Inside the Market’s roundup of some of today’s key analyst actions
As its outlook “worsens,” Canaccord Genuity analyst Matt Bottomley said he’s “stepping to the sidelines” on Canopy Growth Corp. (WEED-T), downgrading his rating for the cannabis producer to “hold” from “speculative buy" on Friday.
The rating change change came a day after Canopy shares dropped over 14 per cent in response to the release of its quarterly results, which featured a 15-per-cent drop in sales from the previous quarter.
"Although we were expecting muted results ahead of Canopy’s FQ2/20 print due to concerns over limited retail infrastructure and growing inventory balances held with provincial buyers – the impact was more significant than we had anticipated," said Mr. Bottomley. "During the quarter, Canopy recorded significant sales allowances/inventory write-downs that we believe represents a red flag for the company and the industry as a whole. As a result, we have made substantial downward revisions to our model."
For the quarter, Canopy reported gross recreational cannabis revenues of $62.5-million, down 9.4 per cent from the previous quarter and below Mr. Bottomley’s projection of $65.2-million.
“More concerning was a $32.7-million sales allowance taken against these volumes as a result of anticipated sales returns and pricing allowances on its oils/softgels from provincial buyers as industry inventory levels continue to spike,” the analyst said. “Including this reserve, gross recreational revenues were $29.8-million – a steep decline of 51 per cent from FQ1/20. On the whole, total net revenues, inclusive of all revenue segments and net of excise taxes, came in at $76.6-million, representing a 15-per-cent decline quarter-over-quarter and well behind our forecast of $105.1-million.”
"Given the large sales reserves booked by Canopy in the quarter, we have pulled back the reins on our near-term expectations in the coming quarters and reduced our FY2020 net-revenue and adj. EBITDA forecasts to $376-million (from the next leg of the market. As a result, we are lowering our price target.”
His 2020 and 2021 revenue projections slid to $440.9-million and $698.5-million, respectively, from $510.6-million and $729.1-million. His earnings per share estimate for 2020 fell to a loss of $5.10 from $4.03, while his 2021 expectation rose to a 23-cent loss from a 32-cent loss.
“Although we believe early 2020 could start to see headwinds dissipate (new product forms under Cannabis 2.0 and accelerated retail opening in Ontario), much like the roll-out of Cannabis 1.0, we believe there will likely still be unforeseen logistical hurdles to overcome in rolling out the next leg of the market," he said.
Mr. Bottomley’s target slid to $25 per share from $40. The current average is $35.82, according to Thomson Reuters Eikon data.
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Though he thinks its key metrics are “trending in the right direction,” Mr. Bottomley also lowered his target and financial expectations for Aurora Cannabis Inc. (ACB-T) following weaker-than-anticipated results.
“Aurora reported FQ1/20 financial results (ended Sept 30) that fell shy of our expectations in a quarter that has seen many LPs stumble given limited retail infrastructure, growing inventory balances held with provincial buyers and a lack of product breadth available to consumers in advance of Cannabis 2.0,” he said. “For the quarter, the company reported total net revenues of $75.2-million, a sizable quarter-over-quarter decrease of 24 per cent and below our forecast of $85.6-million. Although we were expecting an overall sequential decline due to elevated wholesales in the prior quarter that were not expected to reoccur at similar levels, the miss was attributed to a 33-per-cent drop in recreational cannabis sold to provincial buyers – a seemingly common theme witnessed as part of this earnings season.”
Keeping a "speculative buy" rating, Mr. Bottomley reduced his target to $6 from $8. The average is $6.73.
“Although the sharp drop-off in recreational sales reads as headline negative, we believe many of the metrics achieved by the company in the quarter should be incrementally encouraging to investors, including 1) industry-leading cultivation costs and gross margins; 2) recreational net pricing of $5.28 per gram (up 2.7 per cent quarter-over-quarter in a period that has seen notable declines industry wide); and 3) growing medical and international contribution (up 1 per cent and 11 per cent, respectively). As a result, although our outlook for the sector overall has weakened, within a troubling environment, we believe ACB is still one of the better positioned LPs in the space.”
