Inside the Market’s roundup of some of today’s key analyst actions
Following “mixed” third-quarter financial results, Credit Suisse analyst Mike Rizvanovic said he’s remaining “very cautious” on the outlook for the Canadian banks.
“We believe that the already-tough operating environment will only become more challenging as the group contends with net interest margin compression, rising credit losses, volatile capital markets, and growth deceleration in their respective non-domestic P&C Banking divisions,” said Mr. Rizvanovic in a research note released Friday.
“We have taken our estimates down slightly ... and now forecast modest average EPS growth of 3 per cent in F2020. BNS and TD remain our only two Outperform names among the Big Six.”
Mr. Rizvanovic upgraded his rating for shares of Bank of Montreal (BMO-T) to “neutral” from “underperform," pointing to “discounted relative valuation, opportunities on efficiency improvement, and strong excess capital."
His target for BMO shares is $93, which sits below the average on the Street of $103.15.
At the same time, Mr. Rizvanovic cut National Bank of Canada (NA-T) to “underperform” from “neutral,” citing fading capital markets results, rising competition in lending in Quebec, and an elevated valuation multiple.
His target fell to $62 from $64. The average is $65.45.
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Lululemon Athletica Inc. (LULU-Q) “stands above the rest in retail,” said Citi analyst Paul Lejuez following “another standout quarter” for the Vancouver-based company.
Despite a "choppy" retail environment, Lululemon record comparable same store sales growth of 17 per cent for the second quarter, easily exceeding the consensus expectation on the Street of 12 per cent and representing a sequential improvement from the first quarter (16 per cent).
"Momentum was broad based with store comps up 11 per cent (with store traffic up 8 per cent) and all categories comped positively, even the fairly mature women’s bottoms biz (high single digits to low double digits)," said Mr. Lejuez.
After the bell on Thursday, Lululemon also reported earnings per share of 96 US cents, including 2 US cents from a lower tax rate. That result topped both the 90 US cent expectation from Mr. Lejuez and the Street as well as the company’s guidance range of 86 US cents to 88 US cents.
With the result, the company raised its full year EPS guidance to US$4.63-US$4.70 from US$4.51-US$4.59. The consensus was previously US$4.64.
That led Mr. Lejuez to adjust his 2019 and 2020 EPS projections to US$4.76 and US$5.74, respectively, from US$4.74 and US$5.81.
He maintained a “buy” rating and US$205 target for Lululemon shares. The average target on the Street is US$203.29.
"While the stock is not cheap (shares trading at an fiscal 2020 estimated EV/EBITDA multiple of 20 times), LULU stands above the rest in retail during a period of uncertainty," he said. "With no signs of a slowdown in momentum and opportunity for more top line beats ahead, we reiterate our Buy rating.
“We rate shares of lululemon Buy (1). Comp momentum has been among the best in retail and we believe it can continue. Product innovation continues to drive strong results in seemingly developed categories such as women’s pants, the men’s business is a big opportunity, and the customer has given LULU license to broaden into new categories. LULU is one of the more attractive square footage growth stories in softlines retail and there is no sign of a slowdown in momentum, and we expect shares to move higher.”
Elsewhere, believing it possesses "enviable and quality momentum," RBC Dominion Securities analyst Kate Fitzimons increased her target for Lululemon shares to US$215 from US$200, keeping an "outperform" rating.
“Accelerating 17-per-cent 2Q comps and 90 basis points product margin expansion confirm that LULU remains a bright spot in consumer discretionary,” she said. “We think that LULU can continue to see comp/EPS upside into 2H19 with slight multiple expansion warranted given the consistency of strong results.”
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Desjardins Securities analyst Keith Howlett expects Alimentation Couche-Tard Inc. (ATD.B-T) to see substantial benefits moving forward from rebranding and adopting of the practices of Holiday Stationstores Inc., a convenience store operator in the Upper Midwest U.S. that was acquired in 2017.
"Couche-Tard management endeavors to learn from the practices of all companies it acquires," he said. "It is noteworthy when a company as successful as Couche-Tard speaks so highly of an acquisition (Holiday) after dissecting its operations over the last 20 months since closing. Couche-Tard is rolling out the Holiday in store promotional program (Smart Value) in North America and made the Holiday store labour model the foundation of Couche-Tard’s new store labour tool. Couche-Tard is currently testing Holiday food programs, store layout and subscription car wash model in select markets. Go/no-go decisions are expected in CY19. A long-time Holiday executive has recently been named SVP of Operations, overseeing several Circle K regional business units."
