Inside the Market's roundup of some of today's key analyst actions
Desjardins Securities analyst Keith Howlett said his expectations for Alimentation Couche-Tard Inc. (ATD.B-T) are "tempered" in the wake of weaker-than-expected third-quarter 2018 financial results.
On Tuesday, the Laval, Que.-based convenience store company reported adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of US$719.7-million and earnings per share of 54 U.S. cents, both "substantially" below Mr. Howlett's forecast due to what he deemed to be "extraordinary" fuel market conditions during a three-week period in Arizona as well as higher expenses stemming from recent acquisitions and a weaker U.S. dollar.
"European and Canadian operations performed about as expected in aggregate," said Mr. Howlett. "Convenience store sales were strong in Europe, while fuel margins in Canada were ahead of expectation. The U.S. market remains sluggish, with Couche-Tard posting same-store sales growth of 0.1 per cent. Management is implementing a series of tactical and longer-term measures which should begin to stimulate sales. We had expected 3Q results to confirm the strong 2Q results, but this did not occur. We still expect EPS growth of more than 20 per cent in FY19, off a reduced base in FY18."
In reaction to the results, Mr. Howlett dropped his 2018 and 2019 EPS projections to US$2.56 and US$3.18, respectively, from US$2.89 and US$3.40, adding: "While we have reduced our EPS estimates, we are forecasting EPS growth in FY19 of 24 per cent, driven by recent acquisitions. Acquisitions and synergies will drive EPS growth during a period of weak industry revenue growth."
The analyst kept a "buy" rating for the company's stock, but he lowered his target price to $74 (Canadian) from $78. The average on the Street is $75.18, according to Bloomberg data.
Elsewhere, Canaccord Genuity analyst Derek Dley moved his target to $73 from $75, keeping a "buy" rating.
"In our view, Couche-Tard offers investors an attractive combination of both organic and acquisitive growth, which coupled with management's track record, and opportunities abroad, will allow the company to capitalize on accretive growth opportunities," he said.
BMO Nesbitt Burns' Peter Sklar lowered his target to $69 from $72.
Mr. Sklar said: "Notwithstanding the headline earnings miss, which we believe partially stemmed from transitory headwinds, we continue to rate ACT Outperform as we believe the company will continue to execute its global roll-up strategy."
Integra Resources Corp. (ITR-X) is an undervalued developer that is likely to earn a market re-rating, according to Raymond James analyst Tara Hassan, emphasizing both the scale and optionality of its assets as well as its experienced and "proven" management team.
Ms. Hassan initiated coverage of the Toronto-based development-stage company with an "outperform" rating.
Integra, formed in September of 2017 by the team behind Integra Gold Corp., is focused on its DeLamar project, which consists of both silver and gold deposits in Idaho, and purchased from Kinross Gold.
"While Integra Resources has moved its focus south of the border to Idaho, it is utilizing the same team and concept that drove the success and eventual acquisition of IG (acquired by Eldorado Gold in May 2017 for $590-million)," said Ms. Hassan. "Like at Lamaque, Integra Resources has acquired undervalued, data rich brownfield projects with significant exploration potential remaining. Integra intends to employ a similar strategy to advancing these projects; utilize historic data to accelerate exploration efforts and rapidly advance the projects to production to drive a market re-rating (currently trading at 0.46 times NAV [net asset value] and US$11 per oz AuEq [gold equivalent] versus global exploration and development peers at 0.50 times and US$31/oz AuEq)."
"Shortly after announcing the acquisitions, Inferred resource estimates (based on historic drilling) were issued defining a total 3.85 million ounces AuEq at 0.78 g/t AuEq based on RJL Estimates. Importantly, at both deposits the estimates highlighted the potential for smaller, higher grade resources and historic drilling has confirmed high-grade structures. A 20,000 m drill program for 2018 will focus on exploring the high-grade veins, as well as expanding low-grade resources near surface. This program commenced in February 2018 (first results due in early 2Q18)."
Ms. Hassan believes both DeLamar and the neighboring Florida Mountain past-production project, acquired at the same time, offer the optionality to be developed as open pit or underground mines with "history demonstrating the potential for both."
"During the late 1800s and early 1900s the deposits were high grade underground mines with records indicating that the average gold grade was more than 30 grams per ton Au and the average vein width ranged from 1 metre to 5 metres," she said. "Records show that the high grade mineralization at Florida Mountain extended for more than 2 km on strike and was thought to extend to more than 500 m vertically, demonstrating the potential for a large high grade system. Although the focus shifted away from the high grade component of the resource during the exploration campaigns after 1970, there are results from drilling during this time period that support the presence of high grade mineralization, but need to be followed up with a more targeted program."
She added: "We believe this optionality will allow a number of development options to be considered, including potential project scaling, reducing some of the risk facing development projects."
Ms. Hassan set a price target of $2.25.
Despite "mixed" quarterly results, expected free cash flow growth from Jackpotjoy PLC (JPG-LON, ITX-T) could result in a dividend, said Echelon Wealth Partners analyst Ralph Garcea.
