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Inside the Market’s roundup of some of today’s key analyst actions

Dollarama Inc. (DOL-T) is “good value in a difficult environment,” according to Industrial Alliance Securities analyst Neil Linsdell.

Ahead of the release of its fourth-quarter 2020 financial results on April 1, Mr. Linsdell raised his rating for the discount retailer to “buy” from “hold” in the wake of the recent pullback in its share price, despite reducing his forecast due to the “volatile” retail environment.

For the quarter, which ended on Feb. 2, Mr. Linsdell expects revenue to slip 0.3 per cent to $1.057-billion, matching the consensus on the Street. He projects same-store sales to rise 0.8 per cent.

“The calendar shift from last year will further disadvantage Q4 revenue growth as three Halloween shopping days fell into Q3 this past year versus benefiting Q4 last year (making the Q4 comparison more difficult),” the analyst said. “Similar to last quarter, we expect to see a decline in profitability (when excluding the boost from the change to IFRS 16) from increased logistics costs due to disruptions related to the expansion of the distribution centre, as well as increased shipping costs on ocean freight as new rules on cleaner maritime fuel (IMO 2020) came into effect on Jan. 1.”

However, Mr. Linsdell downplayed the importance of the quarterly results, turning his focus toward the retailer's forecast for fiscal 2020 and the impact of COVID-19 moving forward.

"In the last two weeks, we have seen panic buying, which we expect to be beneficial given Dollarama’s assortment of essential products, although other product categories, such as party supplies, may somewhat offset this surge," he said. "As we see more normalized stocking levels at other grocery chains, we expect the nationwide quarantines and social distancing initiatives to lead to reduced traffic flow. As such, we are trimming our F2021 and F2022 forecasts ahead of the Q4/F20 results as we are now anticipating that panic buying in mid-March will be offset by slightly lower foot traffic through the remainder of Q1 (Feb-Apr) and even into Q2, despite expecting Dollarama to a favoured (discount) retailer in times of economic uncertainty. We are also reducing our forecast for new store openings in F2021 from 65 to 60 stores. As a result, we are trimming our F2021 sales growth forecast to just 1.9 per cent (from 7.8 per cent). Despite the lower sales growth, and statements about hiring additional staff, we still expect good cost controls, and cost savings projects that were already in progress to leave only a minor impact on our EBITDA margin forecast for F2021, which is now 29.3 per cent (down from 29.4 per cent)."

With that view, his 2020 and 2021 earnings per share projections slid to $1.89 and $2.23, respectively, from $2.06 and $2.24.

Mr. Linsdell trimmed his target price for Dollarama shares to $41 from $45. The average target on the Street is $47.54, according to Thomson Reuters Eikon data.

“The recent share price decline more than offsets our target price reduction, to now provide an 11.8-per-cent potential return,” he said. “Within this uncertain and volatile environment, we see Dollarama, with its discount retail offering, with an assortment of everyday items, including cleaning products, to be a good investment option for investors. As such, we are upgrading our rating.”


TSX-listed midstream energy stocks are designed to "absorb minor shocks," according to Industrial Alliance Securities analyst Elias Foscolos.

He said, however, they're currently being "test with 'once in a generation' style major tremors."

"Last week, stocks within the midstream sector experienced typical annual share price movements in just one day (plus/minus 25 per cent) leaving both analysts and investors in a zombie-like state of confusion," the analyst said. "These daily price swings vastly eclipsed movements in the broader market with Midstream companies’ share prices gyrating like junior E&P producers. In our view, these movements are a combination of the impacts of the '3Ps' acting at once – this includes the COVID19 (Pandemic) virus’ impact on the economy combined with the Saudi Arabian (the Prince) oil price market share war against Russia (Putin)."

In a research note released Monday before the bell, Mr. Foscolos slashed his financial expectations for the sector and downgraded his rating for one prominent company.

"The trade off between growth capital spending acquisitions and dividends has never been something that we (and we believe the market) has ever considered in terms of evaluating our coverage universe," he said. "The current situation facing the industry can be summed up as a global natural disaster, compounded by an oil price war, that will lead to an economic decline and finally a potential financial liquidity crisis. While credit markets have usually been accessible to Midstream companies, we have to believe even if they are accessible in the near term, they will be much more expensive to tap into or rely on a larger equity cushion. Furthermore, the equity markets have been much more expensive as investors have been repricing the risk of Midstream companies."

