Inside the Market’s roundup of some of today’s key analyst actions
With its earnings before interest and taxes (EBIT) margin improving and seeing “encouraging” early results from its private-label products, Desjardins Securities analyst Keith Howlett raised his rating for Gildan Activewear Inc. (GIL-T, GIL-N) in the wake of Thursday’s release of better-than-anticipated second-quarter results.
“Gildan has now transitioned from selling branded basic apparel assortments within the mass retail channel in the U.S. to manufacturing products within its ‘sweet spot’ under brand names owned by the largest retailers in the U.S,” said Mr. Howlett, who moved the stock to “buy” from “hold.”
“The new product line-up is being constructed in the context of management’s overarching goal to lower SGA expense rate to less than 12 per cent and increase gross margin rate to 30 per cent. Should the U.S. impose new tariffs on apparel from China, Gildan will be further advantaged by its Central American manufacturing hubs and use of US cotton yarn. The core printwear business in the U.S. is performing well, driven by growing market share in fashion basics, facilitated by tiered pricing of key brands (Gildan, Anvil, American Apparel).”
With its results, the company said underwear sales grew more than 50 per cent year-over-year, “reflecting the successful launch of our new private label men’s underwear program with our largest mass retail customer.” It now expects to be awarded additional shelf space to expand the program offering in the fourth quarter.
“Gross margin rate will begin to visibly improve in 4Q19, further increase in 2020 and will potentially reach the targeted 30 per cent in 2021," said Mr. Howlett. "The top line is once again growing, driven by printwear, contract manufacturing, e-commerce and retailers’ private label.”
Mr. Howlett raised his 2019 and 2020 earnings per share projections to $1.96 and $2.42, respectively, from $1.94 and $2.30.
His target for the stock increased to $57 from $48. The current average on the Street is $49.74.
Elsewhere, calling the results “solid,” Citi analyst Paul Lejuez thinks Gildan’s fourth quarter is “now even more important.”
"2Q was a solid quarter for GIL with sales and GM both slightly better than our forecasts," he said. "Management raised the low end of EPS guidance on first half strength, though full-year targets are heavily dependent on 4Q results when GIL is planning sales rising double-digits and EPS up 60 per cent despite tough comparisons (sales up 14 per cent, EPS up 39 per cent in 4Q18). GIL continues to expect SG&A below 12 per cent of sales in 2020 (vs 12.7 per cent in F18) and a GM of 30 per cent in 2021 (vs 27.7 per cent last year) implying op margins 18 per cent or more (vs 15 per cent in F18).
"But we won’t see tangible signs that GM is moving in the right direction until 4Q. And over the longer term, GIL’s positioning (a low-cost producer aiming to win private-label business from mass merchants) may continue to pressure GMs and force management to find cuts in other places."
Maintaining a “neutral” rating for Gildan shares, he increased his target to US$40 from US$37.
RBC Dominion Securities analyst Sabahat Khan raised his target to US$36 from US$35 with a “sector perform” rating.
Mr. Khan said: “We were encouraged by the incremental private label wins announced with the company’s largest mass customer, which will contribute to results primarily in 2020 (modest contribution expected in Q4/19). For the remainder of the year, we expect investor focus to be on trends in the wholesale channel (i.e. pricing/ growth of the fashion basics sub-segment/timing shift of fleece sales) and any further private label program wins that may contribute in 2020.”
SNC-Lavalin Group Inc.'s (SNC-T) strategy to exit construction activities in order to focus on engineering services is likely to help shareholder value, said Desjardins Securities analyst Benoit Poirier.
However, he cautioned "time will be needed to unlock its full potential."
“The new operational structure will allow SNC to focus on its high-margin businesses (Engineering Services segment) while gradually eliminating all construction activities by the end of 2023,” he said. “SNC’s exposure to lump-sum construction projects includes $0.6-billion in Resources (five projects in North America and MENA) as well as $2.8-billion in Infrastructure (six main projects in North America). Management estimates that these projects will be completed by the end of 2023.”
