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

Altria Group Inc.’s (MO-N) $2.4-billion equity investment in Cronos Group Inc. (CRON-T) provides “overall legitimacy” to the cannabis industry, according to Canaccord Genuity analyst Matt Bottomley, who expects the deal to represent a positive catalyst for the sector.

“Much like Constellation’s investment in Canopy, management of Cronos indicated that the proceeds received from Altria will be utilized to accelerate its global growth initiatives, including its distribution footprint, branding and R&D/product formulation,” said Mr. Bottomley. “The company also believes that Altria will bolster its expertise with large-scale manufacturing, automation and supply chain management.

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“As a company that operates predominantly in the highly regulated tobacco industry, we believe Altria has valuable regulatory and compliance experience that could end up being a key competitive advantage for Cronos, as it competes with other LPs for what seems to be a growing set of international opportunities.”

Maintaining a “hold” rating for Cronos shares, Mr. Bottomley hiked his target price to $17 from $9. The average target on the Street is $15.92, according to Bloomberg data.

“Cronos currently trades at 32.2 times our revised calendar 2020 enterprise value-to- EBITDA compared to its peers at 12.6 times and Canopy Growth Corp at 21.3 times (Canada’s largest LP, which has also secured a significant capital injection from a global strategic player),” he said. “Although we believe this deal further cements Cronos’ favourable positioning in the industry, based on a sizeable gap in its relative valuation vs. its peers, we would remain on the sidelines at current levels and maintain our HOLD recommendation.”

Elsewhere, Cormark Securities analyst Jesse Pytlak upgraded Cronos to “speculative buy” from “market perform” with a target of $17, up from $10.


Though BRP Inc. (DOO-T) maintained its earnings guidance despite a slightly higher sales growth outlook, Citi analyst Gregory Badishkanian thinks the recreational vehicle manufacturer’s “underlying momentum appears solid.”

“BRP reported another strong quarter and increased its full-year outlook,” he said in a research note released Monday. “Retail sales momentum slowed a bit but was still very strong (up 6 per cent overall or 16 per cent ex-snowmobiles) as the company gained share in nearly every category. SxS [side-by-side] performance was particularly strong and grew mid-20 per cent vs. the industry up mid-single digits (from August to October).”

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Despite this market strength and raising his earnings estimates for fiscal 2020 and 2021, Mr. Badishkanian lowered his target price for shares of Quebec-based BRP to $48 from $67 based on a change to his valuation. The average target is currently $66.46.

“We believe valuation based on a relative P/E compared to powersports companies is applicable to DOO,” he said. “Over the last 5 years, the other powersports companies have traded, on average, between 10.6 times and 19.6 times with a median P/E of 15.9 times. We think BRP deserves to trade at a 15-per-cent premium to its peer (previously 50 per cent). We are lowering our premium due to questions about the sustainability of recent momentum, tougher year-over-year compares (avg. revenue growth of 16 per cent over the last three quarters), rising inventory levels which raises the pressure on retail demand to materialize (up 9 per cent year-over-year in F’3Q and up 7 per cent YoY in F’2Q) and concerns about late cycle economics. DOO is also seeing some increased competition from competitors who are rolling out new products that could threaten the company’s ability to continue to take market share (i.e. Honda Talon). The company is also facing increased execution risk following recent acquisitions in the boat segment and they are significantly increasing their SxS capacity. Applying a 15-per-cent premium to the current peer group multiple of 11.5 times yields a target multiple of 13.2 times (previously 18.8 times).”

He kept a “buy” rating.


The macro set-up for Canadian energy companies has improved, according to analysts at Tudor Pickering, who shifted to offence from defence for large-cap producers.

Analyst Matthew Murphy upgraded Cenovus Energy Inc. (CVE-T, CVE-N) to “buy” from “hold.” The firm designated the company its top pick in the sector.

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Aaron Swanson raised on ARC Resources Ltd. (ARX-T) to “buy” from “hold.”

Conversely, Mr. Murphy downgraded Imperial Oil Ltd. (IMO-T) to “hold” from “buy,” while Mr. Swanson lowered Paramount Resources Ltd. (POU-T) to “hold” from “buy.”


Following meetings with its investor team last week, Citi analyst Wendy Nicholson thinks Procter & Gamble Co. (PG-N) is now “in a better place today than it has been in years.”

Pointing to its “strong and stable” management team, the end of the negative impact from product line exits and a “stronger” portfolio following “meaningful” divestitures," Ms. Nicholson said: “We also believe that PG has settled into a pace of more regular and much improved innovation, more disciplined spending, and more effective marketing. We think this is reflected not by a single home run product or two (as has been the case in the past), but by lots of singles and doubles, which is manifested by the fact nine of 10 of PG’s reportable segments grew year-over-year in fiscal 1Q19. All in, we believe that PG is now a more focused, more balanced and overall stronger company today, and our confidence in both the breadth and the quality of the drivers of PG’s growth is high.”

