Inside the Market’s roundup of some of today’s key analyst actions
Shares of AltaGas Ltd. (ALA-T) rose 3.75 per cent on Thursday after the Calgary-based energy infrastructure company released an optimistic update to its 2021 business plan and raised its monthly dividend by 4 per cent (to $1 per share).
However, Industrial Alliance Securities’ analyst Elias Foscolos lowered his rating for its stock to “buy” from a “strong buy” recommendation on Friday, pointing to a 13-per-cent rise since an Oct. 30 upgrade.
“ALA’s 2021 business plan update highlights its increasingly utility-like characteristics,” he said. “EBITDA for 2021 is forecasted at $1.45-billion plus or minus $0.05-billion. This was slightly below our prior estimate which has been revised downward, but our longer-term outlook is slightly strengthened as we model in a higher CAGR [compound annual growth rate] in ALA’s regulated asset base. The 4-per-cent dividend increase confirms the strengthened outlook.”
With that view, Mr. Foscolos raised his target for AltaGas shares to $23 from $22. The average target is $21.67.
Elsewhere, other analysts raising their targets included:
* CIBC World Markets’ Robert Catellier to $22 from $21 with an “outperformer” rating.
“The reinstatement of a dividend growth policy, including a commitment to regular annual increases, and in-line guidance, should be a material positive for shareholder confidence,” he said.
* Scotia Capital’s Robert Hope to $22 from $20 with a “sector outperform” rating.
* Credit Suisse’s Andrew Kuske to $24 from $20 with an “outperform” rating.
* TD Securities’ Linda Ezergailis to $22 from $20 with a “buy” rating.
* BMO Nesbitt Burns’ Ben Pham to $24 from $23 with an “outperform” rating.
Though he emphasized the operating outlook for its first quarter of fiscal 2021 is being “challenged” by the latest round of COVID-19-related restrictions, Raymond James analyst Brad Sturges upgraded Canadian Apartment Properties REIT (CAR.UN-T) to “strong buy” from “outperform” on Friday in the wake of recent U.S. investor meetings with its senior management team.
“As the 2nd wave proliferates through many Canadian jurisdictions, understandably, leasing activity could be slower than usual in what is a typically slow leasing season in 1Q21, particularly in the urban city core locations in CAPREIT’s larger markets,” he said. “As a result, the potential exists for modest increases in the REIT’s average rental apartment vacancy rates (still below 3 per cent), and rising bad debt expense (still below 1 per cent). CAPREIT’s mark-to-market (MTM) opportunities in 1Q21 could look fairly muted due to the fairly low level of leasing demand expected in the very short term. That said, we expect that CAPREIT’s 1Q21 earnings results could mark the trough of the REIT’s organic growth degradation year-over-year.”
However, Mr. Sturges thinks a recovery in Canadian multifamily leasing demand following the first quarter “looks promising” as vaccine distribution ramps up.
“The dissemination of COVID-19 vaccines could drive a return to population mobility, a key multifamily demand driver at some point in 2021,” he said. “While the pandemic has momentarily hit the pause button on foreign immigration in 2020, it is possible that a growing backlog of future foreign immigration in Canada could exceed the Canadian Government’s recently increased targets of 400k annually between 2021 and 2023 to potentially over 600k people, according to CAPREIT. Also, the return of foreign students (totaling 640k in 2019) in Canada may be a further boost to multifamily demand.”
He raised his target for CAPREIT units to $61 from $58.75. The average is $57.23.
“We are upgrading CAPREIT to Strong Buy, from Outperform, to reflect its balance sheet strength, the REIT’s above-average 2021E AFFO/unit growth profile relative to its Canadian apartment REIT peers, and the attractive risk-reward profile for its Canadian portfolio that is weighted towards value-add, suburban multifamily properties in the mid to high mid-tier rental segment, which has demonstrated exceptional resiliency during COVID-19,” he said. “As the largest and most liquid Canadian multifamily REIT, it is also possible that CAPREIT’s units could recover relatively faster than its peers by capturing incrementally greater fund flows into Canadian REITs.”
Citi analyst Paul Lejuez thinks there’s “a lot to like” in Lululemon Athletica Inc.’s (LULU-Q) third-quarter financial results, calling it “great, well-run company.”
However, citing its current valuation, he thinks the Vancouver-based company’s shares are “priced near perfection with little room for error.”
On Thursday after the bell, it reported adjusted earnings per share of US$1.16, exceeding the projections of both Mr. Lejuez (82 US cents) and the Street (88 US cents). Total and comparable same store sales growth of 22 per cent and 18 per cent, respectively, also exceeded the analyst’s projections (9 per cent and 6 per cent).
