Monday’s analyst upgrades and downgrades

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

Stifel analyst Martin Landry thinks investors’ concerns about BRP Inc.’s (DOO-T) ability to reach its fiscal 2023 earnings guidance may be exaggerated, and believes the “current entry point could benefit long-term investors.”

Shares of the Valcourt, Que.-based recreational vehicle manufacturer dropped 10.4 per cent on Friday following the release of stronger-than-anticipated first-quarter 2023 financial results as worries about the impact of supply chain disruptions linger. BRP reported earnings per share of $1.66, down 35 per cent year-over-year but exceeding both Mr. Landry’s 85-cent projection and the consensus forecast of $1.13.

The analyst said BRP has “successfully navigated difficult logistic conditions, better than most of its competitors,” and believes that will lead it to match or beat its guidance.

“Investors are concerned with the sustainability of BRP’s earnings as highlighted by BRP’s valuation, which is half of its historical average on a forward EPS basis,” said Mr. Landry. “In our view, when BRP updates it FY25 EPS target update at the upcoming investor day it could abate peak earnings concerns as we believe the target will demonstrate continued EPS growth vs FY23 levels. We expect BRP’s FY25 EPS target could range between $12-14, representing an EPS CAGR [compound annual growth rate] of 4-12 per cent. To get there, we use the following assumptions. (1) Annual revenue growth of MSD [mid-single-digit], which could be conservative given the current slate of high profile product introduction, (2) 17-per-cent EBITDA margin, which management believes is a sustainable level and (3) 4-5-per-cent share buyback per year. We believe these assumptions are reasonable and take into account a slowdown in demand, despite no signs of such a slowdown yet.”

Mr. Landry does not expect rising interest rates to affect demand moving forward. He predicts noticeable growth from the company’s marine segment, which generated flat sales year-over-year for the quarter despite engine and parts availability issues.

“Looking ahead, BRP is focused on the next generation of boats with the introduction of the “ghost engine” line expected at the company’s dealer event in August,” he said. “In preparation for this launch, BRP is doubling its manufacturing capacity in its Lansing, Michigan facility and re-organizing the St Peter’s facility to maximize production by early FY24. We view both announcements as positive given BRP strong track record of new product line introduction and view the company increasing production capacity as a signal that BRP expects strong sales momentum coming from the ‘ghost engine’ line. The company expects the marine segment to generate near $1 billion in revenues by Fiscal 2025, up from $513 million in FY22.”

Despite not expecting a decline in demand or rising cancellation rates on pre-orders, Mr. Landry did reduced his revenue growth assumption for 2024 by 7.5 per cent. Accordingly, taking a “more conservative assumption than previously to reflect macroeconomic headwinds,” he reduced his target for BRP shares by $5 to $145, keeping a “buy” rating. The average on the Street is $133.38, according to Refinitiv data.

“BRP’s shares trade at 7-times forward earnings, half of the 5-year historical average of 14 times driven by (1) the negative investor sentiment with current earnings level perceived to have peaked, (2) difficult supply chain environment increasing the risk profile of the company and (3) a general contraction in equity valuation year to date. In our view, for long-term investors, the current valuation level provides an appealing entry point as we see a low likelihood that FY24 and FY25 EPS declines below the levels guided by the company in fiscal 2023 of $11.00 to $11.35,” he said. “A return to historical average would suggest $80 dollar upside or 90 per cent from current level.”

Other analysts making target changes include:

* Desjardins Securities’ Benoit Poirier to $152 from $154 with a “buy” rating.

“BRP once again outperformed its own expectations by delivering solid results despite ongoing supply chain issues. The momentum has continued into FY23, with robust customer demand for its products and numerous catalysts near-term. Management continues to prudently leverage the balance sheet to strategically return capital to shareholders through buybacks and dividends. We reiterate our bullish stance on the name,” said Mr. Poirier.

* Scotia’s George Doumet to $126 from $133 with a “sector outperform” rating.

All in all, despite that, we believe the (approximately 10-per-cent) selloff in the shares is overdone. Given the substantial discount to its historical valuation (30 per cent), we believe the market is suggesting peak earnings, which we do not see occurring this year (nor next), especial in the context of strong current demand trends and a significant inventory restocking opportunity (which is expected to only start next year),” he said. “Furthermore, on a relative basis, given that both companies have grown/and are expected to grow at similar cadences, we believe BRP’s shares should trade closer in line with Polaris (vs. currently trading at a 1.5 times discount on EV/EBITDA).”

