Friday’s analyst upgrades and downgrades

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

Lululemon Athletica Inc. (LULU-Q) is “masterfully sidestepping macro concerns” with its first-quarter earnings beat and guidance raise, according to BTIG analyst Camilo Lyon.

“With another strong quarterly performance, seemingly bypassing any hint of macro pressures, LULU is exhibiting exceptional execution, boosted by its exposure to a higher-earning consumer and the vast TAM [total addressable market]] opportunities in both North America and abroad,” he said in a research note. “What’s more, the innovation pipeline remains robust as evidenced by the early success of its footwear launch (Blissfeel shoe), golf and tennis specific product, this week’s latest fabric introduction (SenseKnit designed for running), and forthcoming hiking specific gear over the coming weeks.”

After the bell on Thursday, the Vancouver-based retailer reported “solid” first-quarter results with earnings per share of US$1.48 exceeding the US$1.43 estimate of both Mr. Lyon and the Street. He attributed the beat to revenue growth of 32 per cent (versus his 27-per-cent projection) and greater expense leverage.

The analyst noted revenue growth was balanced across its operations with same-store sales comps growing 24 per cent and digital up 32 per cent. The results came despite COVID-related lockdowns in China, which he estimates to contribute 6-7 per cent of total sales.

Concurrently, Lululemon raised its fiscal 2022 revenue guidance to 22-23-per-cent growth from a range of 20-22 per cent previously. It’s projected EPS of U $9.35-$9.50 (from US$9.15-$9.35) due, in large part, to a lower tax rate.

“Remarkably, robust consumer demand has continued into FQ2 as can be seen by solid, above-consensus revenue and EPS guidance of 21-22-per-cent sales growth (vs. consensus of up 19 per cent) and EPS of $1.82-$1.87 (vs. cons. of $1.77),” said Mr. Lyon. “Against this backdrop of consistent and broad-based demand, LULU, to its benefit, is leaning into inventory investments, primarily in its core, seasonless product (45 per cent of inventory) to ensure it has sufficient product on hand (inventory grew 74 per cent in FQ1 vs. 49 per cent in FQ4). This strategy has called for incremental air freight usage to bypass lengthy transit delays, which hurt FQ1 gross margin by 340 basis points (total FQ1 GM contracted 315 basis points with supply chain pressures partially offset by occupancy leverage (up 60 basis points) as markdowns were flat to last year). Given that supply chain pressures have not eased, LULU will likely use air freight through year-end but FQ2 should be the peak of pressure as total GMs are expected to be down 200 basis points, with an improving trend in 2H.”

Citing its “steadfast consistency, ability to execute under varied macro environments, and ample liquidity ($649-million in cash),” Mr. Lyon reiterated his “buy” recommendation for Lululemon shares, however he lowered his target to US$420 from US$491 based on “more conservative” valuation multiples. The average target on the Street is US$424.15, according to Refinitiv data.

“We believe LULU is among the few companies that entered the COVID-19 pandemic from a position of strength and as such, will exit it stronger,” he said. “We believe LULU’s 2026 targets outlined in its new five-year plan (double men’s and digital, quadruple international), implying a mid-teens revenue CAGR [compound annual growth rate] , are not only achievable but could prove conservative by time and should at minimum support a P/E multiple of 36-40 times based on its EPS growth rate (2 times PEG) that likely will average at 20 per cent. 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 in F22 and beyond. 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 making changes include:

* Citi’s Paul Lejuez to US$345 from US$400 with a “neutral” rating.

“LULU beat on the top line, but lower-than-expected GM (driven by higher air freight) led to only a modest EPS beat,” he said. “Demand for the LULU brand continues to be strong in 2Q, and 2Q sales and EPS guidance are above consensus. While there does not appear to be any slowdown in spending for LULU’s customer base so far (a higher income demographic), inventories are a little high in our view, particularly if spending trends weaken as the year progresses (and if the spending trends increasingly favor “going out” apparel). Still the strong top-line results and success of recent category launches including footwear, golf and tennis, underscore the strength of the brand. However, with shares trading at an F22E EV/EBITDA multiple of 19 times (among the most expensive in our universe), we believe the risk/reward is fairly balanced at current levels.”

* Credit Suisse’s Michael Binetti to US$410 from US$450 with an “outperform” rating.

“LULU reported a far better top line quarter than we expected (despite less EPS flow through than normal on a sales beat due to worsening air freight)—with strong growth balanced across channels/categories/geos. LULU raised revenue & EPS guidance for the year — though guidance still looks conservative as revenues are planned to decelerate in 2H (and we see no reason in the details of 1Q to fear a deceleration at this time),” said Mr. Binetti.

