Inside the Market’s roundup of some of today’s key analyst actions
Though Shaw Communications Inc.’s (SJR.B-T, SJR-N) second-quarter results fell largely in line with the expectations of the Street, Canaccord Genuity analyst Aravinda Galappatthige said they provided a “substantial” boost to its wireless prospects and further raised expectations around its Freedom Mobile division.
“In light of a [wireless] net adds number that was 2 times consensus, we believe the first order of business is to set the right expectations,” he said. “For that we primarily rely on management’s commentary around Q3, which alludes to a 40-50,000 net adds quarter. This compares with our pre-Q2 estimate of 40,000. From that standpoint, we see Q2 as essentially re-setting wireless sub loading expectations by roughly 10-20 per cent. The traction in ARPU [average revenue per user] is also noteworthy. We were encouraged by comments which suggested that legacy subs are upgrading from lower price plans to the new $50 plans, especially given the attractive value brands from incumbents.”
Based on his improved outlook for its wireless division, Mr. Galappatthige upgraded his rating for Shaw shares to “buy” from “hold.”
On Thursday, Shaw reported consolidated revenue for the quarter of $1.355-billion, up 12.4 per cent and exceeding the analyst’s projection of $1.244-billion, though he noted the result was ”skewed by a steep upswing in wireless equipment revenue.” EBITDA of $501-million met his $497-million estimate and the consensus on the Street of $500-million.
Despite its cable segment “under-performing notably,” Mr. Galappatthige said Shaw’s wireless subscriptions stood out, believing Freedom is “clearly gaining traction” after adding 89,700 subscribers in the quarter, compared to 33,400 a year ago and well off his 45,000 projection.
“Our new estimates have wireless net adds comfortably surpassing 200,000 (234,000 in fiscal 2018),” the analyst said. “Given the further opportunities in front of Freedom, such as greater traction in BYOD [bring-your-own-device plans], more traction in the West (majority of adds are still in the GTA), deployment of 700 MHz spectrum, etc., we expect continued momentum over the medium term,” he said. “While there may be vacillations in EBITDA and FCF expectations, Freedom’s subscriber and service revenue growth trajectory (due to ARPU expansion) is becoming clearer. Furthermore, we are also factoring in an increasingly supportive regulatory framework for the regional wireless players.”
Mr. Galappatthige raised his target price for Shaw shares to $28.50 from $28. The average target on the Street is currently $29.58, according to Bloomberg data.
Elsewhere, Desjardins Securities’ Maher Yaghi thinks Shaw does not currently offer a “compelling” buying opportunity, believing its valuation “is not attractive enough to outweigh the current organic decline in cable.”
“We are supportive of the wireless venture, but we estimate its contribution to EBITDA growth will remain modest over the medium term as wireline pressures results,” said Mr. Yaghi, who raised his target for the stock to $30.50 from $30 while maintaining a “hold” rating.
“We would need to see improved consolidated financial performance before becoming bullish on the name.”
Mr. Yaghi added: “SJR surprised positively on wireless net additions [Thursday], which was the story of the day. The surprise was not as good in wireline, which missed expectations as subscriber losses accelerated. Financial results were mostly in line. While we are confident the wireless venture will generate decent growth, we believe the operational risk is too high to justify the current elevated valuation of SJR’s shares.”
Netflix Inc. (NFLX-Q) may expand its international footprint by up to 1 million subscribers more than its first-quarter guidance projected, according to Deutsche Bank analyst Brian Kraft.
Upgrading its stock to “buy” from “hold,” Mr. Kraft emphasized the company’s dominance in the market, believing it has been capitalized on and is expanding its lead in streaming by reinvesting in content, marketing and user interface. That has allowed it to both increase its subscriber base and attract additional talent.
“What’s evolved with respect to our view on the stock is that Netflix has changed the industry in a profound way and in doing so has given itself a significant lead, making it very difficult for the traditional media companies, or even other big tech companies, to catch up,” said Mr. Kraft.
He raised his target for the stock to US$350 from US$240. The average target on the Street is US$293.74.
“Netflix’s lead and competitive advantage gives the company more levers than ever to pull in order to drive revenue and cash flow growth over the course of time,” he said.
Elsewhere, Wells Fargo analyst Ken Sena raised his price target for Netflix to US$345 from US$285 after his survey of 500 U.S. residents reaffirmed its pricing power. He found 50 per cent of respondents would pay more for the streaming service.
Mr. Sena maintained an “outperform” rating.
Canaccord Genuity analyst Derek Dley downgraded LXrand Co Inc. (LXR-T) following the appointment of new president and chief executive officer Steven Goldsmith.
On Thursday after market close, the Toronto-based retailer, which specializes in branded vintage luxury handbags, announced Mr. Goldsmith would replace co-founder Frederick Mannella, who was appointed vice-chair of the board of directors and chief development officer.
“Despite the stumble during its Q4/17 results, LXR remains very well capitalized following its recent equity raise of $14-million and, in our view, the addition of Mr. Goldsmith to the management team provides the company with much needed experience during this transitional period,” said Mr. Dley. “As well, we expect that the appointment of Mr. Mannella to Chief Development Officer maintains the company’s strategic vision and keeps its store openings target intact. We expect that the company will be in a position to exit 2018 with upwards of 250 stores, which is ahead of its previous target of over 200, and above its 2017 year-end store count of 133 stores.
