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

Though Pattern Energy Group Inc. (PEGI-T, PEGI-Q) continues to display “solid” fundamentals and the prospects for “healthy” long-term growth, Industrial Alliance Securities analyst Jeremy Rosenfield thinks its recent stock price performance “warrants a pause.”

Accordingly, in the wake of a 17-per-cent jump in price versus a 5-per-cent rise for its independent power producer peers, Mr. Rosenfield lowered his rating for the San Francisco-based company to “hold” from “buy.”

“We continue to like PEGI’s 3GW (net) operating power portfolio, which is highly contracted through long-term PPAs (92 per cent, at a 14-year average remaining contract life) with quality off-takers (‘A’ average credit rating),” he said.

“The near-term growth outlook for PEG remains solid: Recent capital recycling (the sale of El Arrayan and K2 Wind) were positive developments that provide equity capital for reinvestment in near-term accretive growth opportunities (the Stillwater wind acquisition, and additional assets from the 660MW iROFO pipeline).”

Despite that bullish stance, Mr. Rosenfield feels the stock has outperformed near-term expectations and now sits fairly value. He maintained a target price of US$21, which falls below the average on the Street of US$22.75.

“Recent share price performance warrants a more neutral stance,” he said. “PEGI continues to offer investors (1) stable cash flows from its existing portfolio of largely contracted wind assets, (2) healthy expected cash available for distribution per share growth (6-8 per cent compound annual growth rate 2017-22), (3) longer-term potential upside (660MW in the iROFO pipeline, plus investments in development prospects), and (4) an attractive dividend (8-per-cent yield, albeit at an elevated 80-85-per-cent 2019 estimated CAFD payout).”


Desjardins Securities analyst Josh Wolfson thinks the “New Barrick” that will emerge from Barrick Gold Corp.'s (ABX-T, ABX-N) merger with Randgold Resources Ltd. (GOLD-Q) “provides an enhanced strategy and valuation, and improved capital allocation.”

Ahead of the expected close of the deal by year-end, Mr. Wolfson unveiled his updated financial projections for Barrick, seeing near-term free cash flow as "favourable" and supported by "sizeable low-cost Tier 1 production."

"Our estimates outline New Barrick five-year average annual production from 2019–23 of 5.3 million ounces, AISC [all-in sustaining costs] of US$790/oz and equity capital spending of US$1.5-billion," the analyst said. "Notably, a potential meaningful 4 million ounces of this output is sourced from Tier 1, world-class assets. At spot gold prices, we forecast average annual FCF [free cash flow] of US$0.9-billion (but with sizeable yearly variances), equivalent to an FCF/EV of 3.5 per cent. However, forecast corporate production will begin to decline in 2024 and sharply decline in 2027 — a trend similar to other senior gold producers."

Keeping a "hold" rating for Barrick shares, Mr. Wolfson raised his target by a loonie to $18. The average is 62 cents higher.

"Since the announcement, ABX has increased by 28 per cent (index up 6 per cent)," he said. "We calculate New Barrick shares now trade at a P/NAV at spot gold of 2.24 times (peers 1.99 times, ABX two-year average 2.28 times). While elevated, we believe this is balanced by New Barrick’s more attractive short-term FCF operating metrics. GOLD’s historical capital allocation is a key differentiator that we acknowledge could improve our New Barrick forecasts and projected returns."


Canaccord Genuity analyst Raveel Afzaal named a trio of stocks his “best ideas” among Canadian industrial companies on Monday, believing they are “significantly oversold in part due to tax loss selling.”

“At current share prices, downside risk appears limited with potential for significant upside,” he said.

Mr. Afzaal’s picks are:

Superior Plus Corp. (SPB-T) with a “buy” rating and $13.75 target (versus $14.80 average).

“We believe the following factors could help the company potentially exceed our estimates: colder-than-normal weather; improvement in O&G environment following a potentially positive OPEC announcement on December 7; faster-than-expected realization of NGL synergies and improvement in caustic soda environment as Norsk Hydro’s Alunorte alumina facility ramps back up (which is anticipated early next year),” he said.

Diversified Royalty Corp. (DIV-T) with a “buy” rating and $4 target (versus $4.15 average).

“The company is currently operating at a $25M EBITDA run-rate which appears resilient given the quality of the underlying companies as well as the royalty coverage on the portfolio companies,” said Mr. Afzaal.

Park Lawn Corp. (PLC-T) with a “buy” rating and $29.50 target (versus $29.69 average).

