Monday’s analyst upgrades and downgrades

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

Citi analyst Paul Lejuez sees Lululemon Athletica Inc. (LULU-Q) as “stronger for longer” after its first-quarter 2023 results blew past expectations on the Street, sending its shares soaring 11.3 per cent on Friday.

“1Q sales/EPS were better-than-expected on every line item and much better than investors feared,” he said in a note released on Monday. “Amidst a choppy macro environment in the U.S., LULU grew sales 17 per cent in the region, underscoring the strength/health of the brand in its most well-developed market. International sales grew 60 per cent, well ahead of expectations, driven by 79-per-cent growth in Greater China, a big acceleration vs F22 30 per cent (a remarkable result, in our view, given the country was largely shut down). Management is reinvesting some of its sales/GM upside back into the biz, which we see as the right move to drive stronger growth for longer.

“With the U.S. market looking healthy and China a ‘coiled spring’ with several years of outsized growth likely ahead, we believe LULU is one of the most compelling growth stories in retail. With shares trading at a 1 times F24 estimated EV/EBITDA multiple (below NKE at 17.0 times), the risk/reward looks highly attractive.”

In response to the first-quarter beat and the expectation of higher international sales in fiscal 2023, Mr. Lejuez raised his earnings per share projection for 2023 to US$12.35 from US$12.10 and 2024 to US$14.99 from US$14.40.

“We note our F23 of $12.35 is above guidance of $11.74-11.94 based on stronger sales/margin,” he said.

Maintaining a “buy” recommendation for the Vancouver-based company, he increased his target for its shares to US$450 from US$440. The average is US$411.28, according to Refinitiv data.

“Investment highlights that support our Buy rating include: (1) inventory to sales gap better than expected and visible pathway to further improvement (with limited markdown pressure); (2) no sign of a sales slowdown with 1Q trends starting stronger than expected, and U.S. is positioned to grow low double-digits in F23, underscoring LULU’s brand strength/momentum in its largest market; (3) China is poised to rapidly accelerate growth in F23 and become a much more meaningful long-term growth driver (just 8 per cent of sales in F22 going to 22 per cent by F27); and (4) we model 20-per-cent-plus EPS growth annually through F27 as LULU unlocks its global growth potential (and it is not “over-earning” despite doubling sales from 2019 to 2022),” said Mr. Lejuez.

Elsewhere, Barclays’ Adrienne Yih raised her target to US$430 from US$413 with an “overweight” rating.

For further reaction: Friday’s analyst upgrades and downgrades

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CIBC World Markets analyst Hamir Patel is “moving to the sidelines” on Richelieu Hardware Ltd. (RCH-T), downgraded its stock to “neutral” from “outperformer” in response to strong recent appreciation and seeing signs of moderating demand for repair and remodeling supplies.

“In May, Home Depot and Lowe’s both reduced guidance for F2023,” he said. “Home Depot now expects F2023 comp sales to be down 2-5 per cent (vs. prior flat year-over-year guidance) [yr-ago up 3.1 per cent], partly due to greater-than-expected softening of consumption and continued uncertainty regarding consumer demand,” he said. “Similarly, Lowe’s is now guiding full-year 2023 comp sales to be down 2-4 perf cent year-over-year (vs. prior guidance of flat to down 2 per cent), partly due to underwhelming DIY discretionary sales. .... Both home improvement retailers contended with negative sales comps each month over the past fiscal quarter. While the Retailers category only comprises 15 per cent of RCH’s revenues, demand trends at the two major home improvement retailers tend to be indicative of broader R&R spending patterns.

“Although detailed R&R sales data by category is limited, Google search trends figures support anecdotal reports in recent months that consumers are pulling back on big-ticket projects as high interest rates make tapping HELOCs to finance discretionary home improvement projects less compelling. In Canada (source of 60 per cent of RCH revenues), rolling 12-month search trends for kitchen and bath remodels are off 45 per cent/50 per cent since their COVID peaks. Kitchen and bath cabinet makers represent 35 per cent of Richelieu’s Manufacturers mix. Demand for discretionary R&R in Canada is likely to face further headwinds over the next few years as more households see their budgets squeezed from rising shelter costs as their mortgage rates (typically five-year fixed in Canada) come up for renewal. While Richelieu’s end-use customers tend to skew higher income, we note that luxury furniture/lifestyle retailer, RH, is also expecting the luxury housing market to remain challenging into 2024.”

With Richelieu having outperformed peers over the last year, Mr. Patel now sees “more compelling risk/reward opportunities” in his wood products coverage universe.

“Over the medium to long term, we believe RCH is well positioned to deliver organic market share gains and execute on its M&A pipeline,” he said.

“When we upgraded Richelieu a year ago, we highlighted the name as a relatively recession resilient stock trading at a steep discount to its historical multiple. With the shares having outperformed the TSX Composite by over 30 per cent, valuation is less compelling as RCH now trades at 10.8 times 2024 EBITDA, right in line with its historical 12-24 month forward multiple (10.8 times).”

The analyst maintained a $46 target, below the $47.50 average on the Street.

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Seeing an “attractive risk-reward” and “meaningful upside,” BMO Nesbitt Burns analyst Étienne Ricard upgraded Fiera Capital Corp. (FSZ-T) to “outperform” from “market perform” previously.

