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

While he applauded Goodfood Market Corp.’s (FOOD-T) decision to return to “its roots,” Stifel’s Martin Landry thinks it will “take time for investors to return into the stock, potentially capping upside in the near-term.”

Citing its “precarious financial position and choppy track record,” Mr. Landry was one over several equity analysts to reduce his revenue forecast and target price for shares of the Montreal-based company following Friday’s announcement that it will abandon its 30-minutes on-demand delivery services in an attempt to turn EBITDA positive by the first half of fiscal 2023. The premarket announcement sent Goodfood plummeting by 22.4 per cent during the trading day.

“Scaling-up quick delivery services requires significant investments in CAPEX and operating expenses and given the state of the capital markets and the rising cost of capital, management opted out of this initiative,” said Mr. Landry. “This is a major shift as for the last 12-18 months, the company had been focused on quick delivery and spent a full investor day in January explaining the strategy. The company will now consolidate its operations into two facilities (Montreal & Calgary) to service its clients.”

Mr. Landry called the strategic shift “bold,” given the “significant” time and resources devoted to expanding the on-demand delivery program over the last 12-18 months. He thinks the effort, which resulted in a “large” impairment charge of $45-50-million, may have taken management’s focus away from the core meal kit business.

“Website traffic from competitors like HelloFresh and Chefs Plate suggests that Goodfood lost significant market share in the last year,” he said. “Additionally, given our perception that meal kits are a premium product, we see a potential for an industry wide slowdown in demand driven by the challenging economic environment and trade down patterns. Hence, top line growth is likely to be limited in the near term.”

With the announcement, Goodfood released preliminary fourth-quarter results, including revenue of $50-$51-million that fell inline with Mr. Landry’s $50.2-million estimate. An adjusted EBITDA loss of $2-4-million was lower than the forecast of both the analyst and the Street (a loss of $9.8-million).

“The faster than expected cost-cutting by FOOD should be viewed positively by investors and could result in the company returning to positive EBITDA levels faster than previously expected,” he said.

However, Mr. Landry did emphasize the focus for investors is now on the company’s balance sheet and “ability to stay afloat.”

“Goodfood indicated that its cash balance as at August 31st stood at $38 million offset by a term loan of $11 million and convertible unsecured debentures of $35-million, which are out of the money. The company breached its credit facility covenants and entered into a tolerance letter with its lenders. Management is in the process of renegotiating a credit facility. The company’s term loan is set to mature on November 30th 2023 with a bullet payment of $10.6 million. Management may be able to monetize some assets such as leasehold improvements, potentially reducing the need for additional financing in the short term, but our visibility on asset monetization is limited.”

Seeing “limited visibility on [a] return to growth,” Mr. Landry cut his 2023 and 2024 revenue estimates to $204-million and $206.2-million, respectively, from $230.8-million and $248.3-million. His earnings per share projections improved to losses of 28 cents and 18 cents from losses of 57 and 43 cents.

“Given our perception that meal kits are a premium product, we see a potential for an industry wide slowdown in demand driven by the challenging economic environment and trade down patterns. Hence, top line growth is likely to be limited in the near term,” he said.

That led him Mr. Landry to cut his target for Goodfood shares to 60 cents from $1, maintaining a “hold” recommendation. The average on the Street is 61 cents.

“Given the $108 million cash burn over the past 12 months, drastic changes in the company’s strategy were necessary, especially in today’s environment where capital is scarce,” he concluded. “Hence, despite being disappointing, we view the exiting of the on-demand business as a necessary step that may enable FOOD to return to positive EBITDA. Yet, the current cash balance of $38 million and limited visibility on future growth remains a concern.”

Elsewhere, a pair of analyst downgraded the Goodfood:

* Calling it a “significant reversal of its strategy,” Desjardins Securities’ Frederic Tremblay moved it to “hold” from “buy” with an 80-cent target, down from $2.75.

“While a 4Q pre-release shows progress on the path to positive adjusted EBITDA, the uncertainty around the strategy reversal and balance sheet risk are likely to place the stock in show-me territory,” he said.