He added: “Couche-Tard is working on multiple aspects of the Circle K consumer proposition, which over time should elevate its brand image and increase loyalty. Our subjective evaluation is that the best-run regional chains with distinctive consumer offers, such as Sheetz and Wawa, have stronger consumer attachment than Circle K. The financial performance of those two chains is not publicly available. With the scale that Circle K has now achieved in the U.S. and globally, it should be possible to generate Couche-Tard-style financial returns while also driving higher consumer attachment to the Circle K brand.”
On Wednesday after the bell, the Laval, Que.-based company reported adjusted diluted earnings per share for the first quarter of fiscal 2020 of 97 US cents, exceeding the Street's expectation by 3 US cents.
However, Mr. Howlett noted the underlying operating results were “mixed,” adding: “We are attributing softer convenience store sales and margins in Canada and Europe to poor weather and challenging year-over-year comparisons. The bigger picture is the rapid paydown of acquisition debt, the US$3.6-billion of available liquidity, the increasing benefits of global branding and the soon-to-be-unleashed ‘reverse synergies’ from Holiday Stationstores.”
With the results, Mr. Howlett raised his 2020 EPS projection to US$3.27 from US$3.23. He maintained a US$3.65 expectation for 2021, despite increasing his EBITDA estimate.
Keeping a “buy” rating for the stock, he hiked his target to $93 from $88. The average on the Street is $93.41.
“Couche-Tard is making good progress across operating regions (US, Canada, Europe) in developing the Circle K brand for both convenience and fuel,” he said. “The benefits of the rebranding exercise will play out over many years, but the early benefits are beginning to show through new programs such as the Easy Pay debit payment system, which provides immediate fuel discounts at the pump of US$0.06 per US gallon, plus redeemable points earned on convenience purchases. Our inference is that meaningful financial benefits will come from rolling out Holiday Stationstores food and merchandising programs across the Circle K network in the U.S. and Canada, commencing in 4Q FY20. The balance sheet is in good shape, with US$3.6-billion of available liquidity.”
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Though Transcontinental Inc.'s (TCL.A-T, TCL.B-T) third-quarter results largely fell in line with his expectations, Canaccord Genuity analyst Aravinda Galappatthige expressed concern about the “further softening” in its print segment.
“We think that the key area to watch in terms of stock volatility is printing,” he said. “Given the generally fixed cost base in printing, variances in revenues tend to have a substantial impact on EBITDA. We have now seen three successive quarters of meaningful misses in terms of profitability and in the case of Q3 a notable organic revenue decline. While the pullback in marketing spend by the two large customers in retail was known prior, Q3 results suggest that the reduction appears to have some longevity. Hence much depends on management’s ability to achieve some cost adjustments to stabilize EBITDA. This we believe could be a catalyst to re-rate the stock to more reasonable levels.”
Though Mr. Galappatthige maintained a “buy” rating for the stock, he lowered his target to $18 from $21. The average is currently $20.88.
“We have lowered our target to reflect the revised down forecasts as well as the current multiples in the packaging space (based on comps),” he said. “The packaging multiple is lowered from 8.25 times to 7.5 times to factor in recent weakness while the printing multiple has been cut from 4.5 times to 4.0 times to reflect the persistent softness in retail. This lowers our target to $18 per share. Nonetheless, our Buy rating is supported by the underlying FCF yield of 20 per cent in F2020. For a business with a reasonable balance sheet and relatively steady underlying EBITDA (post F2019), we feel that this is a compelling valuation. Furthermore, TCL offers an attractive dividend yield of 6 per cent with the prospect of continued annual dividend growth at the 10-per-cent level.”
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With its “deal flow momentum accelerating,” Beacon Securities analyst Gabriel Leung raised his target for shares of Tecsys Inc. (TCS-T) following better-than-expected first-quarter results.
