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Inside the Market’s roundup of some of today’s key analyst actions

Thomson Reuters Corp. (TRI-N, TRI-T) appears poised to deliver both capital protection and appreciation, according to RBC Dominion Securities analyst Drew McReynolds.

In a research note released Friday before the bell, Mr. McReynolds raised his rating for its stock to “outperform” from “sector perform.”

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“With the stock hovering above our downside scenario range of US$55- US$60, we believe Thomson Reuters at current levels is now positioned to deliver capital protection in the event of a prolonged 2008-2009 style recession and recovery, yet also positioned to deliver capital appreciation should this recession be deep but relatively shortlived with a 'V-like’ recovery beginning in H2/20,” he said.

“We acknowledge that unprecedented uncertainty and pending global economic and credit market headwinds due to COVID-19 will negatively impact Thomson Reuters’ earnings and valuation multiple as equity risk premiums remain elevated. Nevertheless, prior economic cycles for Thomson Reuters have shown: (i) a defensive revenue mix with revenues for the three core businesses (legal, tax, accounting) proving remarkably resilient (albeit not immune); (ii) an ability for management to realize additional cost efficiencies to mitigate incremental revenue pressure and protect profitability; and (iii) the stock typically experiences a reasonably sharp but short-lived period of multiple compression before recovering concurrent with an improvement in market sentiment. Furthermore, Thomson Reuters’ strong balance sheet and liquidity position should enable the company to weather virtually all global economic and/or credit market scenarios that could emerge over the next 1-2 years thus significantly enhancing the stock’s relative risk profile.”

Mr. McReynolds emphasized the company's "defensive" revenue mix, seeing its legal, tax and accounting verticals within the information publishing sector to be "among the most resilient to a recession." He said those three verticals accounted for 78 per cent of consolidated revenues and 93 per cent of his “core” asset value for the company.

“These three verticals generated US$4.6-billion in revenues in 2019, and with approximately 80 per cent of these revenues recurring/subscription-based, we would expect revenues to prove relatively resilient again through this downturn,” the analyst said. “However, this revenue base will not be fully immune given some more cyclically sensitive businesses.”

Mr. McReynolds is now forecasting a deceleration in organic growth to 2.3 per cent in 2020 from 4 per cent in 2019 (and below current guidance of a 4.0-4.5 per cent) and to 2.8 per cent in 2021.

He also lowered his target for Thomson Reuters shares to US$70 from US$82, noting they are now “hovering just above our downside scenario range of US$55-US$60.” The average target on the Street is US$75.52.

“We see a downside scenario range of US$55-US$60 should this cycle play out in duration and magnitude like the 2008-2009 recession (looking past the pending Q2/20 deep economic contraction),” the analyst said. “In this scenario, we would expect Thomson Reuters to deliver relative capital protection with this scenario factoring in a trough FTM EV/ EBITDA [forward 12-month enterprise value to earnings before interest, taxes, depreciation and amortization] multiple 12.5-13.0 times versus 13.6 times currently and representing 4.0-4.5 times multiple points of compression versus the peak multiple of 17.0 times. The 4.0-4.5 times points of multiple compression is less than 4.9 times experienced during the 2008-2009 recession reflecting what we believe is a more resilient asset mix that now excludes Financial & Risk/Refinitiv, a stronger balance sheet, the likely absence of widespread firm failures impacting the largest of Thomson Reuters customers, and an exceptionally low interest rate environment. Should this recession be deep but relatively short-lived with a “V-like” recovery beginning in H2/20 (i.e., not a 2008-2009 style recession), we suspect the March 2020 lows could very well be the low for the stock this cycle and thus would expect steady capital appreciation from here.”

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Citi analyst Paul Lejuez expects Lululemon Athletica Inc. (LULU-Q) to “emerge from the Covid-19 crisis with their brand as strong as ever.”

After the bell on Thursday, the Vancouver-based company reported fourth-quarter financial results that the analyst deemed “standout” and capped off a “strong” year.