Meanwhile, Desjardins Securities’ John Chu shrunk his target to $6.50 from $14 with a “buy” rating.
Mr. Chu said: "On the back of a soft 1Q, we see continued near-term volatility and uncertainty for Aurora’s recreational sales, despite its having many award-winning brands. As such, we are resetting our expectations for Aurora and cutting our sales and EBITDA forecasts"
“We still believe there remains tremendous growth in the sector and have maintained similar year-over-year sales growth rate estimates for our FY21–23 forecast periods, but operating off a lower base following the soft 1Q results. As such, our EBITDA forecasts have been cut accordingly, driven by lower sales and a higher SG&A run rate. The company has not provided any guidance on sales or the path to positive EBITDA.”
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If Bombardier Inc.'s (BBD-B-T) spinoffs proceed as expected, it appears “positioned to be a more streamlined, less leveraged company versus what has been the case in its recent history,” according to Citi analyst Stephen Trent.
"The 2020 spinoffs of the aerostructures and CRJ programs should allow Bombardier to focus on ramping up on core programs, such as the Global 7500 business jet and its rolling stock businesses," said Mr. Trent. "Over time, this increased simplification could also weaken the bearish argument that the stock deserves to trade at a conglomerate discount. Potential share price catalysts include new order activity, as well as any clear progress towards operational growth and FCF breakeven targets."
In a research note released Friday, Mr. Trent updated his financial estimates for Bombardier to incorporate the expected second-quarter 2020 spinoff of its aerostructures services units, as well as expected transportation segment throughput and its third-quarter results.
Though his EBITDA estimates rise slightly and expected leverage shrunk, he maintained a "buy" rating and $2.75. The average on the Street is $2.89.
“On the back of successive corporate reshufflings and production adjustments, concerns about the company’s expected margin improvement are fading,” said Mr. Trent. “On a long-term basis, Bombardier’s broad customer base and its large backlog should also continue to support the story.”
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Raymond James analyst Frederic Bastien is “pumping the brakes” on Neo Performance Materials Inc. (NEO-T).
A day after it revealed a disappointing outlook, Mr. Bastien lowered his rating for the Toronto-based company to “market perform” from “outperform.”
“We continue to believe Neo Materials is performing well given the cards it has been dealt,” he said. “The company is gaining market share from the world’s largest suppliers of advanced materials for auto catalysts, expanding the use of MQU-powered motors to more Honda platforms and qualifying its high-performance magnetic powders with other electric car makers. With the global auto sector falling on hard times, however, we find it rather difficult to paint a growth scenario for NEO in the short-term. With this in mind we are downgrading the stock.”
On Thursday before the bell, Neo Performance reported adjusted EBITDA for the quarter of $12.8-million, exceeding the projections of both the analyst ($12.2-million) and the Street ($12.3-million).
“Although volumes continued to disappoint, a combination of stronger-than-expected prices, product mix and cost savings helped produce the positive variance to our EBITDA forecast,” the analyst said. “NEO experienced a much higher than expected tax rate, however, which lowered its adjusted EPS to $0.12 (below our target of $0.13 and the analysts’ average estimate of $0.14).”
With the results, the company released an outlook that Mr. Bastien deemed "underwhelming."
“The prospects for NEO’s most profitable unit, Magnequench, calls for more of the same in 4Q19 and beyond, particularly as it pertains to higher-priced legacy and longer running programs,” he said. “This is overshadowing, for the time being, by continued strong demand for the high-performance MQU powder and other new products. Included in those are trunk motor applications, which are up 30 per cent over the prior 12 months despite the slower automotive environment. As for C&O, volumes should normalize to the extent the overall product mix between three-way and diesel catalysts for Neo is now more reflective of market mix considerations. We are more cautious on the rare earth separation business, however, and careful not to extrapolate 3Q19′s healthy pricing to other quarters. Finally, we see Rare Metals results moving higher — just not at the pace we previously modeled.”
