Inside the Market’s roundup of some of today’s key analyst actions
Though its fourth-quarter results fell short of his expectations, RBC Dominion Securities analyst Paul Quinn upgraded Resolute Forest Products Inc. (RFP-N, RFP-T) on Friday, seeing its current valuation providing an “attractive” entry point for investors “given our expectation that many of Resolute’s end-markets are at or near their cyclical lows.”
"Nearly all of Resolute’s core businesses have faced very difficult operating conditions over the last year, which, combined with negative news flow, have pushed Resolute’s share price near its all-time lows," said Mr. Quinn in a research note released before the bell.
"However, there are some green shoots. We think lumber is well positioned heading into the spring building season. Pulp markets have tightened, and we see limited risk of further price reductions. Finally, weakness in newsprint and specialty paper markets is likely to prompt a supply-side response (i.e., capacity reduction), in our view. We see the risk-reward as favorable given that the majority of the downside seems currently priced into Resolute’s shares."
Moving its stock to “outperform” from “sector perform,” Mr. Quinn said he expects Resolute’s Wood Products segment to show “significant” improvement in 2020, pointing to an " attractive near-term outlook for the North American lumber business and new exposure to the U.S. South."
He also sees pulp markets poised for a turnaround, however he expressed concern about the impact coronavirus fears on demand.
Mr. Quinn raised his target price for Resolute shares to US$5 from US$4.50. The average on the Street is US$4.63.
Equity analysts at Desjardins Securities increased their oil price deck for 2020 and 2021 in a research report released Thursday afternoon, expressing concern that the market has been slow to factor in “omnipresent geopolitical risk in the Middle East.”
“The new decade started with a major geopolitical disturbance following a series of events in Iraq which pushed the U.S. and Iran to the brink of a direct military conflict. With regard to oil prices, the limp response to the saga represented the third major failed attempt to reintroduce a geopolitical risk premium in response to simmering tensions in the Persian Gulf,” said Justin Bouchard, Chris MacCulloch and Scott Van Bolhuis.
“Recall that the drums of war initially began beating during last summer’s tanker wars near the Strait of Hormuz and the downing of a US military drone by Iran, the retaliatory air strikes for which President Trump called off in the final moments before the mission was executed. This was later followed up by the September attack on the Saudi Aramco Abqaiq and Khurais oil fields, which the kingdom asserted was orchestrated by Iran, an allegation that found support from the U.S. and other western intelligence agencies. Then, on January 3, the U.S. military launched a drone strike in Baghdad which killed Iranian general Qassem Soleimani of the Islamic Revolutionary Guard Corps, which was followed by an Iranian retaliatory attack on two US military bases in Iraq. Both sides ultimately stepped back from the brink by opting to de-escalate the conflict, which drove a sharp drop in global oil prices. The limp market response to these recent events in the Persian Gulf suggests that the market will likely need to see the equivalent of ‘boots on the ground’ at this point to spur a meaningful geopolitical risk premium.”
They also noted the headwinds stemming from the coronavirus outbreak, though they think it will likely prove to be a short-term obstacle.
“We continue to see support for oil prices arising from simmering tensions in the Persian Gulf in tandem with decelerating U.S. production growth and deeper OPEC+ supply cuts, which we now expect to be rolled over beyond the March deadline,” they said.
Growing more constructive on oil market fundamentals, they raised their WTI price forecast to US$60 per barrel in 2020 (from US$55l) and US$57.50 in 2021 (from US$55). That increase, coupled with a rise in their natural gas price assumptions, led them to make several target price adjustments to stocks in their coverage universe ahead of fourth-quarter earnings season.
Among large-cap stocks, their changes were:
- Canadian Natural Resources Ltd. (CNQ-T, “buy”) to $47 from $44. The average on the Street is $47.08.
- Husky Energy Inc. (HSE-T, “hold”) to $11 from $12. Average: $11.49.
- Ovintiv Inc. (OVV-N/OVV-T, “buy”) to US$28 from US$30. Average: US$27.11.
- Suncor Energy Corp. (SU-T, “buy”) to $53 from $54 Average: $50.39.
“We believe large-cap stock performance will reflect FCF generation and the optimal allocation of capital between disciplined growth, deleveraging and shareholder returns,” the analysts said. “In this context, it is difficult to choose between CNQ and SU. That said, CNQ combines discipline with unparalleled growth optionality across its asset base while SU generates robust FCF across a range of commodity price scenarios owing to its integrated business model. We also believe that OVV (previously Encana Corporation) offers a unique value proposition, trading below Canadian and US peers while having geographical diversification and a growing FCF profile.”
For dividend-paying stocks, their changes were:
- Crescent Point Energy Corp. (CPG-T, “buy”) to $9 from $10. Average: $7.85.
- Enerplus Corp. (ERF-T, “buy”) to $15 from $16. Average: $13.95.
- Whitecap Resources Inc. (WCP-T, “buy”) to $7 from $6. Average: $7.04.
For growth stocks, the analysts made the following adjustments:
- Advantage Oil & Gas Ltd. (AAV-T, “buy”) to $4 from $3.50. Average: $3.61.
