Inside the Market’s roundup of some of today’s key analyst actions
While its fourth-quarter financial results largely fell in-line with the Street’s expectations, equity analysts continue to express concern over the difficult macroeconomic conditions weighing on the performance of Lightspeed Commerce Inc. (LSPD-N, LSPD-T).
Shares of the Montreal-based payments-and-retail platform provider dropped 6.1 per cent on Thursday after it warned its revenue for the current fiscal year is expected to come in at the low end of its forecast range.
That led a pair of analyst to downgrade their recommendations in research reports released before the bell on Friday.
* Credit Suisse’s Timothy Chiodo to “neutral” from “outperform” with a US$18 target, down from US$21. The average target on the Street is US$30.29, according to Refinitiv data.
“Given a combination of macroeconomic factors (observed trends and uncertainty ahead cited by management, particularly given a more discretionary base), a still challenging path toward achieving the 20-per-cent non-GAAP EBITDA margin target (our illustrative analysis suggests operating expense growth would have to be contained in the ~MSD range medium-term), ramping efforts from scaled competitors (Clover, Square, Toast, Shift4, and others, notably with Shopify POS annualizing $20-billion-plus Credit Suisse estimates in volumes), and a less attractive LTV/CAC demonstrated thus far (relative to Square, Toast, etc.), we no longer prefer the shares,” said Mr. Chiodo. “We continue to view Lightspeed as well-positioned long-term as a software platform capable of enabling complex merchants to run their businesses, but also in embedding and powering additional ecosystem- and monetization-enhancing financial services, however we await signs of success in the strategy pivot (still early) and/or abatement of macroeconomic pressures cited by management.”
* CIBC’s Todd Coupland to “neutral” from “outperformer” with a $27 target, down from $34.
“Lightspeed reported an in-line FQ3 but lowered its outlook. It reduced its revenue growth expectations for FQ4 and F2024 given macro headwinds and elevated churn among merchants at the low end of the market,” said Mr. Coupland. “While this churn is focused on shifting Lightspeed’s merchant mix to larger retail and hospitality merchants, it will likely mute new customer adds and overall revenue growth for at least the coming year. Both factors will make it difficult for Lightspeed to reach its own financial targets and outperform peers.
“Given this uncertainty, we have reduced our rating.”
Analysts making target changes include:
* National Bank Financial’s Richard Tse to US$30 from US$40 with an “outperform” rating.
“Given the recent pre-announcement on January 17, 2023, Lightspeed’s FQ3 (CQ4) results came with little surprise,” said Mr. Tse. “Those results were driven by robust growth in subscription and transaction-based revenue which was up 26 per cent year-over-year (28 per cent constant currency) on an organic basis supported by growing payments penetration which increased 81 basis points quarter-over-quarter to 17.4 per cent and ARPU [average revenue per user] up 20 per cent year-over-year to $348 (ex-Ecwid). While positive, locations (exEcwid) increased only 5 per cent year-over-year care of the Company’s shift to higher value merchants (more than $500k in Annual GTV). The positive was a continuing change in narrative to profitable growth where a recent restructuring coupled with a reallocation of Company resources (e.g., engineers to flagship products) and payments penetration should have the Company on a path to breakeven / profitability in FY’24. At 2.6 times EV/S [enterprise value to sales] (F23), we think the risk-to-reward profile is to the upside.”
* RBC’s Daniel Perlin to US$24 from US$25 with an “outperform” rating.
“We believe the LSPD story is continuing to evolve, with an increasingly larger portion of the company’s revenues being generated by payments. In addition, the path to profitability in FY24 remains a key focus of management, which we believe as proof-points become available, investors will re-engage with the shares,” he said.
* Eight Capital’s Adhir Kadve to $25 from $40 with a “buy” rating.
“Wile the macroeconomic backdrop continues to present uncertainty for Lightspeed’s merchants, we remain constructive on Lightspeed’s opportunity ahead,” he said. “We continue to believe in the company’s ability to execute its strategy of attracting larger merchants who offer significantly stronger unit economics and thus provide the company with a clear path to profitability in F24.”
* ATB Capital Markets’ Martin Toner to $55 from $60 with an “outperform” rating.
