Inside the Market’s roundup of some of today’s key analyst actions
Citi analyst Paul Lejuez thinks Lululemon Athletica Inc.'s (LULU-Q) long-term earnings power is likely to remain intact through the turbulence brought on by COVID-19, reminding investors not to forget the momentum the Vancouver-based company previously possessed.
"As we look across our universe for those that have sold off significantly during these uncertain times but where the long term earnings power has not changed, LULU is a stand out," he said in a research note released Friday. "LULU is down 40 per cent since 2/20 and its EV has dropped from $33-billion to $19-billion, as the market has painted nearly the entire retail universe with the same brush (fearing near term EPS risk due to closed stores/supply chain disruptions). But LULU is a standout in retail. And while uncertainty around F20 EPS is high (and F20 will not be pretty), we do not believe the long term earnings power has changed much at all, their balance sheet is rock solid, and biz is likely to rebound strongly on the other side of this. So when we think about this COVID-19 curveball and where to take a swing given the broad sell-off, LULU stands out."
Discounting the importance of fiscal 2020 given the market-wide strife, Mr. Lejuez raised his rating for Lululemon shares to "buy" from "neutral."
"We don’t know all the detail of LULU’s 4Q (they report on 3/26)," he said. "But we know they comped in the mid to high-teens range, capping off a year where comps increased 17 per cent and EBIT margin expanded 60 basis points to 22.1 per cent. They seem to be firing on all cylinders, with Ecom sales up 25 per cent and store comps up high single digits. Near term, we believe they are better positioned than many (even though we assume stores will be closed thru 1Q), as Ecom represents 27 per cent of sales. And LULU makes product that people want. Whether consumers buy the product now or in 2Q20 or 2H20 (or F21), we believe their loyal customer base will return."
"We believe LULU will see a sales hit from closing stores (we model 1Q comps down 23 per cent), though it may not be as severe as others (product is in high demand and their Ecom offering is solid). But longer term, we see no reason to question their ability to continue serving their loyal customer, further develop underpenetrated categories (outerwear, personal care, footwear), increase market share in men’s, and continue expanding sq ft globally. We don’t believe the COVID-19 curveball changes any of that once we get through to the other side of this uncertain period."
Mr. Lejuez lowered his 2020 and 2021 earnings per share projections to US$4.89 and US$6.01, respectively, from US$5.10 and US$6.30 to reflect the closing of its stores for the remainder of the first quarter. Expecting stores to reopen in the second quarter, the analyst said he expects traffic to remain "somewhat pressured" for 1-2 quarters.
He maintained a US$190 target for Lululemon shares. The average on the Street is US$249.57, according to Thomson Reuters Eikon data.
Seeing an “attractive” current valuation and emphasizing “the defensive nature of uranium as a commodity during the escalating global COVID-19 crisis,” Scotia Capital analyst Orest Wowkodaw raised his rating for Cameco Corp. (CCO-T, CCJ-N).
The analyst made the move despite pushing back his anticipated restart of the company’s McArthur River mine in northern Saskatchewan by a year to 2023 due to his expectation of weaker near- and medium-term U308 uranium prices.
Mr. Wowkodaw dropped his uranium price deck for 2020 through 2024 by an average of 15 per cent from his previous expectations.
"We forecast the U3O8 term price to reach US$40 per pound in 2023 (vs. US$32/lb today), supporting the decision to restart [McArthur River]," he said.
Mr. Wowkodaw also emphasized the strength of Cameco’s balance sheet, noting: “CCO exited 2019 with $1.1-billion in cash and $1.0-billion in debt, or a net cash position of $66-million. Debt maturities are due in 2022 and 2024. The company has an available undrawn $1.0-billion credit facility that matures in 2023. As at Q4/19, net cash to TTM [trailing 12-month] EBITDA was 0.2 times. While the company is operating in a low margin environment for the foreseeable future due to the requirement to purchase material during the McArthur River curtailment, we forecast positive 2020-2022 FCF of $181-million, $28-million, and $71-million, respectively. We note that CCO is one of the few companies under our coverage to have an estimated 5+ years of liquidity runway under a punitive spot decline of 20-per-cent price scenario.”