Following "mixed" first-quarter results, Mr. Poirier lowered his 2019 earnings per share projection to 26 cents from $15, while he raised his 2020 estimate to $2.50 from $2.43.
Maintaining a “hold” rating for SNC shares, he reduced his target to $34 from $37. The average is $35.82.
“We prefer to wait for a clear improvement in financial performance as we believe further deterioration of the balance sheet would create further pressure on the stock,” the analyst said.
Meanwhile, Raymond James’ Frederic Bastien dropped his target to $25 from $32 with a “market perform” rating.
Mr. Bastien said: “We knew not to expect miracles from SNC-Lavalin’s projects business after the firm warned last week of significant losses for 2Q19. What surprised us were how poorly the so-called high-performing areas of the business did—well, in fact—perform, and the sober assessment of the lump-sum turnkey (LSTK) projects for which the firm remains on the hook. The liquidity picture has gotten so precarious SNC can’t even contemplate buying back stock at today’s depressed levels; it had to slash the dividend once more and must now earmark all Highway 407 proceeds for debt repayment. Beware the falling knife, as they say.”
National Bank Financial analyst Maxim Sytchev increased his target to $38 from $36, keeping an “outperform” rating.
Mr. Sytchev said: “Investors need resolution on 1) receiving 407 cash and 2) operational visibility on the remaining LSTK contracts, otherwise the shares will continue to be viewed as uninvestible. 407 cash is inevitable but visibility around LSTK contracts is difficult as it would require operational excellence that we have not seen from the company. Precedants suggests that there could be 30-per-cent cost reforecasts on the remaining high-risk LSTK backlog (resources and non-transit infra). We now model this as part of our NAV. The shares are now sub-$20 and with the sale of the 407 stake, the market is valuing the rest of the business at ~$1-billion. EDPM alone should be ascribed $4-billion while Nuclear and Infrastructure Services must have some positive value in them. The imbedded value in SNC is clear but investors can no longer stomach the volatility around the LSTK contracts (even if they are being rolled off). We continue to believe the company is go-private candidate and requires divesture of Resources.”
2019 has proven “more challenging than anticipated” for Bombardier Inc. (BBD-B-T), however Mr. Poirier thinks “the best is still to come.”
"BBD reported 2Q19 results which were below expectations, mainly due to poor performance at [Bombardier Transportation]," he said. "As a result, management is making US$250–300-million in additional investments and costs that will reduce profitability for BT and lower FCF. While we are disappointed by these additional issues, we continue to believe in BBD’s capacity to generate positive FCF in 2020. We see more catalysts ahead with proposed divestitures (CRJ and aerostructure assets) that will solidify its balance sheet."
Following the release of weaker-than-expected quarterly results and a reduction to its 2019 guidance, Mr. Poirier lowered his adjusted earnings per share expectation for 2019 by 2 cents to a 4-cent loss. For 2020 and 2021, he now projects profits of 15 cents and 25 cents, respectively, falling from 18 cents and 26 cents.
Keeping a "buy" rating, he dropped his target for Bombardier shares to $4 from $4.50, which remains above the consensus on the Street of $3.66.
“Bottom line, we are maintaining our bullish stance on the name as we continue to believe in management’s ability to deliver on its 2020 turnaround plan,” he said. “The recent refinancing of 2020–21 maturities and proposed divestitures (CRJ and aerostructure assets) should provide enough flexibility to overcome the challenges at BT. We continue to see value in BBD’s shares and reiterate our Buy rating.”
Raymond James' Steve Hansen lowered target to $2.50 from $3.50 with a "market perform" rating.
Mr. Hansen said: “While we continue to admire management’s multi-year turnaround strategy, the string of recent challenges keep us cautious until better visibility emerges. We will continue to monitor accordingly.”
With its earnings per share momentum and capital strength “too good to ignore,” Scotia Capital analyst Sumit Malhotra raised his rating for iA Financial Corp. (IAG-T) to “sector outperform” from “sector perform.”
