Inside the Market’s roundup of some of today’s key analyst actions
Lululemon Athletica Inc.’s (LULU-Q) “industry-leading momentum” is likely sustainable through the second half of the year and into 2019, according to Wells Fargo analyst Ike Boruchow.
Undeterred by a 96-per-cent jump in its share price year-to-date, Mr. Boruchow upgraded his rating for the Vancouver-based company to “outperform” from “market perform,” seeing “meaningful beats/upward revisions ahead" in the wake of corrections to its supply chain and digital channels, which he saw as two operational overhangs.
Emphasizing a favourable macro environment and expecting continued strength in its “core” segments, the analyst raised his target for its stock to US$200, matching the current high on the Street, from US$144. The average target is currently US$152.21, according to Bloomberg data.
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Despite calling it one of his “favoured medium-term exposures,” RBC Dominion Securities analyst Tyler Broda downgraded Vale S.A. (VALE-N) to “underperform” from “sector perform” based on a negative short-term outlook for iron ore, leading him to suggest the Brazilian multinational mining giant is at risk to miss expectations.
“Vale poses a conundrum for investment in our view. The company is in a much improved position than it was 2 years ago. The end of capex for S11-D, a renewed focus on capital returns and a seismic shift in the iron ore market that we think positions Vale in the best structural position to take advantage of future iron ore demand," said Mr. Broda. "On our base case, the company also screens reasonable inexpensive trading on a 7.9-per-cent 2019 estimated FCFY and a growing dividend yield that supports a 5.5x EV/EBITDA multiple. Nickel, in the medium-term, is another structural positive in our view. The strong balance sheet at RBC estimated 0.9 times ND/EBITDA at the end of 2018 gives plenty of room for near-term price volatility. For investors with a 2-3 year view, we think there is very little to dislike.
"In the near-term however, we continue to harbor significant fears on the path of Chinese steel demand, the profitability for Chinese steel makers and the underlying impact of falling margins on both iron ore prices and the elevated level of the current premiums. We have run downside sensitivity analysis in Crouching Miner, Hidden Panda - at this $45/t iron ore environment, we see Vale's EV/EBITDA multiple expand to 10.7 times and the free cash flow yield fall to 2.2 per cent. Our base case expectation is that we see a recovery in iron ore demand in 2019, which should make this a downdraft of this type transitory, but the market is unlikely to let Vale's multiple expand to offset ... We think the concentration in iron ore at 77 per cent of 2019 estimated EBITDA is a risk and this leaves other global mining exposures as preferable for now."
Mr. Broda lowered his target for Vale shares to US$11 from US$12. The average is US$15.66.
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Highlighting “smoke and mirrors on the cost line,” MoffettNathanson analyst Michael Nathanson lowered his target price for shares of Twitter Inc. (TWTR-N), believing the Street isn’t properly taking into account a rise in its expenses and predicting the need to lower margin forecasts next year.
Mr. Nathason said the social media giant has reported “amazingly low” operating expense growth of 0 per cent and 3 per cent in the first two quarters of the current fiscal year, however he sees actual underlying growth of 13-15 per cent based on recent 10-Q filings.
He now expects expenses to rise markedly in the near term, citing its “dire need to improve platform safety” as well as investments in video content.
Maintaining a “sell” rating for Twitter shares, Mr. Nathanson dropped his target to US$21 from US$23, which sits well below the average on the Street of US$33.64.
"Twitter's core non-stock based expense profile has actually been growing double digits in 2018, rather than the near zero rates reported," he said. "However, ramifications for Twitter's top-line have been well covered as our revenue estimates are close to the Street's. Now, instead, we are most concerned about cost growth."
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Citing the underperformance of its stock and a “new, more constructive outlook moving forward,” Canaccord Genuity analyst Tom Gallo upgraded Nighthawk Gold Corp. (NHK-T) to “speculative buy” from “hold” following a recent visit to its Leta Arm gold project .
“Nighthawk Gold’s Indin Lake Greenstone Belt claims in the Northwest Territories Canada is arguably one of the most prospective land packages held by a junior exploration company today,” said Mr. Gallo. “Though a recent resource update failed to crystalize high-grade drill results from the flagship Colomac project, we see the potential in the story beyond this one project. Our view now focuses on the compelling high discovery potential of meaningful, good-grade gold deposits beyond Colomac. We highlight the Leta Arm complex including North Inca, Diversified and Lexindin as the best potential targets to host a large, high-grade, gold deposit in our opinion …
“In our view, management has done an excellent job over the past 5-plus years in not only identifying gold showings but classifying and mapping the complex geology of this Archean Greenstone Belt. Alongside good quality exploration work, a large amount of focus and capital has gone into delineating resources at Colomac, notably following highgrade drill intercepts from Zone 1.5 in 2014. Though Nighthawk failed to convert highgrade drill intercepts at Zone 1.5 into a high-grade gold resource, we are of the view that grade domaining methods used in the most recent update are possibly incomplete. Having reviewed the core and drill sections more extensively, we believe higher grade shoots still exist within the sill, possibly due to the presence of cross cutting structures we outlined in a previous note here. Even if this is the case, and even if a revised resource update could re-demonstrate a high-grade envelope at Zone 1.5, we think it prudent that NHK considers a bulk sample of the zone for additional clarity.”
Mr. Gallo raised his target price for the Toronto-based company’s shares to 60 cents from 55 cents. The average is currently 98 cents.
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The resolution of the dispute over royalties from the Voisey Bay mine should bring greater cash flow certainty for Royal Gold Inc. (RGLD-Q), according to Raymond James analyst Brian MacArthur.
On Friday, Royal Gold announced it has entered an agreement to settle its litigation with Vale Canada Ltd. regarding the calculation on royalties from the Newfoundland mine. Royal Gold owns a 90-per-cent stake in Labrador Nickel Royalty Partnership (LNRP), which possesses a 3-per-cent net smelter return royalty (NSR) on metal produced. Altius Minerals Corp. (ALS-T) holds the remaining 10 per cent.
Royal Gold expects the 3-per-cent royalty rate will now apply to approximately 50 per cent of the gross metal value in the concentrates at existing nickel, copper and cobalt prices
“Royal Gold’s royalty/streaming business model offers investors exposure to high-margin metal sales that can be increased with minimal G&A,” said Mr. MacArthur. “Through royalty/streaming agreements, Royal Gold maintains leverage to commodity prices and exploration optionality, while mitigating downside risk given its limited exposure to operating & capital costs. In addition, Royal Gold has a high-quality, diversified asset base in lower risk jurisdictions, as well as a flexible balance sheet to support future investments and a growing dividend. Given the improvement in its balance sheet, growth and implied return, we rate the shares Outperform.”
His target fell to US$98 from US$99. The average is US$96.08.
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In other analyst actions:
RBC Dominion Securities analyst Stephen Walker upgraded Centerra Gold Inc. (CG-T) to “sector perform” from “underperform” with a target of $7.50, which is below the average of $8.40.
GMP analyst Robert Fitzmartyn reinstated coverage of Surge Energy Inc. (SGY-T) with a “buy” rating and $3.25 target. The average is $3.49.
GMP’s Deepak Kaushal downgraded DHX Media Ltd. (DHX-T) to “reduce” from “hold” with a 50-cent target, falling from $3. The average is $2.44.
With files from Bloomberg News
David Leeder