Inside the Market’s roundup of some of today’s key analyst actions
Spin Master Corp.’s (TOY-T) recent share price weakness is “not justified and presents investors with an appealing entry point,” according to Stifel analyst Martin Landry.
The Toronto-based toymaker is down 13 per cent over the past month, “significantly underperforming” the S&P/TSX Consumer Discretionary index, which has seen a slid of just 1.5 per cent.
“Investors appear to be concerned with supply chain issues potentially impacting the company’s ability to have adequate stocks on the shelves for the upcoming holiday period,” said Mr. Landry in a research note. “We believe these concerns are overblown based on positive comments recently made by peers and based on Spin Master’s recent investor meetings. TOY trades at a forward EV/EBITDA of 9 times, an appealing valuation given the company’s expected growth prospects and a discount of 18 per cent vs Mattel and Hasbro. According to our estimates, TOY is on track to generate its highest annual EBITDA on record, at $345-million, up 14 per cent from the previous high reached in 2018.”
The analyst believes Spin Master is poised to meet or exceed its 2021 guidance after its management reiterated confidence in the company’s financial targets during recent investor meetings.
“In our view, management had enough visibility at that time to account for most logistical issues,” he said. “We also believe the team wants to start building a strong track record under the new leadership, and hence, has taken the right steps to ensure a positive outcome. In addition, digital games and entertainment, which represent more than 20 per cent of total revenues, and a higher proportion of EBITDA, are not impacted by supply chain issues.”
Maintaining his own financial targets, despite acknowledging the impact of increased freight costs, rising resin prices and the global microchip shortage, Mr. Landry reaffirmed his “buy” rating and $58 target for Spin Master shares. The current average on the Street is $54.09.
“Now with operational issues largely behind the company, we have higher confidence in the ability for TOY to return to and potentially exceed historical levels of profitability. Shares of Spin Master are currently trading at a 18-per-cent discount to toy industry peers Mattel and Hasbro on an EV basis, which we think is too wide given Spin Master’s clean balance sheet and our expectation for Spin Master to grow EPS and EBITDA faster,” he said.
BMO Nesbitt Burns’ Randy Ollenberger raised his target prices for a group of Canadian energy companies in his coverage universe on Monday.
“Crude oil and natural gas prices continue to perform ahead of investor expectations,” the analyst said in a research note. “We believe that crude oil prices could continue to improve as global oil demand recovers from the COVID-19 pandemic and ultimately move materially higher post-2023 as supply fails to keep pace with demand.
·”Natural gas is having its moment after languishing over the last six years. Global supply shortages and low storage levels heading into the winter heating season suggest the possibility of even stronger prices to come. We are raising our gas price expectations through 2022.”
His changes include:
- ARC Resources Ltd. (ARX-T, “outperform”) to $16 from $14. The average is $14.46.
- Cenovus Energy Inc. (CVE-T, “outperform”) to $17 from $16. Average: $15.91.
- Tourmaline Oil Corp. (TOU-T, “outperform”) to $52 from $50. Average: $52.48.
“·The North American oil and gas sector has performed well year to date but has underperformed through Q3. The sector is in its strongest financial position since the mid-2000′s while valuations remain at cycle lows. We see considerable upside in oil and gas equities as investors grudgingly acknowledge the change in the sector’s circumstances and burgeoning free cash flow,” he added.
Currently, BMO’s Anthony Petrucci upgraded Crew Energy Inc. (CR-T) to “outperform” from “market perform” with a $3.25 target, rising from $2.50 and exceeding the $2.77 average on the Street.
“·We are upgrading Crew Energy ... resulting from a more robust natural gas outlook as part of our price deck update,” he said. “On our new estimates, deleveraging is ahead of schedule and we see a potential opportunity for the company to refinance its senior notes as early as next year.
“Additionally, we see its undeveloped Groundbirch asset as becoming increasingly strategic as the launch of Coastal GasLink/LNG Canada approaches.”
Meanwhile, BMO’s Ray Kwan raised his target for Vermilion Energy Inc. (VET-T, “market perform”) to $13.50 from $12.50, topping the $13.37 average.
Raymond James analyst Steve Hansen sees EnWave Corp. (ENW-X) poised to make further inroads into the cannabis sector with its Radiant Energy Vacuum technology.
On Thursday, the Vancouver-based company announced a royalty-bearing commercial license agreement with a second large U.S. cannabis multi-state operator. The MSO also purchased a large-scale 120- kilowatt Radiant Energy Vacuum machine, which is used for the dehydration of organic materials, for its cultivation facility.