On Thursday, the company, formerly Industrial Alliance Insurance and Financial Services Inc., reporting operating earnings per share of $1.66, up 14 per cent year-over-year and "well-ahead" of Mr. Malhotra's $1.46 forecast.
"Importantly, in a set of results in which all of the stars aligned for IAG, the bulk of the bottom line differential was still underpinned by the highest-quality component, as Expected Profit growth surged to 13 per cent year-over-year with double-digit increases delivered by four of the five business lines," he said. "When accompanied by favourable policyholder experience and healthy strain and earnings on surplus trends, we viewed the IAG print as by far the strongest of Canadian life insurance earnings season thus far."
Mr. Malhotra said shifts in rate and investment strategies continue to provide a big boost to capital, and emphasized “quieter” policyholder trends remain particularly important for IAG.
"After the 4-per-cent lift in our estimate IAG shares are trading at 7.8 times our 2020 estimates, an 8-per-cent discount to the sector average of 8.5 times," the analyst said. "The upward move in our numbers maintains the positive EPS momentum that the company has been exhibiting, as we note that our 2020 estimate has now climbed a sector-best 8 per cent since its inception in Feb. 2018. When considered alongside the robust capital position (by our estimate IAG has $1.2-billion in deploy-able proceeds) and conservatism around interest rate reserves, at 1.05 times BVPS (vs. a 12-per-cent-plus ROE) we think the valuation accorded to the shares has clear scope for improvement, and as such we are upgrading our rating on the stock."
Mr. Malhotra increased his target to $62 from $58. The average is $61.22.
Raymond James analyst Andrew Bradford thinks Trican Well Service Ltd. (TCW-T) is “unlikely to generate meaningful free cash flow from its core assets until the Canadian market improves,” leading him to downgrade its stock to “outperform” from sector perform."
“Second quarter results in Canada don’t typically provide much in the way of insights into the direction of the fracturing market,” he said. “This is doubly true this year as underwhelming producer capital spending has made specific client lists the key factor in determining second quarter performance. Giving effect to our reduced macro outlook, Trican is generating little in way of free cash flow. At an estimated $50-million in EBITDA for 2019, $4-million in interest, and an estimated $40-million in maintenance spending, there is little free cash flow remaining.”
Mr. Bradford lowered his target to $2.25 from $3. The average on the Street is $1.78.
In a separate note, Mr. Bradford lowered his rating for Calfrac Well Services Ltd. (CFW-T) to “outperform” from “strong buy,” despite a quarterly beat.
He sees the company's outlook "going sideways."
“Calfrac isn’t the only high-financial-leverage oilfield services company, but at an estimated 5.0 times net debt to EBITDA at the end of 2019, CFW is at the higher end of the group,” said Mr. Bradford. "Because of this, even small changes in the macro environment get amplified through Calfrac - some investors might find this an appealing characteristic while others might fear too much volatility.
“Either way, we would be remiss if we didn’t note that at current activity levels, stable as they may be, Calfrac is generating little in way of free cash flow. At our estimated $200-million in EBITDA, less $81-million in interest and an estimated $110 to $115-million in maintenance capital - relatively high as Calfrac doesn’t expense fluid ends - there is little to no residual free cash flow. In other words, investors only win if the macro scenario improves.”
Pointing to its high debt levels and “little” cash flow, he lowered his rating and reduced his target to $4 from $7.50. The average is $3.61.
“The market took a blasé attitude toward CFW’s 2Q ‘beat’ (reported $45-million EBITDA vs $35-million consensus), dropping the stock 5 per cent,” he said. “Though to be fair, it was an exceptionally tough day for OFS stocks in general with the TSX Drilling and OSX indeces down 5 per cent apiece.”
Though BCE Inc. (BCE-T, BCE-N) “continues to benefit from low bond yields and a degree of wireless aversion within the group among investors,” RBC Dominion Securities analyst Drew McReynolds said its second-quarter results “prove once again that fundamentals remain solid driven by strong execution on several tactical fronts.”
