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

Methanex Corp.'s (MEOH-Q, MX-T) demand trends are likely to remain choppy and more likely softer into 2020, according to Jefferies analyst Laurence Alexander.

He downgraded his rating for the stock to "hold" from "buy."

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“While we had anticipated an H1 2019 downdraft, we are less confident on the speed, magnitude and duration of the next upswing given cyclical risks in 2019-2020 that could overwhelm secular tailwinds,” says Mr. Alexander, who believes price volatility is due to new production capacity, the addition of downstream capacity and shifting tradeflows in 2018-2020.

His target for the stock fell to US$61 from US$76. The average on the Street is US$74.

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IPL Plastics Inc. (IPLP-T) is a “growth play in a mature industry,” said Desjardins Securities analyst Frederic Tremblay, pointing to an organic growth rate that is “significantly above that of its large addressable market.”

He initiated coverage of the Quebec-based manufacturer of injection-molded plastic products, which began trading on the TSX in late June, with a "buy" rating.

“IPLP posted 2015–17 revenue CAGR [compound annual growrh rate] of 38.6 per cent (including 6.3 per cent organically), significantly ahead of the industry’s mature growth profile,” said Mr. Tremblay. “In addition to innovation and recent investments in in-mould labelling equipment, we see several trends that should support robust demand, including substitution to plastic from alternatives and the segregation of waste streams (eg food waste and recycling). We forecast 7-per-cent annual growth in 2019 and 2020, excluding potential M&A.”

"A fragmented market provides IPLP with a healthy pipeline of acquisition opportunities. With net debt/EBITDA forecast to fall within management’s targeted range of 2.0–2.5 times by the end of 2018, we view the balance sheet and access to capital markets as supportive, although recent share price weakness might reduce the attractiveness of an equity issuance in the short term. Assuming leverage of 3.5 times EBITDA, we estimate IPLP could acquire US$20–35-million of incremental EBITDA without an equity raise (potential upside of 21–37 per cent to our 2019 adjusted EBITDA estimate)."

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Calling its current valuation "too cheap to ignore" following a 27-per-cent decline in its share price since its initial public offering, Mr. Tremblay set a target of $14 per share, which is 71 cents lower than the average on the Street.

“[IPLP shares] trade at just 6.6 times our 2019 EBITDA forecast,” he said. “This represents a large contraction of the multiple compared with 9-times EBITDA at the IPO. This has resulted in IPLP having one of the cheapest multiples among the entire packaging universe and a 26-per-cent discount to the peer average of 8.9 times. This discount to peers of 2.3 times is significantly higher than the average discount of 1 times observed since its IPO.”

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Dollarama Inc.'s (DOL-T) profit growth “appears constrained by competitive activity” for the first time since it went in public in 2009, said Desjardins Securities analyst Keith Howlett.

Shares of the discount retailer dropped 11.8 per cent on Thursday after it reported third-quarter earnings per share of 41 cents, which fell a penny short of the expectations of both Mr. Howlett and the Street. Total sales of $864.3-million also missed the consensus expectation ($872.6-million), while same-store traffic growth declined for the third consecutive quarter.

"Our view is that the Dollarama business model is not broken but that the rate of future EPS growth will be lower than in the recent past," the analyst said. "The valuation multiple is compressing due to that new reality and the compression of overall market multiples."

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Mr. Howlett dropped his EPS estimate for 2019 by a penny to $1.69 from $1.70. He maintained a 2020 estimate of $1.93.

With a "buy" rating (unchanged), his target for Dollarama shares fell to $43 from $45. The average is $42.71.

Meanwhile, Industrial Alliance Securities' Neil Linsdell lowered his target to $50 from $54.50 with a "buy" rating.

Mr. Linsdell said: "DOL reported weaker-than-expected results, at a time where investors are looking for stability and positive surprises in the growth rate and margins. With management reiterating full-year guidance, the company remains on track to meet its accelerated store opening target and has decided to limit price hikes in order to preserve its value proposition. As such, we continue to see the recent sell-off as a buying opportunity."

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Though it possesses momentum heading into the important fourth quarter and is running ahead of several key 2020 targets, RBC Dominion Securities analyst Brian Tunick lowered his target price for shares of Lululemon Athletica Inc. (LULU-Q), citing “multiple compression on global growth names.”

