Inside the Market’s roundup of some of today’s key analyst actions
Canopy Growth Corp. (WEED-T) has displayed “excellence of execution,” according to Beacon Securities analyst Vahan Ajamian, who now believes the Street’s expectations for fiscal 2020, its first full year of recreational sales, are too low.
Following a recent tour of the marijuana producer’s greenhouses in British Columbia, Mr. Ajamian raised his forward financial projections, leading him to upgrade his rating for its stock to “buy” from “hold” and call it “the go to name for investors in the sector today.”
“We toured Canopy’s BC JV in Aldergrove (1.3 million square feet – one-third of which is already full of wall to wall plants, one-third should be filled with plants this month, and the final third should be complete in May),” he said. “We also saw its JV in Delta (1.7 million sq. ft. which should be fully up and running by the summer). We were quite impressed by what we saw as swift and quality execution. Canopy is clearly leveraging its financial resources and regulatory know-how, moving like clockwork at a rapid pace to have as much product as possible to sell when recreational sales start.
“With the whole 3 million sq. ft. up and running by the end of the summer, we believe Canopy can output 150,000 kg in the first full year of recreational sales from BC alone. Our arguably conservative calculations point to Canopy having an effective interest in 244,000 kg in the first full year of recreational sales across its national footprint. We haircut this further to 219,647 kg in our formal model, which, at an average price per gram of $5.34, translates to revenue of $1.2-billion versus consensus of $855-million. We note that this does not incorporate Canopy’s offtake agreement with Sunniva Inc. (SNN-CN), which we believe could add another $3/share of value for Canopy alone.”
Mr. Ajamian feels Canopy is now in the best position to “swarm the shelves of the legal market in all regions - which is the best set up for any LP to get first time users and keep them long-term.”
“Looking further out, while it has by far the largest footprint today, we believe the other higher-margin aspects of Canopy’s business will start to flourish in the not too distant future – such as: edibles and drinks, particularly given its partnership with Constellation Brands (STZ-N); global reach; and drugs developed by Canopy Health Innovations,” said Mr. Ajamian. “In particular, we are quite optimistic about the CraftGrow program. We believe new up and coming LPs will likely take a very hard look at their prospects for national recreational distribution as well as access to patients, and conclude that they are better off leveraging Canopy’s infrastructure. For Canopy, it provides more supply without having to grow every last gram itself.”
The analyst hiked his target price for Canopy shares to $37 from $24.50. The analyst average target is currently $33,67, according to Bloomberg data.
“We are already seeing the company benefit from a ‘flight to quality’ during the recent shakeout, and we believe the current pullback represents a good entry point,” said Mr. Ajamian. “We believe that Canopy shares’ outperformance will be entrenched in the near future by increasing awareness among European investors, coverage from major brokerages in Canada, as well as a potential Nasdaq listing.”
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Ritchie Bros. Auctioneers Inc. (RBA-N, RBA-T) is well positioned to deliver both “attractive” earnings growth and free cash flow generation, according to RBC Dominion Securities analyst Derek Spronck.
He initiated coverage of the Vancouver-based company with a “sector perform” rating.
Mr. Spronck said the US$758.5-million acquisition of IronPlanet, an online marketplace for heavy equipment and other durable assets, has “catapulted” Ritchie into a leadership position in the online industrial equipment auction space. He believes the deal, completed in May of 2017, has provided the company with “enhanced” digital capabilities as well as a scalable platform to drive both long-term growth and shareholder value.
“Ritchie is the largest auctioneer of industrial equipment, with global scale and a strong brand reputation. Management has not been complacent and has reshaped Ritchie from a bricks-and-mortar auctioneer, into a technology-led asset management and disposition company,” he said. “Major investments have been made and Ritchie is just now leveraging it’s multi-channel platform. The key is that this enhanced platform is more scalable, allowing for growth in both existing and new product verticals. Management is also looking at new data enabled revenue streams, which could further enhance earnings growth.
“As management leverages technology and grows its online presence, we see greater upside optionality and a unique investment opportunity. There has also been a lot of change and it might take a few more quarters before we have better visibility around what normalized growth rates look like. In addition, there are tight supplies of used heavy equipment weighing on auction proceeds, with our channel checks pointing to this dynamic potentially being more protracted (and unique) relative to prior operating cycles.”
Mr. Spronck feels current valuations for the company now reflect the “positive dynamic” stemming from management’s drive to enhance shareholder value, as seen with the IronPlanet deal.
He added: “With potential cycle risk and some variability in post-acquisition growth rates, we see more limited upside over our 12- month investment horizon. Initiate at Sector Perform.”
The analyst set a price target for the stock of US$33. The analyst average is currently US$32.80.
“Ritchie is a well run company, transformed to deliver long-term profitable growth and attractive ROE [return on equity],” said Mr. Spronck. “There are some near-term challenges around equipment supply and still lots of changes for both customers and investors to absorb. We see this dynamic limiting upside in valuations over our 12-month investment horizon. However, we do like the longer-term investment set-up and recommend investors buy opportunistically, with the risk-to-reward looking more interesting below $30 per share.”
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Valeant Pharmaceuticals International Inc. (VRX-N, VRX-T) no longer possesses “near-term sell catalysts,” said Mizuho Securities analyst Irina Koffler, who raised her rating to “neutral” from “underperform.”