"A key highlight in the quarter was the strong bookings of $14-million, which was up 32 per cent year-over-year," he said. "[Software as a service] subscription bookings (measured on an annual recurring revenue basis) was $0.4-million. Included in bookings was a new hospital network win. Subsequent to quarter-end, there was another hospital network win, along with a significant SaaS deal, which provides good visibility into near-term growth. Quarter-ending backlog was $76.4-million (including $38.3-million in ARR), which was up from $69.3-million last quarter."
Maintaining a “buy” rating, Mr. Leung hiked his target to $18 from $15. The average is $17.64.
“We believe the stock will continue to benefit from a multiple expansion over the near-term given the accelerating deal flow (as evidenced by the growing backlog), increasing revenue mix towards high margin recurring revenues, and improving EBITDA margin profile,” he said.
Elsewhere, Laurentian Bank Securities analyst Nick Agostino increased his target to $19 from $17 with a "buy" rating.
Mr. Agostino said: “Despite the headwinds on near-term results from a transition to SaaS, we are pleased by the FQ1 results as it appears TCS is hitting its stride. We take comfort in the strong organic growth in sales and backlog, both reflective of growing demand (TCS noting larger inbound deal opportunities), and the sizable year-over-year and quarter-over-quarter margins expansion, which demonstrates the leverage potential of the model. A reported record pipeline gives us further comfort that demand is sustainable, aided by Workday, and the product is sticky; all good things as TCS will increasingly be re-rated as a SaaS company with 20-30-per-cent growth+margins potential.”
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Canaccord Genuity analyst Kimberly Hedlin thinks Westleaf Inc. (WL-X) is “reaching an inflection point” with extraction revenues expected to commence by the fourth quarter alongside an acceleration of retail roll outs.
“We expect Westleaf’s extraction facility will receive its standard processing licence in the near term, which could serve as a catalyst for additional third-party tolling and private/white label contracts,” she said.
“Over the coming months, management also plans to accelerate its retail roll out. We believe upcoming stores will focus on premium retail locations, which could include downtown Banff, the University of Alberta in Edmonton, and the Palace Theatre in downtown Calgary. While our 2019 store count is essentially unchanged, we have deferred our retail ramp up through 2021 based on our cash forecasts. On the upside, we have increased average per-store sales in Saskatchewan and increased our gross margin assumptions, given Westleaf’s strong performance to date. Overall, our 2020 retail revenue estimate has declined 13 per cent to $25.3-million.”
Mr. Hedline maintained a “speculative buy” rating but reduced her target to $1.15 from $1.20. The average on the Street is $1.13.
“The change in our SOTP DCF [sum-of-the-parts discounted cash flow] valuation is largely attributed to a reduction in the company’s net cash surplus, partially offset by slightly higher valuations for cultivation and extraction (owing to a reduction in future capital spending),” she said. “Given the company’s current valuation, high-quality asset base, unique retail platform, and pending potential catalysts surrounding licensing, we maintain our SPEC BUY rating.”
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In other analyst actions:
Wells Fargo analyst Roger Read cut Canadian Natural Resources Ltd. (CNQ-T) to “underperform” from “market perform,” believing adding meaningful debt from acquisitions in a down-cycle is the wrong way to create value.
Mr. Read said he disagrees with the company’s strategy of repaying debt and generating sufficient cashflow if commodity prices remain favorable. He anticipates management will continue to use debt in future endeavors.
He dropped his target to $29 from $38. The average on the Street is $46.33.
CIBC World Markets analyst Oscar Cabrera cut Trevali Mining Corp. (TV-T) to “underperformer” from “neutral” with a 15-cent target, down from 35 cents. The average is 49 cents.
Mr. Cabrera said: “An average 12% and 14% decline to our 2020E-22E and long-term (2025E) zinc price forecasts, respectively, plus an increase to our 2020E-25E zinc treatment charge forecasts led to a downgrade of Trevali Mining rating to Underperformer from Neutral. TV is targeting a 10%-15% cost reduction at its operations, moving it from the 4th quartile of the zinc all-in sustaining cash cost (AISC) curve (~$0.95 to $1.30/lb vs. TV’s current average of ~$1.05/lb) to the 3rd or 2nd quartile. Exhibit 2 provides an overview of TV’s operations in the global AISC curve, assuming the company delivers the mid-point of guidance for each asset. We acknowledge these improvements could lead to a re-rating of TV shares, but a tough macro environment leaves TV little room for error (i.e., high downside risk), in our view.”
With files from Reuters
David Leeder