Friday’s analyst upgrades and downgrades

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

Lululemon Athletica Inc.’s (LULU-Q) first-quarter results and guidance raise received an enthusiastic reaction from both investors and equity analysts on the Street.

After the bell on Thursday, the Vancouver-based retailer reported earnings per share of US$2.28 for the first quarter of its 2024 fiscal year, blowing past the Street’s expectation of US$1.97 as well as its own guidance of US$1.93 to US$2. Total sales jumped 24 per cent, topping the consensus estimate of a 19-per-cent gain.

Lululemon shares surge as consumers snap up pricier athletic wear

It also raised its annual sales and profit forecasts, pointing to strong demand south of the border and a recovery in China.

It now expects full-year 2023 revenue between US$9.44-billion and US$9.51-billion, up from its prior estimate of US$9.30-billion to US$9.41-billion and exceeded analysts’ forecast of US$9.37-billion. Its profit is projected to be between US$11.74 and US$11.94 per share, rising from US$11.50 to US$11.72 per share and topping the consensus of US$11.61.

“1Q results were better than consensus on all key line items and momentum is continuing into 2Q,” said Citi analyst Paul Lejuez. “Sales increased 24 per cent (vs consensus of 19 per cent) and were up double digits in all months of the quarter. GM was also above expectations, driven both by favorable air freight and better than expected markdowns. 2Q is off to a strong start and 2Q guidance brackets consensus (a strong guide particularly given what we’ve seen across retail recently) and would be higher if not for the proactive investments the company is making in the business. Given recent investor fears about a slowdown in the US business (which did not materialize), and the big China numbers (up 79 per cent), we expect shares to trade higher.”

Elsewhere, Jefferies’ Randal Konik called it “a solid print in a sea of volatile results across the retail industry.”

Mr. Konick raised his target for Lululemon shares to US$250 from US$225 with an “underperform” rating. The average target on the Street is US$409.68, according to Refinitiv data.

Other analysts making target adjustments before the bell on Friday include:

* BMO’s Simeon Siegel to US$355 from US$340 with a “market perform” rating.

“LULU reported a broad based beat and raised full-year guidance as it projected confidence in keeping promotions in check and delivering valuable products and experiences to the consumer,” said Mr. Siegel. “Strong 1Q GMs were followed by 2Q GM positivity, and critically, management noted markdowns in line with last year. This was a clean and healthy beat and with the stock price increasing in the aftermarket, we believe this is reflected in the shares.”

* KeyBanc’s Noah Zatzkin to US$400 from US$390 with an “overweight” rating.

“LULU 1Q revenue and EPS came in ahead of expectations, with top-line strength across all channels and geographies,” said Mr. Zatzkin. “The beat and raise supports our view that increasing brand awareness and product newness are enabling LULU to navigate what has been a challenging macro for most retailers - executing ahead of its Power of Three x2 plan outlined last year. LULU remains one of our top Apparel ideas for the year, and LT, we see meaningful opportunity via product innovation/ launches and international expansion.”

* Morgan Stanley’s Alexandra Straton to US$424 from US$405 with a “buy” rating.

“LULU’s 1Q beat & raise rare vs. peers, speaks to unique momentum, & quells QTD demand & inventory overhangs,” she said. “We believe LULU could prove more resilient thru macro headwinds, w/ 1Q initial evidence. Valuation discount to history creates opportunity to invest in a quality asset on sale.”

* TD Cowen’s John Kernan to US$531 from US$525 with an “outperform” rating.

* Telsey Advisory Group’s Dana Telsey to US$430 from US$425 with a “buy” rating.

* Barclays’ Adrienne Yih to US$430 from US$413 with an “overweight” rating.

* Bernstein’s Aneesha Sherman to US$328 from US$320 with a “market perform” rating.

* Piper Sandler’s Abbie Zvejnieks to US$445 from US$390 with an “overweight” rating.

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While he was encouraged by the re-acceleration in retail sales from March through May, Citi’s James Hardiman said BRP Inc.‘s (DOO-T) guidance “puts even more pressure on the back half of the year, an area of concern for investors, many of whom are bracing for a macro slowdown as we work our way through the year.”