“We view this latest news as further validation that EnWave’s proprietary REV technology and associated Terpene Max drying protocol are poised to gain further adoption across the U.S. cannabis sector,” said Mr. Hansen. “Prior to committing to the technology, we note this latest MSO reportedly conducted extensive benchmarking trials across multiple strains in order validate REV’s advantages over incumbent drying methods, ultimately proving out improved terpene and cannabinoid retention. As news of this commercial commitment spreads, we can only surmise that other major MSOs will likely want to follow in some fashion. At the same time, we see an opportunity for ENW to sell additional machines/capacity into these first two large MSOs as they become increasingly comfortable with the technology.”
Mr. Hansen thinks the latest order is “another solid stride toward management’s FY2021 target to sell 10 small-scale and 5 largescale REV machines.”
He reiterated an “outperform” rating for its shares without a specified target. The average on the Street is $1.53.
“This latest news only reinforces our constructive thesis and broader excitement about having both sides of the ENW platform firing at the same time,” he said. “Supporting this view, we continue to see several positive catalysts on the horizon, including: 1) accelerating REV machine sales across multiple industries (cannabis, food, pharma); 2) additional new business/sales wins at the company’s NutraDried division (grocers, retailers, third-party bulk); and 3) the near-term commissioning of its REVworx division.”
Though it will continue to face inflationary pressure, Costco Wholesale Corp. (COST-Q) is “strong positioned for profit,” according to Credit Suisse analyst Robert Moskow.
On Thursday after the bell, the U.S. retail giant reported fourth-quarter earnings per share of US$3.76, exceeding both Mr. Moskow’s US$3.23 forecast and the Street’s projection of US$3.58, driven by better-than-anticpated 15.5-per-cent comparable sales (versus a 12.4-per-cent consensus). The results sent the company’s shares up 3.3 per cent in New York.
“In a tight supply chain environment, Costco has expanded its competitive moat by leveraging its advantaged merchandising and sourcing capabilities and widening value gaps,” the analyst said. “Costco’s limited SKU assortment helps vendors focus their service levels on a handful of high volume items rather than maintaining inventory on a wide variety with low volume. Unlike peers in the grocery sector, we expect the company to return to its normal ID sales growth rate of 6 per cent FY22 with no pull back from declining COVID infection rates.”
For its 2022 fiscal year, Mr. Moskow expects membership growth of 6.0 per cent, slightly lower than the 6.2-per-cent gain in 2021. However, he anticipates new store openings will rise to 25 from 20.
“Strong membership growth rates in the Executive program increased Costco’s renewal rates because Executive members tend to be more loyal,” he said. “Continued fuel benefits will also boost ID sales growth at least through the first half of the year due to easy comparisons to last year’s low gasoline prices and fewer miles driven. We only expect 15 basis points of gross margin erosion because we expect continued improvement in the ancillary business (including fuel) to help offset 3.5-4.5-per-cent cost inflation and price investments. We expect 10 bps of EBIT margin expansion from SG&A leverage to come from higher sales and a net $250-million benefit from lapping last year’s COVID costs.”
Bumping up his 2022 EPS estimate to US$12.38 from US$11.36 and introducing a 2023 forecast of US$13.25, Mr. Moskow raised his target for Costco shares to US$490 from US$400, maintaining a “neutral” rating. The current average target is US$466.41.
In other analyst actions:
* Canaccord Genuity analyst Matt Bottomley upgraded Medmen Enterprises Inc. (MMEN-CN) to “hold” from “sell” with a 40-cent target, up from 25 cents. The average is 39 cents.
* Canaccord’s Brendon Abrams raised his target for Dream Industrial Real Estate Investment Trust (DIR.UN-T) to $19.50 from $17.25 with a “buy” rating. The average is $17.47.
* Canaccord’s Mark Rothschild hiked his Granite Real Estate Investment Trust (GRT.UN-T) target to $107 from $95, keeping a “buy” rating. The average is $95.30.
* Mr. Rothschild also increased his Summit Industrial Income REIT (SMU.UN-T) target to $23 from $21.75 with a “hold” recommendation. The average is $23.06.
* Canaccord’s Tania Gonsalves lowered his Antibe Therapeutics Inc. (ATE-T) target to $5 from $15 with a “speculative buy” rating. The average is $6.34.
* TD Securities analyst Tim James cut his CAE Inc. (CAE-T) target by $1 to $40, maintaining a “hold” rating. The average is $42.78.
* Mr. James raised his target for GFL Environmental Inc. (GFL-T) to $53 from $52 with a “buy” recommendation. The current average is $44.60.