After lowering his 2019 and 2020 earnings per share estimates to 60 cents and 65 cents, respectively, from 65 cents and 95 cents, he reduced his target for its stock to $13 from $15, which is the current consensus.
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Brookfield Asset Management Inc.'s (BAM-N, BAM-A-T) management fees appear set for a significant increase with the closing of its US$4.7-billion acquisition of a 61-per-cent stake in Oaktree Capital Management, said Canaccord Genuity analyst Mark Rothschild.
“The transaction brings total fee-bearing capital to US$274-billion, amounting to a 67-per-cent increase sequentially and a 95-per-cent increase year-over-year,” he said. “With this transaction complete, management fees are poised to rise dramatically over the next year.”
On Thursday, Brookfield reported quarterly results that Mr. Rothschild called “steady,” pointing to “the stability of its core investments and the growth in its management fees.”
“BAM has been very successful in growing its fee-bearing capital, and its fee-related earnings have accelerated as a result,” he said. “Feebearing capital increased in the quarter to US$274-billion from US$164-billion as of Q2/19, largely the result of BAM’s acquisition of Oaktree. During the quarter, fee-related earnings were US$306-million; however, this does not reflect the contribution from Oaktree, as the acquisition closed on the last day of the quarter. Management estimates that its current annualized fee-related earnings are US$1.3-billion, up 25.5 per cent from US $1.1-billion sequentially and 48 per cent year-over-year.”
Keeping a “buy” rating for its stock, he hiked his target to US$66.50 from US$62. The average is US$64.
“BAM owns an extremely high-quality portfolio and a growing stream of recurring management fees. In the near term, as BAM continues to successfully raise new funds, NAV growth should be driven by its rapidly growing management fees and free cash flow. Longer term, BAM should generate meaningful cash flow growth from its substantial unrealized carried interest and continued strong performance from its various divisions.”
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Citi analyst Gregory Badishkanian lowered his financial expectations for Restaurant Brands International Inc. (QSR-N, QSR-T) on Friday, citing “somewhat unexpected softness in the Tim Hortons business.”
Despite seeing “strong momentum” at Burger King and Popeyes following new product launches, he reduced his 2019, 2020 and 2021 earnings per shares estimates by 2 US cents, 6 US cents and 9 US cents, respectively.
Keeping a "buy" rating for its stock, he lowered his target to US$80 from US$89. The average on the Street is US$77.88.
“Overall, we believe current valuation for QSR doesn’t fully reflect the international growth potential of the THI brand or possible cost savings of the combined company,” said Mr. Badishkanian. “We believe that Restaurant Brands International deserves to trade at a 16-per-cent premium (unchanged) with other asset-light peers given the likelihood of continued SSS [same-store sales] growth and a rapid ramp in international expansion at Tim Hortons and Popeyes, offset by a lack of clarity surrounding management’s expansion plans and an increasingly competitive QSR burger/chicken category.”
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“The future may be delayed” for IPL Plastics Inc. (IPLP-T), said CIBC World Markets analyst Scott Fromson.
“IPLP produced another mixed quarter in Q3/19, as good EBITDA margins offset a large revenue miss,” he said. "With its current asset base, we believe that IPLP will be challenged to achieve both medium-term organic revenue growth and margin expansion, all while deleveraging. The current 3.4 times leverage rules out acquisitions. "
“We retain our Outperformer rating, given the considerable implied return, but are adding the ‘Speculative’ component to our rating to reflect the risk of IPLP’s strategy, evidenced by a pattern of lumpy results since the June 2018 IPO.”
Mr. Fromson lowered his target to $11 from $12.50 after reducing his earnings estimates. The average on the Street is $13.35.
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In other analyst actions:
Cormark Securities analyst Jeff Fenwick raised Avante Logixx Inc. (XX-X) to “buy” from “market perform”
David Leeder