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

A group of equity analysts lowered their ratings for Canopy Growth Corp. (WEED-T) on Monday in response to weaker-than-anticipated fourth-quarter 2020 financial results.

On Friday before the bell, the Smiths Falls, Ont.-based company released results that fell “significantly” short of the expectations on the Street.

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For the quarter, Canopy reported net revenues of $107.9-million, a drop of 13 per cent from the third quarter and below the consensus projection on the Street of $128.7-million.

Pointing to its near-term challenges, CIBC World Markets analyst John Zamparo lowered the cannabis producer to “neutral” from “outperformer” with a $26 target, falling from $35. The average on the Street is $26.76.

“We do not doubt Canopy’s successful future in this industry: we find its management team is best-in-class, balance sheet quality is matched by only one other competitor, and the strategic partnership with Constellation Brands is as valuable as ever,” he said. “But we believe the stock lacks positive catalysts in the near future, and expect more attractive entry points following expected progress on significant operational initiatives. Canopy’s strategy is sound, but will take time, and in our view, current valuation (at an industry-leading 9.5 times calendar 2021 estimated consensus sales) limits material upside.”

At the same time, Stifel analyst W. Andrew Carter cut the stock to “sell” from “buy” with an $18 target, down from $23.

Cormark Securities lowered Canopy to “market perform” from a “buy” rating, while Bryan, Garnier & Co moved it to a “sell” from “neutral."

Elsewhere, Canaccord Genuity analyst Matt Bottomley now sees a longer path to profitability following a “disappointing” operating performance.

“The company appears to be losing ground in its adult-use penetration while operating with a significant cash burn that is still in excess of $300-million per quarter,” said the analyst.

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“The miss was predominantly due to a significant reduction in the company’s Canadian adult-use sales quarter-over-quarter, which came down by a sizable (28 per cent) to $49.8-million (versus our forecast of $82.2-million),” he said. “We had anticipated Canopy seeing increased penetration into the Canadian adult-use market (which was up more than 18 per cent nationally at the retail level QoQ) in addition to higher sales on the introduction of Cannabis 2.0 products (which ended up accounting only for 2 per cent of revenues in the period). The company noted that its QoQ decline in this segment was a result of: (1) lower volumes to provincial buyers (down 31 per cent) in flower and pre-rolls, as many of its peers have shifted to value-priced segments that have gained notable traction as of late; and (2) lower retail sales (down 14 per cent), due to the closure of many of its corporate-owned retail stores on the back of COVID-19.”

After lowering his near-term Canadian market share estimate as well as his fiscal 2021 revenue and earnings expectations, Mr. Bottomley cut his target for Canopy shares to $21 from $23 with a “hold” rating (unchanged).

Desjardins Securities’ John Chu lowered his target to $29 from $34 with a “hold” rating.

Mr. Chu said: “While 4Q was a disappointment both financially (sales, EBITDA) and with the lack of clarity on the path to positive EBITDA, management was candid with what went wrong and how it plans to transition Canopy going forward. The strategic plan is well thought out and focused, following the footsteps of a traditional CPG company. Guidance could come as early as 2H FY21 but continued financial softness is likely to persist in the coming quarters as Canopy undergoes this transition with a new, more focused plan.”

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Following its quarterly earnings beat, Canaccord Genuity analyst Scott Chan said he’s “favourable” on shares of Canadian Western Bank (CWB-T), pointing to its “strong” capital position and historical credit performance through market crises.

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He did, however, express caution over a slowdown in loan growth and near-term net interest margin compression, which hurt net interest income results.

On Friday, the bank reported provisions for credit losses of $34.9-million, beating the consensus expectation of $39.1-million.

"Reported FQ2 PCL ratio for CWB was materially lower than the Big-6 average," said Mr. Chan. "PCL on impaired loans contributed 22 basis points(flat year-over-year), while PCL on performing loans (stage 1 & 2) increased to 27 bps(from 1 bp in Q2/F19). The latter was the main variance vs. peers due to significantly lower allowances built up due to COVID-19. Although management remains confident in its loan book due to secured lending nature, disciplined underwriting and proactive loan measures, we remain cautious on credit and have modelled in a similar total PCL ratio in FQ3. Gross impaired loans increased 12 per cent quarter-over-quarter primarily related to oil and gas exposure in Alberta. During the quarter, CWB provided payment deferral options to 19K loans representing more than 20 per cent of the total book that increased to 24 per cent in May. One area to monitor closely relates to its Franchise Finance business with restaurants and hotel exposure representing less than 5 per cent of the portfolio."