* Wells Fargo’s Ike Boruchow to US$345 from US$370 with an “equal weight” rating.

“While it’s clear LULU remains in early innings of growth, it’s hard to see material upside from these levels as margins remain capped in support of growth on a high-multiple stock, and now layering on additional inventory/GM volatility,” said Mr. Boruchow. “After 6 years (and approximately 1,000 basis points of expansion), LULU is seeing their GM profile come under some rare pressure (MIRROR costs, supply chain headwinds, elevated inventory) - a dynamic that could challenge the stock’s ability to get their historical multiple back (especially against a worsening macro). While numbers are going up with the raised outlook, the stock at $310 after hours still suggests a stock at 33 times our raised 2022 EPS”

* B. Riley’s Susan Anderson to US$377 from US$440 with a “buy” rating.

“With LULU raising guidance again and more exposure to a higher income consumer, we remain buyers,” she said.

* JP Morgan’s Matthew Boss to US$382 from US$455 with an “overweight” rating.

* BMO Nesbitt Burns’ Simeon Siegel to US$304 from US$344 with a “market perform” rating.

* Deutsche Bank’s Gabrielle Carbone to US$427 from US$423 with a “buy” rating.

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Seeing “the classic crawl-walk-run of a spinout,” Citi analyst Joanne Wuensch initiated coverage of Bausch + Lomb Corp. (BLCO-T) with a “buy/high risk” recommendation on Friday.

The stock began trading on May 5 following its spinoff from Bausch Health Companies Inc. (BHC-T) in an initial public offering of 35 million shares. The parent company continues to hold 90 per cent of common shares.

Ms. Wuensch said “this is just the beginning of the BLCO story,” adding: “The last time Bausch was a stand-alone public entity was in 2007, when it was taken private by Warburg Pincus (October 2007), then sold to Valeant (May 2013), to be rebranded as Bausch Health (May 2018), and then in its current formation as Bausch + Lomb spin-out. What makes the asset unique in the ophthalmology world is that it includes the full eye care portfolio, branching along Vision Care, Ophthalmic Pharmaceuticals, and Surgical. Each of the segments are driven by a firm-wide integrated platform which allows Bausch to continue to expand into different needs of the eye health lifecycle.”

The analyst sees a US$50-billion total addressable market for Bausch, which she said has “one of the broadest ophthalmology portfolios and touting these attributes: “1) a core brand (it’s hard to beat the Bausch & Lomb name in ophthalmology, with 77-per-cent brand recognition versus its peers); 2) new products to accelerate revenue growth; and 3) the opportunity to build operating leverage, particularly once stand-up costs are incorporated.”

Ms. Wuensch set a target of US$22 per share, suggesting upside of 36 per cent from Thursday’s close. The average on the Street is US$24.13.

“At the current valuation, we believe that there is more upside than downside risk for BLCO,” she said.

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After evaluating the impact of a potential recession on their coverage universe, CIBC World Markets analysts Kevin Chiang and Krista Friesen made a trio of rating changes in a research report released on Friday.

Mr. Chiang upgraded Canadian National Railway Co. (CNR-T) to “outperformer” from “neutral” with a $167 target. The average on the Street is $164.36.

“We see both Canadian rails offering investors more defensive attributes in the event the economy tips into a recession, while still providing upside if the macro-backdrop remains favourable,” he said. “The outlook for Canadian bulk commodities is positive while pricing remains strong, helping offset inflationary pressures. In addition, CN’s self-help levers, which should drive stronger incremental margins, position the company for outsized EPS growth. We are upgrading CN.”

Conversely, Mr. Chiang cut Lion Electric Co. (LEV-N, LEV-T) to “neutral” from “outperformer” with a US$9 target, down from US$11 and below the US$10.06 average.

Ms. Friesen downgraded Martinrea International Inc. (MRE-T) to a “neutral” from “outperformer” and cut her target for its shares to $10 from $12. The average is $13.47.

“We also recently downgraded NFI from Neutral to Underperformer on May 12,” they said. “Our reasons are: 1) we see better risk-adjusted returns elsewhere, 2) rising interest rates cap long-duration growth stories like LEV, and 3) MRE and NFI have weaker balance sheets and FCF generation than peers.”

Mr. Chiang made these target adjustments:

* Air Canada (AC-T, “outperformer”) to $30 from $35. Average: $29.87.

* Airboss of America Corp. (BOS-T, “outperformer”) target to $32 from $37. Average: $39.25.

* Andlauer Healthcare Group Inc. (AND-T, “neutral”) target to $53 from $56. Average: $52.83.