Mr. Foscolos thinks companies will be forced to follow the lead of Pembina Pipeline Corp. (PPL-T), which announced last week it is reducing its 2020 capital program (from $2.3-billion to $1.2-$1.4-billion). He called the move “very prudent.”

“The trade off between growth capital spending acquisitions and dividends has never been something that we (and we believe the market) has ever considered in terms of evaluating our coverage universe,” he said. “The current situation facing the industry can be summed up as a global natural disaster, compounded by an oil price war, that will lead to an economic decline and finally a potential financial liquidity crisis. While credit markets have usually been accessible to Midstream companies, we have to believe even if they are accessible in the near term, they will be much more expensive to tap into or rely on a larger equity cushion. Furthermore, the equity markets have been much more expensive as investors have been repricing the risk of Midstream companies.”

Mr. Foscolos lowered his rating for a pair of companies. They are:

Inter Pipeline Ltd. (IPL-T) to “hold” from “buy” with a $11 target, falling from $20. The average is $18.56.

“The downturn in commodity prices and general macro uncertainty increases the risk for investors holding IPL stock,” he said. “The best case scenario we see is the sale (or partial sale) of some assets, but that will not necessarily alleviate pressure on the dividend and the dilutive impact of the DRIP. While we see upside, the risk level has been elevated forcing us to rate IPL stock.”

Mr. Foscolos also made the following target price reductions:

  • AltaGas Ltd. (ALA-T, “buy”) to $16 from $21. Average: $20.80.
  • Gibson Energy Inc. (GEI-T, “buy”) to $21 from $27. Average: $26.07.
  • Keyera Corp. (KEY-T, “strong buy”) to $28 from $36. Average: $33.50.
  • Parkland Fuel Corp. (PKI-T, “buy”) to $37 from $47. Average: $48.50.
  • Superior Plus Corp. (SPB-T, “buy”) to $10.50 from $14.50. Average: $13.50.
  • Tidewater Midsteam & Infrastructure Ltd. (TWM-T, “hold”) to $1.05 from $1.15. Average: $1.40.


In a separate note, Mr. Foscolos lowered Mullen Group Ltd. (MTL-T) to “hold” from “buy” in response to Friday’s announcement that it has suspended its monthly dividend as part of a series of measures in response to the "unprecedented declines in economic activity related to spread of COVID-19.”

“While the economic impacts of COVID-19 should have a material impact on MTL’s business, the Company will continue to supply goods through its logistics operations that are considered essential,” said Mr. Foscolos. “The Canadian government has designated truck drivers as an essential service, and MTL mentioned that business has been robust in its Less-Than-Truckload segment, which is generally driven by consumer demand, thus we expect a solid Q1. To cushion the blow to employees, an Employee Financial Assistance Fund has been established.”

After the bell on Friday, Okotoks, Alta.-based Mullen announced its suspending its monthly 5-cent-per-share dividend for three months beginning in April. It plans to maintained its capital budget, but acquisitions will likely slow.

“We believe that the duration of the suspension will ultimately be dependant on how quickly economic activity is able to return to normal,” said Mr. Foscolos. “In our view, this is in keeping with MTL’s ultra-cautious approach to running the business, which necessitates that nothing should be paid out to shareholders until the situation is more clearly understood.”

“The dividend suspension highlights the uncertainty of the current situation on not just MTL but GDP as a whole. As a result, we have substantially decreased our revenue and margins resulting in lower EBITDA. Based on our calculation this lowered outlook does not result in a covenant breach. Should the situation continue to remain uncertain, MTL has further flexibility to extinguish debt using excess cash on its balance sheet.”

With his lower financial projections, Mr. Foscolos reduced his target for Mullen shares to $6.50 from $10. The average on the Street is $9.38.

“MTL’s announcement that it is suspending its dividend highlights the broad ramifications of this economic slowdown outside energy focused stocks," he said. “In our view, the dividend suspension is meant to protect the company until the situation can be evaluated, at which time we anticipate a revised and reduced dividend.”


PepsiCo Inc.'s (PEP-Q) valuation has “gone flat but should get bubbly again soon,” said RBC Dominion Securities analyst Nik Modi.

Seeing its recent investments bolstering top-line growth over the long term, Mr. Modi raised his rating for Pepsi shares to “outperform” from “sector perform.”