Mr. Wowkodaw raised Cameco to “sector outperform” from “sector perform” with a 1-year target price of $13, sliding from $13.50. The average on the Street is $14.53.
“The market dislocation associated with the COVID-19 pandemic has crushed CCO’s share price in recent weeks, despite no change in underlying uranium prices,” he said. “While the shares are trading at relatively elevated near-term EV/EBITDA [enterprise value to earnings before interest, taxes, depreciation and amortization] multiples due to the curtailment of McArthur River, the current P/NAVPS [price to net asset value per share] multiple of 0.82 times is now well below the post-Fukushima average of 1.28 times. Moreover, with the CRA and TEPCO uncertainties largely behind the company (CCO’s lower court victory is currently being appealed by the CRA), we believe the risk profile of the shares is now considerably lower. While the company’s higher priced long-term contract book continues to wind-down, U3O8 lbs under discussion with utilities are at their highest level since before Fukushima, suggesting an improving environment may lie ahead.”
BMO Nesbitt Burns analyst Fadi Chamoun thinks the current economic uncertainty poses a risk to Bombardier Inc.'s (BBD.B-T) deleveraging strategy.
Also expressing concern about its ability to sustain its remaining Bombardier Aviation franchise, he lowered his rating for the company’s stock to “market perform” from “outperform.”
"While BBD’s liquidity is currently sufficient, the path to reduce leverage and meet debt maturities in 2021 is dependent on completing three asset sale deals and directing the proceeds towards debt reduction," said Mr. Chamoun.
"The coronavirus-led economic slowdown and the high level of uncertainty surrounding how deep and long the downturn may be put at risk BBD’s ability to finalize these asset sales and is likely to slow business aviation orders."
His target slipped to 60 cents from $2.40. The average is $1.80.
Citing both its current valuation and top quartile growth, Raymond James analyst David Quezada raised his rating for Emera Inc. (EMA-T) to “outperform” from “market perform.”
"With respect to EMA's footprint, we note the company's two largest utilities — NSPI and Tampa Electric — each maintain relatively small manufacturing bases (industrial revenues at 10-15 per cent of 2019 total) limiting the exposure to a slow down in industrial electricity demand," he said. "Meanwhile, we would expect increased demand from higher margin residential customers (55-60 per cent of 2019 revenues) to present an important offset as many spend more time in the home. Accordingly, we see modest downside (if any) from a demand perspective. Further, while the need to manage resources on construction sites (i.e. staggering work schedules to avoid interaction and supply chain disruptions) could delay some of the company's construction projects including larger scale undertakings in Florida (where 70 per cent if capex is being spent), we continue to expect these projects to move forward over time.
"Notably, with the vast majority of generation coming from natural gas in Florida (70 per cent plus), we expect headroom in terms of affordability for customers on lower fuel costs, facilitating these ongoing investments. While it would be premature to suggest that the company's capital program is entirely immune to change, we continue to believe that EMA can meet its 8-9-per-cent rate base growth target—positioning the company for top quartile earnings. We also highlight that, during the '08-'09 recession EMA was able to grow EPS nicely at a 7-per-cent CAGR [compound annual growth rate] between 2007 and 2009."
Seeing its liquidity and balance sheet as "solid," Mr. Quezada also emphasized Emera's valuation now sits below its historical midpoint and looks "attractive" given bond rates.
