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

CIBC World Markets analyst Hamir Patel is increasingly bearish on the prospects for the lumber, oriented strand board (OSB) and containerboard markets in 2019, believing housing starts likely peaked last year and emphasizing e-commerce demand for corrugate boxes had slid recently with Amazon.com Inc.'s commitment to reduce waste.

“In each market, robust conditions in recent years sparked a wave of capacity additions that will weigh on operating rates over the next two years,” said Mr. Patel in a research report on the forestry sector released Monday. “We also believe the group still has a negative earnings revision cycle to work through as consensus has been slow to adequately reduce assumptions for commodity prices and housing starts.”

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After dropping his EBITDA projections for 2019 and 2020 by 21 per cent and 14 per cent, respectively, Mr. Patel downgraded his rating for shares of West Fraser Timber Co. Ltd. (WFT-T) to “neutral” from “outperformer” with a target of $70, down from $79 and below the consensus on the Street of $80.

“After having only recently upgraded West Fraser to Outperformer on Nov. 2, we are moving to the sidelines again as our more conservative lumber, plywood and pulp forecast leads to significant downward revisions to our estimates,” he said. "Every $10 per thousand board feet (mfbm) decline in North American lumber price forecasts reduces West Fraser’s EBITDA by $78-million. We no longer see a significant pricing catalyst from low log decks in B.C. as Q4 industry downtime has eliminated this factor. Our revised 2019/20 estimates on West Fraser are now 22 per cent/25 per cent lower than consensus. While this may seem dramatic, we note that our lumber forecast for 2019/2020 assumes W. SPF prices average 17 per cent/14 per cent higher than current levels ($325/mfbm). At 7.0 times 2020 estimated EV/EBITDA, West Fraser is also trading at a larger-than-normal premium to peers Canfor (trading at 4.7 times) and Interfor (4.6 times).

Mr. Patel also downgraded Norbord Inc. (OSB-T, OSB-N) to “underperformer” from “neutral” with a target of $29, down from $40. The average is $42.58.

“With 50 per cent of OSB demand tied to new home construction, Norbord is the name in our coverage universe most sensitive to U.S. housing starts,” he said. “Our revised 2019/20 estimates on Norbord are now 25 per cent/36 per cent lower than consensus. While this may seem dramatic, we note that our price deck for 2019/2020 assumes North Central OSB prices average 23 per cent/19 per cent above current prices ($210/msf). Every $10/msf decline in North American OSB price forecasts reduces Norbord’s EBITDA by $53-million. We note that Norbord is also trading at 5.3 times consensus 2020 estimated EV/EBITDA (and as much as 8.3 times on our estimates), above Louisiana-Pacific (4.5 times on consensus estimates) despite LPX generating a growing proportion of its EBITDA from a more-stable end-market (siding).”

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Though Corus Entertainment Inc. (CJR.B-T) exhibited a return to television advertising revenue growth in the first quarter after four consecutive declines, Desjardins Securities analyst Maher Yaghi cautions that the environment is likely to remain “challenging for the foreseeable future.”

On Friday, the media company reported year-over-year advertising revenue growth of 3 per cent overall and 4 per cent in the television segment, driven by an improved audience market share for Global.

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“We would argue that viewers now move across platforms more easily to follow their favourite shows given the ease of access to information, and that rapid success will not automatically transition to future periods,” said Mr. Yaghi. “In addition, the company is now selling inventory from VOD platforms as it is working to gain access to more data from additional business partners. We believe the current strength of the economy also supports demand for advertising and has brought new large players to TV advertising. Management indicated that large corporations such as Wayfair or Google, which used to advertise almost exclusively on digital platforms, now also use TV to reach their respective target markets. The company guided to positive advertising growth in 2Q FY19 based on bookings strength and new revenue streams.

“However, we highlight that advertising market visibility remains limited, in our view, and we expect the industry to remain challenging as more platforms compete for advertising dollars and/or eyeballs.”

He emphasized that advertising trends have been “very difficult” to project in recently, adding: “While growth seems to have resumed, its sustainability, as well as visibility into future quarters, remains opaque. Production houses in the US are gearing up to offer their services directly to consumers. This poses a risk to the business of a media aggregator like Corus if these studios see a benefit from this direct-to-consumer strategy and decide to replicate it in Canada.”

Maintaining a “hold” rating for Corus shares, Mr. Yaghi raised his target to $6.75 from $6.50 after increasing his earnings expectations for both 2019 and 2020. The average target on the Street is currently $6.43.