* Chorus Aviation Inc. (CHR-T, “outperformer”) target to $5.25 from $6.25. Average: $5.97.

Ms. Friesen’s target changes were:

* AutoCanada Inc. (ACQ-T, “outperformer”) to $39 from $45. Average: $53.79

* Boyd Group Services Inc. (BYD-T, “neutral”) to $156 from $168. Average: $184.62.

* Magna International Inc. (MGA-N/MG-T, “outperformer”) to US$76 from US$84. Average: US$82.99.

“Names where we see a lot of the recessionary downside priced in and where we maintain a positive fundamental outlook include BOS, CJT, GFL, LNR and TFII. Names we cover that we believe have the greatest downside are AND, BDGI, EIF, MTL, MGA, MRE WCN and WM. The industrial names listed do not show well in our recessionary downside math, given their premium valuations and/or relative share price outperformance. The pure-play auto suppliers get hit by having high decremental margins, while current production levels are suboptimal,” they said.

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National Bank Financial analyst Endri Leno thinks Dentalcorp Holdings Ltd. (DNTL-T) provides investors the opportunity to participate in the slowly increasing consolidation of the Canadian dental industry that could last for the next 30 years.

The Toronto-based company, currently the largest provider of dental services in the country, controls just 3.5 per cent of a market that he estimates is only 6 per cent consolidated (or owned by corporations). However, its share is rising with its ambitious pace of acqusitions (75-85 practices per year).

“Dentalcorp is well-positioned to execute its acquisition strategy within the $17-$18 billion Canadian dental industry, which, positively, features 1) a cash pay model; 2) high (private) insurance coverage rates (65 per cent to 75 per cent of Canadians); and 3) frequent repeat visits (65 per cent to 75 per cent of Canadians have seen a dentist in the last 12 months),” said Mr. Leno. “While the industry is mature (2 per cent to 2.5-per-cent CAGR [compound annual growth rate] in the last decade) with growth relying on price increases and general population increases, DNTL also uses customer acquisition technology platforms to drive incremental organic growth of 0.5 per cent to 1.5 per cent.

“During our due diligence interviews the overwhelming consensus was that dentalcorp, among other attributes, 1) is the leading consolidator; 2) has the best network of dental practices; 3) provides full autonomy on how individual clinics provide care; and 4) consults dentists in its network on best practices. We also heard that, being the most active/lead corporate consolidator, DNTL has had a head start versus its competitors for quality assets. Of late, other consolidators are acquiring more actively and are bidding up multiples to build up their networks.”

Mr. Leno initiated coverage of Dentalcorp with an “outperform” rating, pointing to a series of attributes: “1) the positive industry fundamentals, 2) opportunity to participate in the consolidation of the Canadian dental market, 3) long-term visibility for acquisitions, 4) relative quality of assets, and 5) continued growth, do override at-the-moment potential concerns.”

He set a $18 target for its share, implying a 48-per-cent return. The current average on the Street is $19.10.

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In other analyst actions:

* TD Securities analyst Aaron Bilkoski downgraded Tourmaline Oil Corp. (TOU-T) to “hold” from “buy” with an $80 target. Elsewhere, Stifel’s Robert Fitzmartyn raised his target to $90.50 from $87.25 with a “buy” rating, calling it a “growth stock at attractive valuation.” The average on the Street is $82.73.

* After Boralex Inc. (BLX-T) was awarded five projects by the Governor of New York and the New York State Energy Research and Development Authority on Thursday, iA Capital Markets analyst Naji Baydoun raised his target for its shares by $1 to $45 with a “buy” rating. The average is $46.81.

* Canaccord Genuity’s Robert Young cut his target for Descartes Systems Group Inc. (DSGX-Q, DSG-T) to US$74 from US$85 with a “buy” rating, while Barclays’ Raimo Lenschow raised his target to US$62 from US$61 with an equal weight” rating. The average is US$77.50.

“Descartes posted another solid quarter that continues to outperform its long term growth and margin guides,” said Mr. Lenschow. “On the call, management highlighted the increased relevance of the Descartes platform given ongoing supply chain constraints and rising fuel costs, which puts pressure on companies to find the most efficient route for shipping their goods. Furthermore, as Covid lockdowns in China ease, shipping volume from Asia Pacific should increase, which helps Descartes transactional lines. With that said, the company called out that its e-commerce business should continue to see more moderate growth compared to during the pandemic and more broadly noted the negative impacts of a potential recession that lowers overall shipping volumes. We think this is why the 10-15-per-cent year-over-year adj. EBITDA growth and 38-43-per-cent Adj. EBITDA margin guides were not raised despite outperformance for the fourth consecutive quarter. Given the uncertain macro and valuation at 25 times calendar 2023 estimated FCF, we continue to see little upside.”