“With the stock now down 18 per cent from recent highs (TSX down 30 per cent) we peg EMA’s 2020 estimated P/E [price to earnings] at 17.1 times, which compares to NA peers now at an average of 17.9 times, Fortis at 18.4 times and EMA’s recent valuation high of 21 times,” he said. “While we acknowledge this is only modestly below the midpoint of the 14-21 times forward P/E historical range, we believe it is an outlier from a historical perspective given that bond rates currently reside at all time lows. The durable negative valuation relationship vs. rates has decoupled in recent weeks but is something we would expect to re-assert itself over time. We estimate a 100 basis points move in 10-year bond rates implies a 1 times P/E valuation lift for Emera, all else equal.”
His target for Emera shares remains $63. The average on the Street is $62.75.
CIBC World Markets analyst Mark Jarvi made a series of rating changes to TSX-listed utilities on Friday.
“The evolving economic and equity market backdrop makes it difficult to provide a stable frame of reference on valuation,” he said. “Nonetheless, we’ve tried to sort through high-level macro and company-specific outlooks/factors to reset our expectations across our coverage. First, we’ve lowered our targets to reflect the broader equity market de-valuation and tried to account for more company-specific uncertainties. We have also updated our FX (notably a stronger USD) and Alberta power price assumptions (more conservative). By no means have we become outright bulls on the sector, but see more pockets of opportunity based on today than we did a few months ago when valuations were quite rich and also highlight some companies with reasonable valuations that offer a defensive positioning for investors.”
He raised five stocks to "outperformer" ratings from "neutral."
* Fortis Inc. (FTS-T) with a $55 target, down from $59. The average is $59.48.
Analyst: “While not the highest total return to target, we believe Fortis’s diversified, quality asset mix provides fairly strong earnings resiliency and the company has low funding risk as it recently completed a $1.1-billion equity raise. Given its strong track record, we believe the name will hold up well, particularly if the preference for defensiveness continues. Further, a weaker CAD vs. the USD does provide an earnings tailwind.”
* Hydro One Ltd. (H-T) with a $27 target from $29. Average: $28.
Analyst: “The company is internally funded, has a strong balance sheet (can take advantage of low rates) and has clarity on its ROEs for the next few years, which helps reduce risk. We believe the simplicity and relative stability will see this stock perform well in current market conditions.”
* Capital Power Corp. (CPX-T) with a $30 target from $39. Average: $38.20.
Analyst: “While we appreciate there is risk in the Alberta power market, the business is more contacted today than in past years and even with our lowered Alberta power price assumptions (we are below the forward curve), we believe the shares have sold off more than they should have. The dividend is well covered for the next several years, we don’t foresee any material risk to near-term results and there could be positive news on recontracting.”
* TransAlta Corp. (TA-T) with an $8.50 target from $11. Average: $12.
Analyst: “In the current market, we believe this upgrade may seem counter-intuitive as investors favour defensive and higher credit quality companies. However, we don’t see material balance sheet risk as the second tranche of the investment from Brookfield covers this year’s debt maturity, liquidity is strong and dropdowns to RNW could further increase liquidity at TransAlta. We believe TransAlta can rationalize assets to manage power prices in Alberta, plus hedges help as well. Even after reflecting lower power price assumptions and more conservative valuation parameters, we still see upside from current levels.”
* TransAlta Renewables Inc. (RNW-T) with a $15 target from $16.50. Average: $16.72.
Analyst: “The company has very stable earnings (highly contracted; low volume risk for natural gas fired assets) and a well supported dividend (with an attractive 8-per-cent yield). It has debt capacity to fund a dropdown with TransAlta Corp, which could create low-risk accretive growth.”
Conversely, Mr. Jarvi cut Boralex Inc. (BLX-T) to “neutral” from “outperformer” with a target price of $28, down from $30 and below the $30.63. consensus.
“The stock has performed relatively well (only down 3 per cent over the last three months) and we do believe the company has a resilient cash flow stream with 97-per-cent fixed price, take-or-pay contracts,” he said. “However, given its smaller market capitalization, lower dividend yield and looking at other risk-return opportunities across the sector, we don’t believe it will continue to outperform over the next 6-12 months.”
