Inside the Market’s roundup of some of today’s key analyst actions
Credit Suisse analyst Mike Rizvanovic downgraded his rating for Toronto-Dominion Bank (TD-T) on Monday, citing the impact of decelerating net interest income south of the border, which he called a “sizable headwind.”
In the wake of earnings season for U.S. banks, which he said “in most cases exceeded already-low expectations,” Mr. Rizanovic lowered TD to “neutral" from “outperform.”
“We downgrade TD ... given its material exposure to the U.S. market (40 per cent of earnings are from U.S. Retail and the TD Ameritrade contribution) and elevated level of sensitivity to further potential interest rate cuts by the Federal Reserve, which we believe would put meaningful pressure on the bank’s earnings growth,” he said. “Beyond margin compression in U.S. Retail we also see downside risk to TD’s AMTD contribution as AMTD’s recently updated revenue guidance is based on a single rate cut by the Federal Reserve, which could be skewing AMTD consensus higher.”
He added: “The U.S. comp groups that we examined for TD and BMO were consistent in reporting much weaker growth in net interest income as stable loan volumes did not compensate for sizable margin compression. Near-term margin guidance by several of the U.S. banks called for more downside, which could be exacerbated by further rate cuts (the forward curve is pricing in a high probability of several cuts through 2020). TD is by far the most exposed among the Canadian banks to that growing headwind.”
Mr. Rizvanovic lowered his target for TD shares to $74 from $76. The average target on the Street is currently $79.19, according to Bloomberg data.
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Though Lululemon Athletica Inc. (LULU-Q) has “done nearly every thing right” and has been “near flawless,” Citi analyst Paul Lejuez lowered his rating for its stock on Monday, pointing to signs of a recent rise in markdowns and outerwear moving to clearance.
“With outerwear representing an estimated 10 per cent of the assortment in 3Q/4Q, we believe this could cause some unexpected merch margin pressure (we are now looking for only slight merchandise margin increases in 2H),” he said. “Bigger picture, we should recognize that as LULU expands further into less developed categories (outerwear, accessories, streetwear), even though this is the right thing to do for the brand (and to grow sales), it may also bring more inconsistency to the merch margin profile (like this season when outerwear sales were pressured by warm weather).”
Ahead of the early December release of its third-quarter financial results, Mr. Lejuez lowered his fiscal 2019 earnings per share projection to US$4.76 from US$4.70 to relect “more conservative” merchandise margin assumptions. He did emphasize his new estimate remains at the high end of management’s guidance (a range of US$4.63-$4.70).
"Sales and margins have both been strong driven by product innovation, which has driven strong traffic trends amongst both women and men, both in the U.S. and globally," he said. "But the stock is at our target price, and trading at 22.5 times our F20 estimated EBITDA, the market expects results to be flawless, leaving little room for disappointment. With that backdrop creating a more balanced risk reward, we have recently noticed a pickup in promos, above and beyond what we usually see from LULU. As a result, we believe merch margins may come in weaker than expected. LULU remains a winner long term, and there is nothing wrong with the brand, but near term higher promos make us question if they are as flawless as they have been."
Dropping the stock to “neutral” from “buy,” Mr. Lejuez maintained a target price of US$208. The average target on the Street is US$210.03.
"LULU has achieved 7 consecutive quarters of double digit comps (and we believe 3Q will make it 8)," he said. "And from 2015-2018, we estimate merch margins increased 700 basis points, as supply chain efficiencies helped drive lower product costs and lower markdowns. This helped EBIT margins increase from 17.9 per cent in 2015 to 21.5 per cent in 2018, at the same time they continue to invest in the business to drive future growth. It has been an impressive run, and with the stock up 71 per cent year-to-date, the market has come to expect results to be flawless."
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In a separate research note, Mr. Lejuez lowered American Eagle Outfitters Inc. (AEO-N) to “neutral” from “buy,” seeing inventory “piling up” and promos “picking up.”
"While we still believe AEO is a market share winner in the teen landscape and Aerie is a winning concept that has a long runway for growth, we see risk to estimates near term," he said. "The company exited 2Q with elevated inventory levels (up 15 per cent versus 2Q sales growth of 4 per cent) and we believe choppy weather in 3Q has only exacerbated the problem. While we were expecting merch margin weakness in 2H, we believe merch margins could be down much more significantly in 4Q as AEO (and its competition) pull promotional levers more aggressively. Longer term, we believe AEO is a share winner in the teen landscape but the near term seems choppy. We maintain our Buy on ANF [Abercrombie & Fitch Co.], which we believe is in better shape from an inventory perspective and trades at 2.1 times our fiscal 2020 estimated EBITDA."
His target for American Eagle shares dipped to US$17 from US$20. The average is US$18.57.
He also lowered his target for shares of L Brands Inc. (LB-N, “neutral”) to US$18 from US$21. The average target is US$22.48.
