Inside the Market’s roundup of some of today’s key analyst actions
Though he sees a more favorable macro backdrop for Canadian forest products companies in 2020, Raymond James analyst Daryl Swetlishoff expects to see “another weak” quarter of results during the coming earnings season, capping “a forgettable year.”
“We sit below consensus estimates for the majority of our coverage list, as pricing rebounded slightly in the quarter for certain lumber grades, and OSB, while pulp and paper prices edged down into year-end,” he said in a research note released Monday.
Despite this near-term pessimism, which caused him to lower his earnings expectations and target prices for companies in his coverage universe, Mr. Swetlishoff thinks a turnaround may be near.
“As we have seen in recent months, U.S. homebuilding stocks have staged an impressive rally amid improved fundamentals with lower mortgage rates and improved consumer sentiment,” he said. "Early quarterly earnings reports from U.S. homebuilders has confirmed this sentiment with higher January buyer traffic, prompting homebuilders to maintain positive outlooks through 1H20. Further supporting the outlook, new home sales gained significant momentum in 2019; which should translate into mid-single-digit growth in single-family housing starts this year. This provides the backdrop for a very constructive outlook on the housing market as inventories decline by double digits, absorbed by long-term homeowners, while vacancies remain low and prices edge higher.
“Our recent Homebuilding & Wood Products Forum left us bullish on the near term building materials outlook (See our Brief here). Since, the emergence of the coronavirus has introduced a measure of uncertainty with respect to Asian wood products demand. Though potentially negative at the margin, we highlight that that market was already oversupplied with beetle-killed European timber and expect cash US lumber pricing to trend upward to close the ~$30/mfbm gap with March futures pricing. This supports our overweight position in lumber leveraged names including Strong Buy rated Interfor and West Fraser. We also see value in peer Canfor, who remains a publicly traded entity following the failed go private bid last quarter, and expect elevated B.C. stumpage to be partially offset by lower European log costs. With 10% of capacity currently curtailed, high leverage to U.S. single family housing starts and less export exposure, we highlight OSB’s relative attractiveness and recommend investors add to Norbord holdings.”
Mr. Swetlishoff reduced his target price for seven of the nine stocks he currently covers. Those changes were:
Canfor Corp. (CFP-T, “outperform”) to $17 from $18. The average on the Street is $16.29, according to Bloomberg data.
Canfor Pulp Products Inc. (CFX-T, “outperform”) to $13 from $17. Average: $11.05.
Interfor Corp. (IFP-T, “strong buy") to $18.50 from $19. Average: $18.07.
Mercer International Inc. (MERC-Q, “outperform”) to US$16 from US$19. Average: US$12.63.
Western Forest Products Inc. (WEF-T, “outperform”) to $1.50 from $2. Average: $1.30.
West Fraser Timber Co. Ltd. (WFT-T, “strong buy”) to $72 from $76. Average: $67.
He raised his target for Norbord Inc. (OSB-T, “strong buy") to $46 from $43, which exceeds the $42.17 average.
He maintained a $20 target and “outperform” rating for Acadian Timber Corp. (ADN-T). The average target is $18.56.
In a research report previewing earnings season for Canadian infrastructure companies, Credit Suisse analyst Andrew Kuske lowered Brookfield Renewable Partners LP (BEP.UN-T, BEP-N) to “underperform” from “neutral" on Monday.
“Clearly, BEP is one of the larger players in the renewable power sector that benefits from scale, development capability, M&A prowess and, among other things, very favourable positioning for those seeking SRI/ESG favourable themes,” he said. “Over the next several quarters, we view BEP’s performance being largely tied to the proposed purchase of the affiliate TerraForm Power (TERP) – that was initially proposed with the stock split of the soon-to-be created Brookfield Renewable Corporation (BEPC). Accordingly, we see the stock as being very range bound, in part, with the ‘bump/no bump’ debate along with the path to close. These near-term issues do not really detract from a well-placed business that looks to be enhancing that positioning.’"