“3Q sales and EPS were ahead of company and consensus expectations, though EBIT margin declined slightly driven by SG&A deleverage (which may have disappointed some),” he said. “Ecom sales increased 93 per cent while stores were down 12 per cent. 4Q sales were guided to decelerate slightly vs 3Q, while 4Q EPS were guided increase mid-single digits versus previous guide of a modest decline (though the market may have hoped for better). The Mirror acquisition seems off to a great start, on track to outpace $150-million in sales already (up from previous guide of $100-million) but it will likely be years before that acquisition moves the sales/EPS needle.”
In response to the results and stronger-than-anticipated guidance for the fourth quarter, Mr. Lejeuz raised his 2020 and 2021 earnings per share projections to US$4.69 and US$7.23, respectively, from US$4.16 and US$6.28.
Based on those increases, he raised his target for Lululemon shares to US$385 from US$340, maintaining a “neutral” rating. The average on the Street is US$404.35.
“Comp momentum has been among the best in retail and margins have expanded almost 400 basis points since 2015,” said Mr. Lejuez. “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. However, with the LULU being valued as one of the most expensive specialty retail concepts ever, we believe the risk/reward is fairly balanced.”
Separately, Mr. Lejuez upgraded Ralph Lauren Corp. (RL-N) to “buy” from “neutral” with a US$134 target, up from US$75. The average is US$91.78.
“We believe RL is making the right moves to upscale the brand while at the same time is positioned to cut a meaningful amount out of its expense base,” he said. “With lean inventories helping gross margins in the near-term and expense cuts cushioning margins in the medium-term, we believe RL can significantly increase EPS in the coming years and exceed consensus forecasts.”
He downgraded TJX Companies Inc. (TJX-N) to “neutral” from “buy” with a US$69 target, down from US$73 and below the US$71.32 consensus.
“While we continue to believe that TJX and the off-price sector will be big share gainers as other retailers close stores, we are less confident that TJX is on a visible path to reversing the downward margin trajectory they have seen for the past several years (prior to fiscal 2020). We are reducing our F21/F22 estimates to reflect our more cautious view on margins. And with the stock trading at 15 times our F21E EBITDA (and at its all-time high), we believe the risk/reward is more balanced at current levels.”
With a “line of sight to significantly improving leverage metrics, combined with improving well results,” Raymond James analyst Jeremy McCrea upgraded Crew Energy Inc. (CR-T) to “market perform” from “underperform.”
On Thursday, the Calgary-based light oil and natural gas producer released a 2021 budget that “significantly” exceeded the Street’s expectations. Its capital spending forecast of $120-$145-million topped the consensus forecast by 127 per cent ($58.3-million).
There are two ways to resolve balance sheet issues. Slowly pay down debt or grow into it with profitable investment projects,” he said. “Crew has now announced significant spending plans for 2021 and 2022 which are designed to increase production by 50 per cent over the next two years. This clearly shows internal management confidence (which has been backed up but meaningful insider share purchases over the last six months of 700,000 shares). Increased spending through 4Q20 will allow the Company to bring seven wells on production though December with an additional six drilled wells in inventory to start 2021. The Company is now guiding to 2021 production of 26-28,000 barrels of oil equivalent per day; and 2022 at 31-33,000 boe/d (from 2020 production at 21,500 boe/d).
“The aggressive spending and corresponding production growth should also optimize infrastructure utilization (especially with the revised take-or-pay agreements in place now). Because of this, Crew is guiding to cost reductions of 25 per cent from 2020 to 2022.”
Mr. McCrea hiked his target to 75 cents from 35 cents. The average on the Street is 58 cents.
Elsewhere, Stifel analyst Robert Fitzmartyn upgraded Crew to “buy” from “hold” with a 65-cent target, up from 55 cents.
Others raising their target included:
* ATB Capital Markets analyst Patrick O’Rourke to $1 from 75 cents with “speculative buy” rating
“By providing a growth alternative in a market that lacks growth options, management has the potential to regain relevancy, with a unique strategy relative to peers. Where past growth attempts by management (and peers) have been derailed by over supply driven commodity price collapses, the lack of competing growth strategies reduces the potential for a price collapse at this time,” said Mr. O’Rourke.
* Canaccord Genuity’s Anthony Petrucci to 60 cents from 50 cents with a “hold” rating.
* BMO Nesbitt Burns’ Ray Kwan to 60 cents from 50 cents with a “market perform” rating.
* National Bank Financial’s Dan Payne to 60 cents from 50 cents with a “sector perform” recommendation.
