The Globe and Mail
Inside the Market's roundup of some of today's key analyst actions
Though conditions in the mutual fund industry have improved thus far in 2017, the first-quarter results for Canadian asset managers are likely to be "varying," according to Desjardins Securities analysts Gary Ho and Doug Young.
"We are moving to a neutral stance (from underweight)," they said in a research report previewing earnings season. "First, we believe fee compression has been reflected in estimates. Second, within the retail comps (CI, IGM and AGF), all now offer ETF products and that should allow them to capture some of the movement to passive investing. Third, concerns over regulatory changes are well-discussed; the impact from CRM2 has thus far been benign. Lastly, we are beginning to see some early signs of net flow improvements."
Mr. Ho did upgraded his rating for IGM Financial Inc. (IGM-T) to "buy" from "hold" and raised his target for the stock to $46 from $41. The analyst average target price is $42.22, according to Bloomberg data.
In justifying the change, Mr. Ho said: "Our upgrade is predicated on: (1) evidence of a turnaround in net flows at Investors Group (IG) and Mackenzie; (2) expense growth has peaked and cost containment efforts could drive upside to our estimates; (3) fee pressures are reflected in our (and we believe consensus) forecasts; (4) we like its China AMC acquisition; and (5) the shares offer an attractive 5.4-per-cent dividend yield."
The analyst also feels there's room for an improved view on the Street toward IGM, noting: "With our upgrade, the stock has three Buys, seven Holds and one Sell rating. We believe sentiment could shift as IGM executes on improving net flows, contains costs and better communicates its story to investors."
In the note, the analysts raised their target prices for other stocks in their coverage universe. Those changes were:
- Fiera Capital Corp. (FSZ-T , "buy" rating) to $16.50 from $15.50. Consensus is $15.64.
- AGF Management Inc. (AGF.B-T , "buy" rating) to $7.25 from $7. Consensus is $6.47.
- Gluskin Sheff + Associates Inc. (GS-T , "hold" rating) to $19 from $18.50. Consensus is $19.50.
- CI Financial Corp. (CIX-T, "hold" rating) to $28 from $27. Consensus is $29.50.
- Sprott Inc. (SII-T , "hold" rating) remains at $2.50. Consensus is $2.40.
"In 1Q17, share prices for the group depreciated 1.5 per cent, underperforming the S&P/TSX Capped Financials Index (up 2.6 per cent)," they said. "Fiera and IGM were the outperformers (up 7.8 per cent and up 3.8 per cent, respectively). For the quarter, we believe investors will focus on: (1) commentary around RRSP season and the outlook for the remainder of 2017; (2) expense/margin management—the ability to curtail/manage expenses, as well as operating leverage if AUM continues to climb on the back of favourable market conditions; (3) commentary around disembedding commissions; and (4) strategy update from new CEOs, particularly at CI and IGM."
Elsewhere, RBC Dominion Securities analyst Geoffrey Kwan raised his rating for IGM to "outperform" from "sector perform" with a target of $47, up from $42.
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Shares of Precision Drilling Corp. (PD-T, PDS-N) have "pulled back into an attractive range," said Raymond James analyst Andrew Bradford.
In reaction to the release of first-quarter results that did not bring any "red flags," Mr. Bradford raised his rating for the Calgary-based oilfield services company to "outperform" from "market perform."
"There was little in PD's 1Q report that changes our outlook for the stock," he said. "Nevertheless, Precision stock is down 5 per cent since it reported (the TSX composite is up 1 per cent over the same period), and, in our view, has moved into attractive value territory. As a result, we are increasing our rating."
On Monday, Precision reported quarterly earnings before interest, taxes, depreciation and amortization of $84-million, or $87-million after adjusting for non-cash stock-based compensation, which was slightly both the estimates of Mr. Bradford ($91-million) and the Street ($93-million).
"The 'miss' was largely due to one-time mobilization costs and higher than anticipated recertification expenses in the U.S.; we don't expect these factors to have a meaningful effect on PD's future cash flow," said the analyst.
"Recertifications cost between $0.3 and $0.5-million per rig and need to be performed at regular intervals (every 1,000 days in Canada); however, the majority of rigs stacked during the downturn were not recertified and will need to be so prior to recommencing field service. As such, investors should expect some up-front drag on EBITDA as activity rises and stacked rigs re-enter the field over the coming quarters – not dissimilar to what we saw in 1Q. As dayrates continue to rise, drillers will recoup these costs more quickly."