“The potential sale of SJR’s CJR shares has been less topical lately since SJR’s management indicated in October that CJR’s stock is trading below its perceived intrinsic value and that a sale is therefore not in the cards,” he said. “However, the stock price has gained about 15per cent since SJR’s comments in October. While SJR’s perceived value of CJR’s shares is unknown, we believe that a higher stock price increases the odds that SJR will dispose of its investment in CJR. SJR’s management indicated in the past that it does not need the liquidity from CJR’s shares to fund its strategic initiatives. However, we believe that SJR will continue to spend heavily to improve its wireless network and that CJR shares are non-core to SJR’s strategy, which we believe will eventually prompt the sale of the block. In our view, the presence of a large known seller could constraint CJR’s share price until the block is sold.”

Elsewhere, Cormark Securities analyst David McFadgen upgraded Corus to “buy” from “market perform” with a $7 target, rising from $5.65.

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Despite a “soft” first quarter, Canaccord Genuity analyst Aravinda Galappatthige sees a “robust” outlook for Cogeco Communications Inc. (CCA-T).

On Thursday after market close, Cogeco reported revenue of $643.3-million for the quarter, meeting the expectations of both Mr. Galappatthige ($644-million) and the Street ($639-million). EBITDA of $285.5-million narrowly missed projections ($294.1-million and $288-million, respectively).

“While Q1/19 subscriber additions were weak as expected, management noted that year-over-year result should start reflecting a recovery from the CRM challenges,” the analyst said. “In Q2/19, net adds are only expected to be modestly worse than Q2/18 (8,700 PSU losses vs. a loss of 5,700 in Q2/18) with Q3 being modestly better y/y. We believe the improving subscriber profile will help further lift the sentiment around the shares, especially given the favorable medium-term outlook for CCA with FTTH [fiber to the home] likely not impacting them meaningfully over the next 2+ years.

“The U.S. segment delivered exceptional financial results in Q1 but faced challenges relating to subscriber additions, although it appears to be seasonal in nature. On the call, management reiterated its confidence in the segment’s ability to generate EBITDA growth of mid-high single digits. With a lot of the returns from the Florida expansion and upgrades to the MetroCast footprint very much ahead of us, we anticipate a period of strength in the U.S. cable business.”

Calling the company’s information and communications technology (ICT) a continued “sore spot” for the company, despite its relatively small size, Mr. Galappatthige lowered his fiscal 2019 and 2020 EBITDA forecast to reflect the segment’s challenges.

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He maintained a “buy” rating, however, and raised his target for its stock to $78 from $76. The average target is $82.17.

“In addition to the good U.S. financial results, we are also encouraged by several other factors,” he said. “Firstly, it appears that the company is now getting past their CRM issues, which we believe has been the main issue impacting the stock. Secondly, we like the subscriber upside potential in the U.S. from the Florida expansion, specifically the opportunity to win contracts with condo buildings in the state. Lastly, CCA’s cash flow profile remains robust and should help them reach 3.1x net debt/ EBITDA by the end of 2019. Given CCA’s decision to forego the 600MHz spectrum auction, we believe the decreasing leverage will give CCA the ability to simultaneously make strategic U.S. acquisitions and increase the dividend.”

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Believing it has positioned itself as a “market-leading” cannabis retailer and wholesaler in several U.S. states, Canaccord Genuity analyst Derek Dley initiated coverage of Cresco Labs Inc. (CL-CN) with a “speculative buy” rating.

Chicago-based Cresco is a grower and retailer of premium cannabis with operations in six states (Illinois, Ohio, Pennsylvania, Nevada, California and Arizona) and is awaiting approval pending for acquisitions in three others (New York, Massachusetts, Maryland).

“We believe Cresco offers investors a best-in-class operational team, with a market-leading presence in several states, including Illinois, an attractive medical market with the potential to legalize cannabis for adult use in the next 12-18 months. In our view, Cresco’s ability to augment its vertically integrated dispensary operations with a robust wholesale business differentiates the company from its multi-state peers. Given the risk and uncertainties surrounding cannabis regulations, and other market factors, we believe a SPECULATIVE BUY rating is appropriate at this time.”

Mr. Dley set a $14 target for Cresco shares, exceeding the average of $13.25.

“We believe Cresco is attractively valued given its strong position in a number of U.S. markets, growth potential through its acquisition pipeline as well as adult-use market legalization opportunities, healthy balance sheet, and best-in-class operational expertise. Cresco currently trades at 9.9 times our 2020 EBITDA estimate of $179-million, which we convert into CAD to account for the company’s CSE-listed share price,” he said. “This compares to multi-state U.S. operators which trade at an average of 12.1 times their respective 2020 EBITDA estimates.”