Mr. Kuske maintained a $60 target for Brookfield, which exceeds the current consensus on the Street by 30 cents, according to Bloomberg data.
Following last week’s announcement that it will not pursue the sale of its Speciality Chemicals business following the completion of a strategic review, Industrial Alliance Securities analyst Elias Foscolos downgraded Superior Plus Corp. (SPB-T), expecting to see near-term weakness.
“In our view, the key read-throughs are not that this business will never be divested, but rather that it will not be divested now due to cyclical economic weakness," he said. "Given this background, we are updating our financial projections for Q4/19 and beyond.”
“We believe that the business will eventually be divested. However, key read-throughs on the financial side is that we can expect some weakness in financial performance from the SC business in Q4/19 and 2020, which we have priced into our revised model.”
Mr. Foscolos lowered the stock to “buy” from “strong buy," noting: “For SC, the lack of a divestiture and some weakness in caustic soda and hydrochloric acid pricing lead us to believe that EBITDA, when adjusted for IFRS16, will be weaker than the prior year and quarter.”
His target slid to $14.50 from $15, which falls 10 cents below the consensus.
Concurrently, in a research note previewing earnings season for Energy Infrastructure, Midstream and Distribution companies, Mr. Foscolos made four target price changes.
“Overall, 2019 was a strong year for the midstream and infrastructure names with our coverage universe returning 32 per cent versus the S&P/TSX Composite Index at 19 per cent,” he said. “Large asset disposition programs led to multiple expansions during the year. The top performing stocks of 2019 were ALA and GEI. ALA (more than 50-per-cent return), exceeded its targeted asset sale program of $1.5-2.0-billion with $2.2-billion in asset sales in 2019. GEI also performed well (more than 50-per-cent return) during the year and closed the sale of its Canadian Truck Transportation business in July. Both GEI and ALA executed major asset disposition programs during 2019 and are both entering 2020 with stronger balance sheets and enhanced financial flexibility validated by credit rating agencies in 2019. For 2020, we are predicting positive returns in our Midstream coverage of 18 per cent (13-per-cent potential one-year stock return plus 5-per-cent dividend yield). Our 18-per-cent potential one-year total return is lower than the sector return posted 2019.”
He raised his targets for the following companies:
Gibson Energy Inc. (GEI-T, “buy”) to $32 from $30. Average: $29.30.
Parkland Fuel Corp. (PKI-T, “buy”) to $53 from $52. Average: $53.62.
Tervita Corp. (TEV-T, “buy”) to $10.50 from $10.25. Average: $10.25.r
Mr. Foscolos lowered his target for Secure Energy Services Inc. (SES-T) to $6.75 from $7.50 with a “buy” rating. The average is $7.14.
“Following the divesture of drilling & completions-related assets, we expect SES to be a leaner, less cyclical company," he said. "We are modelling in $100-million of asset sales in 2020, which will be partially offset by organic expansion in MI, including the new Bigstone/East Kaybob feeder pipeline, full-year contributions from investments made this year, and other facility expansions. As less profitable assets are sold, we expect profitability metrics to improve.”
"OTEX is broadening its potential levers for growth with the acquisition of Carbonite," he said. "Already shifting its core business towards the cloud (with the key Cloud Editions launch upcoming in 4Q), Carbonite provides: 1) a gateway to the down-market with 16k channel partners; and 2) a foundation for building a broader security offering, with the potential to be a third pillar for the company along with content services and business networks.
"With Carbonite not expected to make a net contribution in FY20, and the company focused on deleveraging with no major M&A imminent, we think the focus is less on 3Q20 and more on 4Q20 and exit trajectory into 2021."
After incorporating Carbonite into his financial projections, which he projects to add approximately US$200-million in revenue in the second half of fiscal 2020, Mr. Jester raised his 2021 and 2022 earnings per share projections to US$3.19 and US$3.45, respectively, from US$3.01 and US$3.10.
Mr. Jester maintained a “neutral” rating and US$48 target for Open Text shares. The average on the Street is US$51.59.
