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

Microsoft Corp.’s (MSFT-Q) strong fourth quarter results were driven not only by new releases, but also by longstanding products that continue to deliver, according to Canaccord Genuity Capital Markets.

Analyst Richard Davis raised the stock’s price target to US$155 from US$145 and maintained a “buy” rating. The median analyst target is $153.59, according to Bloomberg data as of midday Friday.

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“Microsoft’s fundamentals are good, but that statement contains a nuance that we do not often see discussed; while the more than half of Microsoft revenue that is made up of growth drivers (Azure, O365, Marketing, Gaming) has soundly exceeded our long-term forecast we laid out in October of 2017 when our thesis on MSFT improved, an interesting observation is that the legacy portions of the business (subjectively set by us as on premise Office software, Windows, and legacy servers), with the exception of Office licensing revenue (of which growth is inversely correlated to that of O365), have also exceeded expectations,” Mr. Davis said in a note.

He added that, “Consistent growth in these businesses was not something that we expected a few years ago. That’s the ‘what.’ Our ‘why’ hypothesis is that when you treat your customers fairly (e.g. – don’t abuse them with egregious price increases and straight jacket contracts), you can actually sustain legacy systems for a lot longer than VCs, upstart companies and public company investors and analysts would expect. The point is that we do not see some sort of cliff event in which Microsoft’s legacy business rolls over hard, and like the large majority of people who follow this company, we are in the consensus that the growth drivers will continue to deliver more than 20 per cent growth for about half of the business.”

“Overall, the quarter was largely in-line with or ahead of expectations. Azure revenue grew 64 per cent, a deceleration from 73 per cent last quarter, but 4 points higher than our estimate; Windows revenue grew 7 per cent, driven by better-than-expected Windows 10 demand in advance of end-of-support for Windows 7, as well as some stockpiling by customers around tariff uncertainty; search revenue was weaker than anticipated, as was gaming revenue, due to lower console and 3rd party title sales; lastly, we would highlight the double digit overall revenue growth guidance for F2020 (which could prove to deliver upside to the 10 per cent we had projected).”

RBC Capital Markets expects Sleep Country Canada Holdings Inc. (ZZZ-T) to report stronger same-store sales (SSS) later in the year and sees potential upside in the stock.

Analyst Sabahat Khan raised the price target to $20 from $19 and maintained a “sector perform" rating. The median analyst estimate is $29.

“For Q2/19, we expect SSS of -2 per cent on top of +4.4 per cent in Q2 last year, and a sequential improvement relative to -3.4 per cent in Q1/19. We continue to expect SSS to be the primary metric that investors focus on, and as such, could see potential for some upside in the shares through late-2019/early-2020 when the company faces easier prior year comparables (assuming the macro backdrop does not materially weaken). Recall that SSS in Q4-18/Q1-19 was -2.7 per cent/-3.4 per cent. Over the longer run, our primary concern would be the potential for the company to have an excess number of stores in operation heading into an economic slowdown and/ or if the bed-in-a-box offerings capture a much larger proportion of the mattress market than we currently anticipate,” he said in a note.

Khan added that Sleep Country plans to add six new store locations in the second quarter as it continue to expand its retail footprint. “Over the last 12 months, the company has added 15 net new store openings. Recall that management previously provided 2019 guidance for 8-12 new stores at Q4/18 reporting. Given the recent SSS weakness and the acquisition of Endy, we could see the potential for a moderation in new store openings as management may look to re-focus its attention on improving traffic and conversion rates across its existing store network.”

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“We forecast sales of $160.0-million (+11.4 per cent year-over-year) vs. $143.7-million in Q2/18 and consensus of $160.6MM (+11.8% YoY). Our year-over-year sales growth forecast reflects Q2/19 SSS of -2.0 per cent, 6 net new openings during Q2, and $15-million of contribution from the Endy acquisition. We forecast Q2/19 operating EBITDA [earnings before interest, tax, depreciation and amortization] of 32.1-million (+40.0 per cent year-over-year); consensus of $33.8-million), which reflects a ~$9.5-million benefit from IFRS 16 vs. the comparable prior-year period. After adjusting for the impact of IFRS 16, we expect Q2 operating EBITDA to remain approximately flat year-over-year.”

While CIBC anticipates lower earnings at Intact Financial Corp. (IFC-T) based on catastrophic losses and poor weather-related claims, it believes the insurer could see good results from autos based on rate increases.

Analyst Paul Holden raised his price target to $134 from $120 and maintained a “neutral” rating. The median analyst estimate is $120.50.

“We expect the bulk of weather-related claims will impact Personal Property and assume a combined ratio of 103 per cent. On the other hand, we are expecting good results in Personal Auto related to rate increases and other margin-enhancing actions. We assume a Personal Auto combined ratio of 92 per cent, down from 96 per cent a year ago. For commercial lines, both Canada and U.S., we are assuming combined ratios that are effectively flat year-over-year,” Holden said in a note.

He added that, “The rate picture remains positive and should only be reinforced by weather-related claims. Ontario auto saw further rate approvals of nearly 2 per cent for Q2 and the CPI Index shows auto rates climbing nearly 9 per cent year-over-year. Overall we are modeling 6 per cent premium growth for Q2, relatively consistent with Q1. There is a possibility that premium momentum builds as competitors start to catch Intact on auto rate increases (less market share erosion for Intact) and if continued claims losses in personal property result in high-single-digit rate increases.”

Holden lowered second quarter estimates, decreasing operating earnings per share forecasts from $1.95 to $1.64. “We are reducing our estimates for Q2, mainly to account for a higher cat loss assumption ($143-million vs. $94-million prior), but also to reflect poor weather in the core claims ratio.”

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More to come

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