“The weekly meal kit business needs to be reinvigorated. FOOD’s focus moves back to what the company was originally successful at: weekly meal plans and add-ons. The weekly business and operating environment are unfortunately not what they once were, in our opinion. The active customer base for weekly meal kits has eroded and, as such, we believe that it will be important to rapidly stabilize this business and return it to growth. This looks like a challenging task given consumer behavior shifts amid high inflation and the easing of pandemic-related restrictions. Incremental marketing investments may be required, in our view.”

* Seeing the update as “concerning” for investors, Raymond James’ Michael Glen cut the company’s shares to “underperform” from “market perform” with a 20-cent target, down from $2.

“We are assuming FOOD will need to repay the balance of the term loan in early F2023. We believe this is a prudent assumption given the circumstances. Additionally, with the review of its operations, we are opting to reduce our revenue assumptions as well as rightsizing SG&A,” he said. “With these adjustments, we still see a large funding gap in the business and believe they will need to raise capital of $30-million during 3QF23E (we have assumed a price of $0.20 per share for this raise). We believe that the company will have substantial challenges raising this capital given capital market conditions and a lack of success and track record with the extremely expensive micro-fulfillment strategy.”

Other analysts making changes include:

* National Bank’s Ryan Li to 75 cents from $1.50 with a “sector perform” rating.

“Despite management’s shift in strategy, we remain on the sidelines given the tepid online backdrop, uncertainty regarding execution, and the requirement for better visibility on the balance sheet/cash flow (a new credit facility arrangement),” said Mr. Li. “In our view, over the near term, the shares will attract heightened scrutiny until FOOD can demonstrate traction with returning its focus back to the subscription business, reaching EBITDA profitability, and significantly reducing the quarterly cash burn.”

* Canaccord Genuity’s Luke Hannan to 60 cents from $1.40 with a “hold” rating.

“While the improvement in profitability is a definite positive, the unexpected and abrupt exit from its ODG business, especially given FOOD’s previously discussed strategy that made ODG the centerpiece of its growth and profitability strategy, is likely to result in eroded confidence in management’s ability to execute from investors and result in the stock being in the penalty box for the foreseeable future, in our view,” said Mr. Hannan.

* RBC Dominion Securities’ Paul Treiber to 70 cents from $1.75 with a “sector perform” rating.

“Shutting down on-demand grocery reduces nearterm cash burn. However, the shares are likely to remain under pressure, given Goodfood’s increasingly constrained financial resources,” he said.


National Bank Financial analyst Vishal Shreedhar expects a “resilient distributor performance” from Gildan Activewear Inc. (GIL-T) when it releases its third-quarter financial results early next month.

However, he warned recent channel checks have shown a “flattish printwear backdrop” and “challenged” retail environment for the Montreal-based company.

“Despite pervasive macroeconomic concerns, our interpretation is that distributors are not anticipating a punitive outlook,” he said.

“In addition, peer commentary suggests several major market trends: (a) A softening retail environment (while the decline in replenishment is expected to improve, it will still weigh on GIL’s results); (b) Supply chains are continuing to recover; (c) Building inventories may cause promotional impacts in H2/22+, particularly in retail.”

For the quarter, Mr. Shreedhar is projecting earnings per share of 82 cents, a penny ahead of the Street’s estimate and 2 cents above the result from a year ago. That gain is driven by consolidated sales of $845-million, increasing from $802-million and $8-million higher than the consensus expectation.

“The Activewear segment is expected to deliver sales growth of 7 per cent year-over-year, reflecting pricing,” he said. “Sales in the Hosiery & Underwear segment are expected to be lower by 2 per cent year-over-year, reflecting softening retail demand, partly offset by pricing.”

In response to foreign exchange gains, Mr. Shreedhar raised his target for Gildan shares to $45 from $43, keeping an “outperform” rating “due to depressed valuation.” The average on the Street is $53.76.