- Athabasca Oil Corp. (ATH-T, “buy”) to $1 from $1.25. Average: 91 cents.
- Baytex Energy Corp. (BTE-T, “hold”) to $2.25 from $2.50. Average: $3.05.
- Crew Energy Inc. (CR-T, “buy”) to 75 cents from $1. Average: 94 cents.
- MEG Energy Inc. (MEG-T, “buy”) to $9 from $7.50. Average: $8.72.
- Obsidian Energy Ltd. (OBE-T, “hold) to $1 from 75 cents. Average: 82 cents.
- Painted Pony Energy Ltd. (PONY-T, “hold”) to 80 cents from $1. Average: $1.04.
For midstream companies, they made these changes:
- Altagas Ltd. (ALA-T, “hold”) to $22 from $21. Average: $22.64.
- Gibson Energy Inc. (GEI-T, “buy”) to $31 from $27. Average: $28.90.
- Pembina Pipeline Corp. (PPL-T, “buy”) to $57 from $55. Average: $52.44.
“In the energy infrastructure space, PPL is our preferred way to play the space due to its dominant WCSB infrastructure position, record of solid dividend growth and wide exposure across the hydrocarbon value chain,” the said. “GEI also stands out, with a stable, long-term cash flow base in its oil sands–centred infrastructure assets and ample running room in both an egress-abundant and egress-constrained environment. We also highlight KEY, which balances disciplined growth with healthy leverage and payout metrics; we believe the name ticks off all the boxes for investors oriented toward sustainable returns at a compelling price.”
Led by its Civil segment, Mr. Arthur is projecting revenue growth of 13 per cent-year over-year. He's also anticipating segment margin recovery in its Defence unit.
“Broadly, we expect trends to continue for moderate high single-digit revenue growth, improving margins, contained Capex, solid cash generation to reduce leverage, and gradually improving ROCE [return on capital employed],” he said.
Mr. Arthur is also anticipating further comment on CAE’s role in providing simulators and training to support the return of Boeing Co.'s (BA-N) 737 Max.
“CAE has (deservedly in our view) received much press in recent weeks following Boeing’s comments proposing mandatory simulator training for 737 MAX pilots as part of that aircraft’s return to flight," he said. “As of last quarter, CAE had 48 orders for MAX simulators (we understand roughly half now delivered), along with capacity in its training network for MAX education. Of course CAE can’t get ahead of announcements from Boeing and the regulators, but we expect further discussion on CAE’s order flow, manufacturing and training capacity to address the anticipated MAX near-term demand surge.”
“We clearly expect incremental demand for CAE, but quantifying the sustainable opportunity from MAX training is a challenge. For some context, we estimate that an incremental 10 simulator units would add 5-10 cents to EPS, presumably not a recurring annual event. 5 simulators added to the training network at high utilization might add another 5-10 cents. With the shares up $5.00 since MAX discussion became mainstream news, a good measure of the incremental earnings potential appears to be reflected."
Calling it an “attractive long-term holding,” Mr. Arthur maintained an “outperform” rating with a target of $41, rising from $39. The average is $37.44.
Following the release of better-than-anticipated first-quarter results on Thursday, Canaccord Genuity analyst Robert Young raised his financial expectations for Real Matters Inc. (REAL-T), expecting “strength” to continue given “a persisting” low interest rate environment.
“Real Matters continues to win new business (four Top100s in Title in the quarter) – despite lenders being preoccupied managing mortgage volumes, suggesting pent-up demand,” the analyst said. “Management stated that the pipeline is robust, making us confident in continued share gains, which should mitigate market cycle risk in the long run,” he said.
Maintaining a “buy” rating, Mr. Young hiked his target to $17 from $14. The average on the Street is $15.64.
“We have adjusted our estimates post the quarter to reflect improved macro market data and positive results in FQ1,” he said. “With mortgage market tailwinds expected to continue in FQ2, we have revised our estimates upward and increased adj EBITDA margins to reflect the business’ operating leverage. We remain cautious on the forecast accuracy through F2021E and beyond, given the direct relationship with the cyclical mortgage market. We remain confident that Real Matters’ solution will continue to gain share, which may limit the impact of future interest rate hikes and/or mortgage market pullbacks.”
Elsewhere, calling it a “standout” quarter, Raymond James analyst Steven Li increased his target to $16 from $13 with an “outperform” rating (unchanged).
In response to a “solid clean” second-quarter earnings beat, Raymond James analyst Steven Li increased his target price for shares of Open Text Corp. (OTEX-Q, OTEX-T) to US$54 from US$48, keeping an “outperform” rating. The average on the Street is US$48.54.
“OTEX printed a revenue/EPS beat for its F2Q20 with solid positive organic growth (two quarters in a row),” said Mr. Li. “The Carbonite transaction has closed and is expected to be modestly accretive in its first stub year and then fully on OTEX operating model exiting F2021. Our forecasts and target price are moving up as a result. Historically, large transactions have tended to drive share price momentum for OTEX and Carbonite is their second-largest acquisition.”
Citi analyst Jazon Bazinet sees two risks facing Twitter Inc. (TWTR-N).
