Inside the Market’s roundup of some of today’s key analyst actions
A trio of equity analysts on the Street adjusted their ratings for Canada Goose Holdings Inc. (GOOS-T) on Monday in response to its warning about the impact of the coronavirus epidemic.
On Friday, the luxury apparel maker slashed its 2020 financial expectations, pointing to lower store traffic in China and travel restrictions. It now expects revenue to grow between 13.8 per cent and 15 per cent, compared with its prior forecast of at least 20-per-cent growth.
Before the bell, Cowen analyst Oliver Chen lowered Canada Goose to “market perform” from “outperform," expressing concern over the potential for “further downside given next year’s estimates could face substantial downside depending on the duration of Coronavirus.”
Mr. Chen projects tourism-related traffic slowdowns could result in 10-20-per-cent downside to earnings per share this year with the potential for more in fiscal 2021.
Also noting its Canadian business, which represents 30 per cent of total revenue, is “maturing” and facing “tough” retail competition moving forward, he lowered his target for Canada Goose shares to $29 from $50. The current average on the Street is $52.68, according to Bloomberg data.
Elsewhere, Goldman Alexandra Walvis lowered the stock “neutral” from “buy” with a $34 target, down from $44.
Ms. Walvis pointed to the potential for “choppier growth ahead,” as well as higher risks and a “maturing growth algorithm.”
Though she sees the impact from the virus as temporary, she also expressed concern over slowing domestic growth and the fact that new stores have been a “progressively smaller” contributor to sales.
Conversely, Baird analyst Jonathan Komp raised the stock to “outperform” from “neutral” with a $53 target (unchanged), believing investor concerns are currently “embedded” in its share price.
“We were encouraged to see GOOS only fall modestly after cutting EPS estimates more than 20 per cent on coronavirus,” said Mr. Komp, who sees “relatively limited one-year out downside.”
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Scotiabank analyst Sumit Malhotra thinks “'dividend delivery’ is the appropriate close to a capital-driven run” for Canadian life insurance companies in 2019.
“Investor sentiment towards the Canadian life insurance sector has undertaken virtually a complete 180- degree turn over the past calendar year, which in our view is best reflected by the upswing in the valuation multiples that the stocks have enjoyed,” said Mr. Malhotra in a research note released Monday.
“While we concede that the rise in aggregate equity markets have helped, the key valuation measures for the lifecos today – 10.1 times our 2020 estimates and just under 1.5 times BVPS [book value per share] – are roughly 20 per cent above the comparable metrics (8.7 times our 2019 estimates and just over 1.2 times BVPS) that were accorded a year ago, which has played a big role in the 40-per-cent surge in the TSX Life & Health Insurance Index since the start of 2018. By comparison, on the other side of our coverage universe we note that that while the rebound in the TSX Bank Index has been a more moderate 13 per cent, the level of multiple expansion for the banks has been especially constrained (10.7 times our 2020 estimates and 1.67 times P/B today as compared to 10.4 times & 1.74 times a year ago), which we believe reflects the divergence in fundamental trends between the two sectors.”
In explaining that rise in investor confidence, Mr. Malhotra pointed to three factors: “(1) stable policyholder experience; (2) reduced sensitivity to macro factors; and (3) the strength of the balance sheet position that the sector has exhibited.”
He added: “While the first two factors have resulted in a reduction in the so-called ‘black box’ aspect long associated with lifeco earnings power, the improvement in capital strength - and seemingly less regulatory impediment with respect to deployment (i.e., no lifeco equivalent to the DSB) - have significantly improved investor sentiment towards the stocks, which now trade at 10.1 times our 2020 estimate (versus the comparable 8.7 times multiple accorded at this time a year ago).”
However, pointing to its “massive move” in 2019, Mr. Malhotra downgraded IA Financial Corp. (IAG-T) to “sector perform” from “sector outperform” ahead of the release of its quarterly results on Feb. 13.
“We have watched (with glee) as IAG shares have surged from a 1.05 times P/B multiple in early-Aug to the 1.48 times mark it enjoys today, with the massive re-rating carried by the ‘triple play’ of significant EPS revisions, ROE expansion, and immediately accretive capital deployment,” he said. “In other words, the company has ticked all of the fundamental boxes we were looking for, and though we expect Q4 will be solid (strong EPS growth, dividend hike, likely increase in the ROE objective), as the focus shifts to the IAS integration we think a move down to a SP-rating is appropriate.”
Mr. Malhotra increased his target for IA shares to $80 from $77. The average is $79.50.