BMO Nesbitt Burns analyst Thanos Moschopoulos thinks Real Matters Inc. (REAL-T) is “well positioned to weather the pandemic.”
Accordingly, he raised his rating for the Markham, Ont.-based tech firm to “outperform” from “market perform,” seeing it set to “benefit from the low-interest-rate environment, which should drive a strong level of refi activity over the coming months.”
"We believe that the very large base of potentially refi-able mortgages, coupled with the Fed's actions to inject liquidity into the mortgage market, should help to offset the potential impact of tightening credit standards and lower purchase activity," he said.
Mr. Moschopoulos lowered his target by a loonie to to $14 per share. The average is $16.
"The 2020 oil price shock has already inflicted more midstream equity damage than the previous two downturns," said Canaccord Genuity analysts John Bereznicki and Dennis Fong, calling the resulting erosion "extreme from an historic perspective."
"In our view, this is primarily because of the combination of COVID-19 demand destruction and incremental Saudi production," they said in a research note released Friday morning. "We also believe that because this downturn began at a relatively low oil price, operators will have less latitude to navigate in the current environment."
“Amidst growing COVID-19 fears and a Saudi price war, WTI has fallen by a breathtaking 57 per cent year-to-date. Consistent with our previous analysis, domestic midstream equities have transitioned from yield proxies to commodity-driven instruments as oil prices have melted down, with our midstream coverage universe down an average of 49 per cent year-to-date. These headwinds have been driven largely by increasing investor fears over counterparty risk, which have elevated dividend yields substantially. While the risk of protracted oil price weakness is significant for the domestic E&Ps, we believe a normalization of WTI (to US$45) could generate compelling returns for equity holders.”
The analysts emphasized midstream companies are their “preferred means of positioning for an oil price recovery.”
"While the last thing most investors are likely contemplating is re-positioning for an oil price recovery, we believe that time will ultimately come," they said. "In our view, few North American liquids producers are now covering their cash costs, which will drive a significant contraction in oilfield activity that should invariably lead to reduced shale oil production. While the duration of the current Saudi price war is difficult to predict, we believe longer-term global oil demand growth will ultimately re-assert itself and potentially set the stage for a period of elevated oil prices.
"Having recently downgraded much of our integrated, E&P and oilfield universe, we view the midstream space as having relatively attractive risk-reward prospects for those seeking oil exposure in a highly uncertain environment. In the 2015-16 downturn, most of these companies realized only modest EBITDA erosion while sustaining their dividends. While recognizing this oil price downturn is shaping up to be more severe (as both global oil and demand and supply are moving in an unfavorable direction), we nonetheless believe the midstream space remains a relatively attractive means of maintaining oil exposure.
Noting companies in their midstream universe possess balance sheets that "generally remain solid," the analysts said investors typically seek out the strongest cash flow generators during periods of commodity price declines.
"We believe protracted (multi-year) oil price weakness at current strip pricing would greatly impair the viability of the domestic upstream sector (including oil sands) and create further downside risk to midstream equities," they said. "Conversely, midstream equities could begin to revert to yield-proxies as WTI normalizes to US$45/bbl, in our view.
"Following the past two oil price shocks, our midstream sample group yielded an average 12-month share price return of 50 per cent (before dividends) from trough."
The analysts lowered their financial estimates for several midstream companies “to reflect a reduced contribution from business segments with commodity and/or volume exposure.” That led them to reduce their target prices by an average of 40 per cent.
Mr. Bereznicki also raised his rating for AltaGas Ltd. (ALA-T) to “sector perform” from “outperform” in response to its recent share price weakness.
His target slid to $16 from $23. The average on the Street is $23.20.
The analysts' other target changes were:
- Gibson Energy Inc. (GEI-T, “buy”) to $22 from $30. Average: $28.53.