The analyst called the Valcourt, Que.-based recreational vehicle maker’s first-quarter 2024 results, reported before the bell on Thursday, a “solid” performance. However, its shares slid 1.4 per cent, which he attributed to a “relatively modest retail performance in the quarter and a lower-than-expected guide for Q2.”

“There is a great deal to like about the BRP story, as the company’s powersports portfolio features both defensible leadership positions and substantial market share opportunities,” said Mr. Hardiman. “In both cases, BRP’s long track record of high-quality products and consistent innovation should (in our view) allow it to gain share for the foreseeable future, even if the market itself is difficult to handicap.”

BRP reported adjusted earnings per share of $2.38 for the quarter, up 43 per cent year-over-year (from $1.66) and 4 cents ahead of the consensus forecast but missing Mr. Hardiman’s $2.45 estimate. Normalized earnings before interest, taxes, depreciation and amortization of $377-million was lower than the projections of both the Street ($384-million) and analyst ($394-million).

“While BRP’s retail performance continues to be solid, 1Q represented a meaningful deceleration for virtually every segment relative to 4Q, even as the industry saw similar trends over this same timeframe,” said the analyst.

“Powersports retail for BRP’s 1Q24 was up 3 per cent, decelerating from the 19-per-cent gain in 4Q23. Management called out a slower start to FY24 driven by unfavorable weather and difficult comps (especially snowmobiles) during 1Q. As weather improved, retail improved in a meaningful way, in that while powersports retail was down mid-20′s in February, this improved to low single-digit growth in March, 30-per-cent-plus growth in April, and 40 per cent-plus growth in May (start of 2Q).”

BRP reiterated its full-year guidance of EPS of $12.25-$12.75, up 2-6 per cent from $12.05 in fiscal 2023. The Street is now projecting $12.50, while Mr. Hardiman raised his expectation by 7 cents to $12.43, due largely to a lower tax rate.

While also increased his 2025 estimate (to $14.01 from $13.98), he cut his target for BRP shares from $117 to $108 “based on weaker-than-expected industry trends thus far this year and growing investor concern across consumer in general and the leisure space in particular.” The average on the Street is $134.89.

“Within the context of the FY24 guidance, management continues to expect flat year-over-year industry growth (low single-digit decline vs. pre-COVID), with volumes driven by market share gains from existing products, new product introductions, and low-to-mid single digit percentage pricing growth,” said Mr. Hardiman, reiterating a “neutral” rating for BRP shares.

“Notably, DOO’s largest competitor PII is also calling for flattish industry growth and its own market share gains driven similarly by the Utility segment and new product launches. It would seem difficult for both to gain share in a flat industry, but DOO is confident in its execution and its recent track record would seem to back that up.”

Elsewhere, TD Securities’ Brian Morrison downgraded BRP to “hold” from “buy” with a $110 target, down from $135.

Others making changes include:

* Desjardins Securities’ Benoit Poirier to $168 from $170 with a “buy” rating.

“1Q results showed that BRP continues to outperform the powersports industry and gain share despite the softer consumer backdrop,” he said. “We view the market reaction and pessimism toward the industry as a buying opportunity, especially given BRP is trading at an unjustified 1.8 times EV/FY2 EBITDA discount to Polaris and below the level on the day prior to its last four SIB announcements. We expect management to continue to leverage the balance sheet to strategically return capital to shareholders via buybacks.”

“We are very pleased with the company’s execution to drive profitable growth. We recommend investors revisit the story.”

* Scotia Capital’s Jonathan Goldman to $145 from $149 with a “sector outperform” rating.

“Our thesis when we launched was that the market was overestimating the severity, not the likelihood, of a potential slowdown in powersports and the impact on BRP’s business,” said Mr. Goldman. “Applying a trough earnings multiple of 8.0 to 11.0 times NTM [next 12-month] EV/EBITDA, the market is imputing anywhere from a 25-per-cent to 45-per-cent decline in EBITDA in 2023. We think investors looking to 2008-2010 as an analog are mistaken. For one, we are in the ‘mild recession’ camp rather the GFC 2.0 scenario. Second, BRP has structurally improved the business since 2008, and even more so over the past three years. Recent capacity expansions and product introductions are sustaining share gains (through 1Q) while investments in its low-cost manufacturing footprint and other internal initiatives are sustaining margins well above pre-COVID levels and its closet peer (+460 delta in 1Q).