“We believe the surge in IAG shares (73 per cent since the start of 2019, and 45 per cent in the past six months) has brought valuation to levels (1.48 times last reported BVPS, a 7-per-cent P/E premium as opposed to the 8-per-cent discount seen in early-Aug) at which we think the ‘good news’ is priced in,” he said. “In addition, the near-term catalysts are no longer as evident, as we expect the focus at IAG will shift to the integration of the IAS acquisition as well as re-building the capital position (sector-low pro forma LICAT ratio of 117 per cent).”
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RBC Dominion Securities analyst Maurice Choy thinks TransAlta Corp. (TA-T) is “likely to attract interest from investors seeking a combination of exposure to the upside in the Alberta energy-only power market, an ESG ‘rate of change’ proposition (as it converts coal to gas generation.)”
Also seeing its current valuation as providing an attractive entry point, Mr. Choy raised his rating for TransAlta to “outperform” from “sector perform.”
“At the current share price level, we see the stock as being undervalued by the market, noting that the residual business has an implied valuation of under 4 times, which is low both from an absolute and comparative basis (i.e., when compared to Canadian and U.S. merchant independent power producers),” the analyst said. “Further, we estimate this residual business to have around a 3.5 times adjusted net debt to EBITDA, with a pathway towards improvement as the coal-togas conversions complete, and as the debt is serviced by cash distributions from RNW and the hydro business.”
Mr. Choy said he sees TransAlta’s recent dividend increase “positively,” seeing it as sign of its confidence in its outlook and future cash flow.
“The Alberta power price, capacity factors and the carbon price remain key variables, and to these ends, we believe the success of TransAlta’s coal-to-gas conversions may better position its assets in the Alberta energy-only market moving forward,” he said.
“While TransAlta’s coal generation would have screened negatively by many investors focused on the Environmental attribute, we believe the company’s coal-to-gas strategy and recently published 2020 and longer-term ESG goals should appeal to investors seeking a stock with a ‘rate of change’ proposition.”
Mr. Choy raised his target price for TransAlta shares to $13 from $11. The average target on the Street is $11.42.
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Citing "tactical positioning, recovering macro and expected FCF generation,” National Bank Financial analyst Maxim Sytchev raised ATS Automation Tooling Systems Inc. (ATA-T) to “outperform” from “sector perform.”
“ATA shares are oversold on RSI. Historically when RSI reached similar levels, 3-month subsequent return was generally (and materially) positive,” he said. “Recall that we cooled down on ATS shares after the overpaid Comecer deal (relative to own multiples); notwithstanding our positive view on the acquired asset. With shares dipping below 200-day MA [moving average], we believe there is a tactical opportunity to exploit. Hence, we are upgrading ATA shares.”
“Other considerations for the upgrade include: 1) Restructuring noise will subside in the upcoming quarter as $18-million out of $25-million charge was booked in FQ3; 2) Backlog-revenue conversion is well-telegraphed and already in the numbers; 3) Manufacturing PMIs are bottoming; 4) CAPEX spike should normalize over the next 2 years; 5) We believe management is now more sensitive to how investors perceive a large-scale deal at materially higher than own trading multiples; 6) Working capital should normalize in FQ4; 7) Key verticals (Life Sciences and EV) are still robust.”
Mr. Sytchev maintained a target of $22.50. The average on the Street is $24.85.
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Touting its “solid execution, outlook and opportunities,” RBC Dominion Securities analyst Steve Arthur thinks CAE Inc. (CAE-T, CAE-N) warrants a “moderate” premium following last week’s release of “solid” third-quarter results that exceeded his expectations.
“CAE shares have jumped 21 per cent year-to-date, largely (in our view) on growing investor awareness of CAE’s potential role in supporting the 737 MAX return to flight,” said Mr. Arthur. “We fully agree that CAE has a critical role to play and will capitalize on the opportunity, though struggle to see incremental earnings to match the share price move. The previously discounted valuation has now become a modest premium to the A&D group, but .... we like the ‘textbook fundamentals’ at CAE and see a premium valuation as warranted.”
Pointing to the company’s “modestly” higher earnings outlook, Mr. Arthur increased his target for CAE shares to $45 from $41, keeping an “outperform” rating. The average on the Street is $41.67.
“Recent share strength (up 21 per cent year-to-date) does give us pause, but we see a moderate premium (24.5 times calendar 2020 estimated price-to-earnings vs. A&D peers averaging 23.5 times) as justified by CAE’s core fundamentals,” the analyst said.
Elsewhere, Scotiabank Financial analyst Konark Gupta cut CAE to “sector perform” from “sector outperform” with a target of $43, rising from $38.
