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

Credit Suisse analyst Andrew Kuske added Brookfield Business Partners LP (BBU-N, BBU.UN-T) to the firm’s list of top investment ideas in Canada, naming it his top pick among infrastructure stocks.

“After a rather lengthy period of restriction, we recently reinstated coverage on Brookfield Business Partners,” he said. “During our restriction period, BBU underwent two large transactions, which we believe provide great value to the company: (1) the IPO of GrafTech; and, (2) the acquisition of Westinghouse Electric.”

On Aug. 23, Mr. Kuske reinstated coverage with an “outperform” rating and target price of $54, rising from US$42 previously and exceeding the consensus on the Street of US$49.67.

“In our view, Brookfield Business Partners offers a compelling valuation with an often misunderstood path to surface value along with the ability to compound capital for outsized returns,” he said.


Alimentation Couche-Tard Inc. (ATD.B-T) displayed "impressive" same-store sales trends in all its markets for the first quarter that are "distinctly superior" to those reported by its U.S. peer group, said Desjardins Securities analyst Keith Howlett.

On Thursday, the Quebec-based convenience store giant reported same-store sales growth of 4.2 per cent south of the border as well as increases of 7.3 per cent in Europe and 6.6 per cent in Canada.

"While the U.S. convenience/fuel retail segment remains fragmented, three players have emerged as the market leaders, being Couche-Tard, 7-Eleven and Marathon (in the process of acquiring Andeavor)," the analyst said. "Couche-Tard has successfully grown by acquisition, underpinned by its financial discipline and operating ability. Return on equity is approximately 24.8 per cent. Many others have attempted to grow by acquisition in the U.S. convenience store industry, but very few have succeeded over an extended period of time. It is easier to acquire convenience store assets than to successfully operate them.

"Couche-Tard appears to have benefited from the overall strength of U.S. consumer spending, as evidenced by recent very strong sales results reported by Walmart, Target, Costco, Home Depot, Lowe’s and TJX."

Based on the results, Mr. Howlett raised his fiscal 2019 earnings per share expectation to US$3.07 from US$3, while his 2020 estimate increased to US$3.40 from US$3.36.

"Sales have been reignited by a combination of marketing and promotional initiatives, the rebranding of stores to Circle K (along with its associated product offer including Polar Pop), varied improvements (by market area) in components of the merchandise offer (eg hot dogs, baked goods, coffee), growth of sales of alternative tobacco products, increased membership and use of loyalty programs (eg Circle K Easy Rewards, Tobacco Club) and growth in car wash capacity," he said.

With a "buy" rating (unchanged), Mr. Howlett's target for Couche-Tard shares rose to $74 from $70. The average target on the Street is $77.44, according to Thomson Reuters Eikon data.

"Couche-Tard is generating increased traffic to its convenience stores, despite relatively flat volumes of fuel pumped in the forecourt," he said. "The number of items purchased per transaction within the convenience store and transaction size are both increasing. Over 60 per cent of transactions at Couche-Tard sites are the purchase of convenience items, without an accompanying fuel purchase. The benefits of the global rebranding to Circle K, about which we had reservations, are exceeding management’s expectations. Longstanding brands, such as Statoil in Scandinavia and Mac’s in Ontario and western Canada, are or have been successfully rebranded Circle K. Management indicates the completion of global rebranding activities will require another 30 months."

Meanwhile, TD Securities' Michael Van Aelst increased his target to $82 from $79 with a "buy" rating.

CIBC World Markets' Mark Petrie moved his target to $75 from $73, keeping an "outpeformer" rating.

Mr. Petrie said: "Couche-Tard's strong Q1 results handily beat our expectations on several metrics. U.S. organic sales growth is our focus, and we believe the key driver of investor sentiment, and on that front the company is dialled in and we are increasingly comfortable that momentum is improving."


Canaccord Genuity analyst David Galison raised his target price for shares of Capital Power Corp. (CPW-T) in reaction to acquisition of a 580-megawatt combined cycle natural gas generation facility in Texas, which he calls a "positive."

On Thursday, the Edmonton-based company announced a deal for Arlington Valley LLC, which owns the Arlington Valley facility. The deal, which is to be financed using credit facilities and debt financing, is expected to close in the fourth quarter.

Mr. Galison took a positive stance, noting the acquisition is accretive and contracted under tolling agreements through 2025. He also said it shows the company's focus on diversifying away from carbon-emitting technologies and the Alberta power market.

"We see a longer-term potential for valuation expansion for Captial Power should they succeed in meaningfully reducing the company’s exposure to merchant markets," he said. "While we do not anticipate the shares to trade at Utility levels in the near term, it is clear that opportunities exist for valuation expansion should management continue to execute on its growth plan."

With the deal, Mr. Galison raised his EBITDA projections for 2018 and 2019 to $690.4-million and $787.9-million, respectively, from $684.3-million and $707.3-million.