“Following the Citadel acquisition which closed in Q4/18, we believe the company is well positioned to deliver $45-million in EBITDA in 2019,” he said. “This is in line with management’s guidance of ‘high $40M range’ for 2019. The company’s peer group has traded at a historical enterprise value to last 12-month EBITDA average of 11.0 times and PLC has historically traded at a premium to its peer group. We believe this is justified given PLC’s stronger balance sheet and potential for significantly higher growth rate.”


Citi analyst Kate McShane sees more headwinds than tailwinds likely in 2019 for U.S. hardline and broadline retail companies.

“When thinking through 2019, we see a lower likelihood for accelerating growth across the P&L,” said Ms. McShane in a research report released Monday. “Most of our companies are lapping elevated top-line gains from a strong consumer and increased marketing investments (thanks to tax cuts) as well as a less inflationary cost environment. The one possible positive is that SG&A dollar growth could decelerate in 2019 given the increased investment seen over the past year, although labor is still an increasing headwind."

She added: “The U.S. macro environment is likely to continue its strong run with low unemployment, higher wages, a solid (albeit slowing) housing environment, and elevated consumer confidence, all of which bodes well for consumer spending trends in 2019. That being said, we’re seeing increasing levels of concern driven by rising rates, the aforementioned housing slowdown, the potential impact of trade wars, and the economic cycle seemingly reaching the later innings.”

Though she said she still “loves the company,” Ms. McShane downgraded her rating for Costco Wholesale Corp. (COST-N) to “neutral” from “buy.”

“In terms of underlying performance, we expect COST to remain a standout in 2019,” she said. “However, the company begins lapping challenging comps in the coming months (Nov. 17 was up 7.9 per cent, Dec. 17 was up 8.8 per cent on an underlying basis) at a time when food deflation is coming into play, the contribution from e-comm sales is diminishing and the headwind from cannibalization may be ticking back up,” she said. “Further, f/x looks set to be a sustained headwind and gasoline is likely to be a substantially lower tailwind to reported SSS growth. This is occurring as COST implements wage increases and continues to invest in price, potentially pressuring margins. Given our expectation for decelerating top-line growth and HSD earnings growth in FY19, it’s difficult to argue the stock should re-rate significantly from the current 26 times FY2 P/E. As such, we are downgrading COST.”

She lowered her target price for Costco shares to US$238 from US$257. The average is US$242.80.

At the same time, Ms. McShane called AutoZone Inc. (AZO-N) her “top pick” in broadlines/hardlines.

Ahead of Tuesday’s release of its first-quarter results, she raised her target to US$985 from US$850 with a “buy” rating (unchanged). The average is US$820.26.

“While we admit AZO appears at first to be an unlikely top idea candidate, we point out the following: 1) likely accelerating comps from better macro trends (lower gas, bigger tranche of seven-year-old cars); 2) accelerating EBIT dollar growth; and 3) valuation at a discount to historical average,” said Ms. McShane.


In a separate note previewing 2019 for U.S. apparel and footwear retailers, Ms. McShane downgraded both Dick’s Sporting Goods Inc. (DKS-N) and Steven Madden Ltd. (SHOO-N) to “neutral” from “buy.”

“The U.S. macro environment is likely to continue its strong run with low unemployment, higher wages, a solid (albeit slowing) housing environment, and elevated consumer confidence, all of which bodes well for consumer spending trends in 2019,” she said. “That being said, we're seeing increasing levels of concern driven by rising rates, the aforementioned housing slowdown, the potential impact of trade wars, and the economic cycle seemingly reaching the later innings.

“Against this backdrop, we think the manufacturers and retailers best positioned to maintain/regain momentum in 2019 are those that are more diversified globally (Nike), those lapping easier compares (in addition to having a better strategy in place to grow top line) (Foot Locker, Carter’s Inc) and those that are seeing momentum in their brands (Columbia Sportswear , Oxford Industries). We saw significant investment of 2018's tax reform windfall over the last year and we think that should continue to support top-line trends in the coming quarters (and 1H19 could also see a lift from personal income tax returns). Conversely, the potential retail price increases resulting from the implementation of tariffs (though at this point apparel & footwear have not been hit with new, incremental tariffs) could act as an offset, stemming demand. Given this setup, we view 2019 as a year of outsized uncertainty.”

Ms. McShane maintained her target for Dick’s Sporting Goods of US$40. The average on the Street is US$38.95.

