Monday’s analyst upgrades and downgrades

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

AltaGas Ltd. (ALA-T) faces “a long, winding road ahead,” according to Desjardins Securities analyst Justin Bouchard, who thinks its strategic “pivot” leaves Street valuations “shaky.”

On Thursday, the Calgary-based energy infrastructure company revealed its 2019 outlook and turnaround plan, which includes a 56-per-cent reduction to its annual dividend (to 96 cents per share from $2.19) and additional asset sales of approximately $1.5-$2.0-billion in 2019. The update also provided the Street a glimpse of the company’s future under new chief executive officer Randy Crawford.

“Given the marginal capex allocated to the power segment and the fact that management did not really mention the power business in its prepared remarks or in its responses to analyst questions (instead electing to highlight utilities and midstream several times), it is perhaps fair to assume that power will play a diminished role in the new ALA,” said Mr. Bouchard. “Our assumption is that the power assets will comprise a significant share of planned dispositions. We could see California power infrastructure, such as the Blythe Energy Center, going on the chopping block, although Mr. Crawford indicated that ALA would consider selling minority positions in the WGL midstream business if it permits the company to consolidate its working interests in other core midstream assets. At this point, it still is not clear what will be divested.”

“A’s business model is in a state of flux entering 2019 as the company shifts toward an integrated utilities/gas midstream focus. We see the value in combining U.S. midstream and utilities assets into an integrated whole while maintaining midstream growth exposure in the Montney, but ALA must first navigate a tricky transitional period as it sells more assets, pays off its refinanced bridge loan, works to maintain its investment-grade credit rating, and integrates and focuses its asset base—all while aligning its payout structure with its longer-term growth focus.”

Keeping a “buy” rating for AltaGas shares, Mr. Bouchard dropped his target to $18 from $24. The average on the Street is $19.89, according to Bloomberg data.

“We have noted that ALA has historically traded in line with its peers in the midstream space, which would be consistent with ranges over C$20/share,” he said. “Given the guided EBITDA by segment, however, the new combined entity has a much more pronounced utilities focus, which arguably does not warrant a midstream multiple. To be sure, the new ALA has an impressive growth suite on the midstream side in the BC Montney and has enviable exposure to growth in the Appalachian basin—that portion of the business certainly calls for a ‘midstream’ multiple. However, because the company has a substantial utilities focus, it should warrant a lower multiple. Given its hybrid operating model, it follows that ALA’s valuation should be a function of the segment-weighted average of multiples prevalent in the midstream and utilities sectors.”

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For the second time since mid-November, Bank of America Merrill Lynch analyst Curtis Nagle lowered his rating for shares of Best Buy Co. (BBY-N), citing “deceleration in industry growth trends and continued caution on key product categories such as TVs, Apple products and gaming.”

Mr. Nagle moved the electronics retailer to “underperform” from “neutral.” He had dropped the stock to that level on Nov. 13.

“We are turning more negative as we now see a higher possibility that BBY may see an outright comp miss in 4Q and we believe Street 2019/20 EPS estimates are too high,” he said.

Though Mr. Nagle said Best Buy remains “a very high quality company with an very strong management team,” he dropped his target for its shares to a Street-low US$50 from US$70,” noting "continued softening in industry trends will make it difficult to grow op. earnings and thus a discount multiple is warranted.” The average target among analysts covering the stock is US$71.25.

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Dundee Precious Metals Inc. (DPM-T) is currently undervalued relative to its peers, said Beacon Securities analyst Jacob Willoughby, who thinks the Street is incorrectly assigning zero value to its Tsumeb smelter, while at the same time “overstating” the sovereign risk involved with operating in Bulgaria.

Calling it an “excellent buy at current levels,” Mr. Willoughby initiated coverage of the stock with a “buy” rating.

“Previously, DPM experienced a period of major capital investment at its three main assets (all 100-per-cent owned): its Chelopech and Krumovgrad mines and its Tsumeb smelter,” he said. “Now, those major capital investments are complete and the company and its shareholders are set to be rewarded with free cash flow levels exponentially higher than in its past.”

He added: “Simply put, DPM is on the cusp of a major inflection point in its history due to two major events that should dramatically increase its free cash flow. First, the upgrading and modernization capital expenditures at its Tsumeb smelter are now complete. The company has spent close to $400m on this endeavor over a period of several years. Secondly, its second gold mine, Krumovgrad in Bulgaria is set to begin producing in Q1. We believe most investors and even some analysts are not yet clued in to the significant amount of additional cash flow these events will generate and this presents an extraordinary buying opportunity.”

Mr. Willoughby set a target of $6.35, which exceeds the current average is $5.22.

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With its long-standing tax dispute with the Canadian Revenue Agency “finally put to rest,” RBC Dominion Securities analyst Dan Rollins hiked his target for shares of Wheaton Precious Metals Corp. (WPM-N, WPM-T), seeing further upside with the removal of a significant overhang.

Late Thursday, an agreement with the CRA was announced which will see foreign income on earnings generated by Wheaton International not subjected to tax in Canada.

“With clarity around taxes on foreign-generated income finally provided, we believe it is hard to justify the current valuation discount between Wheaton and its key peers (Franco-Nevada and Royal Gold),” said Mr. Rollins. “Our view is supported by the underlying quality of Wheaton’s diverse portfolio of streams, which for the most part is backed by low cost and long life assets, operated by established industry players.