Maintaining a "buy" rating for Capital Power shares, his target jumped to $31 from $28. The average is $29.17.

Elsewhere, Industrial Alliance Securities analyst Jeremy Rosenfield bumped his target up by a loonie to $31, keeping a "buy" rating.

Mr. Rosenfield said: "CPX's shares are outperforming peers in the market, as investors are attracted to (1) the company's mix of contracted and merchant cash flows, (2) longer-term leverage to rising power prices and new capacity payments in Alberta, (3) contracted growth projects in Canada and the U.S., expected to drive mid single-digit FCF [free cash flow] per share growth, (4) an attractive profile (6-per-cent yield, 7-per-cent dividend growth through 2020, with a 45-55-per-cent FCF payout ratio, and (5) a relative valuation discount to Canadian IPP peers (less than 7 times 2019 estimated P/FCF versus 11 times for the Canadian IPP peer group."


Raymond James analyst Tara Hassan thinks Alamos Gold Inc.'s (AGI-T, AGI-N) reserve and resource update for its Island Gold Mine in northern Ontario "contributes positively" to the project's valuation and is encouraged by the potential for further resource growth.

Shares of the Toronto-based company jumped 3.5 per cent on Thursday after it announced proven and probable mineral reserves increased 129,000 ounces before mining depletion. Net of mining depletion, mineral reserves increased 8 per cent, or 72,000 ounces, to 959,000 ounces. Mineral reserve grades gained 5 per cent to 10.69 grams per ton of gold.

"The updated resource increases our mine life by 19 per cent," said Ms. Hassan. "We note that the delineation of additional reserves and resources within the vicinity of the current mine infrastructure could support further production increases if exploration success continues. Alamos has previously indicated that it will evaluate further increases beyond 1,100 tpd in the context of exploration success."

Keeping an "outperform" rating, she bumped her target to $11 from $10.50. The average is $11.32.

"We continue to view Alamos as a preferred name in the mid-tier space, with the bulk of its production sourced from projects with well-established mine lives in low-risk jurisdictions and funded growth opportunities on the horizon," said Ms. Hassan.


Ahead of the release of its first-quarter 2019 financial-results on Sept. 13, Raymond James analyst Kenric Tyghe said Empire Company Ltd.'s (EMP.A-T) turnaround plan continues to "track positively," however he's remaining on the sideline given the remaining duration and associated risks of the project.

Mr. Tyghe is projecting adjusted earnings per share for the quarter of 41 cents, which is 2 cents below the Street, with revenue of $6.326-billion, exceeding the consensus of $6.301-billion.

"Our modest 0.8-per-cent increase in revenue ... reflects modest share gains in what remained a very competitive environment compounded by weak food inflation (which we expected to accelerate into 2019)," said the analyst in a reseach note. "While food CPI in Empire’s F1Q19 declined 0.1 per cent, supported partially by positive Fresh CPI of 0.1 per cent, we believe Empire’s improved merchandising, and effective store renovations (improving the absolute and relative shopping experience), drove SSS of 0.6 per cent in the quarter.

"Given the competitive intensity (as highlighted by recent key competitor reports), we expect intense promotional activity (pricing investments) to result in flat gross margins over F1Q18. As a result, our adjusted EBITDA of $297.1-million (a touch below consensus of $302.9-million), reflects flat gross margins and a 21 bp decrease in SG&A margins (on operational improvements more than offsetting minimum wage pressures), for an adjusted EBITDA margin of 4.7 per cent."

He kept a "market perform" and $28 target for the stock. Consensus is $29.20.


Echelon Wealth Partners analyst Russell Stanley initiated coverage of MedMen Enterprises Inc. (MMEN-CN) with a “speculative buy” rating and target price of $7.75.

"MedMen has size and reach on a number of metrics," he said. "On an as-converted basis, MMEN has a fully diluted market capitalization of $2.6-billion. Its core operations are in the largest cannabis market in the U.S. (California), and its recent board appointments (including a former Los Angeles mayor) have raised what was already an industry leading public profile, which we believe is supportive of further efforts to build the retail brand, manage local community relationships in new/existing markets, and negotiate attractive terms on M&A transactions."


In other analyst actions:

Goldman Sachs analyst Neil Mehta downgraded Cenovus Energy Inc. (CVE-N, CVE-T) to “sell” from “neutral,” seeing it as “challenged” due to high exposure to Canadian crude’s weak prices, which is expected to remain low until pipeline expansion projects come online in 2020. The firm dropped its target to US$8 from US$12. The average is $12.56 (Canadian).

TD Securities analyst Damir Gunja downgraded Transcontinental Inc. (TCL.A-T) to "hold" from "buy" with a target of $31, falling from $33. The average target on the Street is $31.63.

Kirkland Lake Gold Ltd. (KL-T) was raised to “buy” from “neutral” by PI Financial analyst Philip Ker. His target increased to $28.50 from $24.50. The average is $33.55.

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