In response to the revised go-private offer from chairman Matthew Campbell and chief executive Garrett Ganden and without a competing bid emerging, Raymond James analyst Bryan Fast lowered his rating for Rocky Mountain Dealership Inc. (RME-T) to “market perform” from “outperform.”
“The revised offer price represents a 6-per-cent increase from the previous $7 per share offer,” he said. “More importantly Rocky Mountain has received support from two major shareholders with control of 18.5 per cent of shares outstanding. Although the revised offer price is still below what we view as intrinsic value, we expect that locking up support from two major shareholders is a big step in getting this deal across the finish line. We remain of the view that the deal was opportunistic, although we cannot contend with a buyer finding value in Rocky’s share.”
He added: “As we previously disclosed in our comments ... the $7 per share deal price was opportunistic and below intrinsic value. Although the $7 per share offer was in-line with our target priceprior to the announcement, our valuation was conservatively based on a discount of 0.7 times book value (vs. 5-year average 0.9 times book value), leaving room for us to move the target higher as results continued to improve. Further, a third party fairness opinion, provided a fair value range of $6.85-$7.90 per share, with the first deal price coming in just ahead of the low end of the range. The revised $7.41 per share offer price represents the midpoint of this range and while still below what we view as intrinsic value, it represents a 34-per-cent premium to the closing price of RME on Oct-30-20.”
Mr. Fast trimmed his target to $7.41 from $8.50. The average is currently $6.80.
After logging a fourth-quarter earnings beat, a series of equity analysts raised their target prices for shares of Transcontinental Inc. (TCL.A-T) on Friday.
Seeing upside to its valuation stemming from stability in its packaging business, Canaccord Genuity’s Aravinda Galappatthige increased his target to $23 from $20 with a “buy” rating. The current average is $23.50.
“With packaging returns in line with expectations in Q4 despite certain timing headwinds (following the ex-resin price impact organic growth rate of 4 per cent in Q3), we believe the market has good reason to start to feel comfortable about the stability of this sector,” he said. “Our current projections indicate packaging will be 47 per cent of total EBITDA by F2021. This assumes no M&A. We continue to believe that investors are still adjusting to TCL’s asset mix as packaging becomes a bigger part of the thesis going forward. Against that backdrop, consistency in performance in packaging, particularly in the present environment, is significant and can serve to continue to re-rate the stock. We believe that as comfort around that factor grows, there is room for valuation to trend towards other packaging comps.”
Others making adjustments included:
* CIBC World Markets’ Robert Bek to $25 from $19 with an “outperformer” rating.
“The company continues to perform well despite COVID uncertainties,” said Mr. Bek. “Strong execution is a hallmark of our thesis, and this is clearly playing out through COVID, as evidenced by yet another strong quarterly beat on EBITDA. We expect a continuation of the rebuilding of value into a post-pandemic recovery.
“We are increasing our FY21 estimates on flow-through from another quarterly beat, our incrementally positive view on packaging, and less conservatism embedded in Printing estimates, as the end of the pandemic likely nears in the next year. We have slightly increased our target multiples to reflect less risk to the story as we look ahead of COVID. We continue to see Transcontinental as a strong execution/strategy transition story, with further execution gains expected over the medium term.”
* RBC Dominion Securities’ Drew McReynolds to $23 from $22 with an “outperform” rating.
* National Bank Financial’s Adam Shine to $26 from $20 with an “outperform” rating.
* Scotia Capital’s Mark Neville to $24 from $20 with a “sector perform” rating.
* TD Securities’ Damir Gunja to $24 from $19 with a “buy” rating.
* BMO Nesbitt Burns’ Tim Casey to $21 from $17.50 with a “market perform” rating.
Though it is likely to continue to face headwinds stemming from the impact of COVID-19 pandemic, Industrial Alliance Securities analyst Neil Linsdell thinks the outlook for The North West Company Inc. (NWC-T) is “generally good” after better-than-expected third-quarter results
“North West Company benefitted from the right mix of products, good logistics (including its own airline), a good pricing strategy, government support payments, and consumers that were restricted from travelling far from their communities,” he said. “We expect continued benefits over the next few quarters, despite short-term headwinds in tourism-dependent markets.”
On Wednesday, the Winnipeg-based retailer reported sales of $553-million, up 6.4 per cent and narrowly lower than Mr. Linsdell’s $560-million estimate. Adjusted EBITDA and earnings per share of $83.6-million and 87 cents easily topped his projections ($65-million and 59 cents, respectively).
