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

Jefferies analyst Owen Bennett lowered his rating of Aurora Cannabis Inc. (ACB-T, ACB-N) to “underperform" from “hold” on Friday, seeing the re-rating of its shares following the release of its third-quarter results as “neither justified nor sustainable”

Though he deemed the results as relatively positive, Mr. Bennett thinks downside is likely, given the stock’s current valuation and the presence of growing operational obstacles.

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“We think near-term sales and GM [gross margin] headwinds are not fully appreciated, while celebrating a hiatus on further dilution is short-sighted, it [is] inevitably returning again when the balance sheet is addressed,” he said “Still set-up well longer-term but we see give back in the price over the next few quarters as likely.”

Mr. Bennett also raised concerns about Aurora’s acquisition of U.S. hemp-based cannabidiol company Reliva LLC.

“Aurora’s ex-COO once described U.S. entry as non-negotiable. We agree, though we do view this particular deal/timing as strange,” he saud. “There is still no permanent CEO to lead this CBD push, the CBD space is experiencing significant headwinds currently, there is further dilution at a questionable multiple which has been a criticism of the past, and the [balance sheet] does not afford investment behind the purchase.”

His target for Aurora shares rose to $14 from $12. The average on the Street is $13.79.


Desjardins Securities analyst Benoit Poirier said he was “pleasantly surprised” by the results of a survey of BRP Inc. (DOO-T) dealers, leading him to “better appreciate the strong demand for powersports products currently.”

"We recently performed a channel check with 30 dealers across North America," he said. "Surprisingly, retail sales appear to have recovered rapidly in April and May after some weakness in March. We had underestimated the impact of lockdowns — notably, restrictions on summer travel or group hobbies, which left consumers looking for alternatives to entertain themselves. Powersports are emerging as a solid choice in the context of social distancing; specifically, dealers noted solid demand for off-road products while on-road vehicles have been negatively impacted by COVID-19-related restrictions."

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Based on the findings, he raised his revenue and earnings expectations for both fiscal 2021 and 2022. He's now projecting earnings per share of $1.12 and $2.39, respectively, from 97 cents and $1.57.

“All of the dealers we spoke with reported solid demand for powersports products; moreover, many noted that they had never seen comparable levels of demand in the industry (some even told us that they were literally missing out on sales while speaking with us!),” he said. “We had initially expected that demand for powersports products would be negatively impacted by the pandemic and the resulting uncertainty around its impact on the economy. However, we had underestimated the impact of lockdowns on people’s lives—notably, the inability to travel or participate in group hobbies, which left consumers looking for alternatives to entertain themselves. Powersports are emerging as a solid choice in the context of social distancing, and dealers noted that demand was strong with families and industry newcomers, which supports this view. While we believe measures implemented to reduce the spread of the virus (such as limiting the number of people allowed into a dealership at one time, reduced staff and shorter opening hours) may be responsible for a portion of the heavy workload currently experienced by dealers, we believe the strong increase in the number of units sold (up to a 35-per-cent increase in some cases) is a testament to the demand for powersports products currently.”

Keeping a “buy” rating for BRP shares, Mr. Poirier hiked his target to $48 from $37. The average on the Street is $34.55.

“We reiterate our long-term favourable view of the name and continue to believe DOO is in a better position to face this crisis than it was in 2008–09,” he said.


Despite lowering his financial expectations for fiscal 2021 ahead of the release of its fourth-quarter 2020 results on May 28, Canaccord Genuity analyst Derek Dley thinks Aritzia Inc. (ATZ-T) is one of few retailers that is “well positioned to navigate the challenging near-term environment.”

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“The company had net cash of $21-million at the end of Q3/F20 and had been investing heavily in its e-commerce infrastructure, with e-commerce sales now representing over 20 per cent of sales, up from 12 per cent at the time of the IPO,” he said. “With heavy investments already made to support growth in e-commerce, we believe the company is well positioned for the new post-COVID-19 consumer economy, and believe the shares are attractively valued for those investors who can ‘look over the near-term valley.’”

For the fourth quarter, Mr. Dley expects the Vancouver-based company to report revenue of $268-million, up 4 per cent year-over-year despite having one less selling week. He's projecting EBITDA and earnings per share of $40-million and 21 cents, both in-line with expectations on the Street and flat compared to a year ago.

“During Aritzia’s Q3/F20 earnings call, the company commented it expected to generate high-single-digit same-store sales growth during the final quarter of the year,” the analyst said. “We are forecasting same-store sales growth of 9.0 per cent for the quarter. As a reminder, Q4/F20 closed at the end of February, meaning Q4/F20 was not impacted by COVID-19, in our view. We believe the company had strong momentum heading into the Holiday selling period, and was able to capitalize on both sales of new seasonal items (including its first foray into men’s products with the Mr. Super Puff jacket), along with continued growth of its core essential sellers platform.”