“Economic conditions weighed on Lightspeed’s GTV and revenue growth. The Company is growing well with larger merchants, and as those merchants become the majority of the customer base, we believe ARPU growth will accelerate. We believe the stock remains undervalued relative to its organic revenue and gross profit growth,” said Mr. Toner.
* Truist Securities’ Andrew Jeffrey to US$30 from US$25 with a “buy” rating.
* BMO’s Thanos Moschopoulos to US$24 from US$26 with an “outperform” rating.
Following “mixed” fourth-quarter results from BCE Inc. (BCE-T), Canaccord Genuity analyst Aravinda Galappatthige sees its guidance as “underwhelming” on both an earnings and cash flow basis.
The telecom company is now expecting 2-5 per cent in earnings before interest, taxes, depreciation and amortization (EBITDA) growth for 2023 and 1-to-5-per-cent gains for revenue, versus the analyst’s projections of 2.9 per cent and 1.6 per cent, respectively. However, free cash flow is forecast to grow 2-10 per cent year-over-year, well below his 25-per-cent estimate, and earnings per share are pegged to decline 3-7 per cent.
“While the revenue and EBITDA guide was not a major surprise, we suspect that the market was somewhat disappointed by the 3-7-per-cent EPS decline outlook as well as expected FCF growth of 2-10 per cent,” said Mr. Galappatthige. “On the latter, given the capex step down off the 2022 peak, we were expecting a higher guide. However, as we take a closer look, this was largely a function of a higher cash tax expectations, interest expenses (due to higher rates) and an approximately $100-million more in capex than we had. Additionally, on EPS, the higher depreciation owing to stepped-up capex of late was also a factor. Given this, our focus would remain on EBITDA and indications around the shape of deceleration in capex spend post 2023, which has implications for FCF.”
Mr. Galappatthige thinks BCE’s internet subscription growth continues to “impress” despite “sluggish” EBITDA. He also thinks wireless gains are “decent” but warns average revenue per user could “moderate” through 2023.
Making “mild” downward revisions to his estimates “based on guidance and macro trends,” he cut his target for BCE shares to $61 from $63. The average is $65.52.
“We maintain our HOLD rating and would be looking for entry points based on: a) any signs of improvement in B2B; b) more clarity on interest rates and; c) better visibility around post-2023 capex,” he said.
Elsewhere, others making changes include:
* Scotia Capital’s Maher Yaghi to $66 from $66.75 with a “sector outperform” rating.
“BCE ended 2022 with annual growth of 3 per cent on revenues, EBITDA and FCF demonstrating strong execution in a mature industry,” said Mr. Yaghi. “We believe yesterday’s stock reaction [down 2.9 per cent] was mainly due to the company’s EPS guidance which is showing a y/y decline, however all of it is due to non-cash fluctuations. We are expecting 2023 FCFs to grow by 5 per cent on the back of 3-per-cent EBITDA growth and a y/y decline in capex and pension funding costs. Investments in FTTH are leading to market share gains, however the transition of those gains to the bottom line will take time as loading costs continue to weigh on margins. With 80 per cent of the planned FTTH deployment now behind the company, we expect FCFs to continue to benefit over the next few years from continued reductions in capex which should support current valuations.”
* BMO’s Tim Casey to $64 from $66 with an “outperform” rating.
* TD Securities’ Vince Valentini to $64 from $65 with a “hold” rating.
For peer Rogers Communications Inc. (RCI.B-T), Mr. Galappatthige raised his target to $69 from $68 with a “buy” rating, calling its guidance encouraging but emphasizing investor attention remains focused on its “post-merger picture.” The average is $71.38.
“With the closing of the Shaw Cable acquisition very much on the horizon, we believe investors would be focused on potential updates around synergies, strategy, de-levering targets, etc.,” he said. “Having incorporated the Shaw assets into our model based on an April 1, 2023, closing, we see leverage starting out at 4.6 times net debt/proforma EBITDA and then easing to 3.7 times by the end of 2024. If we factor in $2-billion for the next spectrum auction, this moves to 3.9 times. We also suspect there may be some upside to the synergy expectation, given the additional time management has had to plan ahead. The questions now turn toward how Rogers would fare in the West vs TELUS and the threat posed by Videotron. In terms of the new postmerger model, we see 43-per-cent accretion to our F2024 FCF per share to $5.45 (excluding restructuring costs) and 33 per cent to 2024E adj. EPS to $5.44. We note that restructuring costs would be 1:1 on the $1-billion in synergies. A notable component of the accretion was the fact that Rogers was able to secure debt financing prior to the sharper upswing in rates. This suggests a high single-digit FCF yield of 8.5 per cent (or 6.5 per cent on our own more punitive definition of FCF).”