“Despite the uncertainty around COVID-19, the Company’s role as an essential service, less out-of-community shopping, improved logistics enabling better in-stock positions, and government assistance payments are expected to further benefit results over the next few quarters, although tourism-dependent communities, including islands in the Caribbean, will likely face challenges,” the analyst said. “Cost reduction initiatives and restructuring efforts that were already in process before COVID-19 should enhance profitability, although the sale of most of the Giant Tiger stores in July will hamper top line growth with an annualized heading of $200-million to revenue.”
Keeping a “buy” rating, Mr. Linsdell raised his target by a loonie to $37, matching the consensus.
In other analyst actions:
* Scotia Capital analyst Orest Wowkodaw raised his target price for shares of Capstone Mining Corp. (CS-T) in response to Friday’s announcement of its new silver streaming transaction with Wheaton Precious Metals Corp. (WPM-T). Calling the deal “very positive” for Capstone shares, he raised his target to $3 from $2.50 with a “sector outperform” rating (unchanged). The average is $1.95.
“We have increased our target multiples to reflect the company’s markedly reduced balance sheet risk profile,” said Mr. Wowkodaw.
* Calling it “an underappreciated story,” CIBC World Markets analyst John Zamparo initiated coverage of MTY Food Group Inc. (MTY-T) with an “outperformer” rating and $65 target, exceeding the $50.71 consensus.
“We believe that even after a recovery, MTY’s stock still reflects its prior business model, and that investors have not completely acknowledged its transformation,” he said. “We expect that, as MTY continues to show resilience, its recovery will continue and it will re-rate closer to peers. We also expect a resumption of dividends and M&A by mid-2021.”
* CIBC’s Mark Petrie increased his target for Empire Company Ltd. (EMP.A-T) to $43 from $42 with an “outperformer” rating. The current average is $42.89.
“Empire remains on track to deliver best-in-class top- and bottom-line growth over the next few years,” said Mr. Petrie. “Q2 results were in line with expectations with market share gains boosted by pandemic preferences (conventional > discount, online) but supported by fundamental improvements. We see valuation as attractive even as uncertainty on post-pandemic consumer behavior cloud the outlook for food retail.”
* After hosting virtual marketing meetings with its management, Desjardins Securities analyst Gary Ho increased his target for Brookfield Business Partners L.P. (BBU-N, BBU-UN-T) to US$44 from US$40 with a “buy” rating. The current average is US$40.57.
“The overall tone was constructive, in our view, and BBU’s portfolio continues to demonstrate its resilient attributes,” said Mr. Ho. “We are particularly encouraged to hear M&A discussions have reaccelerated.”
“Our positive investment thesis is predicated on: (1) a secular shift in investor appetite for private alts to drive capital flows into the asset class—BBU offers investors a unique way to gain PE exposure without liquidity constraints; (2) BBU’s team has delivered a solid investment return track record; (3) historically strong PE returns post recessionary periods; and (4) BBU’s ability to leverage BAM’s extensive platform.”
* Believing its “well-positioned for a catalyst-rich 2021,” Canaccord Genuity analyst Matt Bottomley raised the firm’s target for Ayr Strategies Inc. (AYR.A-CN) to $45 from $40 with a “speculative buy” rating (unchanged) upon assuming coverage of the stock. The average is $36.50.
“Given the large number of catalysts for AYR in 2021, its attractive growth profile and strengthened balance sheet, we believe AYR should trade closer to the average of some of the leading MSOs and we would remain buyers at current levels,” he said.
* Raymond James analyst Stephen Boland hiked his target for Goeasy Ltd. (GSY-T) to $106 from $84 with an “outperform” rating. The average is $97.
* TD Securities analyst Juan Jarrah lowered TORC Oil & Gas Ltd. (TOG-T) to “tender” from “buy” with a $3.14 target, up from $2.50. The average is $2.87.
* Mr. Jarrah raised his target for Whitecap Resources Inc. (WCP-T) to $5.50 from $3.25, keeping a “buy” rating. The average is $4.80.
* Scotia Capital analyst Michael Doumet moved his target for Finning International Inc. (FTT-T) to $33 from $27 with a “sector outperform” rating. The average is $26.50.
* Scotia’s Phil Hardie increased his target for AGF Management Ltd. (AGF.B-T) to $6.50 from $6.25, keeping a “sector perform” rating. The average is $6.38.
* Scotia’s Ovais Habib cut his target for Kirkland Lake Gold Ltd. (KL-T) to $68 from $70 with a “sector outperform” rating. The average is $79.36.
* Canaccord Genuity analyst Derek Dley raised his target for Alimentation Couche-Tard Inc. (ATD.B-T) to $53 from $49 with a “buy” rating. The average is $53.38.
* National Bank Financial analyst Endri Leno increased his target for Medical Facilities Corp. (DR-T) to $7.75 from $6.75. The average is $6.71.