With approximately 75 per cent of its revenue generated by brick-and-mortar stores, Mr. Dley thinks the closures coming from COVID-19 will be felt in the first quarter of fiscal 2021. He’s now expecting same-store sales growth of negative 60 per cent down from a precious estimate of a 10-per-cent decline.

His full-year EBITDA estimate is now $143-million, down from $183-million. Mr. Dley's EPS projection is now 68 cents, falling from 94 cents.

Keeping a “buy” rating, he trimmed his target for Aritzia shares to $21 from $23. The average is $19.71.

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Heroux-Devtek Inc. (HRX-T) faces a difficult future amid significant changes to the commercial aerospace industry sparked by the COVID-19 pandemic, according to Raymond James analyst Ben Cherniavsky.

On Thursday, the Quebec-based landing gear manufacturer reported fourth-quarter 2020 earnings per share of 38 cents after adjusting for impairment charges. That exceeded Mr. Cherniavsky's 33-cent projection and was up 4 cents year-over-year.

“As some investors may recall, our decision to downgrade Heroux-Devtek from Outperform to Market Perform last summer was largely based on valuation,” the analyst said. "Our view at the time was that the stock was ‘priced for perfection’ with implied expectations of steady, uninterrupted earnings growth for years to come. Believing that management had indeed built a compelling platform for future growth, we were empathetic to this bullish sentiment. However, we were also mindful that the aerospace markets were inherently cyclical and that the most recent boom had been abnormally extended (to quote from said downgrade note: ‘we are mindful of the cyclical risks, execution risks, and balance sheet risks that are inherent in this business’).

"In retrospect, our prudent attention to risk vs. return proved to be well-founded. While we obviously didn't predict the Covid-19 pandemic, the reality is that Heroux now faces a radically different outlook compared to nine months ago. The market has clearly taken account of this, sending the company's share price down 50 per cent. Accordingly, the risk-return profile for investors has changed."

Pointing to a downturn brought on by COVID-19, which has foerced it to cut its workforce by 10 per cent and close the former Alta Precision plant, Mr. Cherniavksy dropped his 2021 EPS forecast to 45 cents from $1.05. He also introduced a 2022 projection of 64 cents.

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Keeping a "market perform" rating, he dropped his target for Heroux-Devtek shares to $10.50 from $22.50. The average is $14.07.

“Given the positive bias that we have held towards the company’s long-term fundamentals, it stands to reason that we like Heroux’s stock more at today’s price of $10 than we did when we downgraded it last year at $20,” he said. “That said, we have stopped short of upgrading our rating back to Outperform because we believe that this down-cycle will be particularly acute and extended with few catalysts for sustainable share price appreciation on the near-term horizon. Most likely, we expect the next few years to resemble the aftermath of 9/11, during which aerospace stocks spent several years consolidating in a range-bound fashion before eventually resuming their upward flight pattern. While Heroux is a much different company today vs. back then, the laws of supply and demand have not changed, suggesting that it could be a long time before the industry fully absorbs the excesses that were built-up over the past boom.”


In other analyst actions:

* National Bank Financial analyst Michael Parkin lowered Kirkland Lake Gold Ltd. (KL-T) and Yamana Gold Inc. (YRI-T) to “sector perform” from “outperform.” His target for Kirkland Lake fell to $63 from $64, which falls below the $66.16 average. His Yamana target rose to $8.25 from $8, versus a $7.92 average.

Mr. Parkin raised New Gold Inc. (NGD-T) to “outperform” from “sector perform” with a $2.10 target, rising from $1.30. The average is $1.60.

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* Scotia Capital analyst Benoit Laprade lowered Canfor Pulp Products Inc. (CFX-T) to “sector perform” from “sector outperform” with an $8 target, down from $8.50 but above the $7.80 average.

“We remain concerned that fibre availability/cost issues could be ongoing for some time in a context of potentially significant capex required for an aging boiler a few years down the road,” said Mr. Laprade. “We continue to forecast pulp prices recovering from recent troughs, otherwise more curtailments could be required to bring pulp prices above the global cost curve.”

* Desjardins Securities analyst David Newman resumed coverage of Greenbrook TMS Inc. (GTMS-T), a Toronto-based Toronto-based provider of transcranial magnetic stimulation (TMS), with a “buy” rating and $3 target, down from $3.50. The average on the Street is $3.35.

“We believe COVID-19/recession could amplify the need and trend toward better mental healthcare (growing pent-up demand), greater awareness and increased investment into TMS indications,” said Mr. Newman. "Beyond the US$15-billion market for major depressive disorder (MDD), a growing list of potential indications—including obsessive-compulsive disorder (OCD; FDA-cleared, full reimbursement expected in the next 18–24 months (some case-by-case reimbursement today)), bipolar depression, post-traumatic stress disorder (PTSD) and addiction—could expand the total addressable market (TAM) by 2–3 times.

“However, in the near term, we believe the impact of COVID-19 and recession could weigh on 2Q20 and potentially 3Q20 revenue (and EBITDA).”

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