“We think shares offer a compelling risk/reward trade-off.”

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Recent methanol price weakness is likely to “bite into” the cash flow of Methanex Corp. (MEOH-Q, MX-T), according to RBC Dominion Securities analyst Nelson Ng.

“Methanex recently released its North American, Asia Pacific, and China non-discounted methanol reference prices for June at $545 per metric ton (down 2 per cent from $555/MT), $345/MT (down 13 per cent from $395/MT), and $330/MT (down 11 per cent from $370/MT), respectively,” he said. “Methanex’s European non-discounted reference price for the Q2/23 period is set at €488/MT, which compares to Q1/23 pricing of €478/MT.

“We note that Methanex’s North American reference price continues to be at a significant premium (approximately 94 per cent) to the North American spot price (illiquid market), while the China reference price is at a 50-per-cent premium to the spot price. As a result, we believe there is a potential that the company’s realized price will have a larger-than-normal discount to the posted prices (management guided towards a 21-per-cent discount for 2023). The discount is typically larger during periods where methanol prices decline.”

With Chemical Market Analytics (CMA) also posting a methanol price forecast that was “quite a bit lower” than his previous forecast, Mr. Ng emphasized Methanex’s financial performance is “significantly impacted” by the price of methanol.

“For every $50/MT increase/decrease in methanol prices, we estimate that Adjusted EBITDA could increase/decrease by $350 million (including Geismar 3 contribution),” he said. “While Methanex is in a strong liquidity position (G3 fully funded), we believe lower methanol prices could reduce the company’s ability to return capital to shareholders through share buybacks and/or dividend increases, while maintaining the health of the balance sheet. We also note that the company has a $300 million bond maturing in December 2024, and management has previously indicated the desire to repay this loan rather than refinance.”

Lowering his 2023 and 2024 adjusted EBITDA estimates to US$560-million and US$553-million (from US$629-million and US$709-million), respectively, Mr. Ng reduced his target for Methanex shares to US$50 from US$55, reiterating a “sector perform” recommendation. The average is US$55.

“We see rising recessionary uncertainties, which could negatively impact near-term and longer-term methanol prices. However, we believe the shares are suitable for investors that have a more constructive view on the economy (i.e., soft landing/minor recession) and expect natural gas prices to remain elevated, which should support methanol prices,” he concluded.

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With the release of better-than-expected results, Laurentian Bank of Canada (LB-T) delivered “a good quarter,” according to Credit Suisse analyst Joo Ho Kim.

On Thursday, the Montreal-based bank reported second-quarter core cash earnings per share of $1.16, topping Mr. Kim’s estimate by 2 cents and the consensus forecast by 5 cents. “As expected,” it raised its quarterly dividend by a penny to 47 cents per share.

“With the underlying (PTPP) earnings coming in modestly better than what we were looking for,” said the analyst. “That was driven by lower expenses, as revenues were slightly lower than our forecast, with the better improvement in NIM this quarter offset against further deceleration in loan growth. While slower loan growth was similar to what we saw from its larger peer group this quarter (somewhat slower than our assumption), we do note good results from residential mortgages (up 1 per cent quarter-over-quarter) as positive in a tough market for the business. Expenses were elevated this quarter in the context of revenue (with negative operating leverage and efficiency ratio near 70 per cent), but we expect some pressure to ease off over the next two quarters. Looking ahead, the bank reiterated much of its guidance on key earnings drivers, and we continue to look for signs of execution ahead.”

Maintaining an “underperform” recommendation for Laurentian shares, Mr. Kim increased his Street-low target by $1 to $33. The average is $39.

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In a research report released Friday, analysts at Raymond James raised their short-term price forecast for precious metals while lowering their expectations for base metals.

“On base metals, the most significant change was a decrease in our copper price forecasts in 2023 reflecting a more uncertain outlook related to China demand and general recession fears,” they said. “We have also decreased our price forecasts for nickel and zinc in 2023 for similar reasons. We have also made small changes in our 2023 iron ore price forecasts to reflect current market conditions.