* RBC’s Joseph Spak to $111 from $128 with an “outperform” rating.

“Focus shifts to June 14-15 analyst day and new mid-term outlook which management likely has less visibility on than they would like, but we still believe will show a path to higher earnings power,” he said.

* Raymond James’ Joseph Altobello to $135 from $146 with a “strong buy” rating.

* CIBC World Markets’ Mark Petrie to $125 from $124 with an “outperformer” rating.

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Seeing a “more balanced” risk-reward proposition for investors with its shares having exceeded his target price, BMO Nesbitt Burns analyst Ben Pham downgraded Gibson Energy Inc. (GEI-T) to “market perform” from “outperform,” projecting limited upside “especially with the valuation expansion over the last year ... and market uncertainty with respect to the extent and source of new organic growth.”

“Over the last year, GEI’s forward EV/EBITDA has expanded to approximately 12 times vs. 10 times (peers have expanded by 1 times),” he said. “Since then, GEI has accelerated capital return (6-per-cent dividend increase earlier this year and share buybacks), reported strong financial results, announced new growth projects (i.e., tank at Edmonton), placed the DRU in-service, and have benefitted from a broader energy rally (positive read-throughs for its marketing segment). With those positive catalysts behind us and at these valuation levels, we believe the risk/reward is more balanced as opposed to tilted to the upside.”

Mr. Pham did emphasize Gibson’s management continues to be “upbeat” on new growth, noting: “. Similar to pipeline and midstream peers, the robust commodity price environment has ignited potential new organic growth projects that could benefit GEI. On the last conference call, GEI highlighted that it remains in discussions on new tank opportunities at Edmonton and a second expansion of DRU. It is also keen on entering the renewable diesel industry, especially once the final Clean Fuel Standard is announced (likely end of June). We believe investors will be comfortable with new potential tankage and DRU expansion announcements, but perhaps less comfortable with renewable diesel. Renewable diesel is a high-return, large growth opportunity, but given limited demand to toll/contract, GEI would bear the crack spread exposure and in turn place gradual friction on its contracted EBITDA mix (currently at 90 per cent) and potentially its market valuation.”

Touting its “solid” dividend yield, he maintained a $26 target, remaining “comfortable holding GEI at these levels for income.” The average is $26.19.

“GEI shares offer an attractive 5.5-per-cent dividend yield, with a well covered DCF payout of 68 per cent (vs. target of 70-80 per cent) and supported by a highly contracted business mix, low balance sheet leverage (2.7 times debt/EBITDA vs. target of 3-3.5 times), and difficult-to-replicate Hardisty position,” said Mr. Pham. “Consensus is calling for a 3-per-cent increase in the dividend during 2023 (consistent with our model).”

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Pointing to “deteriorating” lumber prices, Stifel analyst Ian Gillies downgraded Doman Building Materials Group Ltd. (DBM-T) to “hold” from “buy” on Monday.

“Spot lumber prices are now $623 per board foot, having declined 40 per cent in the last month and 46 per cent year-to-date,” he said. “Meanwhile, DBM’s share price has been much more resilient decreasing by 2.2 per cent over the last month and down 8.0 per cent year-to-date. We view lumber price as a proxy for future unit pricing, but acknowledge that 25-30 per cent of product sales are from allied products and the company does strategically manage their inventory.”

“The lumber future strip is illiquid, but one interesting development is that it has gone from backwardation to contango, indicating a near-term supply overhang to be worked through. We have updated our model for a 2022 lumber price of US$844, down 16.5 per cent from US$1,011 previously and a 2023 lumber price to US$673, down 23.5 per cent from US$879/bft previously.”

Mr. Gillies expects Doman’s second-quarter results to be “strong” due to “lead lag benefits.” However, he expects to see the impact of price weakness to begin to appear in the third and fourth quarters. He reduced his 2022 revenue projection by 4.4 per cent and his EBITDA forecast by 3.8 per cent. For 2023, he dropped his estimates by 12 per cent and 16.3 per cent, respectively.

His target for Doman shares slid to $7 from $9. The average is $9.29.