"We see near-term downside to LB shares (they report 3Q19 EPS on 11/20 after market close)," said Mr. Lejuez. "LB’s plan was to pullback on promotions in 2H19 at both VS [Victoria's Secret] and PINK as they worked to improve their assortments. However, as 3Q progressed we have noticed a meaningful uptick in promotional cadence on our store checks at both brands. We believe there is a significant risk to LB’s merchandise margins in 2H19, particularly in 4Q. Recall that LB took a big chance on inventory for 4Q (inventory is expected to be up mid-teens at the end of 3Q), but given how weak trends have likely been throughout 3Q and an anticipated highly promotional holiday environment, we assume VS/PINK will have to be extremely promotional this holiday. And while promotions at BBW [Bath & Body Works.] look more controlled (though still running higher year-over-year), we believe a highly promotional retail environment could put pressure on BBW’s sales and margins."
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TFI International Inc. (TFII-T) is a “shareholder-friendly company with strong FCF capabilities and an attractive valuation versus peers,” according to Desjardins Securities analyst Benoit Poirier.
However, despite releasing "decent" third-quarter financial results, Mr. Poirier lowered his target for shares of the Montreal-based transport and logistics company, pointing to "the recent economic slowdown."
On Friday, TFI reported revenue and earnings before interest, taxes, depreciation and amortization for the quarter of $1.305-billion and $215-million, respectively. Both fell in line with expectations on the Street ($1.296-billion and $218-million). It also generated free cash flow of $130-million, exceeding both the consensus estimate ($117-million) and Mr. Poirier's forecast ($123-million).
“Overall, we are pleased with TFII’s results, which demonstrate management’s ability to deliver in virtually any freight environment,” the analyst said. “At these levels, we believe TFII’s resilient business model—focused on asset-light businesses with robust FCF generation capabilities — is under-appreciated by the Street (we derive a FCF yield of 9 per cent excluding IFRS 16). TFII trades at a 1.7 times EV/FY2 EBITDA discount vs its peers (blended average basis), which is unjustified and represents an attractive entry point for investors to play the improving market conditions in the North American trucking industry.”
Based on the results, Mr. Poirier lowered his earnings per share estimates for 2019, 2020 and 2021 to $3.33, $4.01 and $4.33, respectively, from $3.44, $4.04 and $4.37.
Keeping a “buy” rating, Mr. Poirier reduced his target for TFI shares by a loonie to $59. The average on the Street is $53.15.
“Overall, while we understand the trucking industry is cyclical, we note that TFII’s focus on profitability and FCF continues to deliver solid results while the company is rewarding shareholders with dividend increases and share buybacks,” he said.
Elsewhere, Echelon Wealth Partners analyst Gianluca Tucci lowered his target to $55 from $57 with a “buy” rating (unchanged).
Mr. Tucci said: “The North American freight environment has generally improved in recent years, which has led to a normalisation in freight rates and betterment in volumes, with management continuing to focus on improving the network efficiency in the U.S. We remind investors that TFII’s U.S. TL [truckload] presence via its US$558-million 2016 acquisition of XPO Logistics’ TL division makes it a serious player in that market – we expect the Company to continue to deliver quality revenue as these results prove. While moderate overcapacity faced by the industry in recent quarters has shown signs of abating, any additional economic weakness could further pressure pricing.”
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Citing a “challenging environment for wireline” following last week’s release of its quarterly results, Desjardins Securities analyst Maher Yaghi lowered his expectations for both Shaw Communications Inc.'s (SJR.B-T) cable subscriber base and cable revenue moving forward.
“SJR reported results which were mostly in line with expectations, with challenges in wireline subscribers but resilient wireless net additions, supported by healthy subsidies,” he said. “Importantly, SJR unveiled its FY20 guidance, which reflects management’s confidence in the company’s FCF prospects. This strengthened profile allowed the company to establish a NCIB and to limit dilution from the DRIP, which should be positive for the stock.”
Mr. Yaghi said the results highlighted that Shaw’s wireline subscriber base is “once again under pressure (except for Internet),” and he believes those struggles could “linger” in the coming quarters as new over the top (OTT) services launch.
“Wireline subscriber performance remains under pressure as the company is focusing more on pricing than on maintaining the subscriber base,” he said. “Wireless is now an increasingly larger contributor to consolidated EBITDA due to market share gains and higher ABPU. Indebtedness remains low, which provides SJR with the flexibility to continue deploying its aggressive wireless strategy.”
Maintaining a “buy” rating, Mr. Yaghi lowered his target to $31 from $32.50. The average on the Street is $29.29.
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Called it a “model of predictability” and seeing it “well positioned for rapid growth,” Canaccord Genuity analyst Robert Young initiated coverage of Docebo Inc. (DCBO-T), a Toronto-based Software-as-a-Service enterprise learning provider, with a “buy” rating.
“The global corporate Learning Management Systems market is best described as high growth (15 per cent plus) and fragmented; a few large caps dominate share among F500 customers while Docebo and mid-sized peers offer differentiated technological solutions to achieve higher-than-industry growth levels,” said Mr. Young. "We expect that Docebo can grow at 35 per cent or more over the next several years with a path to EBITDA profitability in late 2021, which puts the company at the high end of the overused but relevant ‘Rule of 40.’
