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

Lululemon Athletica Inc. (LULU-Q) was “impressively consistent again” as its better-than-expected third-quarter financial results displayed “strength across the board,” according to BTIG’s Camilo Lyon.

He was one of several equity analysts on the Street to raise their target price for shares of the Vancouver-based apparel maker following the release of its quarterly results after the bell on Thursday.

Despite macro challenges brought on by global supply chain disruptions, Lululemon reported earnings per share of US$1.62, exceeding the US$1.40 forecast from both Mr. Lyon and the Street. The beat came alongside “solid” revenue growth of 30 per cent, which he noted was balanced by both gains in stores (with comps up 31 per cent) and direct-to-consumer (where digital grew 23 per cent).

“Importantly, robust demand trends have continued into FQ4, particularly online with a strong Black Friday/Cyber Monday performance including the highest volume e-commerce day ever on Thanksgiving Day,” Mr. Lyon said. “Despite pervasive supply chain pressures, LULU has leaned into its core, season-less product assortment (40 per cent of total inventory) while also leveraging its longstanding vendor relationships to ensure it has appropriate levels of inventory on hand (FQ3 inventory grew 22 per cent, slightly ahead of its 15-20-per-cent plan). That said, LULU is not immune to supply chain issues and is certainly leaving some demand on the table, however, its full-price selling strategy (markdowns are down versus F19) is preserving total gross margins in the meantime.”

With the “solid” quarter, Lululemon raised its full-year outlook and fourth-quarter adjusted earnings per share to US$3.25 to US$3.32, matching the Street’s US$3.30 forecast.

However, it cut its full-year sales outlook for Mirror, the at-home fitness device acquired for US$500-million in 2020. It now is projecting between US$125-million and US$130-million, down from between US$250-million and US$275-million.

Mr. Lyon wasn’t concerned by the reduction, noting: “It represents less than 3 per cent of the business today. More importantly, LULU maintained its 3-5-per-cent dilution estimate for F21 and expects EPS dilution to decrease next year.

“Our concern around the duration of MIRROR dilution has been allayed, as it is clear the company is appropriately managing investments and not throwing good money after bad. While subscribers grew 40 per cent year-over-year, we believe higher levels of promotions in the market coupled with increasing digital ad costs are behind the decision to pull back on MIRROR investments. Taken together, the company demonstrated its ability to execute consistently in a volatile macro environment as consumer demand remains strong for LULU product, positioning it well for holiday and into F22.”

Reiterating a “buy” recommendation for Lululemon shares, Mr. Lyon increased his target to US$490 from US$473. The average target on the Street is US$469.36, according to Refinitiv data.

“While we expect COVID-19 to materially impact the retail industry, we believe LULU is well-positioned to weather the current crisis from both a liquidity perspective and a brand perspective,” he said. “We believe LULU is among the few companies that entered the current environment from a position of strength and as such, will exit it stronger. In addition, we believe LULU is a beneficiary of consumers continuing to spend on at-home exercise/workout-related activities in the current COVID-19 environment.

“We believe LULU’s 2023 CAGR [compound annual growth rate] targets (low-teens revenue growth with higher EPS growth) at its investor day remain achievable as well as its goals laid out in its 5-year plan, calling for the company to double sales in men’s and online, quadruple international sales, and continue double-digit growth in women’s and in North America. The company continues to introduce innovative products in its legacy categories as well as expand into new product offerings, which should allow LULU to continue on a path of growth post-pandemic. In addition, we believe LULU’s international expansion efforts, particularly in China, will continue to enhance profitability and expand the brand’s reach.”

Other analysts increasing their targets include:

* MKM Partners’ Roxanne Meyer to US$485 from US$468 with a “buy” rating.

“LULU’s 3Q sales and margins were significantly better than we expected, especially as we braced for potential disruption from supply chain (and particularly, LULU’s Vietnam exposure),” she said. “The 3Q beat and raised 4Q sales, in light of the tough backdrop, highlights both the strong execution of LULU’s sourcing organization and LULU’s competitive advantage given that 40 per cent of its assortment is core/lives throughout the year. Bottom line, sales growth was impressive no matter how it is sliced - store productivity vs. e-commerce, NA vs. international, men’s vs. women’s vs. accessories. This supports our view that the brand is resonating exceptionally well with new and core customers, driven by ongoing product innovation and differentiation even as competition intensifies, and supported by our QSG survey work.”

* Piper Sandler’s Erinn Murphy to US$487 from US$481 with an “overweight” rating.

“We continue to see LULU as a strong post-COVID beneficiary,” said Ms. Murphy.

* Jefferies’ Randy Konick to US$420 from US$395 with a “hold” rating.

* Cowen and Co.’s John Kernan to US$523 from US$515 with an “outperform” rating.