Based on the results, Mr. Bradford did lower his full-year 2017, 2018 and 2019 EBITDA projections to $332-million, $547-million and $590-million, respectively, from $344-million, $556-million and $595-million.
His target price for the stock fell to $7.20 from $7.40. Consensus is $8.59.
"We target PD at 6.8 times estimated 2018 EBITDA, yielding our $7.20 target price," he said. "Our target multiple represents a slight premium to the average Canadian contract driller historical trading multiple of roughly 6.5 times to reflect PD's superior market liquidity."
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Metro Inc. (MRU-T) appears to have overcome the current challenges faced by Canadian grocers, said BMO Nesbitt Burns analyst Peter Sklar.
"Our reservation for the Canadian grocery stocks has been the deflationary environment, which has traditionally resulted in a challenging backdrop for the sector," said Mr. Sklar. "However, to a significant degree, Metro appears to have mitigated this headwind. In addition, Metro's Q2/17 should be the peak deflationary quarter, as the comps become significantly easier for the rest of this year.
"Metro is currently valued at 9.2 times our fiscal 2018 EBITDAR estimate, and on this basis is more expensive than the other Canadian grocers. However, we believe a premium multiple is warranted given Metro's long history of execution outperformance, stock buyback, Adonis, etc."
On the heels of its second-quarter earnings beat, Mr. Sklar upgraded Metro stock to "outperform" from "market perform."
On Tuesday, the Montreal-based company reported quarterly earnings of 56 cents per share, topping both Mr. Sklar's projection of 51 cents and the consensus of 53 cents. It reported delation of 2 per cent, which Mr. Sklar said was offset by "positive" implied tonnage growth of 2.3 per cent, resulting in overall same-store sales of 0.3 per cent.
"Actual deflation of 2 per cent was better than our estimate for deflation of 3.5 per cent and a strong result in the context of 4-per-cent food deflation from stores CPI as reported by StatsCan," he said. "We believe the more modest deflation result was due to positive mix, some trade-up on lower prices of fresh items such as meat, as well as Metro promoting more expensive fresh items for a positive mix effect. The implied tonnage growth of 2.3 per cent was significantly better than our estimate of 0.5 per cent. We previously believed that tonnage in this quarter would decelerate as a result of Metro lapping the closure of some 50 Loblaw locations in late calendar 2015. However, we believe the strong Q2/17 tonnage result reflects Metro's strong execution (i.e. promotional programs, flyer strategy, data insights, etc.)
"Gross margin for the quarter improved about 20 basis points year over year, which was in line with our estimate for an improvement of 20 basis points. Of note, SG&A margin improved by about 10 basis points year over year, which was better than our expectation for a deterioration of 33bps y/y. In addition, in terms of dollars, Metro was able to hold SG&A costs flat year over year, reflecting strong cost control given that rent and labour are likely inflating at about 1.5-2.0 per cent."
Mr. Sklar raised his third- and fourth-quarter EPS projections to 81 cents and 68 cents, respectively, from 75 cents and 61 cents. His full-year 2017 and 2018 estimates rose to $2.61 and $3.06 from $2.43 and $2.62.
His target price for the stock jumped to $53 from $43. The analyst average is $49.31.
"Metro is not an inexpensive stock, as it is currently valued at 9.2 times our fiscal 2018 EBITDAR estimate, and on this basis is valued more expensively than the other Canadian grocers," said Mr. Sklar. "However, we believe a premium multiple is warranted given Metro's long history of execution outperformance, stock buyback, Adonis, etc. And, even after taking into account today's lift in the stock price on the strong quarterly result, the stock is still off of its $48 high before deflation concerns took the stock down to the $40 level."
Meanwhile, TD Securities analyst Michael Van Aelst upgraded the stock to "buy" from "hold" with a target of $52, rising from $45.
Raymond James analyst Kenric Tyghe also raised his target to $52 (from $50) with an "outperform" rating (unchanged).