“In precious metals, we have increased our 2023 gold price estimate on an expectation of a weakening US dollar and expectations of slowing interest rate increases and have adjusted our silver price forecasts with our gold:silver price ratio now at about 83.5 times for 2023 (about 81 times previously). We have also increased our 2024 and long term gold and silver price forecasts to reflect ongoing inflationary pressures with our long term gold:silver price ratio now at about 81 times (previously 80 times).”

With those adjustments, the firm made a large number of target price adjustments for companies in their coverage universe.

For precious metals, they said: “We prefer AEM amongst the senior gold producers for its lower political risk profile and steady to growing production profile with a full-year of the Kirkland Lake assets and consolidation of Canadian Malartic. Among intermediate producers we favor CXB for its production and cash flow growth, EDV for its low cost and attractive valuation, KNT for its growth potential and exploration opportunities, and SIL given its cash flow (just commenced production) and exposure to silver. We prefer OR and WPM in the royalty space and NUAG amongst the juniors for its exploration potential.”

For base metals producers, they said: “Target prices have generally been adjusted downward reflecting lower price forecasts. We continue to favor IVN and TECK amongst the base metals producers given both have near term copper growth, long mine lives and potential catalysts at the other assets and ALS given potential catalysts. We also note ERO has organic growth on the horizon with the Tucuma project expected to enter production in 2024. We also remain constructive on uranium and recommend CCO, NXE and DML.”

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In other analyst actions:

* Stifel’s Justin Keywood raised his recommendation for Mississauga-based Cipher Pharmaceuticals Inc. (CPH-T) to “speculative buy” from “hold” with a $4.75 target, rising from 95 cents. The average on the Street is $9.50.

“We highlight Cipher as a specialty pharma company that could re-rate further, upon successful deployment of a building cash balance and new access to credit,” said Mr. Keywood. “The company has a dermatology product (Epurus) and royalty stream tied to generic assets, Absorica and Lipofen. The generic tail has been much longer than expected, while Cipher has reduced costs and paid off debt, leading to a US$33.4-million cash balance ($1.80 Canadian per share or 47 per cent of total). We see the generic tail as continuing to contribute good EBITDA and cash flow in 2023 and a new US$35-million credit facility, provides US$68-million in liquidity. Cipher also has near $200-million in tax losses available to use against future earnings. With the current capital-constrained market and

a relatively new CFO, we see Cipher as being in an advantageous position to buy good assets at low multiples. As a result, we upgrade CPH.”

* TD Securities’ Greg Barnes upgraded Lundin Mining Corp. (LUN-T) to “buy” from “hold” with a $11.50 target, rising from $11 and above the $10.98 average.

* Raymond James’ Steve Hansen reduced his Deveron Corp. (FARM-X) target to 95 cents from $1.10 with a “strong buy” rating. The average is $1.07.

“We are trimming our target ... based upon the company’s weaker-than-expected 1Q23 print and commensurate revisions to our financial estimates. Notwithstanding these changes, we maintain our constructive view of the firm’s unique competitive position, robust organic & acquisitive growth prospects, and attractive secular tailwinds,” said Mr. Hansen.

* CIBC’s Bryce Adams cut his Filo Mining Corp. (FIL-T) target to $36 from $38, keeping an “outperformer” rating. The average is $32.14.

* In response to the release of the results of a Pre-Feasibility Study for the PAK Lithium Project, Canaccord Genuity’s Katie Lachapelle cut her Frontier Lithium Inc. (FL-X) target to $4, below the $4.08 average, from $4.50 with a “speculative buy” recommendation.

“The PFS results were largely negative relative to our forecasts and the PEA, with both capital and operating costs up materially (but offset by higher pricing),” she said. “In our view, this was not surprising, given recent inflationary pressures we’ve seen across the industry (e.g., Thacker Pass, Kathleen Valley, etc.); and overall, we think the updated technical report outlines a more realistic operational and financial outcome for Frontier.