Earnings per share of US$2.28 exceeded the projections of both Mr. Lejeuz (US$2.23) and the Street (US$2.25), driven by a 20-per-cent year-over-year rise in net revenue (US$1.4-billion) and 9-per-cent increase in comparable store sales. Ecommerce growth jumped 41 per cent from the same period a year ago.

"COVID-19 will cause a temporary pause in LULU’s exceptional growth due to store closings but .... we believe LULU will likely fare better than most during the COVID-19 crisis given the strength and momentum of their brand, and longer-term LULU’s EPS power remains intact," said Mr. Lejuez. "LULU is already seeing demand bounce back strongly in China as stores have reopened and in N America/EMEA, Ecom growth accelerated once stores closed."

Based on the results, which did not include first-quarter or fiscal 2020 guidance, Mr. Lejuez raised his 2020 and 2021 EPS projections to US$5.06 and US$6.31, respectively, from US$4.89 and US$6.01 in order to reflect "reflect the beat in 4Q, a stronger international business in fiscal 2020 given the faster recovery in China and an expected stronger bounce back in comps in fiscal 2021."

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Keeping a "buy" rating for Lululemon shares, he increased his target to US$230 from US$190. The average is US$246.11.

“Comp momentum has been among the best in retail and margins have expanded almost 400 basis points since 2015,” he said. “Product innovation continues to drive strong results in seemingly developed categories such as women’s pants, the men’s business is a big opportunity, and the customer has given LULU license to broaden into new categories. While COVID-19 disruptions will be a near-term headwind, there is no change to LULU’s long-term earnings power.”

Elsewhere, RBC Dominion Securities analyst Kate Fitzsimons increased her target to US$225 from US$195, keeping an "outperform" rating.

Ms. Fitzsimons said: “Encouraging China comments, strong digital demand, expense and inventory management, and strong balance sheet suggest LULU has the bones to weather the near-term volatility, with longer-term market share opportunities on the other side. Remain buyers.”


Citi analyst Alexander Hacking upgraded First Quantum Minerals Ltd. (FM-T) in the wake of the firm reducing its copper prices to adjust for the “ongoing demand shock.”

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"We are not too concerned about copper prices – these are into the cost curve and will bounce back. Operational risk, i.e. potential mine closures, are a clear risk and harder to price," he said in a research note released Friday.

Mr. Hacking said there's a "clear correlation risk and reward on the pure play coppers," leading him to raise First Quantum to "buy" from "neutral."

"First Quantum offers substantial upside to 1 times NAV [net asset value] but the company’s high debt load remains a concern," he said. "Any operational interruptions at Cobre Panama would be painful. We model FCF [free cash flow] breakeven in 2020 helped by the hedging. On balance we see enough upside to justify a Buy rating. In particular, we see potential buyers for stakes in the company’s assets (and note that Chinese miner Jiangxi has already built a 19-per-cent stake)."

Mr. Hacking reduced his 2020 and 2021 earnings before interest, taxes, depreciaiton and amortization (EBITDA) projections for First Quantum by 43 per cent and 26 per cent, respectively.

With those changes, he lowered his target price for its shares to $11 from $13, citing “lower near-term copper price forecasts and a more conservative long-term price assumption.” The average on the Street is $14.20.


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Desjardins Securities analyst David Newman thinks Superior Plus Corp. (SPB-T) has emerged as “a resilient name” after providing an “encouraging” update on the impact of COVID-19 on its operations.

He expects the Toronto-based company to be able to navigate the pandemic given its “recession-resistant attributes,” flexible cost structure and “prudent” balance sheet management, which includes high debt convenant ceilings and a long-term debt maturity profile.

"In Energy Distribution (ED), propane is considered an essential product by some Canadian provinces and the U.S.," he said. "It is more sensitive to weather than to the pandemic or economic cycles (the mild winter this year expected to impact 1Q20 volumes). During the Great Recession, lower volumes were in part attributable to the warmer weather. ED is now heading into the low season (2Q/3Q represent 10 per cent of ED EBITDA), with the impact of COVID-19 or the weather less relevant.