On Tuesday, U.K.-based Jackpotjoy, the parent company of The Intertain Group Ltd., reported fourth-quarter 2017 revenue of £82.6-million, exceeding both Mr. Garcea's projection (£76.2-million) and the consensus on the Street (£76.9-million). Adjusted EBITDA of £22.7-million, however, fell below expectations (£24.9-million and £23.3-million), which he attributed in part to higher expenses stemming from sales and marketing.
"A proven model exists within the Jackpotjoy group of companies, and yields 2018 pro-forma revenue of £235-million on EBITDA of £108-million," said Mr. Garcea. "We expect longer-term margins to remain above 35 per cent."
Mr. Garcea projects the first half of fiscal 2018 to see "slightly" lower margins due to a 1-2 per cent increase in marketing expenses. He does see margin expansion for the second half of the year.
"The improved FCF exiting 2018 could lead to a dividend in 2019," he said.
He maintained a "buy" rating for TSX-listed Intertain shares and raised his target to $23 (Canadian) from $20. The average is $21.63.
Children's Place Inc. (PLCE-Q) shares now appear attractive in the wake of a 8-per-cent dip on Tuesday following a "soft" 2018 outlook, said Citi analyst Kate McShane, raising her rating for the U.S. retailer to "buy" from "neutral."
The New Jersey-based company announced Tuesday it expects first-quarter earnings per share to US$2.12 to US$2.22 from US$1.95 in the same period a year ago. The Street had expected US$2.39.
In justifying her change, Ms. McShane pointed to its industry-leading comps of 8.2 per cent in the fourth quarter. Based on stronger sales and accelerated buybacks, she raised her 2019 earnings expectation.
She maintained a target of US$148. The average target is US$162.88.
Meanwhile, SunTrust analyst Pamela Quintiliano cut her price target to a Street-low US$132 from US$154 with a "hold" rating (unchanged), believing Children's Place's earnings growth potential will be pressured over the next several years.
Though its fourth-quarter results fell in line with guidance, BMO Nesbitt Burns analyst Michael Mazar lowered his target for shares of STEP Energy Services Ltd. (STEP-T) after incorporating the recent US$275-million cash acquisition of Tucker Energy Services Holdings.
To help fund the deal for the privately held U.S. pressure pumping company, STEP completed a $56-million bought-deal financing, which closed last week.
"The acquisition of Tucker also includes a solid client base given Tucker's history (the company has been operating since 2001) which we expect should transition seamlessly to STEP as Tucker's senior management team will be staying on to run the company," said Mr. Mazar.
"We like to say that there are, generally speaking, four reasons to do a major acquisition: First, the valuation is extremely attractive; second, the target has a technology that the buyer feels is disruptive/game-changing/threatening which the buyer could not easily replicate; third, the target has a geographic presence that the buyer could not quickly/easily, organically replicate, and/or fourth, the target has been managed poorly and buyer management feels that they could squeeze additional value by running it better. In general, the more of the above four boxes a deal ticks, the better we like it. The Tucker acquisition obviously checks criteria one and three. In other words, we don't normally like deals that add size for the sake of adding size (buying EBITDA) and equity markets typically don't reward deals like that with multiple expansion."
With the deal, the analyst raised his 2018 EBITDA projection to $230-million (Canadian) from $200-million, while his 2019 estimate rose to $252-million from $221-million.
"In a perfect world, STEP would have acquired pressure pumping assets in closer proximity to its existing U.S. coiled tubing operations in Texas," said Mr. Mazar. "However, that's not always that easy and the West Texas pumping market is highly competitive. Rather than being an "also ran" in the Permian, STEP is acquiring a regional leader in the SCOOP/Stack with a solid track record and known brand. Further, we believe that "ask prices" for pressure pumping acquisitions in the Permian are nearing peak levels, so STEP is getting better bang for its buck in the SCOOP/Stack."
Mr. Mazar kept an "outperform" rating for STEP shares with a target of $13, down from $18. The average is $16.94.
"STEP remains our top pick of the pressure pumpers given its strong balance sheet and geographic diversification, which should offset some expected weakness in Canada during 2018," he said.
Industrial Alliance Securities analyst Michael Charlton dropped Iron Bridge Resources Inc. (IBR-T) to "hold" from "speculative buy."
"Q4/17 wasn't really about production or reserve additions as management spent the better part of a year transforming the Company into a Montney pure play at Elmworth," he said. "In the future, we do see both production and reserve addition potential however, growth looks to be slow with forecasts for only 5 wells per year. IBR is in discussions with third-party cryptocurrency miners and while we do believe this is a unique approach to market diversification, we continue to believe this could ultimately be a distraction for management taking them away from the task at hand."
Mr. Charlton's target fell to 60 cents from 90 cents. The average is 81 cents.
In other analyst actions:
Veritas Investment Research analyst Howard Leung upgraded Constellation Software Inc. (CSU-T) to "buy" from "sell" and hiked his target to $935 from $600. The average target on the Street is $881.50.
Scotia Capital analyst Mario Saric initiated coverage of Tricon Capital Group Inc. (TCN-T) with a "sector outperform" rating and $12.25 target, which sits below the consensus of $13.18.
Bank of America Merrill Lynch upgraded Kinder Morgan Inc. (KMI-N) to "buy" from "neutral" with a target of US$22, which is 5 US cents higher than the average.