Skip to main content

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

Calling its first-quarter 2023 financial results a “light performance amid elevated costs,” National Bank Financial analyst Vishal Shreedhar warned investors are continuing to look for signs of an improving performance from Empire Company Ltd. (EMP.A-T).

“The buy case for EMP is based on expectations of continued EPS growth (albeit moderating) and attractive valuation,” he said in a research note released Friday. “That said, we acknowledge that the market will require sssg [same-store sales growth] to be more in line with peers before rewarding the valuation multiple. EMP’s performance has softened as consumers increasingly shift towards discount amid high inflation. Management suggested that inflation could be peaking; also performance improved through the quarter.”

Shares of the Stellarton, N.S.-based grocery company dropped 4.9 per cent on Thursday following the premarket release of mixed quarterly results. Food retailing sales of $7.938-billion rose from $7.626-billion during the same period a year ago and above Mr. Shreedhar’s $7.829-billion estimate, however EBITDA from the segment of $581-million fell short of his expectation of $572-million. Overall fully diluted earnings per share of 70 cents was lower than the analyst’s forecast by 2 cents.

“We view results to be light,” said Mr. Shreedhar. “Relative to NBF, the EPS miss was largely due to higher SG&A, which was partially offset by higher sales and gross profit..

“EMP’s sssg (excl. fuel) was 0.4 per cent vs. our view of flat. Management noted benefits from higher food inflation and Project Horizon benefits.”

Sobeys parent company Empire CEO slams accusations of ‘greedflation’ after posting sales gain

Mr. Shreedhar thinks Empire, the parent company of the Sobeys chain, is falling short on its financial targets, emphasizing management’s decision to adjust his guidance on the timeline for dilution for its Voilà e-commerce operations.

“Previously, it suggested that peak dilution would be in F2022, but it now expects dilution to be comparable to F2023 (negative $0.28 to EPS),” he said. “From an EPS standpoint, this revision isn’t material; however, the market will be concerned that prior e-commerce investments may create a longer-term drag. We believe that Voilà has a best-in-class offer and expect growth to resume as it anniversaries the period of heightened growth LY. In Q1/F23, sales across EMP’s e-commerce platforms declined by 21 per cent year-over-year.”

“EMP is on target to deliver against its three-year Project Horizon financial targets through F2023. That said, EMP acknowledged it is underperforming its market share expansion plans. On an organic basis, we estimate that EMP will be $60-million short of its F2023 Project Horizon EBITDA target, which is more than offset by the Longo’s acquisition.”

Trimming his full-year 2023 and 2024 earnings expectations, Mr. Shreedhar lowered his target for Empire shares to $40 from $42, reiterating an “outperform” recommendation. The average target on the Street is $44.89.

Elsewhere, other analysts making target adjustments include:

* BMO’s Peter Sklar to $37 from $42 with a “market perform” rating.

“Despite the negative stock reaction to Empire’s earnings, we consider Empire’s FQ1/23 grocery sales and gross margin results to be strong,” said Mr. Sklar. “Grocery SSS (ex. fuel) was slightly above BMO’s expectation at 0.4 per cent (BMO: negative 2 per cent, but below that of the consensus mean of up 1.3 per cent). Considering fiscal first quarters in FY2021 and FY2022 posed tough comparables for the first half of the quarter, we view a positive SSS comp a good result. For FY2023E, Empire expects SSS to be positive (with a slight positive at 0.4 per cent this quarter). Grocery gross margin (ex.fuel) improved significantly by 63bps, demonstrating solid promotional optimization and successful inflation pass-through. Compared with Loblaw and Metro’s flat to slightly up food gross margins, Empire’s 63bps is impressive. However, a number of negatives overshadowed the sales and gross margin progress. First, SG&A on a dollar basis increased about 5 per cent year-over-year, a slight jump from the 3-4-per-cent increases experienced in H2/22. Management attributed it to continued costs to execute Horizon (which include growing FreshCo, Empire’s discount banner, Voilà ecommerce, and Farm Boy, a fresh-orientated specialty banner in Ontario) and a difference in the timing of marketing expenses vs. FQ1/22 last year. Management expects a similar level of SG&A going forward as Horizon executions continue and benefits are not expected until FY2024.”

