Inside the Market’s roundup of some of today’s key analyst actions
The growth of the electric vehicle market has been “underappreciated” by the Street, according to Canaccord Genuity analyst Jed Dorsheimer, leading him to upgrade his rating for Tesla Inc. (TSLA-Q) in a research report released Monday.
“Investors have largely treated the trend towards electrification of autos as a zero-sum game,” he said. “While there will of course be winners and losers, our analysis of the supply chain suggests several win-win scenarios with significant expansion opportunities.”
“We find charging infrastructure to be quite compelling, as a way to quell range anxiety, reduce pricing, and address supply demand imbalances of base metals. While further off, we also explore autonomy from a component level as one of the most compelling solutions to solve our global transport needs.”
Mr. Dorsheimer feels Tesla’s results from the last two quarters and recently released first-quarter guidance have alleviated “significant concerns for both production capability and profitability of the critical Model 3.”
“As such, we see a more stable 2019 with far fewer concerns for investors in the company,” said the analyst, moving Tesla shares to “buy” from “hold.”
“We view the recent string of price cuts as further proof that the cost cutting and right sizing that the company has undertaken are resulting in concrete movement towards the ultimate goal of an affordable $35,000 Model 3.”
Pointing to “strong” shipments to both the European Union and China, Mr. Dorsheimer sees the company’s “tiny profit” expectation for the first quarter being the low point for earnings this year, and he sees “the ramp towards year end may quell the short thesis.”
“In addition, we view Tesla’s coveted autopilot technology as having an almost insurmountable lead in autonomous driving, which will eventually be the key component of future transportation,” he said.
“With the strong operating cash flow generation of $1.23B and cash on the balance sheet of $3.7B, the liquidity concerns and convertible note repayment are no longer valid concerns in our view.”
Mr. Dorsheimer hiked his target price for Tesla shares to US$450 from US$330. The average on the Street is US$320.33, according to Bloomberg data.
“Our new $450 PT is based upon 30 times our FY20 EPS estimate of $15.02, which appears to still be relatively conservative given the strong growth in earnings that we expect during the next several years,” he said.
Though he thinks Canadian Tire Corporation Ltd. (CTC-A-T) is “making all the right moves to remain a modern, relevant retailer,” Barclays analyst Jim Durran downgraded his rating for its stock to “equal weight” from “overweight,” seeing a “daunting” overhang from Amazon (AMZN-Q).
“We believe a catalyst to reduced Amazon uncertainty could be more than a year away,” said Mr. Durran.
He dropped his target for Canadian Tire shares to $166 from $193. The average is $179.
Laurentian Bank Securities analyst Nick Agostino said he has a “mixed” reaction to Monday’s announcement that Solium Capital Inc. (SUM-T) has entered into an agreement to be acquired by Morgan Stanley (MS-N) for $1.1-billion.
“We always felt a large SaaS vendor with a HR solution in its portfolio like SAP or Oracle, or a neutral party like a stock exchange (e.g. Nasdaq), would be the eventual buyer of SUM. MS’s bid is a little surprising as it reverses our view that the large U.S. multinational banks want to exit the ESOP market,” said Mr. Agostino. “Instead it not only further validates SUM’s technological solution (and market lead) but supports MS’s Wealth Management operation while offering MS a funnel for future IPO candidates, given SUM’s extensive private market operation / client base (including Unicorns). The transaction may cause some disruption with some of SUM’s other large white-label partners like UBS and Barclays.”
Mr. Agostino thinks an “attractive” multiple was paid by Morgan Stanley, making it unlikely that another bidder will emerge.
“Beyond the attractive multiple paid, we believe the longstanding relationship with MS dating back to 2016, makes it difficult for another comparable operation like UBS, E-Trade or Charles Schwaab to steep in at this time, and would be challenged to make an accretive offer,” he said. “Similarly, SUM’s largest competitor Computershare has its hands tied with the Equatek transaction, and would be challenged to bid. Despite SUM’s strong balance sheet, being acquired by MS gives it a strong balance sheet to be acquisitive as a subsidiary operation against deeper-pocketed competitors.”