“Our call is pretty simple,” he said. “After a complete review of our model and assessing PepsiCo’s strategic direction under CEO Ramon Laguarta, we believe the company will be able to deliver better long-term revenue and profit growth than we had previously assumed. Investments behind marketing, digital, infrastructure should start to pay dividends. We believe the recent sell-off of PEP provides an attractive entry point for a long-term compounder.”

“The prospects of more sustainable top-line over the long term, paired with current valuation (17.5 times NTM P/E [next 12-month price-to-earnings] vs. 5-yr historical avg. 21 times and large cap peers 18.5 times), drive our upgrade.”

After "modestly" raising his organic sales growth and earnings per share projections, Mr. Modi hiked his target to US$153 from US$115. The average on the Street is US$143.59.

“We point out that since Feb. 19 (market peak), PEP has experienced the second-worst multiple contraction across the group (down 28.5 per cent), implying substantial earnings downside — a risk we see as limited given that the uptick in volume from pantry loading should more than offset the headwinds from FX, supply chain disruption, and channel mix (reduced advertising spend as a result of higher consumer demand will also serve as an offset,” he said.

In a separate note, Mr. Modi raised The Boston Beer Company Inc. (SAM-N) to “outperform” from a “sector perform” rating, seeing its shares as “truly dislocated.”

“Since 2/19, SAM’s multiple has contracted by 25 per cent (from 36.6 times to 27.3 times), which suggests the market is pricing in nearly 30-per-cent earnings risk,” the analyst said. “Our math suggests EPS risk is closer to 3–5 per cent. We see SAM as relatively insulated from current market dynamics, as on-premise represents only 15 per cent of SAM [Sam Adams] sales and [Truly Spiked & Sparkling] should continue to benefit from hard seltzer category growth (as well as pantry loading). We raise our FY’20 shipment growth estimate to 24 per cent (from 20 per cent) and lower our EPS forecast to $10.69 (from $11.04) given that the company will likely become more reliant on third-party manufacturers near-term to keep up with demand.”

He hiked his target for shares of the company to US$424 from US$346. The average is US$411.09.


Though she remains “positive” on its stock, RBC Dominion Securities analyst Kate Fitzsimons slashed her target price for Lululemon Athletica Inc. (LULU-Q) shares ahead of the release of its fourth-quarter results on Thursday.

“Given their positive January ICR update, our expectation is for a 4Q beat versus prior raised mid-to-high teens comp and $2.22-$2.25 EPS guide,” she said. “Focus will be on current trends given COVID-19 related store closures in North America and Europe. With state lockdowns rising by the day, a 1Q/2020 outlook would be optimistic, in our view.”

“The company announced full 12 days of store closures in North America and Europe from March 16-27 (suggesting at least a 14-per-cent comp impact in 1Q just from planned closures off a likely double-digit comp in February/early March). Notably, ecommerce remains live. While we expect that can serve as some offset, we’ve seen search interest trends in the most recent week tick down: now up only 3 per cent year-over-year versus its standard mid-twenties run rate and likely to turn negative.”

Ms. Fitzsimons reduced her 2020 earnings per share expectation for the Vancouver-based company to US$3.34 from US$5.72, , a drop of 32 per cent year-over-year. She now projects a comp decline of 10 per cent.

“Our model assumes declines of 19 per cent, 10 per cent and 1 per cent from 2Q-4Q as efforts to flatten the curve pan out and allow customers time to leave their homes,” she said. “LULU’s SG&A model tilts more variable vs. fixed, which should provide some downside protection vs. other-fixed cost heavy retailers. With inventories growing double-digits likely entering 1Q, we would expect some potential write-down on inventory impacting the merch margin on the swift sales decline. Recall 2013′s Luon write-down was in Street numbers. Our downside scenario points to EPS of $2.23 on negative 18-per-cent comps. Importantly, in our updated and downside analysis, we see LULU as generating healthy free cash flows on our expectation for reduced capex and WC management.”

Maintaining an “outperform” rating, she dropped her target to US$195 from US$265. The average on the Street is US$246.11.

