Inside the Market’s roundup of some of today’s key analyst actions
The recent underperformance of shares of ZCL Composites Inc. (ZCL-T) has led to an “attractive” risk-reward proposition for investors, according to Raymond James analyst Ben Cherniavsky.
In the wake of a 17-per-cent dip in price following the early May release of its first-quarter financial results and a 41-per-cent fall since reaching a 10-year high on May 3 of 2017, Mr. Cherniavsky raised his rating for the Edmonton-based manufacturer of underground storage tanks to “outperform” from “market perform.”
“Pardon the irresistible pun, but ZCL’s shares have been tanking lately!” he said.
“In our view, there have been a confluence of factors behind this dismal performance. First, it is fair to say — and we did say it when we downgraded the stock [on May 4, 2017] — that expectations for this company were getting ahead of themselves when ZCL was trading at more elevated levels back in the spring of 2017. Since then, however, the issues have become more fundamental in nature: (i) the long-standing CEO has been forced to retire for health reasons with his replacement still to be determined; (ii) an attempt to sell the company failed to turn up any buyers; and (iii) growth in the company’s earnings, EBITDA and backlog has recently stalled.”
Mr. Cherniavsky admitted that it is not unreasonable for investors to worry about whether the fuel market for ZCL has peaked. Despite emphasizing that the full adoption of electric vehicles in North America remains a “long way” away, he said the increasing number of fuel-less vehicles cannot be ignored.
“Facing this reality, many gas station operators are being forced to reevaluate returns on future investments, including underground fuel storage tanks,” he said. “ In spite of speculation over this long-term secular decline, the data suggest that gasoline consumed has increased steadily over the years. Furthermore, management’s estimate of the age of currently active underground tanks suggests that replacement demand could drive increased activity in ZCL’s fuel segment in the near future.”
He added: “Relative to our historic expectations for ZCL’s water business, we must admit that results have been disappointing. These uninspiring results do not reflect a lack of effort; nor do they suggest that there is no opportunity for ZCL in water. In fact, management estimates that the market for water storage vessels in North America is roughly US$2.5-billion, much larger than the fuel market. There are many uncertainties regarding ZCL’s future in water, but should Fiberglass Reinforced Plastic begin to replace the incumbent product, namely concrete, this could provide a compelling growth opportunity going forward.”
Mr. Cherniavsky maintained a target price of $11.50 for ZCL shares. The average target on the Street is currently $12, according to Bloomberg data.
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Raymond James’ Jeremy McCrea added ARC Resources Ltd. (ARX-T) to the firm’s “Canadian Analyst Current Favourites” list, replacing Kelt Exploration Ltd. (KEL-T) due to its “relative outperformance.”
“With ARX shedding their gas weighted perception and shifting towards more focused liquid rich future development, along with the top decile performance by two of the latest Attachie wells, significant land base, and future running room we believe by solely focusing on AECO gas price collapse, the investors may be missing the bigger picture here as the company has hinted the future of ARC (and FFO) is much more tied to liquids plays at Tower, Parkland, the Lower Montney at Dawson (100 bbls/mmcf CGR in the first 80 days), Ante Creek and the Cardium,” said Mr. McCrea. “Hence, we are adding ARX to our Analyst Current Favourites.”
Mr. McCrea has an “outperform” rating and target price of $22.50 for ARC shares. The average target is currently $18.03.
He has a “strong buy” rating and $12 target for Kelt, versus the average of $10.90.
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The recent rise in the price of shares of Walt Disney Co. (DIS-N) is “unwarranted,” according to Pivotal Research Group analyst Brian Wieser, downgrading his rating for the U.S. entertainment giant to “sell” from “hold.”
“Certainly, we see industry consolidation (as marked by the ruling on AT&T-Time Warner) as positive for the industry relative to its absence,” said Mr. Wieser. “However, we also think that if Disney has to pay a higher price for the Fox Entertainment assets because it engages in a bidding war with Comcast, the Disney’s value would be negatively impacted as it would reduce the incremental value the company should be able to generate from synergies associated with the acquisition. Alternately, Disney may not be successful in its pursuit of Fox and this would mean the company would not get to realize any of the expected synergies. It’s true that Disney could look for other ways to produce value, such as by applying higher levels of leverage to the company, dividing its video-centric businesses from theme parks or by pursuing other value-enhancing acquisitions, but any of these actions are theoretical at present.