Elsewhere, TD Securities’ Vince Valentini bumped his Rogers target to $78 from $76 with an “action list buy” recommendation.
In response to its “solid” performance thus far in 2023 with shares up almost 16 per cent, Raymond James analyst Steven Hansen lowered his recommendation for Nutrien Ltd. (NTR-N, NTR-T) to “market perform” from “outperform,” seeing a “diminishing commensurate upside” to his target.
In a research note released Friday, Mr. Hansen also cited the impact of sliding global nitrogen, phosphorus and potassium (NPK) prices on performance moving forward.
“Global NPK prices continue to slip in the wake of an ongoing buyers’ strike and sharply lower natural gas prices, the latter which has started to entice European supply back into the market,” he said. “While we continue to expect near-term Chinese & Indian contract resolutions will help kickstart potash demand, we’re increasingly mindful of the narrowing logistical window to get product into market for spring.
“Consistent with our prior missive, we believe management’s initial 2023 guidance (in tandem w/ 4Q22 results) will be critical, allowing it to communicate several key themes we’d like to hear, including: 1) potash discipline—while capacity expansion plans are expected to continue, we believe management needs to stress production/sales discipline in the context of global demand/pricing; 2) conservatism—following a difficult 3Q22 miss, we hope the lower bounds of guidance employ conservative assumptions; 3) capital allocation—we’ll be looking for a reiteration of shareholder-friendly capital allocation policies; and 4) optimization—a commitment to pursue further efficiencies & optimization of the integrated model.”
The analyst kept his US$90 target for Nutrien shares. The current average is US$98.90.
“While we continue to anticipate a multi-year Ag/NPK cycle that supports robust FCF generation at Nutrien, we’re taking this opportunity to step to the sidelines until better NPK price visibility emerges. We will continue to monitor accordingly,” he said.
By “sharpening its operational focus,” Ag Growth International Inc. (AFN-T) can generate “value-accretive growth,” according to National Bank Financial analyst Maxim Sytchev.
In a research report titled Time to harvest prior investment cycle, he assumed coverage of the Winnipeg-based company following Thursday’s Investor Day event, concluding its “seemingly straightforward and ‘simple’ operational algorithm should yield better returns for shareholders.”
“AFN has multiple macro tailwinds (population growth, changing diets, increased exposure to rapidly growing emerging markets, European rebuild opportunity, etc.),” said Mr. Sytchev. “For the stock to work, what’s needed is a laser focus on execution in its core business lines, in order to break out from the material underperformance pattern vs. similarly exposed comp cohort (we cannot call AGCO or Deere peers, Kepler Weber more so – AFN stock is down 12 per cent over five years vs. respective returns of 103 per cent/154 per cent/518 per cent).
“The value-destructive digital pivot needs to be curtailed, enabling supporting technology implementation for existing products only vs. competing head-on against IoT [Internet of Things] specialists or much larger entities in the space. We believe the new CEO (Paul Householder – appointed in Sept. 2022) provides a perfect junction to turn the page and optimize the previously amassed assets via centralized supply chain procurement, tighter working capital management, benchmarking and overall capacity optimization (does that sound familiar to what we have seen from ATS since 2017? – that approach has worked very well for investors). We believe key messages from the Investor Day provide the blueprint for achieving compounding.”
The analyst pointed to four highlights from the event: a potential path to a top line of $3-billion (from $1.5-billion currently) through “product transfers to international markets, organic investments + macro”; margin growth opportunity to beyond a 17-per-cent-plus EBITDA level (from an estimated 16.2 per cent in 2022; Operating leverage; and “FCF generation directed towards debt repayment (no M&A).”
“How can we be certain that the above suggestions are going to be implemented?,” said Mr. Sytchev. “The introduction of an ROIC component into the compensation of management effective in 2020 should provide better alignment while being over the CapEx/M&A hump should mathematically lift returns. Internal cash flows can therefore be redeployed towards simultaneously strengthening the balance sheet and accruing value for equity holders by lessening the financial risk. This self-help chapter of AFN should be less exciting and therefore more value generative.”