* Wells Fargo’s Ike Boruchow to US$420 from US$410 with an “equal weight” rating.

Conversely, these analysts lowered their targets:

* JP Morgan’s Matthew Boss to US$518 from US$570 with an “overweight” rating.

* Deutsche Bank’s Gabriella Carbone to US$484 from US$486 with a “buy” rating.


Emphasizing their “stable” earnings and dividends, iA Capital Markets analyst Matthew Weekes assumed coverage of four Utility stocks on Friday.

“To a large extent, the earnings of Utility stocks are predictable, underpinned by stable demand for electricity and natural gas and regulated rates that are determined based on allowing the utility to generate a reasonable return on equity,” he said. “The regulated structure allows utilities to invest in their assets with a very high degree of confidence, with the ultimate objective to provide shareholders with stable and growing earnings and dividends. Several of the stocks within our coverage universe have among the longest running track records of annual dividend increases among TSX-listed companies .”

Pointing to their “strong” growth platforms, Mr. Weekes assumed coverage of both Emera Inc. (EMA-T) and Fortis Inc. (FTS-T) with “hold” ratings on Friday.

“EMA and FTS both have similar U.S. exposure (approximately two-thirds of rate base) and strong growth trajectories,” he said. “EMA aims to grow its rate base at an 7-8-per-cent CAGR [compound annual growth rate] through 2024, while FTS is targeting an 6-per-cent CAGR through 2026. While EMA and FTS have strong rate base growth, we are maintaining Hold ratings on both stocks based on our views that EMA and FTS have (a) existing relative valuation premiums compared to peers when considering earnings payout ratios, (b) limited balance sheet upside, with any incremental growth likely requiring additional equity or hybrid financing, and (c) potential FX downside despite recent headwinds or the Canadian dollar, particularly for EMA which assumes a CAD/USD rate of 1.3 in its three-year growth forecasts.”

He set a $64 target of for Emera shares, exceeding the $61.53 average on the Street

“With operations focused on U.S. markets, and mainly in Florida which has one of the strongest economic growth profiles among U.S. states, we believe that EMA has a strong platform for rate base growth. However, EMA still has a way to go to lower its payout ratio into its desired target range, and we are cautious on potential U.S. dollar headwinds, which could temper EPS growth,” said Mr. Weekes.

His target for Fortis shares is $61, topping the $58.83 average.

“FTS currently has the highest stated dividend growth rate within our Utilities coverage at approximately 6 per cent per year, underpinned by organic growth across its geographically diverse regulated assets, about two-thirds of which are in the U.S.,” he said. “However, we believe that FTS’s growth is priced in through its premium valuation relative to peers.”

Though they have “differing approaches to growth,” Mr. Weekes gave both Canadian Utilities Ltd. (CU-T) and Hydro One Ltd. (H-T) with “buy” recommendations.

“CU generates most, and H generates all, of its earnings in Canada, which we view favourably from an FX perspective,” the analyst said. “H currently has a dividend growth rate of 5 per cent per year, underpinned by organic investment in its regulated T&D infrastructure, which we could see rising to 6 per cent per year if the Company’s T&D Joint Rate Application (JRAP) for 2023-2027 is approved. CU has a lower dividend growth profile due to limited growth in its regulated rate base, resulting in a discounted valuation relative to peers as witnessed by its current 5.0-per-cent yield. As CU is pursuing a less traditional path to growth through investments in non-regulated renewable energy projects, we believe that its earnings growth potential is, to a large extent, discounted by the market. We view CU and H as attractively valued on a dividend yield payout equivalent basis, and both CU and H have flexibility in their balance sheets.”

He raised the firm’s target for Hydro One by $1 to $35.

“H’s regulated T&D base provides a solid platform for rate base and dividend growth, with upside for higher growth starting in 2023 if proposed investments under the Company’s JRAP are approved,” said Mr. Weekes.

He set a $39 target for Canadian Utilities. The average is $37.53.

“CU receives a valuation discount in the market, likely due to its lower regulated rate base and dividend growth profiles compared to peers,” said Mr. Weekes. “However, we believe that growth potential in non-regulated earnings streams is underappreciated.”


After a “humbling” year for independent power producers in 2021, Desjardins Securities analyst Bill Cabel is “looking forward to acceleration in growth” in the new year.

“We are happy to see 2021 in the rearview mirror as our coverage names underperformed the broader S&P/TSX by 38 per cent,” he said. “We attribute this underperformance to (1) inflation driving fears of rate hikes; (2) rotation into stocks that could benefit from economic expansion; and (3) poor weather conditions driving below-LTA generation (11-per-cent on average).