* Desjardins Securities’ Chris Li to $44 from $48 with a “buy” rating.

“We believe EMP’s low valuation (12.5 times vs 14-times average) mainly reflects investor concerns about consumers shifting from full-service to discount (EMP is under-indexed) in the high-inflation environment, as well as Voilà e-commerce dilution remaining higher for longer,” he said. “While these are valid concerns, we believe these risks are largely priced in. We expect valuation to improve once there is better visibility. But, patience is required.”

* CIBC World Markets’ Mark Petrie to $45 from $47 with an “outperformer” rating.

* TD Securities’ Michael Van Aelst to $43 from $45 with a “buy” rating.


Scotia Capital analyst Jason Bouvier lowered his recommendation for Vermilion Energy Inc. (VET-T) on Friday, warning of the drawbacks from a potential windfall tax in the European Union.

The proposal will be voted on Sept. 30 and allow each member state to enact its own tax.

“Our understanding of the windfall profits tax is that it is based on the profitability of the producer from 2019 to 2021, plus 20 per cent,” said Mr. Bouvier. “Then any profits above that level (i.e., windfall profits) would pay a tax of 33 per cent. Currently, the proposed tax will only apply to windfall profits in 2022.

“VET has acquired assets in Europe over the past few years, so we are using our 2023 estimates as a proxy of what those assets would have earned in 2019-2021. However, we are using the average European commodity prices over the 2019-2021 period (TTF of $10/mcf and Brent of $71/bbl). This suggests a normalized European taxable income of $176-million per year. Adding 20 per cent suggests $211-million for a rough level of base profits.”

Mr. Bouvier estimates the tax could impact Vermilion’s 2022 cash flow by 3-6 per cent, assuming use of tax pools and hedging losses.

“We believe, even if the windfall tax is enacted, that VET will continue to meet its balance sheet targets and funnel excess FCF to shareholders (i.e., increasing shareholder returns),” he said. “However, in our view, this is an incremental risk to the stock and given the company’s recent outperformance (24 per cent over past 3 months vs the XEG).”

Based on that view, he lowered the Calgary-based company to “sector perform” from “sector outperform” with a $40 target (unchanged). The average is $41.57.


Calling it “a solid investment with robust upside potential,” Scotia Capital analyst Divya Goyal assumed coverage of CGI Inc. (GIB.A-T) with a “sector outperform” rating, seeing it as “undervalued” given its “depth and long-term growth potential.”

“CGI has, over the years, methodically established a well-orchestrated business with robust clientele, which, we believe, will generate recurring business for the company; however, in our opinion, that will only help sustain the current profitability of the business,” she said. “We believe accretive acquisitions will be the true enabler of CGI’s long-term growth; CGI’s acquisition strategy – which involves expanding the business footprint through key metro market acquisitions, followed by deepening the footprint through transformative acquisitions – should enrich CGI’s product suite while augmenting its current clientele. The company’s capital allocation priorities right now include internal investments imperative for organic growth, mergers and acquisitions (M&A), and share buybacks, which we think will collectively enhance the shareholder value.”

In a research report titled A Long Runway Ahead!, Ms. Goyal emphasized CGI’s “strong” leadership and succession planning, which she thinks defines the company’s long-term outlook.