He moved his rating for Solium to “tender” from “buy” with a target of $19.15, down from $14. The average is $15.05.
Elsewhere, Canaccord Genuity analyst Robert Young downgraded Solium to “hold” from “buy” with a target of $19.15, rising from $14.50.
Though he expects its shares to continue to offer investors above-average returns in 2019, Raymond James analyst Frederic Bastien downgraded Russel Metals Inc. (RUS-T) to “outperform” from “strong buy” in the wake of last week’s release of in-line fourth-quarter results that capped a “banner year.”
“We cannot lose sight of Alberta’s latest oil patch struggles, the dragging steel tariff dispute and the tough 2018 comps RUS will start lapping soon,” he said.
Mr. Bastien kept a $31 target, which exceeds the consensus of $29.88.
Following a “strong” holiday season, RBC Dominion Securities analyst Ross MacMillan expects Shopify Inc.’s (SHOP-N, SHOP-T) fourth-quarter results to be “strong” with revenue upside at or exceeding the 6-7 per cent seen in the last two years.
Mr. MacMillan pointed to several factors, including: “i) A strong overall holiday season for e-Commerce; ii) Higher GPV [gross payment volumes] driven by new international Shopify Payment markets; iii) A higher take-rate across the Plus base driven by the first holiday period with no cap on Plus GMV-based pricing; iv) Incremental monetization for Merchant Solutions, including organic efforts such as Fraud Protect and inorganic efforts such as Return Magic; and v) Better net new merchant acquisition metrics bolstered by the acquisition of Tictail.”
The analyst raised his target price for Shopify shares to US$180 from US$159. The average on the Street is currently US$166.79.
However, despite his enthusiasm, Mr. MacMillan maintained a “sector perform” rating for the stock, noting: “Assuming that the company starts CY19 with typical cushion, we still believe it is likely that guidance could start at less-than 40-per-cent revenue growth. Given this and current valuation (22 times calendar 2019 enterprise value to gross profit) which is only slightly below our high growth software group (23.7 times CY19 EV/GP), we wrestle with valuation upside from current levels despite our optimism on 4Q18 results.”
The 2018 U.S. farm bill is likely to prove to be a key catalyst for both Charlotte’s Web Holdings Inc. (CWEB-CN) and the entire hemp industry this year, said Canaccord Genuity analyst Derek Dley in a research note reviewing his participation in a recent non-deal roadshow with the company’s CEO and CFO.
“Our expectation that the passing of the 2018 Farm Bill would lead to increased consumer acceptance of CBD products, appears to have held true,” he said. “More importantly, we believe that the de-scheduling of industrial hemp as a Schedule I controlled substance will increase retail partner appetite to distribute CBD products. Charlotte’s Web has capitalized on increasing retail acceptance of CBD products, and now sells its products in nearly 3,700 locations, compared to 3,000 locations at the end of Q3/18, demonstrating not only the increasing CBD acceptance, but also cementing the company’s position as the leader in hemp extract products, and the partner of choice for new retailers looking to enter the space.
“As CBD products continue to gain traction, we believe a number of mass market retailers will soon begin to distribute CBD products, and believe Charlotte’s Web is well positioned to win these agreements. To that end, the company is currently selling its products within Safeway in Washington and Colorado. We expect this to be the first of many upcoming mass market retail wins for Charlotte’s Web and believe the company will be in over 5,000 stores by the end of 2019, an assumption that may prove conservative as additional mass market retailers look to enter the fray.”
Mr. Dley also emphasized the Farm Bill has brought less restrictive advertising and marketing rules to the sector, which Charlotte’s Web has taken advantage of through its digital media strategy.
“This again will increase consumer awareness and acceptance of Charlotte’s Web products, in our view, as many online marketers and search engines were previously unwilling to support CBD products,” the analyst said.
He added: “We foresee continued product innovation from Charlotte’s Web in 2019, including new formulations designed for specific use cases (anxiety, sleep deprivation, etc.), new product formats, a line of topical products, and new canine formulations under the Paws brand. Overall, we believe momentum in the CBD market continues to accelerate, and Charlotte’s Web is well positioned to capitalize on this momentum given its leading brand, market share leadership, strong management team, and healthy balance sheet.”