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With his “confidence restored,” Stifel analyst Ian Parkinson upgraded Superior Gold Inc. (SGI-X) to “buy” from a “hold” recommendation.

“Transformation well underway,” he said. “We had taken a cautious approach to Superior Gold following the missteps of 2020. Chris Jordaan joined the company as CEO in May 2021 and has lead SGI through a Turnaround. The operations side of the business has delivered with seven consecutive quarters of increasing gold production. Management has also delivered a new reserve and resource statement with a 66-per-cent jump in Reserves. We maintained a positive view of the long term potential of the SGI portfolio during this time but took a cautious approach to our recommendation until our confidence is secured through consistent execution.”

Mr. Parkinson maintained a $1.50 per share target, which is 4 cents below the consensus on the Street.

“Our investment thesis is threefold: 1) Reconcile production grade towards reserve grade; 2) Resource to reserve conversion to increase mine life of Plutonic and Hermes; 3) Exploration success at Plutonic, leading to an increased resource base,” he said.

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While he thinks Good Natured Products Inc. (GDNP-X) “continues to demonstrate solid results in the face of stiff macro and inflationary headwinds,” Raymond James analyst Steve Hansen downgraded the Vancouver-based company to “market perform” from “outperform,” citing “sustained inflationary concerns and the lack of obvious catalysts near-term.”

On May 31, the plant-based product manufacturer reported better-than-anticipated first-quarter results, including revenue of $25.9-million, up 228.3 per cent year-over-year and above Mr. Hansen’s $25-million estimate.

“Consistent with past quarters, key factors underpinning this growth included: 1) increases in average selling price per unit; 2) strong organic revenues driven by new customer additions, including a national US food producer; & 3) a full quarter of the firm’s Ex-Tech acquisition. Importantly, GDNP also posted 1Q22 Adj. EBITDA of $1.16-million, the company’s second consecutive quarter in positive territory,” he said.

At the same time, gross margins continued to slide (to 25.6 per cent versus 35.3 per cent during the same period a year ago. Mr. Hansen said the decline was “argely owing to: 1) lower packaging group mix (higher industrial) following recent acquisitions (Ex-tech, IPF); 2) supply chain and inflationary cost pressures; & 3) fluctuations in the percentage of in-sourced manufacturing versus outsourced manufacturing to meet production demand. Fortunately, recent efforts to combat these challenges (price increases, transport surcharges) led to another sequential (quarter-over-quarter) gross margin increase (up 230 bps q/q), helping push EBITDA back into positive territory. Looking forward, management indicated that cost pressures are expected to persist and could reverse some recent progress.”

Mr. Hansen maintained a $1 target, below the $1.37 average.

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Calling its “high-profile” Queensway discovery in Newfoundland “one of the higher profile successes globally for its combination of high grade and thickness,” BMO Nesbitt Burns analyst Andrew Mikitchook initiated coverage of New Found Gold Corp. (NFG-X) with an “outperform” rating.

“The project, and particularly the Keats zone, has produced extremely strong drill intercepts, with Keats providing multiple triple-digit gold assays across widths exceeding 10 metres,” he said. “The grade and apparent scalability of mineralization defined thus far at the project sets it apart from most other recent gold discoveries.”

“The project is at an early stage, with no resource and the Keats zone only discovered in 2019. New Found Gold is in the midst of a 400,000-metre drill campaign to expand and define mineralization at the project, and in our view, the company has strong potential to add additional zones and expand what has already been defined.”

Mr. Mikitchook sees New Found “well-funded” with “strong” shareholder backing, including a 31-per-cent stake owned by Eric Sprott.

He now sees the main risk being high market expectations, “given the strong expectation for expansion of mineralization at the project implied by the company’s $1.2-billion market capitalization.”

“However, with 38 per cent of the 400,000m drill program complete, in our view the results so far have reinforced the Queensway property as a world-class discovery,” the analyst said. “Due to the early stage of the project, we assign a Speculative qualifier to our rating.”

“As an exploration company, drill results will continue to be the main driver of NFG shares, in our view. NFG aims to extend existing zones, including Keats, while testing the Appleton fault and other targets on the large Queensway property.”

Mr. Mikitchook set a $10 target for New Found shares. The average is $11.15.

“We see strong potential for the substantial 2022 exploration program to continue to build value for shareholders,” he concluded.