“A re-rating is possible if the ‘bigger tent’ translates to faster growth, but evidence of this is at least a few quarters out,” he said. “In the meantime, the shares trade at 14.5 times our 2021 EPS, close to the longer-term average. We remain on the sidelines.”
Boyd Group Services Inc. (BYD-T) is “on cruise control heading into 2020,” said Desjardins Securities analyst David Newman.
In a research note ahead of the March 18 release of its fourth-quarter results, Mr. Newman made "minor" tweak to his forward estimates, including his 2019 and 2020 earnings per share projections (to $5.07 and $6.25, respectively, from $5.13 and $6.34.). However, his revenue for the fourth quarter (down to $588-million from $596-million) remains ahead of the consensus on the Street ($573-million), while his adjusted EBITDA expectation ($80-million from $82-million) falls in line ($81-million).
Despite the reductions, he expects “solid” quarterly results.
"We forecast SSSG [same-store sales growth] of 1.5 per cent given the ongoing technician constraints, milder weather conditions, the GM strike (albeit modest) and tough comps (vs 4Q18 SSSG of 6.8 per cent), offset by the contribution from new locations, perhaps some catch-up on unprocessed repair work and an uptick in vehicle miles travelled (VMT)," he said. "The pace of acquisitions slowed in the quarter (seven locations in 4Q19) but picked up speed in early 2020 (with 12 locations, including its entry into California). The company successfully converted to a corporate structure and transitioned to a new CEO (Tim O’Day; Brock Bulbuck moved to Executive Chairman)."
"We forecast 2020 SSSG of 4.1 per cent, driven by its growing DRP (and performance-based) arrangements, OEM certifications, WOW Operating Way, and investments in technology and people (supported by various HR initiatives). We expect BYD to add 90 locations and five start-ups in 2020, supported by more than $250-million in dry powder and a conservative balance sheet (1.8 times net debt/EBITDA in 3Q19)."
See its valuation continuing to “accelerate,” Mr. Newman raised his target for Boyd shares to $235 from $200, keeping a “buy” rating. The average on the Street is $223.58.
“We are increasing our target price ... based on 15.0 times EV/EBITDA (was 13.0 times) on our revised 2020 estimates,” he said. “We believe the premium is justified given BYD’s superior growth profile, including M&A and organic growth opportunities, growing competitive moat (with strong barriers to entry), strong cash flows, prudent balance sheet management, high returns on capital and disciplined management team. BYD is a resilient quality compounder which fares well through periods of economic weakness, supporting its asymmetric return profile. We would point out that BYD is trading at an EV/EBITDA-to-growth (EVG) ratio of 1.1 times (on 2020, pre–IFRS 16), well below its peer group average of 1.8 times.”
“While the stock has appreciated 75 per cent in the last 12 months and 3 per cent in 2020 to date (vs 11 per cent and 1 per cent, respectively, for the S&P/TSX), we believe the strong upside momentum should continue.”
Expecting a “brighter” future, RBC Dominion Securities analyst Nik Modi raised Colgate-Palmolive Co. (CL-N) to “outperform” from “sector perform" on Monday.
“After a sustained period of under-performance, we believe CL shares are poised to outpace the returns of its mega cap peers for the following reasons: 1) Colgate’s 2020 guidance is both achievable and beatable; 2) CL shares are under-owned by institutional investors; and 3) CL is poised to benefit from the growing popularity of ESG investing,” he said.
He hiked his target to US$91 from US$69, which exceeds the US$75.07 consensus.
“According to the study on ESG funds by the RBC equity strategy team, CL is among the most popular S&P 500 names in both passive and active sustainable equity funds, but not other active managers,” said Mr. Modi. “This may suggest: 1) as inflows into the sustainable equity funds surged in both active and passive funds, CL is poised to benefit and we have already seen some early evidence from increased fund ownership; 2) CL may currently be relatively under-owned among active managers (an opportunity).”