“CGI is founder-led business and all senior executives have been with the company for more than a decade, having joined either as consultants or through a transformative business acquisition,” she noted. “The company takes a structured approach to its leadership: as part of their professional development, each executive rotates through various divisions before becoming a leader of a certain segment or division. We believe this has created an extremely knowledgeable team of technology leaders well versed in CGI’s business model and client specifics. Furthermore, these leaders are called ‘members,’ because they, like other CGI employees, are company owners (through CGI’s share purchase plan),which instills a sense of accountability. While we think this approach solidifies the company’s existing governance structure, succession planning is a key issue for us. Founder and Executive Chairman Serge Godin established the company in 1976 and currently controls 53 per cent of the company’s voting rights.”

The analyst set a target of $130 per share. The current average is $127.92.

“GIB.A is currently trading at a approximately 10 times next 12 months (NTM) EV/EBITDA multiple (16 times NTM P/E multiple),” said Ms. Goyal. “Given our expanding coverage universe of North American technology service providers, we reviewed CGI’s performance across a broad array of global technology service providers (currently trading at an average NTM EV/EBITDA multiple of 12.5 times), considering common sector themes. Based on our analysis of the peer composite, we believe CGI is an underappreciated stock given the robustness of its business model and financial wherewithal, including its double-digit EBITDA margin and solid free cash flow (FCF) growth, which, per our estimates, will generate 22-per-cent ROE and 17-per-cent ROIC by F2024, justifying the premium to its current valuation.”


While its losses continue to “narrow,” Flow Beverage Corp.’s (FLOW-T) cash balance continues to be a concern, said Stifel analyst Martin Landry, leading him to lower his recommendation to “speculative buy” from “buy” to “reflect increasing risks.”

“With a cash balance of $15.75-million and a cash burn averaging $7-million per quarter it becomes evident that Flow will require some kind of cash infusion in the near future,” he said. “The company has an important asset base, with fixed assets valued on the books at more than $20 million and a positive working capital of $10 million as of Q3FY22. These could partly be monetized potentially though an asset backed loan (ABL), or through an outright sale in the case of the equipment. The announcement of a non-dilutive cash infusion should be viewed positively and reassure investors and hopefully announced before calendar year-end.”

On Thursday before the bell, the Toronto-based company reported total revenue of $12.72-million, up 6 per cent year-over-year but below Mr. Landry’s $15.1-million estimated. An Adjusted EBITDA loss of $5.1-million also narrowly missed his forecast (a loss of $4.9-million).

“Flow Beverage reported strong Flow branded revenues of $10.8 million, offset by lower than expected co-packing revenues,” he said. “This resulted in Flow missing expectations on its top-line but given the strength in gross margins and a reduction of 10 per cent year-over-year in OPEX, EBITDA loss was mostly in-line with estimates at a loss of $5.1 million, an improvement of over 40 per cent year-over-year. We view the strength in branded water revenues as positive and momentum seems strong, especially in the food service segment where Flow recently signed 3 large contracts. Nonetheless, with sustained operating loses, Flow’s cash balance remains a focus.”

Though he sees “strong growth prospects” and the evidence of gains from its ongoing targeted marketing campaign, Mr. Landry cut his target for Flow shares to 25 cents from 75 cents. The average on the Street is $2.25.

“We are reducing our 2023 revenue estimate by 25 per cent to reflect the current trend of Flow’s co-packing operations. Flow’s co-packing business is down roughly 30 per cent year-over-year in the last 2 quarters, reflecting the company’s strategy to focus on Flow branded revenues,” he said. “In the short term, lost sales from co-packing operations will not be offset by branded water sales, reducing our FY23 revenue outlook. We derive our target price using the average of (1) a 1.50 times (1.2 times previously) our 2023 sales estimates and (2) a DCF calculation. Our increase in valuation multiple is attributed to Flow’s positive Q3 results, which showed strong momentum in its Flow branded revenues along with narrowing Adj. EBITDA loss.”

Elsewhere, EF Hutton analyst Chip Moore cut his target to $2.50 from $3 with a “buy” rating.