“While the near-term outlook may become more challenging, we believe that Gildan’s share price already reflects a punitive expectation,” he said. “Specifically, Gildan’s shares trade at 9.4 times our NTM [next 12-month] EPS vs. the five-year average of 17.5 times. Applying a normalized long-term valuation of 17 times NTM EPS suggests that the market is looking for EPS to fall to $1.77 (which we think is punitive).

“For investors that have latitude to look through a potential slowing in near-term earnings, we believe that Gildan can provide attractive upside.”


RBC Dominion Securities analyst Christopher Carril reaffirmed Restaurant Brands International Inc. (QSR-T, QSR-N) as his top pick among North American fast food and casual dining companies heading into third-quarter earnings season.

For the quarter, he’s projecting earnings per share of 82 US cents, which is 2 US cents higher than the consensus on the Street and up 3 US cents from the same period a year ago.

“Last quarter’s results showed encouraging signs of stability and improvement in both Burger King’s and Tim Hortons’ home markets,” he said. “For Tim Hortons Canada, we believe pricing, menu innovation and continued improvement in mobility will support sequential three-year trend improvement during the 3Q (we model three-year comp of 3.9 per cent, accelerating from 2.0 per cent in the 2Q). For Burger King US, we expect investors to be focused on the brand’s ability to maintain stability and/or post modest improvement in the 3Q (we model a flat three-year comp, vs. 2.2 per cent in 2Q). Lastly, for Popeyes, we will be listening for detail around digital/delivery and development. With respect to digital, last quarter QSR’s home market digital sales grew low double-digits year-over-year, while international digital sales grew ‘well above’ home market levels, and we see opportunity to build upon these gains in the 2H22.”

Overall, Mr. Carril predicted the earnings season will see the outlook for restaurant demand remaining “debated amid concerns around consumer health more broadly.”

“Based on our recent checks and other industry data points ... we think restaurant sales trends have remained largely healthy in the 3Q,” he said. “In our view, the lack of clear data points suggesting any meaningful inflection in 3Q restaurant sales will likely drive further debate around the sustainability of top line trends into the 4Q, as well as how we and investors should begin to think about the outlook for 2023. As we turn to key debate topics this earnings season, elasticity of restaurant pricing actions over the past year-plus should remain a key point of debate (we note particular/growing investor interest in CMG as it relates to this topic). Investors will also be looking for evidence of brands’ abilities to pass along further pricing if necessary, should cost headwinds persist or if brands/franchisees seek to close pricing gaps to peers (for example, DPZ’s announcement last week re: its carryout mix and match deal, now at a $6.99 price point, from $5.99). As such, we’ll continue to listen for commentary around pricing flow-through, as well as any incremental data points around consumers trading up or down across segments/menus. Finally, we note that recent promotional activity (e.g., DPZ’s recent 20-per-cent off promotion; the October return of Olive Garden’s Never Ending Pasta Bowl special) and incremental brand investments (e.g., Burger King advertising) have led to an increase in investor questions around the broader competitive landscape and industry strategy. While we may continue to see an uptick in promotional activity, our sense is that industry behavior should remain rational in the very near term — with more careful consideration around value constructs, depth of discounting and operator margins — though we’ll be listening closely for clues this earnings season around this topic.”

Though he trimmed his targets for several competitors, including McDonald’s Corp. (MCD-N, “outperform” to US$275 from US$305), Mr. Carril maintained a US$70 target and “outperform” rating for Restaurant Brands shares. The average on the Street is US$64.50.

“Overall we continue to favor shares of highly franchised fast food companies, as we continue to view these business models as more defensive and offering relatively better earnings visibility (versus company-owned models),” he concluded. “Outperform-rated QSR remains our top pick in this group, followed by MCD, DPZ and JACK. Turning to company-owned models, our order of preference is CMG, DRI and SG. As we detailed recently, we see long-term tailwinds for fast casual concepts — including Chipotle and sweetgreen — as consumers likely continue to trade down from full-service restaurants to the fast casual segment, particularly in softer macro environments.”


Expressing a preference for gold equities over base metals, Barclays analyst Matthew Murphy downgraded Hudbay Minerals Inc. (HBM-T) to “equal-weight” from “overweight” based on its valuation on Monday.