Keeping a “buy” rating for CWB shares, Mr. Chan raised his target to $25.50 from $24. The average on the Street is $25.32.

Elsewhere, Desjardins Securities analyst Doug Young lowered his financial expectations, but he maintained a "buy" rating and $26 target.

“Valuation is compelling, an improved funding mix should help temper NIM compression and the conversion to calculating RWA under the AIRB methodology remains on track for approval by year-end FY20. That said, CWB’s exposure to western Canada, while lower vs a few years ago, remains a concern,” said Mr. Young.

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Skeena Resources Ltd. (SKE-X) offers “undervalued exposure to a sizeable, high-margin, fast-payback brownfield asset in a tier-1 mining jurisdiction,” according to Hannam Partners analyst Roger Bell.

Touting the potential of the former Eskay Creek Mine in northern British Columbia, he initiated coverage of the Vancouver-based company with a target price of $4.16 per share, which implies 250-per-cent upside from its current price.

“The Company’s main focus is on developing the past-producing Eskay Creek project, once the highest-grade gold mine in the world, on which Skeena agreed an option to acquire from Barrick Gold in 2017,” said Mr. Bell. “Since closure of the historic underground mine in 2008, the C$ gold price has appreciated by 160 per cent while transformational new hydroelectric capacity has been installed in close proximity to the mine site. This has allowed Skeena to reintroduce Eskay as an open-pit operation. Evaluation of historical data and new drilling has confirmed that significant tonnages of high-grade mineralization remain, and a Preliminary Economic Assessment (PEA) completed in Nov’19 - based on a US$1,325 per ounce gold price - showed a compelling NPV5% of $638-million (Canadian) and IRR of 51 per cent, producing an average of 236 thousand ounces per annum gold and 5.8 million ounces per annum silver over a 9-year life.”

Mr. Bell also feels consolidation of ownership will likely drive re-rating in 2020, adding: “Skeena has spent $20-million on exploration at Eskay Creek to date, fulfilling a spending requirement of $3.5-million under its purchase option with Barrick. The Company has until the end of 2020 to exercise the option with a further payment of $10-million due to Barrick, who would retain a 1-per-cent net smelter return (NSR) royalty. A further $7.7-million will be posted by Skeena to cover the environmental rehabilitation bond. Skeena is also aiming to negotiate the waiving of Barrick’s “back-in” option over Eskay, giving the Company unencumbered ownership of the asset. We note that Skeena currently trades at an EV/Resource (M,I&I) of $36 per ounce AuEq, a 59-per-cent discount to the median comparable of $89 per ounce AuEq; in our view, a resolution of the Eskay Creek ownership structure in 2020 should be a catalyst to drive a re-rating vs peers.”

Currently the lone analyst on the Street covering the stock, according to Reuters, Mr. Bell did not specify a rating for Skeena shares.

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The rise in higher-margin discretionary sales enjoyed by Dollar Tree Inc. (DLTR-Q) in recent weeks represents a “potential positive read-through” for Dollarama Inc. (DOL-T), according to Desjardins Securities analyst Chris Li.

He thinks the Virginia-based discount retailer is the most comparable North American peer to Dollarama based on its similar sales mix.

"Importantly, DLTR began to see a change in buying behaviour, with a shift from essentials to higher-margin discretionary products for ‘stay at home’ including crafts, stationery, toys, kitchenware, lawn and garden, hardware, etc, as well as celebration products for graduation, Mother’s Day, etc," he said. "With the exception of party/paper, all discretionary categories are showing positive comps in May. The government stimulus has helped drive sales. The uptick in discretionary sales drove the discretionary mix higher to 55 per cent in May from 45 per cent in early April. Higher discretionary sales support higher average basket, offsetting the traffic decline. Overall, comps at DLTR have returned to a level that management is more accustomed to seeing."

Mr. Li thinks Dollarama is seeing a similar trend.

However, despite expecting higher sales growth,he trimmed his earnings expectations ahead of the release of its first-quarter 2021 results on June 10 before the bell based on a "more conservative" margin outlook. His 2021 and 2022 earnings per share projections slid to $1.71 and $2.12, respectively, from $1.80 and $2.20.

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"While the impact of the pandemic on consumer behaviour is still highly uncertain, we expect DOL’s comps to show quarter-over-quarter improvement through the year," he said. "We expect the ‘shop less and buy more’ behaviour to persist in the foreseeable future as consumers continue to practise physical distancing. On the more challenging side, we expect pandemic-related issues and heightened competition to limit margin growth."