Introducing his forecast for 2024, the analyst is projecting mid-single-digit organic growth in both 2023 and 2024 “as well as some margin improvement given the focus on improving profitability and reducing the EBITDA drag of the now restructured ‘Digital’ segment.
He maintained the firm’s target of $62 per share. The current average on the Street is $57.64.
Elsewhere, others making changes include:
* Raymond James’ Steve Hansen to $64 from $55 with an “outperform” rating.
“Yesterday’s Investor Day ... broadly reinforced our constructive macro outlook and, more importantly, outlined clear strategic priorities focused on: 1) sustained organic growth (no M&A!); 2) platform optimization & incremental margin improvement; and 3) deleveraging the balance sheet. Having recently surpassed $1.0-billion in sales ($1.4-billion TTM), new CEO Paul Householder notably identified $2.0-billion as the next key goal/milestone (no timeframe) & even called out $3.0-plus-billion as being on the longer-term roadmap. As indicated herein, we admire this plan and believe that consistent/successful execution will facilitate healthy multiple expansion over time,” said Mr. Hansen.
* iA Capital Markets’ Matthew Weekes raised his target to $57 from $54 with a “speculative buy” rating.
“Based on commentary from AFN’s investor day, we are increasing our 2023 and 2024 Adj. EBITDA by 3.7 per cent and 4.4 per cent, respectively, bringing us more in line with consensus,” he said. As a result, we are raising our target price ... which is based on a combination of an 8.0 times EV/EBITDA multiple, an 8.0 times P/AFFO multiple, and a DCF analysis while continuing to build in provisions for litigation risk. We reiterate our Speculative Buy rating, underpinned by AFN’s (a) diversified ag-equipment business serving both Farm and Commercial customers, with exposure to both fast-growing and mature agricultural markets; (b) track record of strong growth in per share metrics; (c) constructive near-term outlook with projected high-single-digit Adj. EBITDA CAGR from 2022-2024; and (d) positive secular trends underpinning equipment in agri-food equipment and infrastructure; tempered by (e) litigation risk.”
* TD Securities’ Michael Tupholme to $66 from $53 with a “buy” rating.
Despite a strong run for gold thus far in 2023, Citi analyst Alexander Hacking “remains constructive with a view that Fed hike cycle is in the later innings.”
“Citi’s commodity team is broadly bullish on gold seeing the yellow metal in an elevated range for the medium-term as the Fed hike cycle draws to a close,” he said. “Gold has started 2023 off strong with prices averaging $1,900 per ounce in January as the US Dollar weakened and inflation concerns abated slightly.
“In our September update, the gold price was hovering in the $1,650/oz range and real yields were rising above 1.5 per cent, which has normally been associated with $1,200/oz price level. Real yields have retreated to 1.2 per cent from peak levels in mid-October and the gold price has marched steadily higher – a bullish correlation, in our view.”
In a research report released Friday, he updated his models for gold producers ahead of fourth-quarter results and to reflect the firm’s updated price forecast.
“FCF yield are 5 per cent at spot – similar to major copper miners – and with lower cost of capital,” said Mr. Hacking. “NAV [net asset value] valuations imply around $1,600-1,700 per ounce long-term gold on our models. NEM, GOLD and AEM are the three premier gold miners controlling a large number of the world’s most profitable mines (NGM, PV, Boddington, Loulo-Gounkoko, Canadian Malartic, Detour Lake etc). Management teams all have a strong record.”
That led to target price changes to the three stocks:
* Agnico Eagle Mines Ltd. (AEM-N/AEM-T, “buy”) to US$65 from US$50. The average on the Street is US$63.86.
“Agnico is arguably the highest quality name in the space given its assets and management. Production is mostly in Canada with strong reserve life & expansion potential,” he said. “4Q EPS estimate is $0.45 per share vs consensus $0.55 per share.”
* Barrick Gold Corp. (GOLD-N/ABX-T, “neutral”) to US$20 from US$16. Average: US$21.97.
“Barrick appears discounted to Newmont on valuation but we struggle to see a re-rating catalyst,” he said. “4Q EPS estimate is $0.15/sh vs consensus $0.16/sh.”