“We see limited top-line growth in 2019, with comps subject to risks from a more competitive environment and softness in core areas of the business (outdoor, equipment, footwear),” she said.

Her target for Steve Madden fell to US$34 from US$38, which sits below the US$36.92 average.

“We lower our rating on SHOO to Neutral as the stock is trading above its historical discount to the S&P with only average 2019 EPS growth expectations and a low degree of defensiveness,” she said.

Ms. McShane called Nike Inc. (NKE-N) her “best idea” for 2019. She has a “buy” rating and US$94 target for its shares. The average is US$87.50.

“While the company trades at a 24 times fiscal 2020 price-to-earnings multiple (5 per cent above its 5-year historical premium to the S&P), expected acceleration in EBIT$ and EPS growth in 2019 is evidence that NKE’s global secular growth story remains intact and justifies a premium multiple,” she said.


Seeing an “attractive entry point for a recovery story,” RBC Dominion Securities analyst David Palmer upgraded Noodles & Company (NDLS-Q) to “outperform” from “sector perform” with a US$12 target (unchanged). The average is US$12.14.

"Noodles stock has fallen 40 per cent since its peak in mid-October — largely due to an announced (and later delayed) sale of shares by private equity owners," he said. "Our view of a recovery at Noodles is unchanged and we believe this pullback will prove temporary."

He added: "Given the recent weakness, we believe the risk/reward is favorable given a multitude of sales and margin catalysts, growing private ownership in the sector, and attractive valuation."


Believing a reduced risk of higher tariffs represents potential upside to Masco Corp.'s (MAS-N) margins and earnings, RBC Dominion Securities analyst Mike Dahl raised his rating for the Michigan-based home improvement and building product manufacturer to “outperform” from “sector perform.”

"A 'cease fire' agreement was reached at the G-20 summit in the ongoing trade conflict between the U.S. and China," said Mr. Dahl. "As a result, the proposed Jan. 1st increase of import tariffs from the current 10-per-cent level up to the proposed 25 per cent will be delayed for an additional 90 days, providing time for a more comprehensive and concrete trade agreement to be reached. We had previously noted that a favorable resolution on tariffs would potentially warrant a more positive stance. $600-million of Masco’s COGS are subject to these tariffs, which would have represented $150-million (170 basis points) of margin headwinds to 2019 if the 25-per-cent level went into effect."

"We now see upside potential to our ’19 EPS estimate and think recent deflation in key inputs coupled with the company’s more defensive product portfolio will allow MAS to outperform the peer group."

Mr. Dahl raised his target to US$38 from US$37. The average is US$39.89.


Despite thinking “strong” third-quarter results and “excellent” retail momentum have done enough to reassure investors that BRP Inc. (DOO-T) remains in growth mode, CIBC World Markets analyst Mark Petrie sees macro concerns that he believes will weigh on the recreational vehicle manufacturer moving forward.

“There are accumulating clouds, or at least a building belief that conditions cannot improve and that a recession is looming,” he said. "While this may be true, BRP is not currently reporting anything—in results, or anecdotally—to suggest that a weakening has begun.

“Even still, given the highly discretionary nature of BRP’s assortment, caution is prudent. Our estimates are little changed, and this swing in sentiment arrived sooner, and more severely, than we expected, but a more moderate view on valuation is appropriate.”

Maintaining an “outperformer” rating, Mr. Petrie dropped his target price for BRP shares to $63 from $79. The average is $66.45.

“Given how significantly shares have pulled back, and given the healthy fundamentals even in a potentially tougher environment, we continue to see upside in BRP shares,” he said.

Elsewhere, GMP analyst Martin Landry upgraded BRP to “buy” from “hold” with a $60 target, falling from $70.

Desjardins Securities' Benoit Poirier lowered his target to $74 from $78, keeping a "buy" rating.

Mr. Poirier said: “Overall, while we acknowledge that market sentiment has deteriorated recently, we believe that the strong market conditions will continue to generate solid results in the forthcoming quarters, which should enable management to reach its objective of normalized EPS of at least $3.50 in FY20. We believe the shares are attractive in light of the current FCF yield of 4.9 per cent, and we recommend investors buy the shares.”


In other analyst actions:

Eight Capital analyst Craig Stanley upgraded Kirkland Lake Gold Ltd. (KL-T) to “buy” from “neutral” and raised his target to $33.25 from $25. The average is $34.30.

Eight Capital’s Suthan Sukumar initiated coverage of VersaPay Corp. (VPY-X) with a “buy” rating and $2 target. The average is $2.22.

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