Mr. Tyghe said: "While deflationary pressures intensified in the quarter, the comps do start to ease in Metro's F3Q17E in key fresh categories (both fruit and vegetable). While the competitive intensity remains elevated (which Costco's Ontario expansion will serve to modestly compound), we believe Metro's relative store experience and solid execution (effective data-driven promotions) will continue to offer a sufficiently differentiated offering and proposition to protect its market share. Metro's eCommerce initiatives (while small) are tracking to slightly ahead of plan in phase 1, on better than expected average basket. We remain constructive on Metro."
CIBC World Markets analyst Mark Petrie raised his target to $48 from $43 and kept his "neutral" rating.
"Metro's well-earned reputation as a leading operator marked another notch this quarter as the company delivered excellent margin results despite accelerated deflation," said Mr. Petrie.
"For a disciplined and diversified operator like Metro, we believe today's competitive environment leaves ample room for healthy results and only valuation holds us back from a more constructive stance."
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Ahead of the release of its quarterly results, scheduled from May 2 before market open, RBC Dominion Securities analyst Ross MacMillan downgraded Shopify Inc. (SHOP-N, SH-T).
"Our downgrade is not a call on 1Q17 results nor a call on weakening fundamentals: Our recent survey work points to positive demand trends and we fully expect the company to be able to revise estimates higher," he said. "Our call does try to put the bull case in context and suggests that a lot of good news is embedded in the current price."
His rating for the Ottawa-based tech e-commerce software maker fell to "sector perform" from "outperform."
"We have stress tested our model out to calendar year 2020 using more bullish assumptions around S&M efficiency, GMV [gross merchandise value] per merchant and the take-rate on GMV," the analyst said. "Our bull model envisages the company achieving greater-than $1.6-billion of revenue in 2020 and $2.40 of non-GAAP EPS that year. However on a 40 times multiple and discounted back 2 years at 10 per cent to end of calendar 2017, we would arrive at our current target of $77 at the end of CY17.
"Even in our bull case model, we think there is risk that net new merchant additions will decelerate in CY17 and possible flatten/ turn negative in CY18, given assumptions around S&M spend, gross additions and churn. While the base of merchants will continue to grow under a flat net new addition scenario and the value of each merchant will continue to increase, we think this second derivative change will be important."
Mr. MacMillan also believes the company's recent initiatives, including price changes on Shopify Plus and the introduction of its Shipping and Capital segments, will result in only "modest" impacts on its financial model in the near term.
"Other new initiatives will likely take time to mature," he said. "We note, for example, feedback from users of the Amazon sales channel integration application suggest that it is best suited for certain types of vendor (e.g. clothing and apparel) and that further work is required to improve the speed and accuracy of the integration."
Mr. MacMillan maintained a target price of $77 (U.S.) for the stock. Consensus is $72.63.
"We note that Shopify's current fully diluted market cap is $7.7-billion," he said. "This means Shopify has a higher value than the cumulative value of Demandware (bought by Salesforce for $2.8-billion net of cash in 2016), Magento (recent Private equity investment round valued at $700-million in 2016), Hybris (bought by SAP for $1.5-billion in 2013) and ATG (bought by Oracle for $1-billion in 2010). Shopify is also worth almost 50 cents per $1 of GMV versus around 20 cents per $1 of GMV for Demandware on its take out by Salesforce and 1 cent per $1 of GMV for Magento on its take private."
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Chipotle Mexican Grill Inc. (CMG-N) is "approaching fair value for a solid recovery," said RBC Dominion Securities analyst David Palmer.
Noting the stock has risen in price by 25 per cent in the year to date, outperforming the S&P 500 by 18 per cent, he downgraded the stock, believing the implied return to his new price target of $500 (U.S.) is "more representative of a sector perform rating." He had previously rate the fast food chain company an "outperform."
In the first quarter, Chipotle posted earnings per share of $1.60 (U.S.), topping the consensus $1.28 as both sales and margins rebounded from the food safety issues that marred the company in 2016.
Mr. Palmer said he learned some interesting "tidbits" from the conference call that followed the quarterly earnings release on Tuesday, noting: "In total, these observations give Chipotle an incomplete card on some important initiatives such as digital, pricing action, and other operational changes. However, it is already clear that a new board is putting some big goals in front of management — including big stock upside. The top observations were: 1) The new executive comp goals include a $650 stock goal and 7-per-cent annual same-store sales growth target, 2) The company points to a 27.5-per-cent margin if sales get to $2.4-million, which we estimate implies roughly $25.50/share in EPS power, 3) Chipotle will start testing a new dessert called bunuelos later in April, 4) Two year trend improvement has seemingly stalled since February, 5) Margin management improved but food and labor cost pressure could increase slightly in upcoming quarters, 6) Pricing will progress slowly—and we are assuming impact over 2017 and 2018, 7) A recent data breach creates a potential risk to digital adoption and the brand, 8) The lift from advertising is not yet clear, and 9) The promise of digital looks solid but it is also unclear what the lift has been (or will be)."
