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

A day after shares of Hexo Corp. (HEXO-T) plummeted 23 per cent with the withdrawal of its 2020 revenue forecast, prompting a sector-wide sell-off, Jefferies analysts Ryan Tomkins and Owen Bennett made significant changes to target prices for Canadian marijuana producers on Friday, emphasizing price performance over the next 12 months will likely see a “strong divergence between those who can execute/move to profit and the rest.”

“With a number of negative headlines impacting the sector the last 6 months, and still with little sign of profitability, the sector has seen greater risk/volatility priced in,” they said in a research note released Friday.

The New York-based firm expects to see a number of smaller companies go bankrupt or face consolidation with larger names in the sector, as cash flow demand rises.

The analysts lowered their rating for shares of Canopy Growth Corp. (WEED-T) to “underperform” from “hold," pointing out it is the most expensive name across the space even after a recent sell-off.

They thinks Canopy will face increased pressure as other larger cap peers, like Aurora Cannabis Inc. (ACB-T) and Aphria Inc. (APHA-T), moved into positive territory financially over the next 12 months.

Their target for Canopy shares dropped to $25 from $77. The average target on the Street is $51.71.

Conversely, in response to Thursday’s drop, they upgraded Hexo to “hold” from “underperform,” believing pressures faced by the company are better understood following its 2020 outlook change.

Their target for Hexo shares fell to $3.80 from $7.70. The average is $8.62.

They also raised Flowr Corp. (FLWR-X) to “buy” from “hold” with a $3.20 target, down from $7.30. The average is $4.10.

Organigram Holdings Inc. (OGI-T) was moved to “buy” from “hold” with a $8.20 target, down from $10.50. The average is $11.45.

The New York-based firm also cut its target price for several other equities, including:

Aurora Cannabis Inc. to $7 from $14. Average: $9.50.

Aphria Inc. to $11 from $15. Average: $14.60.

Emerald Health Therapeutics Inc. (EMH-X) to $1.50 from $4.20. Average: $2.88.

Cronos Group Inc. (CRON-T) to $10 from $15. Average: $18.25.

Tilray Inc. (TLRY-Q) to US$25 from US$57. Average: US$45.92.

Elsewhere, Eight Capital downgraded Hexo to “neutral” from “buy” with a $3 target, falling from $12.

Desjardins Securities analyst John Chu lowered his target for Hexo shares to $12.50 from $14, keeping a “buy” rating.

Mr. Chu said: “Recent management changes and a more uncertain near-term sales outlook are expected to weigh on the stock in the coming months. Seasonally weaker industry sales for the fall could also be a headwind. In early CY20, we could start to reach an inflection point for the sector as edibles and new stores help drive sales, of which HEXO should be an early beneficiary."


Analysts at Canaccord Genuity expect “significantly” strong third-quarter results for TSX-listed precious metals company, pointing to the “strong” price of gold and second-half weighted production for most producers.

“We forecast precious metals producers in our coverage universe to double earnings quarter-over-quarter on average (85-per-cent quarter-over-quarter growth for the S&P/TSX Gold index),” the firm said in a research note. “This is well ahead of every sector in the S&P500, with earnings for the S&P overall expected to be relatively flat. As we highlighted ... we expect sustaining FCF to roughly double in H2/19 compared to H1/19, on the back of 10-per-cent higher production growth and a 14-per-cent higher gold price. Based on better cost structures, producers are poised to realize record 2020 AISC [all-in sustaining cost] margins of $570 per ounce at $1,500 per ounce, surpassing the 2011 peak of $524 per ounce, which featured a $1,669 per ounce.”

Canaccord raised its price deck for gold prices by 5 per cent with a new long-term forecast of US$1,603 per ounce (from US$1,530). Its silver price deck rose by almost 15 per cent with a long-term price of US$19.26 (from US$16.76).

With those changes, the firm’s analysts increased their target prices for stocks in the sector by 5 to 15 per cent.

As well, analyst Carey MacRury upgraded Barrick Gold Corp. (ABX-T, GOLD-N) to “buy” from “hold” with a $28 target, up from $22 and above the average on the Street of $26.40.

“Despite the 41-per-cent increase in the S&P/TSX gold index, we believe that valuations are reasonable,” the analysts said. "On consensus forward EV/EBITDA, the seniors are trading at 6.8 times , slightly above the 5-year average of 6.5 times (range of 5.4–7.6 times). On a consensus P/NAV basis the seniors are trading at 1.4 times, above the 3-year average of 1.2 times and near the top of a 0.9–1.5-times range. However, we believe that multiples have been compressed over the past several years and we see room for multiples to continue to expand. Additionally, the seniors are trading at an attractive 10-per-cent sustaining FCF yield.

On gold, the firm said: “Gold is up 17 per cent year-to-date, its best performance since 2010, with gold equities also outperforming, up 41 per cent year-to-date (2.4 times gold). Despite the strong move, we remain bullish on gold. With $15 trillion in negative-yielding debt globally and amidst a global easing cycle (despite historically low rates), we believe gold is well positioned to move higher. We also continue to take a cyclical view of gold, with gold averaging gains of 109 per cent over past gold bull markets; so far this cycle gold is up 48 per cent, suggesting plenty of room to move higher. We believe gold remains largely under-owned among generalist investors, gold supply has peaked, emerging market central banks continue to buy gold, management teams remain disciplined, and there has been a lack of investment (and available funding) for exploration and development.”

Among senior producers, analysts made the following changes:

Newmont Goldcorp Corp. (NEM-N/NGT-T, “buy”) to US$60 from US$53. Average: US$46.24.