“We expect the seasonally strongest FQ4 and Boeing MAX aircraft’s potential return to service this year to act as potential catalysts in the near term,” said Mr. Gupta. “However, we are downgrading our rating to SP from SO given the stock has gained 21 per cent year-to-date (vs. TSX 3.5 per cent) and valuation is not as compelling, likely already discounting some of the upcoming catalysts. While we continue to like CAE as a long-term growth compounder, we suggest waiting for a more attractive entry point. Our earnings outlook has improved slightly, largely on Defence rebound, and there could be some more upside potential to our Street-high estimates from MAX (near-term) or M&A (longer-term). On the flip side, there could be downside risk to our estimates in the near term from coronavirus.”
Desjardins Securities’ Benoit Poirier hiked his target to $43 from $36 with a “hold” rating (unchanged).
Mr. Poirier said: “We continue to like CAE in the long term for its resilient business model and robust growth prospects. Nevertheless, we prefer to remain on the sidelines as we await a better entry point before buying the stock given the limited 5-per-cent potential return to our target price.”
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Calling it a “digital health play disrupting primary care,” Canaccord Genuity analyst Raveel Afzaal initiated coverage of WELL Health Technologies Corp. (WELL-T), a Vancouver-based medical services provider, with a “hold” rating.
“In our opinion, the share price is factoring in substantial growth from initiatives which are at an early stage. This is because of management’s track record and exposure to a large market that is ripe for disruption,” he said.
Mr. Afzaal emphasized the presence of “visible” growth drivers for both its digital and clinical verticals, noting: “WELL appears competitively positioned to increase average revenue per user and margins of the OSCAR EMR service providers through the launch of new modules developed by thirdparties such as online booking, virtual check-in, virtual care and improved cybersecurity. These features are highly sought after by Canadian patients and can also help optimize the admin staff to doctor ratio, which represents a significant portion of the overall clinical’s expenses. WELL intends to leverage these modules to improve the profitability of its clinics. Further, it looks to continue consolidating the fragmented primary care market and utilize best HR practices to improve the utilization rate of its clinics.”
Though he pointed to the company’s “established” foothold in the primary care market and the presence of long-term macro headwinds, Mr. Afzaal said he gave the neutral-equivalent rating as he seeks “further visibility on timing and magnitude of these growth initiatives.”
He set a $1.80 target for its shares, which falls 80 cents below the average on the Street.
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Having seen a jump of almost 200 per cent since August, Profound Medical Corp. (PRN-T, PROF-Q) is “fully valued by the market,” according to Mackie Research analyst Andre Uddin.
That prompted him to lower his rating for the Mississauga-based medical equipment manufacturer to “hold” from “speculative buy.”
Despite the downgrade, Mr. Uddin said Profound sits in a “solid” position fundamentally, seeing a “clean and solid” balance sheet and poised to see a rise in revenue south of the border.
“We expect the U.S. commercialization of TULSA-PRO to provide PRN with robust growth,” he said. “Our total revenue estimates, which gave us a generous valuation for the company, are ahead of consensus – $23-million versus $15-million for 2020 and $62-million versus $43-million for 2021. We also expect PRN to turn profitable in 2021 vs. 2022 by the street.”
Mr. Uddin increased his target to $26.10 from $20.30. The average is currently $32.41.
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In other analyst actions:
* BMO Nesbitt Burns analyst Mark Wilde raised Domtar Corp. (UFS-N, UFS-T) to “market perform” from “underperform” and increased his target to US$36 from US$33. The average on the Street is US$38.
“While we remain conscious of structural declines in paper and risks to a nascent recovery in the pulp market, further downside in the stock appears limited,” he said.
“We applaud recent progress in improving Personal Care segment and timeliness of Domtar’s share repurchase activity. Domtar has well-capitalized white paper assets with repurposing potential and could also move to sell its Personal Care segment.”
* Pointing to “updated reserves, commodity strip prices and current market sentiment,” Industrial Alliance Securities analyst Michael Charlton downgraded Crew Energy Inc. (CR-T) to “speculative buy” from “buy” with a target of 75 cents, falling from $1 and below the current consensus of 88 cents.
“While we see great potential in Crew given its UCR well results and ample borrowing capacity given $53-million drawn against its $235-million credit facility at year-end, the company’s optically high debt levels continue to drag on investor sentiment given the $300-million of 2024 notes outstanding that drives its Net Debt to CF ratios above 4.0 times,” he said. “We expect Crew will continue to pursue more non-core asset sales this year to pay down debt while maintaining a flattish production profile and spending within cash flow.”
* Scotiabank’s Mario Saric upgraded NorthWest Healthcare Properties Real Estate Investment Trust (NWH.UN-T) to “sector outperform” from “sector perform” with a $14 target, up from $13.25 and above the consensus of $13.10.
* Cleveland Research downgraded Nutrien Ltd. (NTR-T, NTR-N) to “neutral” from “buy.”
With files from Bloomberg
David Leeder