“LULU has been an impressive share gainer in the athletic and apparel category generally over the last several years,” said the analyst. “We expect that could remain the case, particularly as retail bankruptcies (including athletic) mount in the coming months. Realistically, strong brands with strong loyalty with an emphasis on innovation will be the survivors. Further, lululemon’s balance sheet is very clean. Exiting 3Q, LULU had no debt, $586-million in cash, clean inventories, and untapped revolver of $400-million – positioning the company exceptionally well versus levered peers.”


A group of equity analysts lowered their ratings for BRP Inc. (DOO-T) on Monday following last week’s earnings release and the announcement of the suspension of its dividend.

Though he thinks it’s “still a leader,” CIBC World Markets’ Mark Petrie downgraded the recreational vehicle maker to “neutral” from “outperformer,” seeing the environment as “too tough."

“BRP capped a record year with strong Q4 results ahead of expectations,” he said. “Though Q1-to-date has been healthy, we expect results to be materially impacted by COVID-19 related shutdowns and follow-on impacts. BRP’s better-than-industry growth offers some insulation, and today’s share price will likely lead to attractive longer-term returns, but we see too much nearterm risk and uncertainty over our forecast period to recommend buying shares today.”

Mr. Petrie reduced his target to $28 from $70. The average on the Street is $52.50.

“BRP shares are pricing in significant damage to near-term earnings, having fallen 67 per cent from mid-February," he said. "In that context, we believe they represent excellent value for patient investors willing to ride out the uncertainty. And although BRP carries a reasonable amount of leverage, its lack of financial covenants, distant maturities (none until 2024/2025) and substantial cash position (especially including the $700-million now withdrawn under its revolver) help ensure its ability to navigate all but the most calamitous outcomes.

“But at the same time, we believe the COVID-19 pandemic will take a substantial toll on consumer confidence, balance sheet and spending habits. And as a highly discretionary purchase, BRP’s product lines will be hit hard. We have reduced our earnings forecasts materially, particularly in H1, and introduce F2022 forecasts based on a modest recovery. The powersports industry took five years to rebuild earnings in the Financial Crisis, and while it is nimbler this time around, conditions are very different. While we acknowledge much of this is priced in, it could be several quarters before we have sustained positive news to re-ignite consumer demand.”

BMO Nesbitt Burns analyst Gerrick Johnson dropped the stock to "market perform" from "outperform" with a $26 target, down from $72.

Mr. Johnson said: “While being best-in-breed in key powersports categories, those categories are dependent upon consumer discretionary spending, which we think will be significantly constricted over the next 6 to 12 months, if not longer. ... The company suspended its dividend, declined to provide FY21 guidance, and drew down its revolving credit facility of $700 million to the maximum. If DOO is preparing to hunker down, so should investors.”

TD Securities’ Brian Morrison dropped BRP to “hold” from “buy” with a $30 target, down from $74.

Elsewhere, Desjardins Securities' Benoit Poirier lowered his target to $37 from $75 with a "buy" rating.

Mr. Poirier said: “BRP has not been impacted by the COVID-19 outbreak yet although management made it clear that it will represent a significant headwind in the months to come as the situation evolves rapidly. Overall, while we expect the situation to deteriorate through FY21, we believe BRP is strong enough to face this crisis. We see value in the shares at current levels for long-term investors and therefore reiterate our Buy rating.”


Though he sees its concerns lingering after COVID-19 subsides, Goldman Sachs analyst Noah Poponak raised Boeing Co. (BA-N) to “buy” from “neutral,” expecting air travel to “be as popular as ever.”

Mr. Poponak thinks it stock “should be procured at the current price that is down 70 per cent year-to-date, 80 per cent from 2019 highs.”

He lowered his target to US$173 from US$256. The average is US$203.94.


Expressing concern about the impact of COVID-19 on the hospitality industry, Echelon Wealth Partners analyst Douglas Loe lowered K-Bro Linen Inc. (KBL-T) to “hold” from “buy.”

“K-Bro’s FQ419 financial data themselves were actually solid by our expectations, exceeding our forecast on both EBITDA and margin in what tends to be a seasonally soft financial period (hospitality volumes tend to subside in the period and in FQ1, thereafter exhibiting seasonal strength in FQ2-FQ3 in most fiscal years),” he said.

“With FQ419 data in the rear-view mirror and with current operational macro-environment for the hospitality sector that K-Bro serves already encountering seismic challenges (K-Bro’s datapoint on average occupancy across its hospitality client network already dipping to about 10 per cent was particularly sobering for us), we are revising our hospitality revenue/EBITDA forecasts accordingly."