Upon assuming coverage of the stock, he said the Street's revenue estimates for the social media company are too high beyond 2020, while its cost projections are likely too low.
"A large portion of Twitter’s historical revenue growth has stemmed from converting monthly active users to daily active users," he said. "However, the revenue per DAU has not increased materially over the last four years. While Twitter can continue to migrate MAUs to DAUs, there are limits. If Twitter matches best-in-class MAU to DAU conversion (Facebook is at 65 per cent), it suggests a revenue ‘ceiling’ of about $5 billion per annum. The Street’s forecast eclipses this ceiling in 2023. As such, we expect reductions to the Street’s revenue outlook in 2021 and 2022 as the potential revenue ceiling approaches.
“The Street expects D&A and SBC costs to represent just 20 per cent of revenues by 2022. However, Twitter’s own outlook suggests these two items will likely reflect 23 per cent to 30 per cent of revenues. In addition, academic studies suggest Twitter has not made any progress limiting the distribution of misinformation (‘fake news’). Facebook, on the other hand, has made material improvements. But, Facebook has materially stepped up investments to achieve this. For Twitter, the Street assumes opex per DAU will remain relatively flattish at Twitter over the next three years. This may be too bullish.”
Given his projections for Twitter’s revenue fall short of the consensus estimate and his expense projection exceeds it, Mr. Bazinet set a “neutral” rating coverage for its stock.
He lowered the firm’s target for Twitter shares to US$35 from US$36. The average on the Street is US$34.10.
"We will reassess our rating once Street estimates more closely reflect the likely trajectory of the financials," he said.
At the same time, Mr. Bazinet assumed coverage of a pair of other companies.
He gave Pinterest Inc. (PINS-N) a “buy” rating and US$30 target. The average on the Street is US$26.29.
“We like the Pinterest for three reasons: First, there is a large opportunity to more effectively monetize non-U.S. users. Second, the Street’s 2020 estimates look reasonable to us. Third, the firm’s valuation looks compelling,” the analyst said.
Mr. Bazinet set a “neutral” rating and US$20 target for Snap Inc. (SNAP-N). The average target is US$19.18.
“The company has experienced a robust recovery since 4Q18,” he said. “User growth and revenue growth have both reaccelerated. And, this year, the firm may generate positive Adjusted EBITDA and FCF for the first time.”
“We like the social media sector. And, Snap is performing quite well. However, we believe that there is risk to the Street’s 2021 and 2022 estimates for both revenues and adj. EBITDA. That keeps us on the sidelines.”
Citi analyst Adam Spielman opened a “Negative Catalyst Watch” on Philip Morris International Inc. (PM-N) ahead of the release of its fourth-quarter results and guidance next Thursday.
“We do not expect the 4Q19 numbers to be that interesting as PM gave highly specific guidance in December, although a small miss is quite likely,” the analyst said. “More importantly we expect PM to guide to significantly slower organic sales and EPS growth in 2020, due mainly to the absence of 2019’s easy comp in Japan and a slowdown in Indonesia. On top of this we think there is a good chance the company cuts its 2021 volume target for iQos. On the bull side, iQos seems to have gained share in Japan and we also expect PM to talk up its new products, like Mesh.”
Mr. Spielman maintained a “neutral” rating and US$90 target, which falls short of the US$95.33 average.
Believing further downside is “inevitable,” CIBC World Markets analyst John Zamparo downgraded Sundial Growers Inc. (SNDL-Q) to “underperformer” from “neutral.”
On Thursday, shares of the Calgary-based cannabis producer fell over 40 per cent after it announced a series of management departures, including CEO Torsten Kuenzlen, chairman Ted Hellard and COO Brian Harriman.
"Such dramatic changes likely portend a much more challenging 2020 than previously expected," he said. "We believe the company’s strategy to rely upon wholesale markets has fallen well short of expectations, while share capture at the retail level has likely disappointed. The same roadblocks impacting all cannabis companies (minimal distribution points, unattractive pricing, lack of delivery options, regulatory restrictions) also affect Sundial, which has the added burden of adapting to Alberta’s current vaping ban. We believe additional financing will be necessary, as early as Q2/20, and have doubts that SNDL can attain this at reasonably attractive terms.
“Beyond operations, two other factors will likely place significant pressure on SNDL stock. First is the 30 million shares (30 per cent of the total outstanding) that are unlocked on February 2. We believe the cost basis of these shares is approximately US$1.15 per share and investors may rush to sell and preserve capital as the coming quarters are likely to be challenging. Second is a quirk related to SNDL’s Bridge Farm acquisition that will add another 19 million shares to the total count. When Sundial acquired Bridge Farm, it agreed to a make-whole provision on the equity component ($45-million) of the deal. We have never been supporters of the Bridge Farm acquisition, and while we now have the benefit of hindsight, agreeing to provide a backstop of the equity component (at a US$14.50 per share value) of the deal now seems highly questionable.”
Mr. Zamparo reduced his target to US$1 from the current consensus of US$4.
In other analyst actions:
Cowen and Co. initiated coverage of Neptune Wellness Solutions Inc. (NEPT-T) with a “market perform” rating and $3.75 target. The average on the Street is $9.33.