“Furthermore, the addition of the Hybrid Light model, should allow LXR to open new stores in locations which are less productive on a sales/ft2 metric, but still offer a similar 10-15-per-cent four-wall EBITDA margin return. The Hybrid Light concept requires much less capital expenditures, and operating costs per store from LXR, leading to attractive returns in what were previously viewed as less attractive store locations. We believe the addition of the Hybrid Light model will allow for an acceleration of new store development, while still allowing LXR to achieve attractive economics per store, in line with its previous targets.”
However, Mr. Dley lowered his rating for the company’s stock in response more “cautious” outlook, citing increased supply uncertainty in Japan and the management’s turnover.
He also lowered his target to $6 from $9.
“In our view, LXR’s robust network growth profile, increasing consumer awareness, first mover brick-and-mortar advantage, and the industry’s rapid growth justify a valuation that is more in line with its peers, and we believe the current valuation represents an attractive entry point for an early stage growth company,” said the analyst.
On March 23, Cormark Securities’ Maggie Macdougall, the only other analyst currently covering the stock, downgraded the company to “speculative buy” from “buy” with a target of $6.25, down from $8.
Credit Suisse analyst Michael Binetti expressed increase confidence that Lululemon Athletica Inc.’s (LULU-Q) multiple profit and loss (P&L) drivers and ongoing brand momentum can support upside to earnings projections for fiscal 2018.
“In our investor conversations, we’ve heard almost no pushback on LULU since a near-flawless 4Q,” said Mr. Binetti in a note released Friday titled “The LULU Skeptic: Pushing to Understand the Bear Thesis After a Near-Flawless Quarter.”
“As such …. we push ourselves to explore any overlooked concerns for a stock that will most certainly need to continue to surprise to the upside (to help foster a healthy stock debate from here). LULU’s 4Q results were among the best in the sector in years, with guidance to above-Street EPS in 2018 ($3.00-$3.08 versus Street $3.01 previously), with accelerating SSS [same-store sales] and traffic momentum in 1Q (1Q SSS guide: low-single digits). The stock is up 17 per cent since the print and trades at 29 times Street 2018 EPS (3-year average: 26.5 times). But our bear case assessment in this note doesn’t sufficiently change our positive view.”
After raising their oil price assumptions for 2018 and 2019, Credit Suisse analysts Jason Frew and Gary Ho hiked their cash flow per share projections for Canadian oil companies by an average of 12 per cent for both years, exceeding the Street’s expectations by 4 per cent and 10 per cent, respectively.
In a research note released late Thursday, the analysts increased their Brent and WTI forecasts for 2018 to $71 and $66, respectively, from $60 and $56. For 2019, their estimates rose to $70 and $65 from $60.75 and $58.
“We expect the market to tighten into the rest of the year with global inventory draws and OECD commercial inventories to reach normalized levels in 2018 - driving up prices heading into 2Q18,” they said. “Concurrently, we have raised our long-term (2020+) Brent/WTI price forecasts to $65/$60 from $60/$57 to incentivize more project sanctions to offset base depletion. On average, our oil price forecast is 8-10 per cent above street consensus for 2018-19, and more in line for 2020 onwards.”
Those changes, and subsequent adjustments to their financial expectations, resulted in several target price changes for stocks in their coverage universe. Those were:
ARC Resources Ltd. (ARX-T, “outperform”) to $19 from $21. Average: $17.81.
Husky Energy Inc. (HSE-T, “outperform”) to $23 from $21. Average: $19.67.
Imperial Oil Ltd. (IMO-T, “outperform”) to $47 from $45. Average: $39.20.
NuVista Energy Ltd. (NVA-T, “outperform”) to $11.50 from $10.50. Average: $10.76.
Seven Generations Energy Ltd. (VII-T, “outperform”) to $27 from $26. Average: $23.22.
“Q1 had its challenges, perhaps best expressed in our CFPS estimate for CVE which is well below consensus,” they said. “We are also notably below on SU and IMO. Key factors contributing to Q1 weakness are wider differentials, lack of downstream capture in certain cases and operational issues. CVE and SU both guided to some of the challenges – any further weakness in the stocks could be an opportunity for investors against the backdrop of our higher oil price view.”
In the wake of first-quarter results that fell short of his expectations, Beacon Securities analyst Gabriel Leung lowered Firan Technology Group Corp. (FTG-T) to “hold” from “buy” with a $3 target, down from $5. The average is $5.25.
“Overall, we would characterize the Q1 results as being disappointing particularly given the positive narrative provided by management last quarter,” said Mr. Leung. “While, we believe the macro environment remains positive, we do feel that given the recent several quarters of underperformance (particularly on margins) that a more conservative forecast is required.”
In other analyst actions:
Citing concerns over the financing of its development project pipeline, Bank of America Merrill Lynch analyst Michael Jalonen downgraded Eldorado Gold Corp. (EGO-N, ELD-T) to “underperform” from “neutral” with a target of US$1, down from US$1.50. The average target on the Street is US$1.51.
Cowen analyst Andrew Charles downgraded Starbucks Corp. (SBUX-Q) to “market perform” from “outperform” based on rising competition among craft coffee competitors as well as concerns about the success of its loyalty efforts. His target fell to US$65 from US$68, versus the average on the Street of US$63.83.
GMP analyst Martin Landry upgraded Goodfood Market Corp. (FOOD-T) to “buy” from “speculative buy” with a target of $3.25, which is 12 cents more than the consensus.
Veritas Investment Research analyst Ahmad Faheem initiated coverage of New Flyer Industries Inc. (NFI-T) with a “buy” rating and $72 target. The average is $68.57.
Monness, Crespi, Hardt & Co analyst James Cakmak upgraded eBay Inc. (EBAY-Q) to “buy” from “neutral.”