“SPB’s Specialty Chemicals (SC) plants are operating at pre-crisis levels. There is a short-term COVID-induced surge in consumption of paper and bleach products, which have boosted demand for sodium chlorate and chlorine. We expect demand to soften eventually as more customers shut down/reduce their production capacity. Looking back to the Great Recession, SC volumes and EBITDA declined in 2009 but quickly recovered in 2010/11.”

Keeping a "buy" rating, he trimmed his target for Superior Plus shares to $12 from $13.50. The average is currently $13.21.

Elsewhere, Industrial Alliance Securities analyst Elias Foscolos maintained a "buy" rating and $10.50 target.

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Mr. Foscolos said: “SPB’s revised presentation and information in its news release confirmed our prior outlook. First, weather plays the most important factor in propane sales and economic variables are secondary due to the utility type nature of sales. Second, the Company plans to update its EBITDA guidance with the release of its Q1/20 results. Our current estimate of $440-million is 12 per cent below guidance midpoint. Finally, we currently have no concerns with the Company’s debt covenants.”


Brampton, Ont.-based accessibility product manufacturer Savaria Corp. (SIS-T) is “well-positioned in an uncertain environment,” said Desjardins Securities analyst Frederic Tremblay following the release of “solid” fourth-quarter results.

“Management noted that results so far in 1Q20 appear consistent with expectations,” he said. “Demand for accessibility products has remained solid since the start of the COVID-19 outbreak and key manufacturing facilities in North American and China are open. Some 2Q sales could be delayed due to temporary construction site shutdowns. The Span division is increasing manufacturing capacity for medical beds to meet increased demand during this health crisis. The company is also looking to seize incremental growth opportunities with new products in both the Accessibility and Patient Handling segments.”

“The secular trend of an aging population with rising needs for accessibility, mobility and safe patient handling solutions is intact. Furthermore, we view several of Savaria’s products as resilient in a tougher economic environment and we note several steps taken by management to diversify the business, most notably an entry into patient handling/medical products (23 per cent of 2019 revenue) through acquisitions and internal product development. Finally, Savaria’s financial position is strong, with low leverage, a $39.7-million cash position and $110.0-million in available credit facilities.”

Keeping a "buy" rating for Savaria shares, Mr. Tremblay trimmed his target to $15.50 from $17. The average is $15.75.

“Although COVID-19 could mean some sales delays, we believe Savaria is well-equipped to weather the storm, thanks to product diversification and a solid balance sheet,” he said.

Meanwhile, Laurentian Bank Securities' Nick Agostino lowered his target to $15 from $17 with a "buy" rating (unchanged), citing "economic uncertainty and lowered visibility as we navigate through the virus-induced market volatility."


MTY Food Group Inc. (MTY-T) “wasn’t built for pandemics,” said Raymond James analyst Michael Glen.

“Over the years covering MTY, we have largely held a favourable view regarding the strategy and growth of the organization,” he said. “This strategy largely revolved around the acquisition and integration of restaurant franchisors, many of which were in need of some degree of restructuring and cost savings plan. We found that MTY’s history and track-record placed them well to acquire and integrate such businesses, which entailed the heavy lifting associated in right-sizing organizations, leveraging central services, and consolidating and closing down lower volume unprofitable stores. That all said, as we look forward from this point, we believe the strategy and outlook will change substantially, and we need to reflect several changes with our model and assumptions.”

Mr. Glen reduced his financial expectations for both 2020 and 2021, dropping his earnings per share projections to $1.15 and $1.42, respectively, from $3.42 and $3.60.

