40, versus the consensus of $38.90. Mr. Arfaei said: "Following signs of strengthening headwinds, and increased uncertainty about the pipeline, we now believe that the risk/reward with PFE is mostly balanced. We certainly appreciate that the timing for our downgrade could have been better (e.g., when a split seemed less likely), and that the ~4% yield should provide support at this valuation. However, we simply don't see many significant catalysts to meaningfully offset the headwinds we expect. Moreover, we believe that Pfizer is now more likely to pursue deals that could prove costly, like Medivation."
Credit Suisse analyst Edward Westlake upgraded Anadarko Petroleum Corp. (APC-N) to "outperform" from "neutral" and raised his target to $77 (U.S.) from $70. Consensus is $71.88. He said: "We're still concerned about the oil price trajectory if OPEC don't rein in output. However, we suspect APC will continue to monetise assets to reduce the absolute level of net debt. At the same time, the message of focus on three core areas – the Delaware, Wattenberg and Deepwater Gulf of Mexico (where APC has significant infrastructure advantages) will resonate with investors. Yes, the shares could pull back into the $50's as oil falls but there seem to be higher highs ahead. Our 'pause' call on APC was wrong due to operational and management execution. There is more that management can continue to do to drive the shares."
Square Inc. (SQ-N) was raised to "outperform" from "neutral" by Credit Suisse analyst Paul Condra with a target of $15 (U.S.), up from $12. Consensus is $12.93. Mr. Condra said: "Our neutral initiation was based on our view that despite solid fundamentals, we weren't comfortable with a higher valuation for the stock. However, following 3Q16's solid result, we are increasing our forecasts to reflect higher top line growth and better leverage, and believe we can now comfortably justify a $15 price target for the stock with no change to our multiple assumptions or valuation methodology."
Citi analyst Faisel Khan downgraded Columbia Pipeline Partners LP (CPPL-N) to "neutral" from "buy" and lowered his target to $17 (U.S.) from $18. Consensus is $17.33. "We believe the probability of the buyout is high given Columbia controls CPPL's GP and owns the majority (approximately 84 per cent) of CPG OpCo LP; consequently the units are likely to trade within a narrow range of our PT," the analyst said.
Quotient Technology Inc. (QUOT-N) was raised to "outperform" from "sector perform" by RBC Dominion Securities analyst Mark Mahaney, who raised his target to $15 (U.S.) from $14. Consensus is $15.33. "We believe QUOT has achieved enough critical mass to sustain premium and profitable growth," he said.
RBC Dominion Securities analyst Frank Morgan downgraded Brookdale Senior Living Inc. (BKD-N) to "outperform" from "top pick" and lowered his target to $16 (U.S.) from $25. Consensus is $22.86. "BKD's miss and guide down due largely to increased competitive pressures and costs caught investors by surprise and it will take time to get things right, and even longer to see multiple expansion," he said. "That said, our LT thesis remains intact and there is underlying value here."