“Thus, we believe the bar has been set relatively low for our IPPs in 2022 and we are optimistic the assets can go on an ‘LTA run’ and see our stocks recoup some of the 2021 underperformance. Looking ahead to 2022, we believe investor focus should be on the massive total addressable market that seems to be in a constant state of growth and continued emphasis on ESG investing, weighed against inflation and resulting rate hikes and sector rotation into economic expansion plays. Regardless of these headwinds, our preferred names will be radically larger companies over the coming years.”

In a research report released Friday, he reduced his target prices for shares of companies in his coverage to align with the forecast of the firm’s macro strategist.

His changes are:

  • Algonquin Power & Utilities Corp. (AQN-N/AQN-T, “buy”) to US$18.50 from US$19. The average on the Street is $17.22.
  • Brookfield Renewable Partners L.P. (BEP.UN-T, “hold”) to $51 from $53. Average: $55.88.
  • Boralex Inc. (BLX-T, “buy”) to $50 from $53. Average: $47.36.
  • Capital Power Corp. (CPX-T, “buy”) to $47 from $48. Average: $45.62.
  • Innergex Renewable Energy Inc. (INE-T, “hold”) to $21.50 from $22. Average: $24.18.
  • Northland Power Inc. (NPI-T, “top pick”) to $52 from $55. Average: $48.29.

“Our Top Pick and preferred names are as follows: (1) NPI. We remain extremely bullish on OFSW. With limited ways to play the OFSW space, we believe NPI is a standout IPP and expect it to grow its EBITDA by a 10-per-cent CAGR out to 2028. (2) BLX. The onshore renewables name to own, in our view. We expect it will continue to win projects in France and New York, as well as new growth opportunities in the U.S.. We also expect EBITDA to grow at a 10–14-per-cent CAGR out to 2025. (3) AQN. Within our coverage, we expect AQN to show the highest EBITDA growth over the next two years, driven primarily by rate base investments and M&A (which offers an opportunity for significant rate base investment and ROE improvement),” said Mr. Cabel.


Citing an “anticipated quiet 1Q22 in terms of data disclosure” and a " potential financial overhang progress through next year,” Raymond James analyst David Novak lowered Zymeworks Inc. (ZYME-N), a Vancouver-based biotechnology company, to “outperform” from “strong buy” on Friday.

“Without a doubt, 2021 has been a painful year for ZYME shareholders, or broadly speaking biotech investors in general,” he said. “We would be remiss if we did not highlight that a significant portion of the value erosion of ZYME can be attributed to the macro environment. Throughout 2021, biotech stocks have experienced an indiscriminate sector wide sell off, following a high-flying 2020, which was largely driven by generalist capital inflows catalyzed by excitement over COVID-19 vaccine and therapeutic development. The impact is clear, following a 48.2-per-cent gain in 2020, the SPDR S&P Biotech ETF, an equal weighted index of biotech stocks, has declined 18.5 per cent year-to-date, or 34 per cent from its Feb 8, 2021 highs, vs. the S&P 500 which has posted a 26.6-per-cent gain year-to-date. As such, Biotech is the worst performing of all 11 S&P 500 sectors this year. The silver lining, however, is historically speaking, similar sell offs in biotech have been followed by rapid and robust rallies. With sector wide discounted valuations, we believe it is very likely 2022 stands to benefit from such a rally, spurred by a significant uptick in M&A, as big biopharma looks to replenish development pipelines at substantially discounted ticket prices.

“The above said, we also cannot entirely attribute ZYME performance to macro dynamics. While we stand by our conviction that the company currently trades well below fair fundamental value, particularly in light of recent ESMO GC data which we continue to view as class leading, we hear and sympathize with investor frustrations around corporate communication/ IR strategy.”

Mr. Nowak maintained a US$74 target for Zymeworks shares. The current average is US$47.04.

“We continue to have the utmost conviction in ZYME’s management, board and clinical data generated to date, and as such we maintain our view that investors are able to stomach the current volatility will be substantially rewarded as clinical development continues to advance,” he said.


In other analyst actions:

* JP Morgan analyst Tyler Langton cut B2Gold Corp. (BTO-T) to “underweight” from “neutral” with a $6 target, below the $8.32 average on the Street.

* JP Morgan’s Michael Glick lowered Stelco Holdings Inc. (STLC-T) to “neutral” from “overweight” with a $49 target, down from $56.

* Mr. Glick raised his target for Teck Resources Ltd. (TECK.B-T) to $40 from $39 with an “overweight” rating. The average is $42.36.

* In response to its Investor Day event on Thursday, CIBC World Markets analyst Stephanie Price raised her target for Altus Group Ltd. (AIF-T) to $73 from $63 with a “neutral” rating, while National Bank Financial’s Richard Tse hiked his target to $80 from $70 with an “outperform” rating and BMO’s Stephen MacLeod increased his target to $80 from $73 with an “outperform” rating. The average is $74.81.

