Inside the Market’s roundup of some of today’s key analyst actions
Colliers International Group Inc.'s (CIGI-Q, CIGI-T) acquisition of Dougherty Financial Group provides “synergies galore,” according to Raymond James analyst Frederic Bastien, who said he maintains his constructive view of the firm following news of the deal.
“This is not your typical tuck-in acquisition, in that Dougherty originates more than $2.5-billion of real estate loans annually and is on track to generate roughly $100-million in revenues this year,” said Mr. Bastien. “We expect the Minneapolis-based company to not only strengthen CIGI’s capital markets practice in the U.S., but also add an incremental 3-4 per cent to its bottom-line on Day 1.”
“We believe Dougherty’s debt offering will add a new dimension to Colliers’ capital markets business, which currently accounts for about 15 per cent of consolidated revenues. The steady, recurring nature of its delegated underwriting services is also expected to help smooth out the cyclicality inherent in sales brokerage. Ultimately, Dougherty should go a long way in bolstering Colliers’ commercial real estate (CRE) business stateside, where it remains subscale. That spells opportunity for a company with a unique enterprising culture and a proven record of disciplined capital allocation.”
Mr. Bastien believes “the numbers add up” on the US$160-million deal, which he said translates to approximately 8 times earnings before interest, taxes, depreciation and amortization (EBITDA).
“Although this multiple is at the high end of what we’ve seen Colliers pay in the past, we find it reasonable for a quality service company of such size and profitability (EBITDA margins are in the 20-per-cent range),” the analyst said. “CIGI is buying out the 80-per-cent stake held by Mike Dougherty, who founded the practice back in 1977, while the senior leadership will roll out its 20-per-cent interest and continue to run the day-to-day operations. The transaction is subject to customary closing conditions, including receipt of regulatory approval, and is expected to close in 1H20.”
In reaction to the deal, he raised his 2020 earnings per share projection to US$5.30 from US$5.15 with his revenue estimate jumping to US$3.322-billion from US$3.242-billion.
Keeping an “outperform” rating for Colliers shares, Mr. Bastien moved his target to US$88 from US$85. The average target on the Street is US$82.17, according to Bloomberg data.
Meanwhile, CIBC World Markets analyst Sumayya Syed maintained an “outperformer” rating with a US$85 target, up from US$80.
Ms. Syed said: “We view the acquisition of the Dougherty Financial Group as a key strategic milestone for Colliers. More than the incremental revenue and EBITDA contribution, strategically this transaction rounds out Colliers’ capital markets platform through the addition of a large debt financing platform, while also improving cross-selling opportunities in the Sales Brokerage and Investment Management segments. Our revenue and EBITDA estimates increase slightly after factoring in the acquisition.”
2020 is likely to be “The Year of Connectivity” for IT hardware and tech supply chain firms, says Citi analyst Jim Suva, who expects to see an “initial blizzard” of product designs and releases as 5G networks launch.
“We also see increased M&A given low borrow costs coupled with the maturity of IT Hardware. By end market, we expect smart phones to return to growth with more content driven by 5G while auto production remains challenged,” he said.
“We see downside risks to consensus CY20 sales forecast given Celestica’s disproportionately high exposure to networking (42 per cent of revenue) and enterprise (21 per cent of revenue) end markets,” he said. “Our calendar 2020 sales and gross profit estimates are 2 per cent and 7 per cent lower than consensus as we expect profitability headwinds from continuous pricing exposure and lower capacity utilization. We adjust our valuation scorecard to reflect worse revenue outlook (adjust to -1 from 0) but better customer concentration given Cisco disengagement (adjust to 0 from -1). We are not making changes to our sales/EPS forecasts. Our target price remains at $7.25 which represents 15-per-cent downside to the stock price. We acknowledge the 2019 stock underperformance (down 5 per cent vs. SP500 up 27 per cent) has set a low bar and the company is trading at 20-per-cent FCF [free cash flow] yield and 1.3 times price to tangible book value of $6.24 . However, our experience shows disengagement and program exit with top customers typically cause stock turbulence for several quarters (DELL and JNPR in CY19 and CSCO in CY20).”
Moving the stock to "sell from “neutral,” Mr. Suva kept a US$8.50 target, which remains ahead of the US$6.94 consensus on the Street.
At the same time, Mr. Suva named Amphenol Corp. (APH-N), a Connecticut-based producer of electronic and fiber optic connectors, cable and interconnect systems, his top pick for 2020, believing it sits best positioned to benefit from changes brought on by 5G.
“While we acknowledge the company is typically conservative in giving initial full year guidance setting up for a potential stock pull back in January, our above consensus organic growth is based on Amphenol’s broad exposure within Apple, recent upbeat iPhone sales, and 5G antenna upside,” the analyst said. “Mobile device segment (where Apple sits) is expected to contribute 80 per cent of APH’s organic sales decline in 2019 due to 4G socket consolidation. Given the company’s position in Apple supply chain and strong track record, we expect a solid recovery (25-per-cent year-over-year growth) in the segment in 2020.”