His target rose from $465 to $500. The average is $456.96.
"Our estimates imply that Chipotle's sales recovery should continue over the next several quarters," the analyst said. "Chipotle's scores on certain brand attributes are improving and we are optimistic that margins will continue to recover over the next few years with the help of pricing. Chipotle's restaurant-level economics remain best-in-class despite recent brand damage and digital ordering remains a significant future opportunity. The company also seems to be having success leveraging its second make line."
Elsewhere, Credit Suisse analyst Jason West bumped his target to $425 from $375 with a "neutral" rating (unchanged).
"The pace of recovery should moderate from here as CMG begins to lap more normalized sales and expense trends," said Mr. West. "We also continue to believe the cost of customer recapture will be higher than expected, particularly amidst a very tight labour market and increasing competition."
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There is too much earnings risk for Baker-Hughes Inc. (BHI-N) as a standalone company for it to be rated "outperform," said BMO Nesbitt Burns analyst Daniel Boyd.
"The stock is likely to be defensive given the $17.50 special dividend related to the pending merger with GE (mid-2017 close) and net-cash balance sheet," he said. "However, we expect EBITDA growth to disappoint due to unfavorable mix and see near-term execution risk."
Mr. Boyd downgraded the stock to "market perform."
"Our pro forma income statement for the BHI-GE combination combines our below-consensus estimates for BHI (2018E EBITDA of $1.725-billion is 17 per cent below consensus $2.078-billion and 28 per cent below December pro forma guidance suggesting $2.4 billion) with our below-guidance stand-alone GE O&G estimates ($2.0 billion, 17 per cent below December guidance suggesting $2.4-billion in 2018)," said Mr. Boyd. "We assume faster cost synergies ($700 million versus $600 million expected in company presentations) but do not credit for revenue synergies (company presentations suggested $100 million EBITDA impact by 2018). Our operating income estimates are adjusted for increased depreciation due to fair-value write-ups to intangibles post-merger close, which is expected in mid-2017. Although our estimates for GE O&G are below guidance, we credit for meaningful recovery in 2018 (revenue up 11 per cent year over year) after further declines in 2017 (revenue down 12 per cent year over year). We believe 2017 declines are likely given conference call commentary suggesting 1Q17 revenue down materially year over year and expected 2017 earnings below the 2016 level."
His target is now $65, down from $69, which is the current consensus.
"We like the potential for synergy upside but think expectations for a buyback may be too high," he said. "While we think a buyback of up to 12 per cent of pro forma market cap is possible, we view it as unlikely. GE is more likely to use the balance sheet to be acquisitive, in our view."
RBC Dominion Securities analyst Kurt Hallead lowered his target to $72 from $80 with an "outperform" rating.
Mr. Hallead said: "BHI's outlook is similar to large cap peers: optimistic on NAM, with international markets lagging through the first part of the recovery. We remain positive on the combination with GE O&G and are encouraged by the potential for revenue upside from digital integration and shifting focus to products and technology. We think the increased scale and stability afforded through the transaction enhances the company's competitive position."
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In other analyst actions:
West Fraser Timber Co Ltd. (WFT-T) was downgraded to "underperform" from "sector perform" at RBC Dominion Securities by analyst Paul Quinn. His target fell to $53 from $55, versus the analyst average target price of $64.75.
Imperial Oil Ltd. (IMO-T) was raised to "outperform" from "market perform" by Raymond James analyst Chris Cox. His target fell to $49 from $52, while the average is $45.78.
Paradigm Capital Inc. analyst Jason Tucker initiated coverage of High Arctic Energy Services Inc. (HWO-T) with a "buy" rating and $8 target. The average is $7.24.
Cormark Securities Inc. analyst David McFadgen downgraded NYX Gaming Group Ltd. (NYX-X) to "market perform" from "speculative buy" and dropped his target to $1.20, from $3.20. The average is $2.49.
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David Leeder