With a “buy” rating (unchanged), Mr. Dley raised his target for Charlotte’s Web stock to $26 from $21, which tops the average of $25.83.
“Our revised target represents 18.0 times our revised 2020 EBITDA estimate of $111-million (up from 16.3 times our previous 2020 EBITDA estimate of $99-million) as we have elected to increase our estimates and target multiple due to the company’s recent new retail partner wins, mass market agreements, which we believe are set to increase, better-than-expected hemp harvest leading to new revenue opportunities, and momentum within the CBD industry in general,” he said. “Charlotte’s Web remains one of our Top Picks for 2019.”
Following “solid” fourth-quarter results highlighted by hydro generation that exceeded long-term averages, Desjardins Securities analyst Bill Cabel increased his target price for Brookfield Renewable Partners LP (BEP.UN-T, BEP-N).
“BEP reiterated its annual distribution growth target of 5–9 per cent and maintained its focus on delivering a long-term total return to unitholders of 12–15 per cent on a per-unit basis,” he said. “We believe these targets are achievable through a combination of organic investment opportunities (primarily operational efficiencies, embedded inflation escalation and development), with the potential for more upside through opportunistic M&A and rising power prices. The company has built a war chest and has solid access to capital and the proven ability to deliver, integrate and operate accretive acquisitions, which gives us high conviction it can continue to find meaningful asset additions.”
Keeping a “hold” rating, Mr. Cabel raised his target to $43 from $42.50. The average is $41.77.
“BEP offers a high-quality, diversified asset portfolio and provides stable, long-term cash flows/distributions,” he said. “While we like these assets, management and the growth strategy, we see higher-return options and more manageable payout ratios in other names under coverage.”
Elsewhere, Industrial Alliance Securities analyst Jeremy Rosenfield kept a “buy” rating and US$35 target.
Mr. Rosenfield said: “BEP continues to offer investors (1) a high-quality global renewable power investment platform (ownership interests in more-than 17GW of installed capacity), (2) a high degree of contracted cash flows (65 per cent or more through 2023), (3) a long-term organic and M&A-based growth strategy (350 MW under development, and more-than 7GW of prospects), and (4) attractive income characteristics (7-per-cent yield, less-than 90-per-cent 2019 estimated funds from operations payout, and a 5-9-per-cent dividend growth target).”
Taking a “more positive” view of the solar sector in the wake of recent changes to China’s tariff policy, UBS analyst Jon Windham raised his rating for Canadian Solar Inc. (CSIQ-Q) to “neutral” from “sell.”
His target for shares of the Guelph, Ont.-based company rose to US$23 from US$14, which exceeds the US$20.14 average.
Altura Energy Inc. (ATU-X) is “standing tall amongst small caps,” said Haywood Securities analyst Christopher Jones, who initiated coverage with a “buy” rating.
“ATU is a small-cap E&P with medium to heavy oil-weighted production in central Alberta and due to the emphasis on cost optimization the Company generates CF netbacks that rival that of light oil producers,” he said. “By applying new technology to exploit oil pools with large OOIP and low-recovery factors, management’s intent is to position ATU for multiple years of profitable production and reserve growth. The Company has largely flown under the radar of most investors since its recapitalization of Northern Spirit Resources in 2015, which is justifiable given investors have shied away from the small-cap sector given the volatility in commodity prices. Nonetheless, juniors that can generate above-average growth and profitability remain investible, but the challenge is finding these stories in a crowded and beaten up sector. Against this backdrop, in our view ATU is a company that warrants closer attention.”
Mr. Jones set a target of 70 cents, which is 9 cents lower than the consensus.
In other analyst actions:
BMO Nesbitt Burns analyst Jenny Ma upgraded CT Real Estate Investment Trust (CRT-UN-T) to “outperform” from “suspended coverage” with a $16 target, exceeding the average of $14.95.
Paradigm Capital analyst David Davidson upgraded Ivanhoe Mines Ltd. (IVN-T) to “buy” from “hold” with a target of $4.80, rising from $4. The average is currently $6.41.
With a file from Bloomberg News