Kinross Gold Corp. (K-T/KGC-N, “buy”) to $9 from $8. Average: $8.

Agnico Eagle Mines Ltd. (AEM-T/AEM-N, “buy”) to $98 from $87. Average: $89.60.

Pan American Silver Corp. (PAAS-Q/PAAS-T, “buy”) to US$21.50 from US$20. Average: US$21.58.

Yamana Gold Inc. (YRI-T/AUY-N, “buy”) to $6.50 from $5.50. Average: $5.15.

Kirkland Lake Gold Ltd. (KL-T/KL-N, “buy”) to $70 from $66. Average: $63.99.

B2Gold Corp. (BTO-T, “buy”) to $7 from $6.50. Average: $6.06.


North American freight matkets are “solidly in a recession,” according to analysts at Credit Suisse, pointing to both rail carloads and the Cass Shipment Index contracting for three consecutive quarters.

“While it’s too early to call a bottom in rail volumes (and we are not dismissing the shorter term risks associated with potentially worsening carload declines …particularly coal and intermodal), we continue to prefer to own the rails versus the truckers,” said analysts Allison Landry, Brian Wright and Samantha Yellen. "Idiosyncratic cost stories, and structural improvement in FCF conversion and returns since the last downturn keep us relatively positive.

“In the last 20 years, prolonged rail stock underperformance (3-plus quarters) has only occurred 3 times, each preceding years of outright EPS declines. The ’08-'09 and ’15-'16 periods coincided with protracted quarters of volume declines (8 and 6 quarters, respectively), as well as shocks to the global macro-economy. The duration of rail volume contractions in each of the 5 cycles prior to ’08-'09 was 4 quarters.”

After the analysts lowered their financial expectations for stocks in their coverage universe, Ms. Landry cut her target for shares of Canadian National Railway Co. (CNI-N, CNR-T) to US$98 from US$104, which remains above the average of US$96.73.

Her target for Canadian Pacific Railway Ltd. (CP-N, CP-T) dropped to US$249 from US$275. The average is US$325.58.

She maintained an “outperform” rating for both.


Canaccord Genuity analyst Dalton Baretto said he’s taking a “more conservative” stance on Ero Copper Corp. (ERO-T) following the release of its resource update on Thursday.

He said the announcement "raises a lot of questions for investors given that it contemplates an expansion to 5.5 million tonnes per annum (from the 3.2 mtpa current installed capacity) on the back of a significant expansion of relatively low grade reserves."

"We view this release as a clumsy attempt to demonstrate ERO's ability to substantially ramp up production based on currently defined material only, even before allowing for any real exploration upside," said Mr. Baretto. "Following subsequent conversations with management, we view this release as a 'proof of concept' rather that a reflection of eventual reality."

With the results, Mr. Baretto lowered his 2019 sales and EBITDA expectations, but he sees higher-than-previously anticipated results for 2020.

Keeping a "buy" rating, his target for Ero Copper shares fell to $24.50 from $28.50. The average is currently $21.77.

“We continue to believe in the exploration upside, nickel potential and strength of the management team, and as such, we reiterate our BUY rating on ERO,” he said.

Meanwhile, Raymond James analyst Farooq Hamed lowered his target to $20 from $22, maintaining an "outperform" rating.

Mr. Hamed said: “Overall, while the company significantly added to its reserve and resource tonnage as expected, we were somewhat surprised by the mix of new tonnes added which drove a greater than expected decline in overall grades while operating costs also increased. Further, LOM capex increased more than expected. ERO also noted a change in its exploration strategy going forward that will start to focus more on its regional targets identified through its previous airborne EM survey with less drilling resources being allocated to near-mine and in-fill programs.”


Seeing the increased popularity of hard seltzer as “truly terrific,” Citi analyst Wendy Nicholson upgraded her rating for Boston Beer Company (SAM-N), which produces the Truly Spiked & Sparkling line as well as owning the Twisted Tea Brewing Company and its signature Samuel Adams beer line, to “buy” from “neutral.”

“The hard seltzer category continues to grow at a rapid clip (up 200 per cent year-to-date), and while we expect there could be some slowdown in this pace as we enter the cooler months, we believe that overall, the hard seltzer category will continue to grow at a double-digit rate for as far as we can see,” said Mr. Nicholson in a research note released late Thursday.

"While the hard seltzer category is growing so quickly partly as a result of new brand entrants and increased marketing support, we recognize that Truly will likely continue to donate some market share as the category becomes increasingly fragmented."

Ms. Nicholson said Truly is on pace to nearly triple in sales in 2019 relative to 2018 levels, and she emphasized further expansion in distribution and advertising is to come.

Though she noted the “pretty horrifying” trends for its core beer and cider portfolio, Ms. Nicholson increased her 2020 and 2021 earnings per share estimates to US$11.45 and US$12.79, respectively, from US$11.05 and US$12.34.

Her target for the stock jumped to US$448 from US$394. The average on the Street is xxx.

“We believe that SAM’s strong growth in the hard seltzer and hard tea categories will continue for the foreseeable future, despite more competition coming into the hard seltzer category, and will more than offset weak growth for SAM in its core beer and cider categories,” the analyst said. “What is more, we like SAM’s recent acquisition of Dogfish Head, as we expect it to boost SAM’s overall market share trends in the U.S. craft beer segment. We also like SAM’s debt free balance sheet and its opportunity to improve its operating margins over time (as the company’s operating margins are now 300 basis points below their 2015 peak). With all of this in mind, we think there is room for both upside to earnings estimates (from better sales growth and margin expansion, both relative to our expectations) as well as room for the valuation multiple for the stock to expand.”


With files from Reuters

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