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On Thursday, the Vancouver-based company reported "blowout" third-quarter comparable same-store sales growth of 18 per cent, exceeding the 13.7-per-cent expectation on the Street. Earnings per share of 75 US cents also topped both the consensus (69 US cents) and the company's guidance (65-67 US cents).

Mr. Tunick said the results confirm Lululemon "remains a bright spot in consumer" and believes the company is likely to continue to post higher-than-expected results in the fourth quarter after guiding high single-digit to lower double-digit comps (versus the Street's 11.2-per-cent projection) and EPS of US$1.64-1.67 (versus US$1.65).

"We expect the 4Q outlook to be conservative given: 1) consistent high-teens trends quarter-to-date (record Thanksgiving/Black Friday Direct sales, for example); 2) resonating product including outerwear and a giftable focus with accessories; 3) robust store and Direct traffic levels; 4) growth tests including loyalty and self-care tests; and 5) healthy inventory levels including 25-per-cent gain in 3Q vs. 20-21-per-cent 4Q outlook," he said. "4Q gross margin is guided +50-100-bps, while SG&A is guided flat to up 50-bps as the company makes strategic investments. Despite an in-line outlook, note that 4Q historically generates the biggest comp and EPS beats for LULU."

"Running ahead of select 2020 targets, with Direct and Men's on pace to be well over $1-billion apiece. Beyond 2020, we expect LULU's path to $6-billion-plus from $3.2-billion today should look similar to what we see now, including 10-per-cent footage growth, men’s business north of $1-billion, a digital ecomm penetration of 30 per cent or more, and International. Certainly, comments about an early paid-loyalty test in Edmonton being well received, a self-care product test, on top of a strong 2019 innovation pipeline suggests the company is proactively working to engage its customers."

Mr. Tunick raised his 2018 EPS estimate to US$3.70 from US$3.58. His 2019 expectation rose to US$4.36 from US$4.25.

Keeping an "outperform" rating for Lululemon shares, his target fell to US$165 from US$185. The average is now US$163.24.

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Elsewhere, Citi’s Paul Lejeuz maintained a “neutral” rating and US$152 target despite modest raises to his EPS expectations for fiscal 2018 and 2019.

Mr. Lejeuz said: “LULU once again posted among the strongest comps and GP$ increases in retail ... though this time perhaps it came as less of a surprise to the market. Momentum continues into 4Q, and while the company is guiding 4Q comps high single digit to low double digit, we believe management is being conservative as much of the volume in the qtr is yet to come. It is tough to find anything not to like about LULU, other than that with it trading at 18 times our fiscal 2019 estimated EBITDA, we believe it will have a tough time impressing the market from here.”

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Despite a “tempered” near-term outlook, Canaccord Genuity analyst Rahul Paul thinks the longer-term picture “remains attractive" for Alamos Gold Inc. (AGI-T, AGI-N).

He pointed to several factors, including:

- Its Young Davidson mine remaining a “relatively attractive” asset upon successful completion of its ramp-up;

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- Continued outperformance of its Island Gold mine, which he sees as on track to beat upgraded production guidance;

- His forecast for fully funded organic production growth of over 35 per cent by 2021;

- The potential for “further organic growth longer term from an extensive project pipeline”;

- A balance sheet that is among the best in the sector.

However, Mr. Paul reduced his operation and financial forecast for fiscal 2018 through 2020 to reflect lower production and higher costs at Young Davidson, located in northern Ontario. He sees "an assumed longer timeline for completion of the lower mine infrastructure and slower ramp-up of underground mining rates to 8,000 tpd by Q1/21 (vs Q1/20 previously) in addition to higher capital/operating costs going forward."

That led him to lower his target for Alamos Gold shares to $9 from $11.50 with a "buy" rating (unchanged). The average target is $9.45.

“Our reduced target price also assumes a lower multiple reflecting our view that the continued operating challenges, cost overruns and ramp-up delays at Young Davidson may limit re-rating pending successful completion of the underground ramp-up,” he said. “While we acknowledge investor disappointment with Young Davidson, we believe the shares may be oversold trading at 0.42 times P/NAV (21-per-cent discount to intermediate peers) following the 45-per-cent year-to-date decline (32 per cent vs the S&P/TSX Gold Index).”

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