“We came away from Altus Group’s Investor Day with a positive view around the long-term growth opportunities at Altus Analytics (AA) and Property Tax,” said Mr. MacLeod. “While there were no “new” announcements, management provided incremental colour around Altus’s strong competitive positioning and the next step in its evolution, becoming an “intelligence-as-a-service” provider.

“AA momentum remains strong and the Tax digital transformation is under way - both positive forrevenue growth and margins. We continue to see a long runway for growth.”

* Stifel analyst Ian Gillies initiated coverage of CubicFarm Systems Corp. (CUB-T), a Langley, B.C.-based agriculture technology and vertical farming company, with a “speculative buy” rating and $2.35 target. The average on the Street is $2.50.

“CubicFarm is at the early stage of the commercialization of its technologies, but we are optimistic that it has the potential to be successful with benefits from the following key items: 1) Creating a new category; 2) Exponential revenue growth with strong margins to boot; 3) Hardware transitioning to software, creating potential for multiple accretion; 4) Population trends leading to higher demand for food; 5) Customer financing is a key positive catalyst to increase purchasing flexibility for customers; and 6) insider ownership alignment is high,” he said.

* Following Thursday’s earnings release, CIBC’s Mark Petrie increased his Empire Company Ltd. (EMP.A-T) target to $48 from $46 with an “outperformer” rating. Others making changes include: ATB Capital Markets’ Kenric Tyghe to $48 from $46 with an “outperform” rating and National Bank Financial’s Vishal Shreedhar to $46 from $45 with an “outperform” rating. The average is $45.50.

“We consider results to be positive given a beat across key metrics. Relative to NBF, the beat was largely due to slightly higher FR (food retailing) revenue, higher FR gross margin dollars and lower FR SG&A dollars. In addition, the Investments & Other segment aided EPS by $0.04; we consider this segment to be less indicative of recurring earnings power,” said Mr. Shreedhar.

* In response to a critical report from a U.S. short seller, Scotia Capital analyst Paul Steep cut his target for Nuvei Corp. (NVEI-Q, NVEI-T) to US$107 from US$130 with a “sector outperform” rating.

“NVEI’s shares came under significant selling pressure Wednesday due to the publication of a short report which raised several concerns including management omitting prior employment and affiliations, legal concerns with respect to certain acquisitions, and questions regarding financial disclosures (e.g., acquisitions),” said Mr. Steep. “Our view is that management execution and financial results are an element of addressing investor concerns following a short report. As such, key factors that we are monitoring with regards to Nuvei will be the firm’s performance against a number of operational and financial metrics namely: total volume, revenue growth (organic and acquired), and EBITDA and FCF performance. Our target price moves ... based on revising our estimates to reflect the potential near-term impact on the business from the short report (e.g., potential for delays in client wins, higher professional service fees) along with a lower valuation multiple 33.0 times EV/EBITDA on an NTM 1-year forward basis (a discount of 6 times vs. high growth peers) reflecting a decline in value across the payments peer group over the past month and a 2-times discount to account for the potential impact of the short report.”

* BMO Nesbitt Burns analyst Deepak Kaushal initiated coverage of Sangoma Technologies Corp. (STC-T) with an “outperform” rating and $30 target. The average is $40.05.

“We believe Sangoma can compete effectively against larger competitors by providing enterprise-grade communications-as-a-service to the SMB and mid-market, with a value-based customer-first approach,” he said. “With its SaaS transformation complete, we see multiple growth levers for Sangoma to accelerate growth, both organically and through continued acquisitions, while maintaining a discipline for profitability.”

We believe current valuation, at the low end of a group of peers, is attractive, and we see potential for multiple to re-rate higher with accelerating growth.”

* TD Securities analyst Tim James raised his Transat AT Inc. (TRZ-T) target to $4 from $3.25, above the $3.55 average, with a “reduce” recommendation.

“The increased target price is due to a higher DCF value for the going-concern scenario in our target price, which reflects the stronger-than-expected Q4/F21 cash flow relative to our forecast, and the resulting reduction in net debt,” said Mr. James. “Although we believe that our target-price methodology is the most prudent approach at this time, uncertainty regarding an expected share price in 12 months is unusually high, partly due to the unprecedented impacts from the pandemic and the market’s apparent willingness to focus on long-term, but unproven, earnings potential.

“We continue to believe that evolving changes in air-travel restrictions, COVID-19 case trends, real-time indicators of the travel rebound, and liquidity at Transat are more significant short-term determinants of the share price than quarterly revenue and EBITDA. Therefore, we do not expect Transat’s share price to take its direction from the Q4/21 earnings release, but from broader sector moves.”

* Scotia Capital analyst Mark Neville raised his target for Transcontinental Inc. (TCL.A-T) to $25 from $24, keeping a “sector perform” rating. The average is $26.33.

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