“A relatively solid quarter, highlighted by improving profitability and new distribution momentum, despite some broader market challenges and reduced co-packing activity year-over-year, with core brand still outperforming,” he said. “Near-term, focus stays on cash runway and path to breakeven, as we expect much more on strategic actions to follow, a potential catalyst, in our view. We highlight growing traction in the attractive food service channel (both directly to leading brands and via major suppliers servicing QSR chains, and others), while Flow has also secured an important new agreement with Primo Water (PRMW-T; not rated) – gaining access to the company’s more than 1.8M subscription customers across the U.S.. The new vitamin water product is also now in its nascent launch phase, representing another key incremental growth opportunity next year.”


CIBC World Markets analyst Mark Jarvi raised his target for a trio of power producers on Friday.

“In recent weeks, the European Union (EU) has introduced measures to stem the cascading impacts of high electricity prices,” he said. “A price cap of ~€180/MWh in spot market sales for renewable assets is expected. While the situation is fluid and details on new measures are scarce, we want to share our updated views on this evolving situation. Boralex (BLX) and Northland Power (NPI) are the most impacted in our coverage and we now assume the price cap applies to all merchant revenues. For NPI the impacts are modest relative to prior assumptions (2022 estimate up/2023 estimate down) while for BLX we see 7-8-per-cent estimate reductions (still in line with or above consensus) but that ignores upside from potential new short-term, fixed-price contracts. We believe these firms are still better off than we assumed two months ago and should benefit from a push for renewable capacity additions in Europe.”

His changes are:

  • Boralex Inc. (BLX-T, “outperformer”) to $50 from $49. The average on the Street is $51.69.
  • Innergex Renewable Energy Inc. (INE-T, “outperformer”) to $23 from $22. Average: $22.29.
  • Northland Power Inc. (NPI-T, “outperformer”) to $49 from $48. Average: $51.


In other analyst actions:

* After in-line fourth-quarter results, Canaccord Genuity’s Scott Chan trimmed his Axis Auto Finance Inc. (AXIS-T) target by 5 cents to 75 cents, below the 95-cent average, “mainly from lower top-line revenue growth (lower gross yield) and slightly higher interest expenses (prime rate increases).” He kept a “speculative buy” rating.

* KeyBanc’s Scott Schoenhaus initiated coverage of Vancouver-based CloudMD Software & Services Inc. (DOC-X) with a “sector weight” recommendation.

* Scotia Capital’s Patricia Baker lowered her target for Roots Corp. (ROOT-T) to $4.50 from $5, keeping a “sector perform” rating. The average is $4.25.

“Roots delivered another strong operating performance in Q2 with strong sales, up 22.9 per cent, and a much-improved gross margin, up 118 basis points year-over-year,” she said. “The strong performance in Q2 reflected a disciplined and strategic approach to managing promotions, a strong focus on operational efficiencies, and optimization of the product portfolio. Roots’ Q2 adjusted EBITDA declined 62 per cent year-over-year to $5.5-million, primarily reflecting the impact of lower government subsidies and rent abatements this year. In Q2, Roots achieved higher y/y sales and significant gross margin expansion and strengthened the balance sheet. Both sales and gross margin trends in the quarter surpassed our expectations, while SG&A costs were also higher than anticipated with y/y growth reflecting the full opening of stores and related wage costs. The strong sales and margin trends were achieved despite continued supply chain disruptions and related higher supply chain costs. Roots management have done a great job in resetting the foundation of the business and have very ably strengthened the brand. We see Roots as well positioned to continue to execute well against its strategic agenda, driving incremental growth, share, and profitability.”

* Following the late Thursday announcement of its acquisition of the wood utility pole manufacturing business of Texas Electric Cooperatives, Inc. for a total purchase price of US$28-million plus inventories of approximately US$4-million, Scotia Capital’s Benoit Laprade raised his Stella-Jones Inc. (SJ-T) target to $51 from $50, above the $48.88 average, with a “sector outperform” rating.

Report an error

Editorial code of conduct

Tickers mentioned in this story