“We believe current top-line momentum warrants a higher longer-term top-line assumption and we believe Colgate can get EBIT leverage due to moderating costs and advertising levels almost back to peak-levels,” the analyst said.
Credit Suisse’s Telecommunications Services analyst Douglas Mitchelson made a trio of rating changes to stocks in his coverage universe on Monday.
Seeing a lack of catalysts, Mr. Mitchelson lowered Verizon Communications Inc. (VZ-N) to “neutral” from “outperform” with a US$65 target. The average on the Street is US$61.61.
“2020 will be back-half weighted for Verizon due to first half investments to drive wireless market share in advance of the true mass market launch of 5G this fall and to reposition the Business division following the Verizon2.0 reorganization of the company around Business and Consumer customer segments,” he said. “Management expects these investments to result in accelerating growth into 2021, but we expect investors will take a wait and see attitude given the always uncertain wireless competitive environment and wireline secular headwinds. Further, investors remain concerned that Verizon does not have enough wireless spectrum to compete longer-term, though operational performance sustains at healthy levels. This dynamic might not be resolved until the C-Band auction is concluded (Verizon thinks late 2020), and we estimate resolution will come at a $15-billion cost (for 80 MHz). Management noted share repurchases are now part of its capital deployment framework, but we don’t expect these near-term unless the C-Band auction is delayed (which would not be a net positive). We also see the risk cable companies will shift their MVNO usage to AT&T, and market share and customer acquisition cost shifts as each carrier pursues 5G iPhone customers this fall are unknown, though Verizon appears very well positioned to compete in 5G given brand and mmWave advantages.”
He is also “stepping to the sidelines” on ViacomCBS Inc. (VIAC-Q), moving its stock to “neutral” from “outperform” with a US$37, down from US$52 and below the US$46.84 consensus.
“We are lowering our rating .... as a result of a second meaningful downward FCF revision post the Viacom/CBS merger announcement. ViacomCBS’s new, less cash-generative profile reduces its ability to repurchase shares (which would have helped offset long-term terminal value concerns), and makes the company’s P/FCF valuation less compelling relative to its inherent risks," the analyst said. “While we acknowledge the potential shares might be oversold in the short-term (driven by Street estimate cuts and traditional pay TV shortfalls for 2020) and trade at a deep discount to asset value, as well as the clear potential for CEO Mr. Bakish to drive enhanced merger synergies, we now see only 8-per-cent upside potential to our new $37/share target price for 2020, for which a Neutral rating is appropriate.”
Conversely, he raised Charter Communications Inc. (CHTR-Q) to “outperform” to 'neutral."
“We are upgrading Charter ....as we reassess the value being created by successful Time Warner Cable integration overlaid with our overweight view on the cable sector (with our ‘broadband stronger for longer’ thesis and improving opex and capex efficiency) and management’s clear levered equity returns focus,” he said. "Given 4Q results and management commentary we have increased confidence in the 2020-21 outlook, including faster growth for broadband customers, margin expansion, and FCF generation – we now see scope for $60-billion of stock buybacks the next 4 years vs. its $120-billion market cap. Notwithstanding Charter shares already returning 70 per cent in 2019 and carrying a less approachable valuation than peers, we expect outsized EBITDA and FCF growth will lead to 20-per-cent upside in 2020
His target rose to US$600 target US$520 “due purely to higher FCF estimates.” The average is US$542.48.
In other analyst actions:
AltaCorp Capital analyst Patrick O’Rourke reiterated his “speculative buy” rating for Delphi Energy Corp. (DEE-T) after company off research restriction following a $46.5-million equity raise and a 15-to-1 share consolidation. He set a $1.50 target for its stock.
“Overall, we view the event as positive to the business model and see considerable potential upside to the newly reset equity base, with significant financial and equity leverage to NAV upside. That being said, we continue to view the equity investment on the ‘Speculative’ side given a number of factors including current financial leverage, market capitalization size/liquidity, evolving West Bigstone results, and the potential for another material transaction at some point in the medium-term,” he said.