He maintained a Street-low $6 target, which is below the $9.28 average.

Mr. Murphy also downgraded Ero Copper Corp. (ERO-T) to “equal-weight” from “overweight” with an $18 target. The average is $20.18.

Concurrently, he made these target changes:

* Agnico Eagle Mines Ltd. (AEM-N/AEM-T, “overweight”) to US$63 from US$62. Average: US$61.36 average.

* First Quantum Minerals Ltd. (FM-T, “equal-weight”) to $22 from $20. Average: $31.16.

* Franco-Nevada Corp. (FNV-N/FNV-T, “underweight”) to US$111 from US$112. Average: US$137.91.

* Kinross Gold Corp. (KGC-N, K-T, “overweight”) to US$5 from US$6. Average: US$5.77.

* Teck Resources Ltd. (TECK.B-T, “equal-weight”) to $47 from $40. Average: $53.99.

* Wheaton Precious Metals Corp. (WPM-N/WPM-T, “equal-weight”) to US$40 from US$41. Average: US$51.


As volatility “persisted” through the third quarter, base metals equity analysts at Stifel expect companies to avoid announcing new production targets until some stabilization in prices emerges.

“Coming off a rapid drop in metal prices that started in June, base metal prices were generally flat throughout the quarter, down a few percent, with nickel the exception, up 3 per cent quarter-over-quarter,” they said in a research report released Monday.

“Despite the flat metal prices, some companies saw their share prices rebound and march higher after being oversold in Q2 (ERO, TKO, Teck and HBM). Inflation and the margin eroding impact of rising costs was top of mind in Q2 and with some companies revising costs higher at the time, combined with some consumable prices, such as diesel, below their peaks, we do not expect cost pressures to be as topical, with some companies potentially coming in better than our expectations. Operating performance and some production and capital return (dividends and buybacks) expectations for 2023 may start to be unveiled, although most companies are just now starting the process of formulating 2023 target.”

The firm lowered its short-term outlook based on the “current macroeconomic backdrop, but have left our long-term assumptions unchanged.”

Analyst Alex Terentiew raised his targets for two stocks:

* Teck Resources Ltd. (TECK.B-T, “buy”) to $61 from $59. Average: $53.99.

* Copper Mountain Mining Corp. (CMMC-T, “buy”) to $2.80 from $2.50. Average: $3.27.


Following its Investor Day event and a property tour in Halifax last week, Raymond James’ Brad Sturges sees Killam Apartment Real Estate Investment Trust (KMP.UN-T) “positioned for growth in a competitive, high-quality apartment market.”

“Given the relative affordability and high quality-of-life of Halifax versus other Canadian cities, Halifax has experienced greater net migration and population growth in the last 5+ years, ranging from 7-12k people annually or equal to 2-4-per-cent annual population growth, or 5 times its historical annual average,” he said. “As a result, Halifax’s demographics have shifted towards a younger average age in the last 20 years. While Halifax has experienced relatively greater MFR [multi-family residential] construction levels in recent years totaling 10k out of the city’s 50k MFR suite inventory that tends to be delivered by 10-15 different developers (mainly local private family groups), the Peninsula of Halifax (the city’s downtown core) does present higher land constraints to add incremental MFR supply.”

As the largest MFR landlord in Atlantic Canada, Killam is likely to continue to see improving pricing power as Halifax leasing conditions remain tight and affordable alternatives are “more limited,” according to the analyst.

“Killam’s Canadian multi-residential portfolio includes 6k apartment suites in Halifax (approximately 12-per-cent market share),” said Mr. Sturges. “By comparison, CAPREIT is the next largest landlord in Halifax with 3k MFR suites. As the Halifax MFR market has tightened during the last 2 years, Killam’s Halifax MFR same-property occupancy rate has improved to 99 per cent in 2Q22 (vs. 97 per cent in 1Q21), and the REIT’s rent growth realized upon regular suite turnover has accelerated from 4 per cent in 1Q20, up to 14 per cent in 3Q22.”

