Inside the Market’s roundup of some of today’s key analyst actions
Though Transat A.T. Inc.'s (TRZ-T) second-quarter results exceeded expectations on the Street, Desjardins Securities analyst Benoit Poirier thinks the uncertainty surrounding its acquisition by Air Canada as well as the impact of COVID-19 will continue to concern investors.
Accordingly, despite believing management has done an "excellent job so far" in its focus on cash preservation, he lowered his rating for the Montreal-based airline to "hold" from "tender" on Friday, awaiting "greater evidence of the turnaround and the closing of the proposed transaction."
“TRZ expects the transaction to close in 4Q CY20 following the European Commission’s decision to conduct an in-depth investigation (the deadline to rule on the deal was initially set for June 30),” said Mr. Poirier. "Meanwhile, the Canadian approval process is still underway to obtain a decision from the Minister of Transport (was expected in June although the pandemic has delayed the process).
“While TRZ remains fully committed to the transaction, during the conference call management noted that the pandemic could make it more difficult to obtain the regulatory approvals needed in the current context. Recall that the Competition Bureau had identified 83 problematic routes (refer to our note), which could make it difficult to find the right suitors to divest of these assets. Nevertheless, we believe the transaction continues to make sense for AC in the long term.”
On Thursday before the bell, Transat reported an adjusted loss of $1.03 per share for the second quarter, topping the Street's projection of a $1.97 loss. Revenue fell 36 per cent year-over-year to $571-million, but also exceeded the consensus ($542-million).
Mr. Poirier called the company's cash preservation "impressive" and believes its "solid" balance sheet should help it through the pandemic.
However, he cut his target for Transat shares to $9 from $18. The average target on the Street is $14.70.
“We see path toward C$13 as investors recognize TRZ’s long-term intrinsic value,” he said. “Our target of C$9.00 now includes the company’s surplus cash of $6.95 per share at the end of FY21 and $1.59 per share for the land in Mexico. As TRZ’s financial results recover, our valuation could increase by $4.53 per share (based on 2 times FY21 EBITDA) although this is premature in light of current uncertainties.”
After its quarterly results fell short of expectations, RBC Dominion Securities analyst Kate Fitzsimons thinks Lululemon Athletica Inc.'s (LULU-Q) view on the state of the recovery of its brick-and-mortar stores as well as a large jump in inventory are likely to be near-term overhangs.
However, she said she remains a buyer of the Vancouver-based company's shares, pointing to category headwinds, market share opportunities, "strong" digital infrastructure and the state of its "best-in-class" balance sheet.
"While expectations were not low on LULU headed into the print, the key question for our group remains who is structurally better positioned for accelerating growth post-COVID," said Ms. Fitzsimons. "Despite comps running up 20 per cent through early March, LULU saw its first revenue miss since 2016 in a most unusual quarter against elevated expectations.
"That said, comments that LULU saw its biggest market share gains in the athletic category in years (on product margins up 180 basis points!) affirm our view that structural tailwinds for LULU will be at the brand's back post-COVID-19, with additional tailwinds in a WFH world as consumers emphasize comfort and wellness. That said, with estimates coming down on messaging to a slower productivity rebuild into 2H20, we would be buyers on a pullback as we believe the tenets of the $6-billion Power of Three plans remain firmly intact."
After the bell on Thursday, Lululemon reported a 17-per-cent decline in sales in its first quarter, exceeding the Street's expectation of a 12-per-cent drop. Earnings per share of 22 US cents missed the consensus by a penny.
"Notably the topline missed for the first time since 2Q16(!) but it’s important to note that roughly half the revenue miss came from their ‘other’ segment, and we also flag that 1Q saw one of LULU’s largest market share gains in recent years," she said.
Despite the miss, Ms. Fitzsimons raised her full-year 2020 EPS projection to US$3.93 from US$3.55, suggesting the expectations of both the company and the Street are too conservative.
“Currently, productivity in the 60 per cent of stores open is at 75 per cent plus (some stores positive year-over-year) driven by conversion,” she said. “While we expect investors were maybe looking for more, we note the team is messaging to a slower stores productivity recovery into 2H20 given strong comparisons and capacity/traffic restrictions in a social distancing world. The fact that China stores are up 20 per cent in May suggests there could be conservatism with the productivity assumption, we’d note. LULU still expects Ecomm to outperform, with the internal view that top line trends return to high single-digit growth in 4Q (suggesting stores likely negative). This mirrors the EPS growth trajectory, of less worse into 2Q and 3Q before returning to growth in 4Q. Note the current consensus has EPS at 6-per-cent growth in 3Q, so we’d expect it to adjust from here. We model top line down 8 per cent, up 2 per cent, up 9 per cent, from 2Q-4Q led by digital up 125 per cent, up 75 per cent, up 50 per cent.”
Keeping an “outperform” rating for its shares, she trimmed her target to US$348 from US$360. The average on the Street is US$296.37.
Elsewhere, Citi analyst Paul Lejuez raised his target to US$340 from US$230 with a "buy" rating.
Mr. Lejuez said: “1Q sales down 17 per cent fell short of expectations, but it is the only retailer (that closed stores) that made money in 1Q. The recovery of reopened stores in North America (down 25 per cent to flat) also fell short of a high bar. The bar is now lower and LULU’s long-term growth story is intact. LULU is a long-term market share winner benefitting from both athletic and casual trends (which are likely to gain further momentum in this environment). LULU is one of the few high quality growth stories in retail and given this scarcity value, shares warrant a significant premium to the rest of retail.”