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Scotia Capital analyst Orest Wowkodaw is moderating his outlook for Iron Ore Company of Canada (IOC), leading him to reduce his annual dividend estimates for Labrador Iron Ore Royalty Corp. (LIF-T) by an average of 15 per cent through 2024.

LIORC holds a 15.10-per-cent equity interest in IOC.

“Since completing a major expansion in 2014, IOC has produced an average of only 17.5Mtpy [metric tons per year] of combined Fe (pellets + concentrate; 100-per-cent basis) in the 2015-2021 period, or 20 per cent below design of 21.7Mtpy, achieving a peak of 19.0Mt in 2017,” said Mr. Wowkodaw. “Given the chronic operating underperformance (with no improvement in Q1/22), we now forecast more modest 2022-2024 Fe [iron] production of 17.3Mt, 17.8Mt, and 18.5Mt, down an average of 6 per cent per year vs. 17.8Mt, 19.0Mt, and 20.5Mt, previously.

“Our revised 2022 Fe estimate of 17.3Mt (up 4 per cent year-over-year) is near the bottom of the 17.0-18.7Mt guidance range. Our long-term estimates are now based on more modest steady-state Fe output of 20.0Mtpy vs. 21.7Mtpy previously (or raw Fe concentrate of 21.3Mtpy vs. nameplate of 23.0Mtpy) starting in 2027. We have also increased our LOM opex and sustaining capital expectations with a higher-than-average spend anticipated over 2022-2024, primarily focused on improving operating performance. Overall, our updated LIF 8%NAVPS estimate of $33.50 declined 7 per cent.”

With lower cash flow per share projections, the analyst now forecasts declared dividend per share estimates of $3.25 for 2022, $2.75 for 2023 and $2.40 for 2024, down from $3.75, $3.10 and $3 previously. That reflects yields of 10.1 per cent, 8.6 per cent and 7.5 per cent, respectively.

Maintaining a “sector perform” rating for LIORC shares, Mr. Wowkodaw reduced his target to $41 from $45. The average is $41.43.

“We rate LIF shares Sector Perform based on significant price appreciation and the relatively limited implied return to our 12-month target. In our view, the risk/reward profile for LIF shares appears more balanced at current levels,” he said.

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Despite Friday’s announcement of further leadership changes, iA Capital Markets analyst Neil Linsdell said he remains “optimistic” about Dirtt Environmental Solutions Ltd.’s (DRT-T) “continuing improvement as we lap some of the worst of the pandemic impacts and should see continuous year-over-year improvements.”

After the bell, the Calgary-based company, which specializes in prefabricated building interiors, announced the departure of Chief Commercial Officer Jennifer Warawa and Chief Operating Officer and Interim co-CEO Jeffrey Calkin.

“DIRTT is parting ways with these two executives as it cleans house ahead of the announcement of a permanent CEO, who is expected to be in place by July,” said Mr. Linsdell. “At that point, we expect the (other) Interim co-CEO, Geoff Krause, to return to his CFO position, and for the Company to complete a more thorough strategy review and re-invigoration of the business, which it seems the new Board has already been actively preparing. In the interim, we feel confident that the existing team can manage the current operations.”

Mr. Linsdell said the announcement of a permanent CEO will “likely be a relief both internally and externally following years of disruption and lacklustre performance.”

Seeing its guidance reflecting improving activity levels, he maintained a $1.85 target and “buy” recommendation. The average on the Street is $2.68.

“Shares have rebounded over 23 per cent since we upgraded to a Buy a month ago,” he said. “As we outlined in our May 6 note, we believe that as the Company rebuilds, it will be well-positioned to capture more meaningful contracts as its offerings address client demands for more versatility and surety of costs and schedule commitments.”

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In other analyst actions:

* BoA Securities analyst Ronald Epstein upgraded CAE Inc. (CAE-T) to “neutral” from “underperform” with a $38 target, rising from $33. The average is $40.09.

* Barclays’ Adrienne Yih cut her target for Lululemon Athletica Inc. (LULU-Q) to US$435 from US$450, keeping an “overweight” rating. The average is US$410.41.

“LULU’s 1Q22 results further demonstrate the company’s capacity to continue its growth trajectory despite concerns on the macro backdrop as its core product strongly resonates with consumers and as it expands the breadth of offerings,” she said.