Following better-than-expected second-quarter results, released Thursday before the bell, Mr. McReynolds thinks BCE is “reinforcing a slowing but still constructive backdrop” for the Canadian wireless market.
"Although management cautioned that ABPU [average billings per user] growth will moderate in the quarters to come due to the flow-through of lower overages from the recent launch of unlimited plans, management still expects ABPU growth to remain positive in 2019, which should translate to low-single digit network revenue growth," he said. "In addition, management believes that lessons have been learned from the introduction of unlimited plans and EIPs in the U.S. wireless market and sees network quality becoming a greater differentiator and value-driver."
Calling BCE “a core telecom holding that provides safety, yield and growth,” he raised his target for its stock to $62 from $61, keeping a “sector perform” rating. The average on the Street is $61.67.
“Given BCE’s position within the group as a defensive, highly liquid dividend grower and bond proxy, we expect the stock to remain sensitive to macro changes (interest rates, economy),” he said. “Nevertheless, we believe company fundamentals remain intact driven by: (i) mid-single-digit wireless EBITDA growth; (ii) steady Internet and IPTV net additions leveraging an expanding FTTH [fiber to the home] footprint and under-indexed market share; (iii) an improving business market; (iv) easing consolidated capex intensity in 2019E; and (v) further cost efficiencies.”
Elsewhere, Desjardins Securities' Maher Yaghi kept a "hold" rating and $65 target.
Mr. Yaghi said: “BCE reported good results in 2Q19 as the company’s media and wireless businesses helped fill the slack in wireline growth. Overall, wireless loading was healthy in the quarter; however, ARPU growth remains pressured by the underlying customer loading profile. We downgraded our rating on BCE three months ago and we continue to believe the stocks’s valuation remains elevated vs peers given the company’s underlying growth rate.”
After an “encouraging” second quarter and outlook, Raymond James analyst Andrew Bradford raised his rating for Strad Inc. (SDY-T) to “strong buy” from “outperform.”
“Numerically, Strad is a $100-million market cap super star among oilfield services companies,” he said. "2Q19 EBITDA was up 20 per cent year-over-year while 1H19 EBITDA is up 52 per cent year-over-year. These are the best comparatives we’ve seen from any company reporting so far this period.
“We recently reduced our macro forecasts for the Canadian oilpatch, which means fewer equipment rentals through the balance of 2019 and 2020, but doesn’t materially impact the larger division - Industrial Matting (which generates 84 per cent of total EBITDA). But as an offset, Strad has been awarded three industrial matting contracts commencing later this quarter and continuing into early 2020. The net effect on our estimates is to transfer $2-million in EBITDA from 2019 into 2020.”
Emphasizing its “ambitious” growth plans are back by demand and are internally funded, Mr. Bradford raised his target to $3 from $2.75. The average target is currently $2.75.
“We continue to position Strad as a high-growth, low-debt non-drilling & completion oriented OFS company,” he said. Discrete infrastructure projects are sufficient to move the needle, and there is fairly clear visibility to increased demand for its matting product and services over the near- and midterm."
Expecting more near-term “pain,” RBC Dominion Securities analyst Nelson Ng lowered his financial forecast and target price for shares of Methanex Corp. (MEOH-Q, MX-T) after weaker-than-anticipated second-quarter results.
“The combination of continued softness in methanol prices, weaker-than-expected results, and the company’s decision to move forward with the Geismar 3 (G3) development will reduce near-term cash flow flexibility,” he said.
Pointing to " the cost impact of the Egypt outage in H2/19, lower posted methanol prices, and modestly higher costs going forward," he lowered his 2019 and 2020 EBITDA estimates to US$635-million and US$820-million, respectively, from US$755-million and US$858-million.
With a “sector perform” rating, Mr. Ng reduced his target to US$60 from US$65. The average is US$51.07.
In other analyst actions:
JPMorgan cut Air Canada (AC-T) to “neutral” from “overweight” with a target of $50, rising from $42. The average on the Street is $52.96.