On Thursday, the cannabis producer reported revenue of $22.1-million, up 30 per cent from the previous quarter and ahead of Mr. Bottomley's $20.2-million projection.
“The driving factors behind the sequential top-line growth included: (1) growth in its value-brand Original Stash (a consumer segment that continues to see outsized growth in the sector); and (2) the introduction of newly launched products, including hash and extract drops,” the analyst said. "As a result, the company saw its adult-use volumes increase by 42 per cent quarter-over-quarter, which outpaced revenues due to a decline in the company’s average adult-use net pricing, which came in at $2.25 per gram versus $2.47 in FQ2.
"Further, the company continues to hold a more than 30-per-cent market share in Quebec, and as can be inferred from its pricing vs. volume growth above, HEXO continues to place importance on securing/increasing market share throughout Canada as opposed to maximizing average pricing in the near term."
Hexo also achieved an improved adjusted gross margin at the high end of the industry range, which Mr. Bottomley called “particularly encouraging, given its focus on the lower-priced value segment of the market.”
Raising his revenue projections for the next two fiscal years, Mr. Bottomley raised his 2020 EPS estimate to a 74-cent loss from a $1.20 deficit previously.
That led him to increase his target for Hexo shares to $1.50 from $1.30. The average on the Street is $1.48.
However, he kept a "hold" rating for the stock, saying he's "staying on the sidelines."
“We believe HEXO is still in the early stages of its refocused efforts (with its new Cannabis 2.0 products just beginning to launch) we would remain on the sidelines as the company continues to navigate what is still a challenging market in Canada – but we’re encouraged by the FQ3 print,” he said.
Elsewhere, Desjardins Securities analyst John Chu increased his target to $1.75 from 90 cents with a "hold" rating.
Mr. Chu said: “A strong 3Q reinforced the strides HEXO has made on the margin and cost front, leading us to move up our estimate for HEXO achieving positive EBITDA by one quarter (to 2Q FY21 from 3Q FY21). Despite a dominant market share in Québec, we need to see meaningful progress in other provinces against more established brands and more competition before we feel more comfortable that it can replicate its success in other provinces.”
In other analyst actions:
* Pointing to “strong” underlying trends, Scotia Capital analyst Konark Gupta raised Mullen Group Ltd. (MTL-T) to “sector outperform” from “sector perform” with a $7.50 target. The average is $7.23.
“We are upgrading MTL after the company disclosed much stronger than expected Q2 results, despite the impact of COVID-19 on both trucking and energy segments,” he said. “We were also positively surprised by the strong cash position, considering that MTL has already exceeded our buyback assumption for Q2 with 13 more trading days left in the quarter.”
* BMO Nesbitt Burns analyst Joel Tiss lowered Caterpillar Inc. (CAT-N) to “market perform” from “outperform” with a US$130 target. The average on the Street is US$126.47.
“We believe any near-term recovery for its end markets will be somewhat challenged by customers’ budgetary constraints and government finances being stretched,” he said.
“These factors will likely overwhelm the myriad internal improvements occurring at the company, at least for the next few years.”
* Desjardins Securities analyst David Newman raised his target for Superior Plus Corp. (SPB-T) by a loonie to $13.50 with a "buy rating (unchanged). The average on the Street is $12.71.
“With just a few weeks remaining in 2Q20, we have raised our estimates across the board to reflect the cooler start to spring (positive for propane volumes, especially in the U.S.), as well as continued strong margins (effective margin management (lower wholesale propane prices) and impact of recent cost-cutting initiatives),” he said. "While Energy Distribution (ED) should benefit from a colder-than-normal April and May, Specialty Chemicals (SC) should increasingly benefit from a recovery in caustic soda prices (more toward 2H20), which should backfill some of the recent slackening in chemical volumes.
“We are increasing our target price ... given SPB’s resilience against COVID-19/recession (propane is an essential commodity, more driven by the weather), as we expect to be highlighted in 2Q20, imminent tuck-in acquisitions in the U.S. and a substantially improved balance sheet (augmented by the recent Brookfield investment).”
* Acumen Capital analyst Nick Corcoran increased his target for Andrew Peller Ltd. (ADW.A-T) shares to $15 from $14.50 with a “buy” rating (unchanged). The average is $14.75.
“We view the Q4/FY20 results as positive. While COVID-19 is expected to impact product mix and channel mix, ADW’s operations remain well positioned,” he said.
* Raymond James analyst Brian MacArhur raised his target for Labrador Iron Ore Royalty Corp. (LIF-T) by a loonie to $27 with an “outperform” rating (unchanged). The average is $25.56.
“We believe Labrador Iron Ore Royalty Corporation offers investors good exposure to premium iron ore through its interest in and royalties on Iron Ore Company of Canada (IOC),” he said. “Directly and through its wholly-owned subsidiary, Hollinger-Hanna Limited, LIF owns a 15.1-per-cent equity interest in IOC and receives a 7-per-cent gross overriding royalty on all iron ore produced from leased lands, sold and shipped by IOC and a 10-cent per tonne commission on sales of iron ore by IOC. Given LIF’s exposure to premium iron ore (which we believe should trade at a premium given structural changes in the iron ore market), low jurisdictional risk and attractive dividend yield, we rate the shares Outperform. We also note additional value might be created if the royalty cash flows and other cash flows were split into separate companies in a tax-efficient manner given royalty companies historically trade at a higher multiple given their lower risk.”