- Inter Pipeline Ltd. (IPL-T, “buy”) to $15 from $25. Average: $22.25.
- Keyera Corp. (KEY-T, “buy”) to $21 from $41. Average: $40.11.
- Pembina Pipeline Corp. (PPL-T, “buy”) to $31 from $58. Average: $46.50.
- Tidewater Midstream and Infrastructure Ltd. (TWM-T, “buy”) to $1 from $1.80. Average: $1.47.
TD Securities analyst Mario Mendonca raised his ratings for a group of Canadian bank stocks on Friday.
His moves were:
- Bank of Montreal (BMO-T) to “action list buy” from “hold” with an $84 target, slipping from $99. The average is $92.17.
- Bank of Nova Scotia (BNS-T) to “buy” from “hold” with a $66 target, down from $75. Average: $72.
- Canadian Imperial Bank of Commerce (CM-T) to “action list buy” from “hold” with a $105 target, down from $110. Average: $104.79.
- National Bank of Canada (NA-T) to “buy” from “hold” with a $53 target, down from $67. Average: $65.35.
Citi analyst J.B. Lowe is "throwing in the towel" on the U.S. offshore drilling sector, believing it "will likely need a broad restructuring in order to alleviate the debt burdens that pervade the group."
In a research note released Friday, Mr. Lowe slashed his day rate forecasts and financial estimates for companies in his coverage universe based on a reduced activity outlook.
“Offshore drillers have done a commendable job shifting maturities to the right; most do not face significant maturities until 2023+,” he said. “That said, persistently low day rates, high interest burdens, and not insignificant maintenance capex requirements will likely see the drillers as a whole burning cash into 2022, by our models. Drillers have already started to lean on their revolvers and will likely continue to do so, but this only pushes off what we see as the inevitable need for balance sheet restructuring.”
"For high-spec floaters, we had previously anticipated a measured rise up to $300k/d by 2023, and utilized a long-term forecast of $350k/d. While our mid- and long-term forecasts are relatively unchanged in our update, we now expect the floater market to average $200k/d in 2020, $190k/d in 2021 before rebounding to $225k/d in 2022. For jackups, we now model a base rate of $75k/d in 2020 and 2021, before rising to $90k/d in 2022. We lowered our mid-term jackup day rate estimate to $110k/d, and our long-term forecast is relatively unchanged at $125k/d."
With those changes, he made significant cuts to his EBITDA projections. That led to a slashing of his target prices for the companies' stocks.
His moves were:
- Borr Drilling Ltd. (BORR-N, “neutral”) to 40 US cents from US$9. Average: US$8.
- Transocean Ltd. (RIG-N, “neutral”) to US$1.25 from US$8. Average: US$5.58.
- Valaris PLC (VAL-N, “sell”) to 25 US cents from US$5. Average: US$3.91.
- Noble Corporation PLC (NE-N, “sell”) to 25 US cents from US$1. Average: US$1.28.
- Diamond Offshore Drilling Inc. (DO-N, “sell”) to 90 US cents from US$3.50. Average: $3.67.
In other analyst actions:
TD Securities analyst Vince Valentini raised Thomson Reuters Corp. (TRI-T) to “buy” from “hold” with a $95 target, down from $110. The average is currently $106.30.
TD’s analyst Craig Hutchison cut Copper Mountain Mining Corp. (CMMC-T) to “hold” from “speculative buy” with a 45-cent target, down from 65 cents. The average on the Street is 98 cents.
TD’s Greg Barnes lowered First Quantum Minerals Ltd. (FM-T) to “speculative buy” from “action list buy” with a $9.50 target, sliding from $16.50. and below $14.82 average.
TD’s Graham Ryding raised Fiera Capital Corp. (FSZ-T) to “buy” from “hold” with a $9 target, down from $13. The average is $7.67.
National Bank Financial’s Adam Shine moved Cineplex Inc. (CGX-T) to “outperform” from “tender.”