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Following sharp underperformance since October, U.S. internet stocks now possess attractive valuations for investors, according to Citi analyst Mark May.

“Internet stocks’ relative performance has been quite consistent over the years, with years of meaningful outperformance followed by a year of underperformance,” said Mr. May in a research report released Mondau. “But, through the first nine months of ’18 it appeared that CY18 would be an outlier. However, the sharp underperformance since October reverted us back to this historical trend. The recent correction combined w/ continued strong fundamentals has resulted in Internet valuations, on avg., currently being at their lowest premium to the markets in at least 5 year.

“With valuations that are now, at worst, near historical averages (some near historical lows), with CY19 earnings expectations now largely reset, and with Citi’s equity strategists being modestly bullish, we are selectively constructive on Internet stocks as we begin the New Year. In fact, for the first time in six years we now have Buy ratings on all four FANG stocks.”

Mr. May named Amazon.com Inc. (AMZN-Q) his top pick for 2019, followed by Netflix Inc. (NFLX-Q) and Despegar.com Corp. (DESP-N).

He continues to rate Amazon a “buy” with a target of US$2,125, which falls slightly below the average on the Street of US$2149.

“While Facebook’s growth has slowed of late and there was noise in Amazon’s retail topline metrics in 3Q18, Alphabet and Netflix continue to post impression results, Facebook’s growth is still more than 30 per cent and we believe underlying trends at Amazon Retail is actually quite strong,” he said. “All-in, we believe Internet topline fundamentals remain strong. That said, expense growth has accelerated for both offensive and defensive reasons, driven by hiring, new product development and a significant ramp in datacenter spend. That said, indicators suggest 2019 could mark a peak in the rate of expense growth, margin declines. We continue to generally favor large-cap Internet over SMID as some, not all, SMID-cap Internet companies will likely continue to face competitive pressures.”

In conjunction with the report, Mr. May upgraded his rating for Snap Inc. (SNAP-N) to “neutral” from “sell” with a target of US$7, rising from US$6 but below the average of US$7.55.

Mr. May said: "We are upgrading from Sell to Neutral for five main reasons: 1) SNAP shares have declined 70 per cemt since late Feb. 2018 and at current levels the valuation (4 times EV/’19 revs) is now below TWTR and FB’s current (6 times and 5 times, respectively) and 4-year average (5 times and 9 times, resp.) EV/Rev multiples; 2) we expect the company will soon fully roll-out a new version of its app for Android, which could improve user and engagement growth; 3) Advertising ARPU [average revenue per user] accelerated in 3Q18 (both in the U.S. and Int’l), which bodes well, esp. if user growth likewise improves later in 2019; 4) expense growth has been slowing in recent quarters, and 4Q18 guidance implies that this will continue. This could bode well for margins/profits if revenue trends persist, and could result in Snap reaching the important milestone of adj. EBITDA breakeven over the next 12 months; and, 5) advertisers/agencies we speak with are generally optimistic about the outlook for the platform, including stating that policy changes have made it easier to distribute content and platform changes have resulted in improved campaign analysis.”

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In other analyst actions:

Goldman Sachs upgraded Teck Resources Inc. (TECK-B-T, TECK-N) to “buy” from “neutral” with a target of $39, up from $38. The average is $42.45.

Scotia Capital analyst Robert Hope downgraded Hydro One Ltd. (H-T) to “sector perform” from “sector outperform” with a target of $22, falling from $23 but above the current average of $20.93.

TD Securities analyst Samuel Damiani upgraded CT Real Estate Investment Trust (CRT-UN-T) to “buy” from “hold” with a $14.50 target, which is 20 cents lower than the average.

National Bank Financial analyst Don Demarco downgraded Sherritt International Corp. (S-T) to “sector perform” from “outperform” with a $1 target, down from $1.25. The average is $1.64.

Mr. Demarco also downgraded Leagold Mining Corp. (LMC-T) to “sector perform” from “outperform” with a target of $3.50. The average is $3.75.

National Bank Financial analyst Shane Nagle downgraded Titan Mining Corp. (TI-T) to “sector perform” from “outperform.” He lowered his target to $1.30 from $1.50, which sits below the $1.67 average.

National Bank Financial’s Mike Parkin downgraded Eldorado Gold Corp. (ELD-T, EGO-N) to “sector perform” from “outperform” with a target of $4.75, falling from $5.20. The average is $7.67.

GMP analyst Anoop Prihar upgraded Cobalt 27 Capital Corp. (KLBT-X) to “speculative buy” from “reduce” with a target of $7.20, down from $10.90. The average is $12.15.

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