Mr. Loe said “substantially reduced” hospitality revenue projections for both Canada and the UK is warranted at least for the next few quarters.

For 2020, he dropped his revenue for Canadian hospitality operations by quarter to $7.8-million, $3.4-million, $4.1-million and $7.9-million respectively, down from $12.1-million-to-$16.3-million a year ago.

“Our quarterly revenue growth trajectory implies that we anticipate modest recovery in hospitality processing volumes by FQ420, a reasonable expectation in our view but one that is clearly subject to refinement as new macro-economic and epidemiological data emerges,” he said.

Mr. Loe sliced his target to $27 from $45.50. The average is $39.93.

“With heightened medium-term business risk on the horizon, and with F2020 quarterly financial data likely to tangibly be impacted by new risk, we are shifting our rating on KBL,” he said.

Elsewhere, Eight Capital’s Ammar Shah lowered the stock to “neutral” from “buy” with a $28 target, down from $50.


Pointing to COVID-19-related concerns about mid-market and end-consumer demand for diamonds, BMO Nesbitt Burns analyst Edward Sterck downgraded a trio of companies on Monday.

“The coronavirus (COVID-19 virus) pandemic and Europe-wide lock-down are significantly weighing on diamond market sentiment,” he said.

His moves were:

Lucara Diamond Corp. (LUC-T) to “market perform” from “outperform” with a 50-cent target, falling from $1.25 and below the $1.49 average.

“Lucara remains in a robust financial position and, in our view, is by far and away the best positioned of the diamond producers we cover," he said.

Mountain Province Diamonds Inc. (MVPD-T) to “market perform” from “outperform” with a 50-cent target, down from $1.50. The average is $1.92.

“At this point Gahcho Kué continues to operate as normal but the fly-in-fly-out nature of the operation could present a risk if Canada enacts domestic travel restrictions,” he said. “We think Mountain Province is operationally in a relatively sound position, but servicing the balance sheet requires a reasonably constant level of cash in-flows.”

Petra Diamonds Ltd. (PDL-L) to “market perform” from “outperform” without a specified target.

“Our principal concerns are that the COVID-19 virus could impact diamond demand and pricing, weighing on Petra’s free cash flow at a time when the balance sheet is in question,” he said. “A timely agreement with bondholders would present a significant positive catalyst for all parties.”


In other analyst actions:

* TD Securities analyst Mario Mendonca raised Manulife Financial Corp. (MFC-T) to “action list buy” from “buy” with a target of $27, down from $33. The average is $29.03.

* Mr. Mendonca moved Great-West Lifeco Inc. (GWO-T) to “buy” from “hold” with a $29 target, down from $35. The average is $33.

* Canaccord Genuity analyst Yuri Lynk upgraded Toromont Industries Ltd. (TIH-T) to “buy” from “hold” with a $66 target, down from $69. The average is $77.86.

* Scotia Capital analyst Paul Steep upgraded CGI Inc. (GIB.A-T) to “sector outperform” from “sector perform” with a $90 target. The average is $112.88.

* Mr. Steep cut Altus Group Ltd. (AIF-T) to “sector perform” from “sector outperform” with a $42 target, sliding from $46 and below the $46.44 average.

* TD Securities analyst Bentley Cross lowered Trilogy International Partners Inc. (TRL-T) to “hold” from “buy” with a target of $2.25, down from $3.25 and below the $3.22 the consensus.

* National Bank Financial analyst Shane Nagle cut three mining companies to “sector perform” from “outperform.” They are:

  • Filo Mining Corp. (FIL-X) with a $2.25 target, down from $4. The average is $4.03.
  • Nevada Copper Corp. (NCU-T) with a 30-cent target, down from 70 cents. The average is 80 cents.
  • Trevali Mining Corp. (TV-T) with a 15-cent target, down from 34 cents. The average is 30 cents.

* National Bank’s Patrick Kenny raised Gibson Energy Inc. (GEI-T) to “outperform” from “sector perform” with a $25 target, down from $30. The average is $26.07.

* Mr. Kenny also upgraded TC Energy Corp. (TRP-T) to “outperform” from “sector perform” with a $67 target, falling from $76. The average is $72.90.

Follow David Leeder on Twitter: @daveleederOpens in a new window

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