“At a strategic level, we think Disney is fine without the Fox business. The industry is a “melting iceberg” either way. However, we think that the company and its investors have bought into the idea that a direct-to-consumer orientation is a positive focus for the company. Disney can still prioritize direct-to-consumer initiatives without Fox, but its propositions to consumers and creators of content would be stronger with Fox but weaker without those businesses. For this reason, the absence of a Fox transaction would be subjectively negative for Disney.”
Failing to see any further upside to his US$93 for Disney shares, he lowered his rating for the stock. His target sits below the current consensus on the Street of US$119.53.
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Canada Goose Holdings Inc. (GOOS-T, GOOS-N) is “firing on all cylinders,” said Canaccord Genuity analyst Camilo Lyon, who called the luxury coat maker the “best retail growth story” despite its premium valuation.
On Friday, shares of the Toronto-based company jumped over 30 per cent after it reported earnings per share for the fourth quarter of 9 cents, exceeding Mr. Lyon’s projection of a 7-cent loss and the consensus on the Street of an 8-cent loss as revenue jumped 144 per cent year over year, or double the analyst’s expectation.
“To say GOOS’ Q4 performance exceeded expectations would be an understatement,” said Mr. Lyon “More accurately, GOOS’ stellar results underscore our view that it is evolving from a product-driven company into a global lifestyle brand grounded in technical product creation that is also beginning to leverage the experiential components of its retail strategy, one that is providing the foundation for long term growth across geographies and categories.”
“Importantly, we expect this strong growth trajectory to continue in F19 and beyond as GOOS will just begin to capitalize on the immense long-term opportunity in China this fall/winter (via opening 2 retail stores and launching e-commerce on Tmall) while also growing in NA through new store openings (opening 3 stores this fall) and expanded lightweight offering. To support these growth initiatives, the company is appropriately investing in personnel, IT, and manufacturing. Based on the growth catalysts discussed above, we believe there is opportunity for upside to initial F19 guidance of 20-per-cent-plus revenue growth and 25-per-cent-plus adjusted EPS growth.”
With the results, Mr. Lyon increased his fiscal 2019 and 2020 EPS estimates to $1.11 and $1.39, respectively, from 85 cents and $1.06.
He kept a “buy” rating and hiked his target to $90 from $58. The current average on the Street is $77.40.
“Building on the stellar performance in F18, GOOS guided to 25-per-cent-plus revenue, 50 basis points-plus adjusted EBITDA, and 25-per-cent-plus adj. EPS growth in F19,” he said. “In addition, the company provided strong 3-year financial targets with average annual revenue growth of at least 20 per cent, adj. EBITDA margin of at least 26% in F2021, and average annual adj. EPS growth of at least 25 per cent. Given GOOS’ current performance and growth engines in place (category extensions, geographic expansion), we believe GOOS is well positioned to meet/beat these targets.”
Elsewhere, Credit Suisse analyst Michael Binetti raised his target to $88 from $52, maintaining an “outperform” rating.
Mr. Binetti said: “More important than the significant 4Q beat was GOOS step-changing its 3-year growth & margin algorithms even higher. GOOS is now guiding to a 3-year revenue CAGR [compound annual growth rate] of “at least 20-per-cent-plus” vs +mid/high teens previously—and that’s after beating its FY18 guidance by 30 per cent.“
EVA Dimensions analyst Anthony Campagna raised his rating for the stock to “hold” from “underweight.”
Barclays analyst James Durran kept an “overweight” rating and increased his target for the U.S.-listed stock to US$68 from US$50.
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Citing its “impressive” operational turnaround Goldman Sachs analyst Noah Poponak reinstated coverage of Bombardier Inc. (BBD.B-T) with a “buy” target, noting management has exceeded consensus EBIT expectations for nine consecutive quarters since taking over.
Emphasizing the growth potential for its large cabin business jets and holding high expectations for C Series orders, he set a target of $7, which exceeds the average of $5.26.
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Believing the recent decline in Calfrac Well Services Ltd. (CFW-T) is overdone, CIBC World Markets analyst Jon Morrison upgraded its stock to “outperform” from “neutral.”
Shares of the Calgary-based oilfield services company has dropped almost 30 per cent in the past month, versus a 20-per-cent decline for its North American peers.
“While we aren’t surprised to see some softness in the oilfield services sector, and particularly the pressure pumping sector, considering: 1) the recent weakness in the crude tape; 2) concerns around a potential H2/18 slowdown in the Permian; and 3) the read-throughs from C&J Energy Services’ plans to defer some fleet deployments on a softerthan-expected operating environment in the Southern U.S., the pullback for Calfrac seems a little overdone,” he said.