Maintaining a "hold" rating for Dollarama shares, he raised his target to $49 from $44. The average on the Street is $44.92.

“In our view, DOL’s essential-business status, strong management team and solid financial position make it a good defensive investment,” said Mr. Li This is balanced against high expectations for next year (consensus 29-per-cent EPS growth), with the risk of heightened competition amid a recession limiting DOL’s ability to pass on higher costs to consumers."

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Costco Wholesale Corp.'s (COST-Q) third-quarter financial results were “solid” with few surprises, said Citi analyst Paul Lejuez.

On Thursday after the bell, the U.S. retailer reported earnings per share of US$1.89, matching the expectations of the Street. Total revenue rose 7.3 per cent to $37.27-billion in the third quarter, topping estimates of US$37.13-billion.

“As with other retailers that have remained open during the pandemic, COST’s top-line strength was offset somewhat by increased expenses related to employee compensation and COVID-19 related cleaning standards,” said Mr. Lejuez. “We believe these are near-term issues, and longer-term, COST should benefit from new customers gained during this period and increased loyalty from existing customers. While we believe COST is a best-in-class operator, with the stock trading at 18 times our fiscal 2021 estimated EBITDA, we believe expectations are high and the risk reward is balanced.”

Pointing to higher-than-anticipated expenses, he lowered his 2020 and 2021 earnings per share projections to US$8.42 and US$9.76, respectively, from US$8.90 and US$9.90.

He kept a "neutral" rating and US$310 target for Costco shares. The average target is currently US$323.67.

“We like long-term positives of the COST story including its membership format, its merchandising strategy, its low prices, the draw of its ancillary businesses, its e-commerce initiatives, its geographic diversification, the steady nature of margins, and cash returns to shareholders,” the analyst said. “We expect these factors to drive ongoing strength in SSS growth and membership sign-ups as COST continues to generate strong EPS growth via the top line. But with COST trading at the upper end of its historical ranges, we see these positives priced into the stock at current levels.”

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Emphasizing its “strong and steady” financial track record and “stable and meaningful” dividend, Acumen Capital analyst Trevor Reynolds initiated coverage of Information Services Corp. (ISV-T) with a “buy” rating.

ISV is a Regina-based provider of registry and information management services for public data and records.

"ISV has a highly recurring revenue model with stable cash flow generation driven by the MSA," he said. "2019 was a strong year for ISV with revenue of $133-million (up 12 per cent year-over-year) and adjusted EBITDA of $40-million (up 13 per cent year-over-year). The company continues to diversify the revenue base with close to 50 per cent of revenue now derived from outside Saskatchewan (was zero at IPO). Over the past five years ISV has increased revenue by an average of 11 per cent per year, while adjusted EBITDA and FCF have achieved an annual average growth rate of 5 per cent and 7 per cent, respectively. Well over $90-million has been paid out to shareholders since the IPO with the annual $0.80/sh. dividend unchanged since the IPO.

“ISV is committed to delivering shareholder value through consistent performance and execution of strategic growth opportunities. Management looks to leverage industry leading expertise in registry and information management in new markets globally. The company is focused on generating profitable growth both organically and through M&A while producing stable free cash flow. ISV is committed to ensuring customer experience is best in class which is a differentiator from many competitors and is something that does not change when entering new markets.”

Seeing ISV shares “attractively” valued at current levels, Mr. Reynolds set a target price of $17.25. The average on the Street is $15.25.

“ISV’s core market exposure in the Registry Operation’s division is Saskatchewan housing which will be impacted to an uncertain degree by COVID-19 over the near term,” he said. “In the Services division, the market remains strong with continually increasing regulatory and compliance requirements resulting in governments, legal firms, and financial institutions outsourcing a growing list of non core business processes and services to focus on core competencies. The emphasis remains on reliability and security of information as ISV works to access what they view to be an emerging global registry market. While COVID-19 is having an impact, ISV has proven they are able to adapt to market conditions, customer needs, and evolve with changing trends.”

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In other analyst actions:

CIBC World Markets analyst Mark Petrie raised his target for Aritzia Inc. (ATZ-T) to $22 from $19 with an “outperformer” rating. The average on the Street is $19.81.

“Aritzia is navigating the pandemic with a consistent philosophy to how it manages its business in normal times, by investing for long-term profitability and growth,” he said. “Though near-term expenses will run higher than we had previously thought, we remain comfortable that ATZ is well-positioned for any ‘new normal’ given its robust e-commerce platform and high-quality and highly profitable store network. Our fiscal 2021 estimates are reduced, while fiscal 2022 is increased slightly.”

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