He said: “We have changed our forecast to reflect the following assumptions: 1. We believe that MTY/Kahala/Papa Murphy’s should be able to actively take advantage of those stimulus programs being put in place in the U.S., which will offer an important level of relief to restaurant franchisees; 2. We absolutely believe that MTY will survive this downturn and will have the financial flexibility to do so; 3. We believe store closures (which were already elevated pre-coronavirus) will accelerate in the short-term (we are now assuming a 9-per-cent system sales headwind on closures in the next year, which is based on 1,000 gross closures) which (importantly) will also entail a significant increase in corporate stores that will need to be managed (at least in the short-term); 4. We believe new store openings / new franchise sales (which was an important offset to closings in the past) will grind to a halt for at least the next year; 5. Through fiscal 2Q (March-May), we anticipate considerable pressure on SSSG in 2Q (we have 2Q Canada down 50 per cent with U.S. down 30 per cent) with a continued impact through the balance of the year (we now see consolidated SSSG dropping 17.5 per cent in F2020); 6. We do not see any ability for MTY to participate in M&A as the company will need to take actions to protect its existing store base and balance sheet; and 7. We strongly believe it would be prudent for MTY to reduce the dividend to zero through at least the next year as the company works through a very significant period of changes.”

Mr. Glen dropped his target for MTY shares to $35 from $62, citing the "significant" reductions to his forecast. The average is currently $43.25.

“We anticipate MTY will report 1QF20 results in early April, and we will look for some incremental clarity on the outlook at that point,” he said.


In other analyst actions:

* Raymond James analyst Frederic Bastien cut his target for FirstService Corp. (FSV-Q, FSV-T) to US$105 from US$120 with an “outperform” rating. The average is US$109.50.

“We see in FirstService a well-run company poised to consolidate North America’s highly fragmented property services market and deliver above-average shareholder returns for decades to come,” he said. “It owns more defensive businesses than ever, including Global Restoration, and all are deemed essential services that will continue to operate through the coronavirus pandemic. These won’t spare FSV from the widespread economic disruption that is upon us, to be perfectly clear, but they should hold it in relatively good stead. We back this up herein with a stress test of our estimates for both FirstService Residential and FirstService Brands.”

* Canaccord Genuity analyst Matt Bottomley lowered his financial projections and target for shares of Harvest Health & Recreation Inc. (HARV-C) after it announced it announced the “mutual termination” of its merger agreement with Verano Holdings LLC.

Keeping a "speculative buy" rating, his target slid to $4.50 from $7. The average is $8.14.

“Although we believe Verano was the most attractive of Harvest’s pending deals, given current market conditions and HARV’s balance sheet (US$107-million of cash), we do not believe the company was fully funded to successfully close/integrate all its announced M&A to date,” siad Mr. Bottomley. “As a result, the removal of Verano should help alleviate some of this concern as the company focuses its efforts on existing core markets such as AZ, PA, FL and MD. Harvest plans to provide a more comprehensive corporate and M&A update and forward outlook when it reports its Q4 results on April 7.”

* TD Securities analyst Brian Morrison upgraded Magna International Inc. (MG-T, MGA-N) to “buy” from “hold” with a $40 target, down from $60. The average is $55.65.

* Canaccord Genuity’s Tania Gonsalves cut Medexus Pharmaceuticals Inc. (MDP-X) to “speculative buy” from “buy” with a $5 target, down from $6.50 and below the $6.03 average.

* Goldman Sachs analyst Adam Samuelson raised Nutrien Ltd. (NTR-N, NTR-T) to “buy” from “neutral” with a target price of US$45 per share, falling from US$53. The average is US$52.90.

* BMO Nesbitt Burns analyst Rene Cartier downgraded Trevali Mining Corp. (TV-T) to “market perform” from “outperform” with a 25-cent target, down from 30 cents and below the 27-cent average.

“Along with a number of other metals, zinc prices have been challenged and the suspension of operating activities at the Caribou mine is not entirely surprising,” he said.

“We are downgrading shares of TV ... as, in our view, there is elevated risk of additional mine curtailments, liquidity pressure, and concerns surrounding covenants.”

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