Mr. Morrison has a target price of $9.50, exceeding the consensus of $8.58.
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Following its four acquisitions south of the border recently, Park Lawn Corporation Ltd. (PLC-T) now possesses an asset base with “strong” growth potential in an “attractive” industry for investors, said CIBC World Markets analyst Scott Fromson, initiating coverage with an “outperformer” rating.
“Death care industry characteristics are highly attractive: 1) A recession-resistant business model with stable, long-life assets and favourable demographics of an aging North American population; 2) A high degree of fragmentation, offering acquisition opportunities to consolidators like Park Lawn with size, economies of scale and access to capital; and, 3) High barriers to entry, particularly zoning and permitting issues,” he said. “The most significant threats to organic growth are increased rates of cremation and lower-cost alternatives.
“We forecast CAGRs of 75 per cent for EBITDA and 31 per cent for adjusted EPS over the next two years. Our forecasts are driven by: 1) Organic growth, particularly on recent acquisitions, through intensification/expansion of existing properties and increased pre-need sales of lots & funeral services, augmented by operating efficiencies; and, 2) Minor acquisitions, building on its expanded network, in existing and new geographies; we would expect Park Lawn to resume larger deals in 12 to 18 months. Over the long term, the company expects acquisitions to comprise approximately 60-70 per cent of EBITDA growth. We see this strategy of ‘buy and enhance margins’ as key to continuing share price growth. ”
He set a target for Park Lawn shares of $29, which is 69 cents below the consensus.
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“Building scale in the GTA is the name of the game” for Summit Industrial Income REIT (SMU.UN-T), said Desjardins Securities analyst Michael Markidis upon resuming coverage following its $115-million equity financing.
He said the Brampton, Ont.-based REIT’s recent acquisitions of five properties, including three in the Greater Toronto Area, is “consistent” with its strategy of both expanding its portfolio and increasing its relative exposure in the region.
“SMU has been very active on the asset management front in 2018,” he said. “Net investment of $133-million includes $180-million of acquisitions offset by $46-million of dispositions, pushing the pro forma portfolio to more than $1.1-billion. Management is targeting three key geographies; however, we believe the overriding objective is to maintain, or potentially improve upon, the REIT’s relative exposure to the GTA (60 per cent currently) while investing in Montreal, Alberta and the data centre segment to enhance overall accretion. Development should eventually become additive to the REIT’s GTA exposure; including the 7.5 acres noted above, management has accumulated 12.5 acres of excess land in GTA west this year.”
With the deals, Mr. Markidis did lower his funds from operations projections for 2018 and 2019 to 57 cents and 60 cents, respectively, from 59 cents and 64 cents.
He kept a “hold” rating for Summit units and a target of $9, which is 4 cents lower than the consensus.
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CIBC World Markets analyst Chris Couprie initiated coverage of Invesque Inc. (IVQ.U-T) with a “neutral” rating.
“IVQ is unique compared to other Canadian listed health care landlords in that instead of operating the properties, IVQ typically enters into long-term, triple net lease agreements with third-party operators, transferring the operational risk to the tenant in exchange for more stable cash flows. Upside is retained on certain JV properties, providing for some growth potential,” he said.
“In IVQ’s triple-net model, the durability of the cash flows is tied to the credit of the tenants. As of Q1/18, over 90 per cent of IVQ’s seniors housing suites are located in the U.S. The U.S. seniors housing industry has been under pressure both in SNF (reimbursement rates) and retirement housing (new supply). In particular, some operators in the SNF industry have faced financial difficulties, which has in select instances led to rent concessions from landlords and/or bankruptcies. We believe that a stabilization or improvement in EBITDAR coverage ratios could signal that industry challenges are subsiding.”
Mr. Couprie gave Invesque a $9.25 target. The average target is $8.90.
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In other analyst actions:
BMO Nesbitt Burns analyst Alex Terentiew downgraded Arizona Mining Inc. (AZ-T) to “market perform” from “speculative outperform” and raised his target to $6.20 from $5.50. The average is $5.82.
Raymond James analyst Pavel Molchanov upgraded Chevron Corp. (CVX-N) to “outperform” from “market perform” with a target of US$140 (unchanged). The average target is US$143.13.
David Leeder