He maintained a “buy” rating and US$115 target for Amphenol shares. The average is US$110.46.
For Apple Inc. (AAPL-Q), Mr. Suva has a “buy” rating and US$300 target (both unchanged), versus a US$265.80 average on the Street.
He said: “We believe consensus is underappreciating the Apple Watch and Apple AirPods demand strength and Apple’s wearables segment is likely to surpass $10 billion of quarterly sales this quarter. Yes we agree with consensus that generally believes Apple’s services will continue to grow and help margins but we believe consensus is overlooking the wearable’s segment. We materially raised our Sales and EPS estimates recently and expect AAPL to deliver results towards the high end of their December quarter guide.”
In response to Friday’s release of third-quarter 2020 financial results that largely fell in-line with his expectations, Raymond James analyst Steven Li lowered his revenue projections for BlackBerry Ltd. (BB-N, BB-T), pointing to “spotty” results from its Enterprise Software (ESS) segment and slower-than-anticipated results stemming from its acquisition of Cylance, a California-based cyber security business, earlier this year.
The Waterloo, Ont. tech firm reported non-GAAP revenue of US$280-million, exceeded the consensus estimate of US$276-million. Licensing revenue topped projections, while its Internet-of-Things and ESS businesses both fell short and saw year-over-year declines.
“Last quarter, management attributed the ESS shortfall to weak execution and retooling of the sales force,” said Mr. Li. “This quarter, management commentary implies sales team operating with better discipline and accountability with pipeline growing both in dollar value and number of deals. New products, partnership can help turn the corner. In UEM, the new continuous authentication product, BlackBerry Intelligent Security services (BIS) is gaining traction with several high-profile wins this quarter including the Department of National Defense in Canada, Julia Spare Group. A new partnership was announced with CACI for Secusmart (U.S. Gov opportunity: 4 plus million government issued phones, BB solution already meets NSA and FedRAMP certification).”
Mr. Li lowered his 2020 and 2021 revenue estimates to US$1.046-billion and US$1.193-billion, respectively, from US$1.071-billion and US$1.221-billion.
He maintained a “market perform” rating and US$9.50 target for BlackBerry shares. The average is US$7.76.
Elsewhere, CIBC World Markets analyst Todd Coupland increased his target to US$7 from US$6.50 with a “neutral" rating.
Mr. Coupland said: “While these results are an improvement, our thesis is unchanged as we wait for a more attractive entry point when BlackBerry demonstrates more consistent results.”
Pointing to mark-to-market gains in the implied value of its proposed London Stock Exchange Group (LSEG) stake, CIBC World Markets analyst Robert Bek raised his target price for shares of Thomson Reuters Corp. (TRI-N, TRI-T).
“Once the sale is complete, TRI will own 15 per cent of LSEG," he said. "Since the U.K. elections on Dec. 12, LSEG shares have been on the rise, appreciating by 9 per cent. While currency gyrations between the GBP and USD have worked slightly against the TRI math, the LSEG move has dominated our NAV changes. The result is the pick-up in our NAV of roughly $3.00 per share, which we now confirm towards our price target.
“As a reminder, LSEG’s US$27.5 billion takeover of Refintiv remains in process, but is expected to clear by Q3/20. LSEG shareholders overwhelmingly approved the transaction a few weeks ago.”
Calling it “an attractive defensive vehicle for Canadian investors, Mr. Bek hiked his target to US$73 from US$70 with a “neutral” rating (unchanged). The average on the Street is US$69.44.
“Given current trading valuations, TRI remains fairly valued, in our opinion," he said. "We believe investors seeking defensive positioning should still look at the story. While valuations are not cheap, the fundamentals are difficult to push lower on all fronts. Consummating the LSEG transaction would be positive, but is, in our opinion, already reflected in targets and recent trading.”
Seeing less earnings downside than the Street, JPMorgan analyst Steve Tusa raised his rating for shares of 3M Co. (MMM-N) to “neutral” from “underweight” on Monday, also pointing to the stock’s recent underperformance.
“While partially a valuation call, it’s also about sentiment and earnings trends,” said Mr. Tusa. "On sentiment, the secular story for 3M is indeed challenged, and PFAS [poly- and perfluoroalkyl substances] is a headwind but after a year in which earnings were successively missed and assuming a $10-15-billion hit for PFAS, current levels seem to be discounting a challenged reality appropriately, and we see less earnings downside versus consensus.”
His target rose to US$150 from US$143. The average is currently US$169.76.
In other analyst actions:
RBC Dominion Securities analyst Paul Quinn cut Western Forest Products Inc. (WEF-T) to “underperform” from “sector perform” with a target of $1, falling from $1.25. The average on the Street is currently $1.40.