“Based on Friday's closing share price and at spot commodity prices, we believe there is further upside in Wheaton's share price assuming the valuation gap narrows over the coming months, if not weeks.”

Maintaining an “outperform” rating for Wheaton shares, Mr. Rollins increased his target to US$30 from US$24. The average is now US$26.86.

“Wheaton remains well-positioned fundamentally with robust free cash flow and stable forecast production,” he said. “At spot metal prices, we expect annual EBITDA of $520-million over the next 3 years which should result in annual free cash flow generation of $495-million. This would fund $145-million of annual dividends (30 per cent of trailing 4Q cash flow). Based on forecast free cash flow at spot prices, we expect Wheaton to be net cash positive in H2/2021 versus estimated net debt of $1.2-billion at the end of this year. Wheaton could also benefit from a seasonally strong period for precious metals (mid-December through February), especially if silver prices begin to outpace gold with the gold/silver ratio trading near recent highs at 85:1. In addition, we see the potential for Wheaton to layer on additional revenue through the acquisition of accretive streams.”

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With Shopify Inc. (SHOP-N, SHOP-T) “building the war chest again,” Industrial Alliance Securities analyst Blair Abernethy raised his earnings expectations for the Ottawa-based e-commerce company.

On Friday, the company announced the pricing of its previously announced public offering of 2,600,000 Class A subordinate voting shares at a price to the public of US$154 for a gross profit of US$400-million.

“While the company has yet to deploy the $657-million it raised in February at $137.00/share, we believe that this new financing reflects an expanding investment opportunity set that Shopify wants to be better positioned for, particularly on the acquisition front as capital market access for emerging technology companies has become constrained in recent months,” said Mr. Abernethy.

“Over the past two years, we believe that the market opportunity for the Shopify Plus platform has expanded, the Shopify Capital business has launched very successfully and could consume significantly more capital, and Shopify has been focusing on incorporating more leading-edge technologies, such as machine learning and augmented reality (“AR”), into its platform. We believe that it is increasingly likely that Shopify will pursue tuck-in AI and AR acquisitions next year in order to accelerate its product development program. In addition, Shopify continues to put more emphasis on international growth and facilitating related payments, which requires further capital investment in offices and data centres. Thus, we fully expect to see Shopify become more active in 2019 in terms of deploying some of its now $2-billion in cash resources.”

Mr. Abernethy increased his fiscal 2019 and 2020 adjusted earnings per share estimates to 75 US cents and US$1.52, respectively, from 69 US cents and US$1.48.

He kept a “buy” rating and US$170 target for Shopify shares. The average on the Street is US$159.89.

“In our view, Shopify is well positioned to continue to rapidly increase its merchant store count, develop new innovative products, and gain traction with large enterprises on its Shopify Plus platform,” he said. “With this financing, Shopify is now better positioned to pursue technology tuck-in, product line extending acquisitions and further expand its international footprint while it continues to drive rapid organic growth over the next few years. We are maintaining our Buy rating.”

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DHX Media Ltd.’s (DHX.B-T) deal with Apple Inc. (AAPL-Q) to produced new Peanuts content is a “significant, positive validation” of the value of the marquee brands within its portfolio, according to Echelon Wealth Partners analyst Rob Goff.

“In what should be its biggest deal to date, DHX has increased the value of its Peanuts’ library with the brand rejuvenation expected from new content and Apple partnership/distribution,” he said. “With the Apple deal for new content, the company has secured a significant amount of animation production for its studio while also strengthening the merchandising and licensing value of its Peanuts brand. Apple will have the rights to introduce and distribute Peanuts merchandising as a licensed sale.

“Furthermore, the value of the Peanuts franchise has also be strengthened for WildBrain where it showcases the historic content and will have select rights to show specific derivatives of the new content covered under the Apple deal. We also note that the global marketing license with Metropolitan Life (MET-N) expires in December of 2019. Arguably, DHX’s ability to relicense Peanuts has increased with Apple contracting for new production. We would expect DHX’s ability to monetize on the legacy Peanuts programming under contract until into 2020 would be strengthened by the now anticipated focus on new content with Apple.”

With a “speculative buy” rating, Mr. Goff moved his target for DHX shares to $4 from $3.40, which exceeds the current average of $2.54.

“We maintain our view that consensus expectations reflect a baseline from which to build organic growth on a more stable trend line with the potential for upside about new production including Peanuts and with the potential for significant moves to form further strategic partnerships to empower monetization of brands and library content,” he said.

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Believing its double-digit revenue growth can continue and seeing upside potential for both fourth-quarter and 2019 estimates, Stifel analyst Jim Duffy upgraded Lululemon Athletica Inc. (LULU-Q) to “buy” from “hold.”

Mr. Duffy called the company’s 2020 objective of US$4-billion in revenue and implied earnings power of US$5 “low hurdles."

He maintained a US$151 target, which falls below the consensus of US$163.55.

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In other analyst actions:

RBC Dominion Securities analyst Nelson Ng upgraded Superior Plus Corp. (SPB-T) to “outperform” from “sector perform” with a target of $14. The average is $14.80.

Industrial Alliance Securities analyst George Topping initiated Osisko Gold Royalties Ltd. (OR-T) with a “buy” rating and $16 target, which is 7 cents lower than the consensus.

With a file from Reuters