Though he touts “significant value creation potential through its identified near-term development pipeline and longer-term intensification opportunities across its Halifax-Dartmouth MFR portfolio,” Mr. Sturges trimmed his target for Killam units to $20.75 from $22 with an “outperform” rating. The average is $21.62.

“Killam remains committed to: 1) maximizing its revenues through active yield management strategies and by repositioning suites where appropriate returns can be generated; 2) ESG initiatives that can reduce energy consumption across its portfolio such as solar panel installations, and water consumption reduction initiatives; 3) further diversification of its Canadian MFR portfolio into Ontario and Western Canada; and 4) adding high-quality MFR properties through its ongoing development program that can include future mixed-use projects,” he concluded.


Citing ongoing headwinds in its Meat Protein business, CIBC World Markets’ Mark Petrie cut his earnings expectations for Maple Leaf Foods Inc. (MFI-T) on Monday.

“In Meat Protein, Maple Leaf continued to face a challenging operating environment in Q3 due to: 1) unfavourable hog markets with packer margins well below the five-year average ($2.60 in Q3 vs. the five-year average of $11.50); and, 2) ongoing labour vacancies, which negatively impact manufacturing capacity,” he said. “Furthermore, MFI will also face a slight currency headwind due to a weaker yen, with Japan accounting for 9 per cent of LTM [last 12 month] revenues. That being said, pricing actions taken in late August should be a slight tailwind for one month of the quarter. Putting all the pieces together, we have reduced our Q3 Meat Protein EBITDA estimate to $108-million (from $127-million).”

Mr. Petrie is now projecting earnings per share for the company’s third-quarter of 3 cents, down from 14 cents previously and below the consensus projection on the Street of 12 cents. His full-year 2023 forecast is now $1.69, falling from $1.94 and under the $1.72 consensus.

To “reflect the difficult operating environment and lack of visibility on both the timing and trajectory of the EBITDA margin recovery,” he also trimmed his target for Maple Leaf shares to $32 from $35, maintaining an “outperformer” rating. The average is $33.67.


In other analyst actions:

* In a third-quarter earnings preview for North American railway companies, Stifel’s Benjamin Nolan trimmed his targets for Canadian National Railway Co. (CNI-N/CNR-T, “hold”) to US$118 from US$119 and Canadian Pacific Railway Ltd. (CP-N/CP-T, “hold”) to US$75 from US$79. The average is US$124.25 and US$80.38, respectively.

“Rail equities have struggled since mid-3Q, and are now trading at multiples below their respective historical averages,” he said. “While the equities look to be at an attractive entry point, we took a look at the headwinds and tailwinds poised to impact the Class 1 railroads heading into 3Q22 earnings season and into next year. Tailwinds such as improving labor capacity, healthy balance sheets, and demand catalysts for Canadian Grain, Coal, Automotive, and potentially Intermodal carloads. However, the macro backdrop looks to be less conducive to growth amid looming recession fears, rising interest rates, cost inflation, and persistent supply chain chaos. Assuming slowing economic growth, we are taking near-term estimates down slightly, but remain constructive on the Class 1′s ability to execute long-term growth objectives. Given valuations and relative upside, we re-iterate our current Buy ratings for NSC and CSX on value, and our Hold ratings on the rest of the group.”

* Stifel’s Cody Kwong reduced his Parex Resources Inc. (PXT-T) target to $35 from $37, below the $38.76 average, with a “buy” rating.

“PXT’s latest update pointed towards underwhelming 3Q22 and 4Q22 production volumes, largely due to uncontrollable circumstances. That said, current volumes of 55,000 boe/d [barrels of oil equivalent per day] suggest it is still on track to reach its 60,000 boe/d exit 2022 target. We also came away with a positive take on its exploration program, where we observe 4x successful wells (Incl. an 1,800 bbl/d well at Cabrestero), offset only modestly by an uneconomic outcome in the Fortuna block. As we modestly rein in our 2022 outlook, we are reducing our target,” he said.

* TD Securities’ Brian Morrison moved his Spin Master Corp. (TOY-T) target to $60 from $65, maintaining a “buy” recommendation. The average is $63.50.

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