* In response to its US$210-million deal to acquire Nutrawise Health and Beauty Corp., RBC Dominion Securities’ Sabahat Khan raised his Jamieson Wellness Inc. (JWEL-T) target to $46 from $39, exceeding the $44.28 average, with an “outperform” rating.

“This transaction provides Jamieson with a number of benefits, including: 1) adding a growing brand in the sizable U.S. VMS market; 2) providing a platform that can be expanded over the medium- to long-term with further M&A (in our view, M&A will likely be a consideration 24 months onwards as management will likely focus on integration and execution over the next 1-2 years); 3) adding incremental in-house manufacturing capabilities (with adequate capacity to support Nutrawise’s growth over the next few years); and, 4) providing Jamieson an opportunity to cross-pollinate best practices and leverage/ share R&D across its brands (i.e., existing Jamieson formulations could be shared with Nutrawise to accelerate their growth),” he said. “Recall that management had messaged their interest in M&A (with a focus on the U.S. market), and with this acquisition we believe Jamieson has been able to establish a growth platform in the U.S. market at a reasonable price. On the valuation, the acquisition multiple of 10 times 2021 Adjusted EBITDA is reasonable in light of the growth outlook for the acquired business and Jamieson’s own trading multiple leading up to acquisition announcement.”

* Piper Sandler’s Clarke Jeffries raised his target for Lightspeed Commerce Inc. (LSPD-N, LSPD-T) to US$40 from US$39, keeping an “overweight” rating. The average is US$48.11.

* Credit Suisse’s Andrew Kuske raised his target for Tidewater Midstream and Infrastructure Ltd. (TWM-T) to $2.25, above the $1.95 average, from $2, keeping an “outperform” rating.

“We believe Tidewater trades at a discounted valuation – that which is partly a function of the unique asset base (midstream and refinery exposure) and the market cap (i.e., small- cap status),” said Mr. Kuske. “Given the unique niche regional exposure along with the structural reality of the renewable fuels business, we view believe the stock offers a rather compelling risk-reward relationship, combined with additional growth potential in light of basin dynamics.”

* Acumen Capital’s Trevor Reynolds trimmed his VersaBank (VBNK-T) target to $18.50 from $19.50, keeping a “buy” rating. The average is $15.75.

“Results for the quarter mixed as net income came in below our expectations due to costs associated with growth initiatives while loans and deposits both reached record levels,” he said. “While the growth initiatives are taking longer than expected to materialize, the outlook for VBNK is strong in our view with continued growth projected for both loans and deposits in the current market environment.”

* In reaction to softer-than-anticipated first-quarter results, Canaccord Genuity’s Luke Hannan lowered his Waterloo Brewing Ltd. (WBR-T) target to $6 from $7.25 with a “buy” rating, while Acumen Capital’s Nick Corcoran cut his target by $1 to $5.50 with a “buy” rating. The average is $7.35.

“There were several negative takeaways from the quarter, in our view: inflation in input costs continues to prove challenging to offset and demand industry-wide has moderated,” Mr. Hannan said. “Having said that, the end of a long period of growth capex led to WBR delivering a positive free cash flow quarter even before taking into account a favourable $7.2 million swing in working capital, a notable development given the seasonal weakness of Q1 in general for WBR. Therefore, we think it’s important investors don’t miss the forest for the trees here: the company, in our view, can still generate a healthy amount of free cash flow even in this environment, which will support debt repayment.

“As the company navigates these headwinds, we still expect it to deliver (1) owner brand volume outperformance and (2) new contract wins in the co-packing business, where it has an edge relative to competitors given its operational excellence and its blending capabilities. Multinational beverage companies are increasingly diverting internal resources toward portfolio innovation, particularly in the RTD segment, relying on partners with technical expertise like WBR for blending and packaging. These secular tailwinds persist for Waterloo, which should help support margin expansion over the long term.”

* Following the announcement of its deal to buy John Wood Group PLC’s environment business, Canaccord Genuity’s Yuri Lynk reduced his WSP Global Inc. (WSP-T) target to $190 from $200, reaffirming a “buy” rating, while RBC’s Sabahat Khan raised his target to $199 from $197 with an “outperform” rating . The average is $178.07.

“We reiterate our positive view on WSP following the announcement as this acquisition increases WSP’s exposure to the fastgrowing Environment end-market, provides further exposure to OECD countries, and aligns well with the targets included in the company’s 2022-2024 Strategic Plan,” said Mr. Khan.

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