“Furthermore, the project still presents robust operating margins (approximately 65 per cent) on our long-term price deck and Frontier continues to screen cheap vs. other North American developer peers (0.53 times NAV vs. peers at 0.62 times). An update on the road infrastructure will be a critical next update for the company, in our view.”

* TD Securities’ Derek Lessard cut his Neighbourly Pharmacy Inc. (NBLY-T) target by $1 to $29 with a “buy” rating. The average is $28.94.

* Stifel’s Stephen Soock resumed coverage of Orla Mining Ltd. (OLA-T) with a “buy” rating and $7.25 target, matching the average on the Street.

“Orla is a gold producer and exploration company with assets in Mexico, Panama and the United States. Each property hosts both near-surface oxide gold deposits and deeper polymetallic sulphide deposit,” he said. “The Camino Rojo oxide heap leach mine is currently operating in Mexico with another two in the permitting stage. We model production to be more than 250koz AuEq/yr by 2028. The next two growth projects are expected to be internally funded from operational free cash flow, limiting the likelihood of equity dilution over the next five years. Since the 2022 acquisition of South Railroad from Gold Standard, Orla drilling has hit high-grade at multiple targets nearby on the under-explored land package We expect the company will unlock additional exploration value across the sparsely drilled land packages in all three countries.”

* Raymond James’ Andrew Bradford cut his Precision Drilling Corp. (PD-T) target to $110 from $135 with a “strong buy” rating, while ATB Capital Marketrs’ Waqar Syed cut his target to $143 from $145 with an “outperform” rating. The average is $127.36.

“Precision provided an operations update that addresses both the impact of wildfires in Canada (considerably less than feared) and the recent sharp decline in the U.S. rig count (more than we had been modeling),” said Mr. Bradford. “The direct net impact of Precision’s update on our 2Q23 EBITDA numbers take us from $129-million EBITDA to $119-million. But the speed and magnitude of the U.S. rig count decline necessitates a reset of our baseline macro forecasts as well. In this respect, we’re also lowering our 2H23 EBITDA outlook by 6 per cent, and lowering our target price ... Notwithstanding our estimate and target reduction, our view is that momentum has driven OFS share prices to levels considerably below what future cash flows would suggest. It’s entirely likely that negative momentum will continue to control the market dynamic over the near-term, but as fundamental analysts, we’re compelled to draw attention to the value opportunity this is creating.”

* Coming off restriction following the close of its $35-million convertible debenture offering, National Bank’s Matt Kornack trimmed his target for PRO Real Estate Investment Trust (PRV.UN-T) to $6 from $6.25 with a “sector perform” rating, while Raymond James’ Brad Sturges cut his target by 50 cents to $6.25 with a “market perform” rating. The average is $6.96.

“These debentures represent a modest earnings headwind since the effective rate exceeded that of the floating rates on the revolver by a wide margin (9-plus-per-cent effective on the debentures vs. 6-7 per cent today for the revolver, but we are modelling 5 per cent in 2024 based on our Economics & Strategy group’s forecast),” Mr. Kornack said. “This financing provides the REIT some capacity to pursue additional acquisitions when combined with recent disposition activity.”

* Following the announcement of five pipe coating contract awards and a letter of intent worth a total of $150-million, Canaccord Genuity’s Yuri Lynk raised his target for Shawcor Ltd. (SCL-T) to $20 from $19 with a “buy” rating. The average is $17.88.

“We estimate $105-million of the $150-million is incremental with two of the five purchase orders announced being previously disclosed as letters of intent,” said Mr. Lynk. “Work on the new contracts will be staggered between H2/2023 and 2026, supporting our view that pipe coating activity is in the early stage of a multi-year expansionary cycle. These awards bode well for the potential sale of the Pipeline & Pipe Services (PPS) segment. As such, we are tweaking our estimated value for PPS from $225-million to $250-million on enhanced visibility and continue to expect a mid-year announcement.

“Shawcor remains an inexpensive stock with compelling capital allocation upside potential. Pro forma the PPS sale, net cash should be in excess of $300-million. We see potentially shareholder-friendly capital deployment opportunities in a buyback, the eventual reinstatement of a dividend, and, most importantly, over $100-million in organic growth opportunities with payback periods of three years or better.”