* Newmont Corp. (NEM-N/NGT-T, “buy”) to US$70 from US$60. Average: US$56.89.
“NEM is the go-to S&P500 gold stock, in our view, and still offers attractive dividend yield (4-5 per cent),” he said. “4Q EPS estimate is $0.45/sh vs consensus $0.47/sh.”
In other analyst actions:
* Morgan Stanley’s Ioannis Masvoulas upgraded Lundin Mining Corp. (LUN-T) to “overweight” from “equal-weight” with a $12.80 target, up from $9.10 and above the $9.44 average.
* Mr. Masvoulas raised his First Quantum Minerals Ltd. (FM-T) target to $23 from $22, below the $30.86 average, with an “underweight” rating.
* Raymond James’ Brad Sturges cut his Allied Properties REIT (AP.UN-T) target to $36.50 from $38.50 with an “outperform” rating.The average is $35.85.
* CIBC World Markets’ Krista Friesen raised her targets for AutoCanada Inc. (ACQ-T) to $28 from $24 and Martinrea International Inc. (MRE-T) target to $15 from $13 with “neutral” ratings for both. The averages are $39.67 and $16.06, respectively.
* Bernstein’s Bob Brackett cut his Barrick Gold Corp. (ABX-T) target by $1 to $27, below the $29.56 average, with a “market perform” rating.
* Cowen and Co.’s Oliver Chen reduced his target for Canada Goose Holdings Inc. (GOOS-T) to $30 from $35 with an “outperform” rating. Others making changes include: CIBC’s Mark Petrie to $27 from $30 with a “neutral” rating and Barclays’ Adrienne Yih to US$21 from US$20 with an “overweight” rating. The average is $29.
* CIBC’s Stephanie Price bumped her Open Text Corp. (OTEX-Q, OTEX-T) target to US$40 from US$35, keeping a “neutral” rating. Others making changes include: Raymond James’ Steven Li to US$42 from US$48 with an “outperform” rating, Citi’s Steven Enders to US$35 from US$33 with a “neutral” rating, BMO’s Thanos Moschopoulos to US$39 from US$34 with an “outperform” rating and TD Securities’ Daniel Chan to $50 from $40 with a “buy” rating. The average is $44.13.
“OTEX reported strong F2Q23 results with upside vs. consensus to Cloud revenue, License, and adj EBITDA,” said Mr. Enders. “Having officially closed the Micro Focus deal earlier this week, the call focused on the ~2-yr integration and deleveraging strategy. Management laid out a new 3-yr framework, expecting near-term margin compression tied to severance costs, cloud investments, and integration expenses, yet expects to quickly gain momentum with 3-5-per-cent organic growth by FY26 for core OTEX and 1-3 per cent for MFGP with 39-per-cent adj EBITDA margin vs. 33 per cent in FY23. Despite the strong results and an attractive valuation, we remain Neutral rated as we see elevated execution risk given the scale and complexity of the MFGP integration and view OTEX as a ‘Show Me’ story.”
* Scotia’s Kevin Fisk raised his Parex Resources Inc. (PXT-T) target to $26 from $24 with a “sector perform” rating. The average is $34.61.
* Raymond James’ Michael Shaw lowered his TC Energy Corp. (TRP-T) target to $62 from $63 with an “outperform” rating. The average is $62.18.
* Ahead of the Feb. 6 release of its fourth-quarter 2022 earnings, National Bank Financial’s Jaeme Gloyn increased his target for TMX Group Ltd. (X-T) to $150 from $148 with a “sector perform” rating. The average is currently $154.29.
“While we maintain a favourable view of TMX’s long-term growth outlook, strong track record of strategic execution (e.g., diversify business mix, invest in tech/data, grow derivatives and drive cost control) and defensive attributes (e.g., more than 50-per-cent recurring revenue, diversified/countercyclical revenue drivers, strong balance sheet and solid FCF generation), we maintain our Sector Perform rating in light of a lower total return to our target
price relative to other companies in our coverage universe,” he said. “That said, our estimates imply a near double-digit EPS growth rate in 2023 as we anticipate additional listings revenues will rebound (as they have countless times over the past decade) and as TMX has announced several pricing initiatives that will support baseline 2023 revenue growth (up to 7-10-per-cent growth in our view.”