The analyst called the company’s 2018 outlook realistic, believing it’s in a good position to reach management goals, adding she does not “expect quarterly performance or dermatology weakness to upend the stock.”
Though she cautioned Valeant isn’t “out of the woods” and sees “another down year” in 2019, seeing a protracted turnaround process, Ms. Koffler increased her target for Valeant shares to US$15 from US$10.
The average is US$18.12.
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Believing it’s “attractively” valued in comparison to “growth” apparel retailers, BMO Nesbitt Burns analyst Stephen MacLeod initiated coverage of Roots Corp. (ROOT-T) with an “outperform” rating.
“Roots has a unique position as a Canadian brand icon, with a long history of success as a founder-led business,” said Mr. MacLeod. “We believe Roots’ growth is at an inflection point, with new management bringing operational rigour to key retail functions. By leveraging recent internal investments (i.e., United Brand Range) and driving external growth (comp store sales, new stores, e-commerce), we forecast improved ROIC [return on invested capital] and 17-per-cent adjusted EBITDA CAGR [compound annual growth rate] through 2019. This, combined with the stock’s valuation, leads to attractive risk-reward.”
He set a price target of $14, which is 8 cents less than the consensus.
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Desjardins Securities analyst Benoit Poirier sees “significant” value-creation opportunities on the horizon for Bombardier Inc. (BBD.B-T) after reassuming coverage of the stock following a recent US$500-million equity issuance.
Despite the dilutive effect of the transcation, Mr. Poirier feels it creates both flexibility to achieve its 2020 turnaround plan and the ability to unlock “significant” shareholder value.
“In November 2017, BBD repaid its entire debt maturing in 2019 (US$600-million) with a new debt offering due in 2024 (US$900-million), which eliminated any future liquidity requirement prior to 2020,” he said. “The remaining US$300-million issuance is earmarked for future working capital investment required for growth. Nevertheless, recall that we had increased our interest payment forecast by US$40-million per year following this new issuance, as the interest rate on the new offering is higher than that for the 2019 notes (7.5 per cent versus 4.75 per cent previously). The recent equity issuance of US$500-milluion is also expected to strengthen BBD’s cash position, which should provide it with further flexibility heading into 2018 and beyond. We are pleased with both transactions, as they will give the company more flexibility in the short to medium term to pursue its 2020 turnaround plan while the C Series and Global 7000 programs continue to ramp up.
“BBD’s story has changed dramatically since the launch of the five-year turnaround plan―the story is now all about FCF generation and financial flexibility. Over the course of its turnaround plan, BBD’s financial performance has evolved significantly. In fact, we are starting to see real improvement in key business performance metrics. Net debt to EBITDA is starting to decline, and BBD is approaching its target of FCF breakeven by the end of 2018 In addition, we believe BBD’s performance should continue to strengthen in the coming years, as management executes the latter part of its 2020 strategic plan and solidifies the company’s financial position. As a result, even if BBD does not deploy significant capital in 2018, it is worth looking at its options beyond this pivotal year.”
In a research note released late Thursday that examined the cash-deployment possibilities open to Bombardier, Mr. Poirier pointed to a trio of options: buying back Caisse de dépôt et placement du Québec’s stake in Bombardier Transportation; selling its Downsview site in Toronto; and “unleashing the full potential” of its C Series through its partnership with Airbus.
“As of now, we believe these opportunities naturally fit into management’s transformation plan,” he said. “Overall, we are impressed by the improvement and consistency demonstrated by the management team over the past two years. Furthermore, we also welcome its prudent approach to capital-deployment opportunities as we do not believe any major growth capex program is required at this point to ensure BBD’s success through 2020.”
Though he lowered his adjusted earnings per share projection for 2019 by a penny to 17 U.S. cents, Mr. Poirier maintained a “buy” rating for Bombardier shares and a $4.75 (Canadian) target. The average target on the Street is $4.38.
“We continue to believe that the stock could reach the $6.25 level by 2020, and we see more opportunities that might further unlock shareholder value,” he said.
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Calling it a “emerging growth story,” RBC Dominion Securities analyst Kurt Hallead initiated coverage of Cactus Inc. (WHD-N) with an “outperform” rating.
Cactus, a Houston-based oilfield services company, launched an initial public offering in late January.
“WHD is ideal for small cap cyclical growth fund managers looking for direct exposure to the consumable oilfield equipment market and tangential exposure to land drilling and frac,” said Mr. Hallead. “WHD’s FCF generation should enable it to be opportunistic on the M&A front and be on the leading edge of new product development. These dynamics should help drive market share gains and maintain industry-leading ROC [return on capital].”
The analyst set a target price of US$32 for Cactus shares, which is US$31.14.
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In other analyst actions:
Eight Capital analyst Phil Skolnick upgraded Cenovus Energy Inc. (CVE-T, CVE-N) to “buy” from “neutral” with a $15 target. The average target among analysts currently covering the stock is $14.20.
Mr. Skolnick also upgraded Baytex Energy Corp. (BTE-T, BTE-N) to “buy” from “neutral” with a $5.30 target, which exceeds the $4.39 consensus.
GMP analyst Robert Fitzmartyn downgraded Traverse Energy Ltd. (TVL-X) to “speculative buy” from “buy” with a target of 35 cents, down from 60 cents. The average target is 38 cents.
GMP’s Martin Landry upgraded Cronos Group Inc. (MJN-X) to “buy” from “restricted” with a $9 target, which is 33 cents less than the consensus.
David Leeder