“The stock has traded off 15 per cent since its IPO at $16; we believe the culprit is inefficient markets (a small float and low liquidity) and not the fundamentals of Docebo’s business. At the most recent close of $13.66, we value Docebo at 4.6 times enterprise value to 2020 estimated revenue, which as a SaaS business with high-quality revenues is a multiple-turn discount to the peer average.”
Mr. Young set a target for the stock, which began trading on the TSX on Oct. 9, of $19 per share, which falls $1 short of the consensus.
Meanwhile, CIBC World Markets’ Stephanie Price initiated coverage with an “outperformer" rating and $20 target.
Ms. Price said: “At current levels, we believe Docebo represents a compelling opportunity, with the company’s SaaS revenue growing at twice the industry rate but its stock trading over five turns below peer average EV/S multiples despite scoring similar or better on the Rule of 40 (Revenue Growth + FCF Margin) metrics.”
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Canaccord Genuity analyst Scott Chan sees a “challenging rate environment” for Canadian Lifecos as its third-quarter earnings season commences later this week.
However, projecting adjusted core earnings per share growth for the group of 4 per cent year-over-year, Mr. Chan raised his target prices for the four companies in his coverage universe.
"Generally, we estimate Q3 reported earnings should be lower, mainly impacted by declining interest rates and lower Asian equity markets (e.g. HSI down 9 per cent quarter-over-quarter impacting MFC). This could be slightly offset by widening spreads (e.g. Canada U.S.), and FX (lower CDN$). We will look for updates on the LTC review for MFC (expected to be net neutral), and potential negative experience (e.g. UK retail credit issues at GWO). Recall, we have modelled for pre-announced URR negative impacts for MFC ($0.5-billion post-tax) and SLF ($0.1-billion after tax) expected to be recorded with Q3/19 results.
Ahead of the quarter, we are raising our target prices on the Lifecos mainly from rolling forward our NTM EPS and BVPS [next 12-month earnings per share and book value per share] forecasts by one quarter to Q3/20. .... We believe current valuations are compelling, with the Group trading at trough valuations of 9.5 times our NTM P/E [price-to-earnings] (representing a 11-per-cent discount to 5-year historical avg.), in addition to attractive dividend yields. We continue to favour MFC and IAG (both BUY rated)."
Mr. Chan’s changes were:
Great-West Lifeco Inc. (GWO-T, “hold”) to $32 from $31. The average on the Street is $32.32.
iA Financial Corp. (IAG-T, “buy”) to $66 from $64. Average: $67.
Manulife Financial Corp. (MFC-T, “buy”) to $33 from $32. Average: $28.44.
Sun Life Financial Inc. (SLF-T, “hold”) to $58 from $56. Average: $59.01.
Elsewhere, CIBC World Markets’ Paul Holden increased his target for IAG to $67 from $61.
In his own earnings preview, Mr. Holden said: “We are forecasting 10-per-cent Core EPS growth for IAG year-over-year, highest in the group. Our estimate is higher than consensus, but around the middle of management’s guidance range ($1.55-$1.65). Key drivers behind our estimate are: 1) 10-per-cent growth in Individual Insurance expected profit, consistent with the first two quarters of 2019; 2) another quarter of double-digit growth out of the U.S. (14-per-cent core income growth year-to-date); 3) zero experience gains versus a positive result YTD; 4) lower interest expense given average debt was down 17 per cent year-over-year; and, 5) a 3-per-cent reduction in average shares outstanding. We think IAG is well positioned to hit its growth objective, which would result in an earnings beat relative to consensus.”
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Mackie Research analyst Greg McLeish initiated coverage of Rubicon Organics Inc. (ROMJ-CN) with a “buy” rating and $4 target.
“There is significant demand for organic cannabis products in Canada and Europe,” said Mr. McLeish. “Over 47 per cent of Canadian cannabis consumers prefer organically grown products. Organic cannabis is also critical for the therapeutic market and over-the-counter products. More than a third of American consumers surveyed said they would prefer to buy organic cannabis; nearly half of which also indicated that they would pay 50-100% more for such products. This presents cannabis businesses that have an organics strategy with a significant opportunity for advantage over others who do not have the capacity to capture this market segment. Rubicon is one of only three organic cannabis producers in the Canadian market at this time, and is well positioned to satisfy this market demand with the completion of its facility in British Columbia in Q4 2019.”
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In other analyst actions:
Beacon Securities analyst Michael Curran raised Osisko Mining Inc. (OSK-T) to “buy” from “hold” with a $4 target. The average on the Street is $4.46.
RBC Dominion Securities analyst Julian Easthope initiated coverage of Stars Group Inc. (TSGI-T) with an “outperform” rating and $33.35 target. The average is $30.12.
Cormark Securities analyst Meny Grauman raised Intact Financial Corp. (IFC-T) to “buy” from “market perform” with a $148 target. The average is $136.86.
Wells Fargo Securities analyst Jim Birchenough initiated coverage of Imv Inc. (IMV-T) with a “market perform” rating and $3.92 target. The average is $11.09.
Paradigm Capital analyst Jason Tucker cut Trican Well Service Ltd. (TCW-T) to “hold” from “buy” with a $1 target. The average is $1.32.
David Leeder