“Bottom line, we do in fact expect 1Q to have represented a high-water mark for PG in 2019, and we expect organic sales growth to slow in 2Q given a tougher year-over-year comp, and we fear the competitive environment could intensify in fiscal 2H19 (especially in Grooming). Also, we fear there could be some lumpiness in PG’s growth on a quarter-to-quarter basis based on the price increases that PG is implementing across its business (in both developed and emerging markets), as perhaps some retailers and/or consumers buy excess inventory ahead of the price increase, or as PG could lose some market share if competitors do not follow PG’s lead. Further, given the unsettled global macroeconomic environment (including trade tensions with China, which represents 8 per cent of PG’s sales), we think it is prudent to forecast total organic sales growth for FY19 at 2.6 per cent, basically at the midpoint of PG’s forecasted range. That said, as YoY margin comps actually get easier, and as PG benefits from both some lower commodity costs and the boost from some price increases, we expect the balance of PG’s earnings to improve as the fiscal year goes on.”

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With a “buy” rating for the stock, she raised her target to US$104 from US$99. The average on the Street is US$89.30.


Previewing its 2019 financial and operational outlook call, which is scheduled for Thursday, Industrial Alliance Securities analyst Elias Foscolos said he expects AltaGas Ltd.'s (ALA-T) dividend to be reduced by 30-50 per cent.

“The upcoming dividend reduction was announced in conjunction with the Q3 results,” he said. “We believe the rationale for the dividend reduction is primarily driven by reducing dilution caused by the DRIP plans and less driven as a method to fund growth capital and reduce debt. The reason for our prior statement is because the net outflows from the current dividend and DRIP plan (regular and premium) as opposed to a reduced dividend and regular DRIP plan are not material (outflow difference at $50-million per year).”

Mr. Foscolos also expects AltaGas to announce the sale of its remaining 55-per-cent stake in NW Hydro for $1.4-billion, followed by the divestiture of other non-high growth assets in the first half of 2019. He’s also projecting total growth capital for 2019 of $1.5-billion with EBITDA guidance of $1.3-billion.

After adjusting his financial model for the company, Mr. Foscolos dropped his target by a loonie to $21, or 4 cents less than the consensus, with a “buy” rating (unchanged).

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Echelon Wealth Partners analyst Amr Ezzat initiated coverage of Alithya Group Inc. (ALYA-T), a Toronto-based IT company which began trading on the TSX on Nov. 2 following the completion of a reverse takeover of Edgewater Technology Inc. , with a “buy” rating.

“The IT Services industry is in the midst of a paradigm shift; we believe smaller and more agile players stand to benefit more in the age of the digital cycle (cloud, application services, mobility, big data analytics, security): We believe the digital transformation (DX) presents a significant opportunity for IT Services companies pervading all industries and verticals with digital disrupters forcing incumbents to adapt or face the risk of getting ‘Amazoned’,” he said. "We also believe that smaller, more nimble players with specialized offerings stand to benefit more than their larger counterparts in providing technology-driven innovation and capitalizing on the shift from traditional to digital solutions; speed and agility are increasingly becoming key success factors for service providers. According to DXC Technology (DXC-US, NR), next-generation solutions stand to grow at a CAGR of 20%+ through 2021 (versus flattish growth for traditional solutions).

“In addition to the potential inorganic growth opportunities, ALYA has multiple levers to pull on to drive best-in-class organic top line growth: We expect the Company to deliver above-average sales growth based on its exposure to the above-mentioned secular trends and cross-selling opportunities with its recently closed Edgewater acquisition. Namely, we expect the Company to grow sales at a 5-year CAGR of 18.5 per cent through our forecast period.”

Mr. Ezzat set a target of $7 per share, which exceeds the consensus by 12 cents.


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In other analyst actions:

TD Securities analyst Mario Mendonca upgraded Royal Bank of Canada (RY-T, RY-N) to “buy” from “hold” with a target of $115. The average target on the Street is $110.48.

National Bank Financial analyst Adam Shine upgraded Corus Entertainment Inc. (CJR-B-T) to “outperform” from “sector perform” with a target of $6, rising from $5.50 and exceeding the average of $5.79.

National Bank’s Dan Payne downgraded Bonterra Energy Corp. (BNE-T) to “sector perform” from “outperform” and lowered his target to $10.25 from $21. The average is $13.66.

National Bank’s Travis Wood upgraded ARC Resources Ltd. (ARX-T) to “outperform” from “sector perform” with a target of $11, down from $13.50 and lower than the consensus of $16.25.

Cormark Securities initiated coverage of Strad Energy Services Ltd. (SDY-T) with a “buy” rating and $2.50 target. The average is $2.18.

Cormark also initiated coverage of Prairie Provident Resources Inc. (PPR-T) with a “buy” rating and target of 60 cents. The average is $1.08.

With files from Bloomberg News

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