In a research note, he listed " five sources of earnings upside potential for which minimal credit is granted at current valuations. They are: “First, improving investor sentiment for public market strategies considering stabilizing bond yields/equity markets year-to-date. Second, potential for improving flows from the regionalization of Fiera’s distribution resources (95 per cent-plus of equity/fixed income AUM outperforms benchmarks over 5 years). Third, AUM growth capacity at StonePine ($51-billion in AUM vs. $66-billion as of Q4/21). Fourth, fee rate upside given FSZ believes it has ‘differentiated strategies [with] pricing power.’ Lastly, continued cost optimization ‘as [FSZ] looks to drive efficiency.’”

Believing its “price is fundamentally disconnected from value with industry comparables that support a $9-15 per share value, a material disconnect to market,” Mr. Ricard maintained a target of $8.50. The average is $7.97.

“Our valuation framework is mindful of AUM attrition risk at StonePine and values FSZ at the low end of industry comparables,” he said.

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Stantec Inc. (STN-T) is “well positioned to provide strong investor return in future years,” according to Stifel analyst Ian Gillies.

In a research report released Monday, he reexamined his investment thesis for the Edmonton-based firm following a stretch of “impressive” share price performance “driven by strong earnings growth and multiple expansion.”

“Over the past year, Stantec has outperformed the S&P 500 by 33 per cent and S&P/TSX Composite Index by 40 per cent,” said Mr. Gillies. “Over a 5-year period, STN is up 148 per cent versus the S&P 500 at 57 per cent and S&P/TSX Composite at 25 per cent. The question that results from this is whether Stantec can continue to provide outperformance in future years. In our view, future returns should be healthy and the stock should continue to be a core holding, but matching share price performance similar to prior years will be a tall task.”

He cautions that there’s a “modest amount” of room for multiple growth, believing “valuation expansion will not be as material a contributor to stock price outperformance in future years as the company is already trading at 1.2-times premium to engineering average.”

“The company’s balance sheet and FCF profile leaves it in an enviable position whereby it can execute a significant amount of M&A without the need for discrete equity financing. We expect the primary driver of share price performance in future years to be driven by earnings growth tied to M&A; followed by organic growth; and then to a lesser extent multiple expansion,” he said.

“If the company could find sufficient acquisition opportunities to meet our scenario analysis, ROE would increase from 16.2 per cent in 2022 to the low 20s in the middle of the decade while FCF conversion could reach the low double digits from mid to high single digits by the same time frame as there is incremental gearing on the existing fixed cost base. These events tend to be imperceptible over short periods, but can help lead to valuation expansion over the course of time. Meanwhile, EPS growth for 2023-2028 period is 19.8 per cent.”

Keeping a “buy” rating, Mr. Gillies raised his target for Stantec shares to $93 from $86. The average on the Street is $89.60

“The juice continues to be worth the squeeze and adding new positions at this price level is attractive,” he concluded.

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While he predicts the likelihood of near-term pressure” for shares of Converge Technology Solutions Corp. (CTS-T) ahead of its removal from the S&P/TSX 300 Composite on June 19, Echelon Capital analyst Rob Goff continues to see “underlying fundamental value in the shares where forecasts balance improved supply-chain conditions with economic caution.”

“We look for pressure around the TSX Index removal and where the NCIB buying completes the program,” he said. “We would view pressure on the shares as a positive window given our fundamental view. We could see continued demand strength with Q223 results and the announcement of an SIB potentially together with the sale or sell-down of its stake in Portage as positive catalysts.”

“While imprecise, we estimate this move would impact roughly 9 million shares of CTS. The net impact must further factor short positions in the market ahead of its removal. While much anticipated, we could see pressure on the shares over the much-speculated removal. We look for CTS to remain active with its NCIB where purchasing 115K daily would be expected to complete its NCIB share program by the middle of June. We believe the Company has been actively repurchasing shares through its NCIB program after the termination of its Strategic Review (May 9/23) allowed it to reactivate its NCIB where it had previously repurchased 6.5 million of the 10.7 million permitted. We believe a substantial issuer bid (SIB) remains a consideration by the Company. We could see proceeds from either the sale of its stake in Portage or a reduction in its stake as a move to raise proceeds to cover an SIB.”

Seeing Converge as “undervalued,” Mr. Goff trimmed his target by $1 to $6, keeping a “speculative buy” recommendation. The average is $5.71.

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Desjardins Securities’ Chris Li expects Dollarama Inc.’s (DOL-T) first-quarter 2024 earnings report to “reflect continued strong consumer preference for value, partly offset by unfavourable product mix on margin, and labour cost pressures.”

The analyst does not expect the Wednesday release to be a catalyst for the Montreal-based discount retailer in the near term, however he predicts it will reaffirm his projection of “attractive annual 14–15-per-cent EPS [earnings per share] growth in the next couple of years (partly driven by higher price points) — supporting valuation — and for share price appreciation to track EPS growth.”

After tweaking his financial projections, Mr. Li is now forecasting EPS of 58 cents, a penny below the consensus estimate with same-store sales growth of 10 per cent (versus the Street’s 11-per-cent expectation) driven by traffic gains, which he thinks are “returning to pre-pandemic levels.”

“U.S. dollar stores (DG, DLTR) are down significantly following guidance cuts,” he said. “While DOL faces similar headwinds (lower spending on discretionary, unfavourable mix), one key difference is that DOL serves broader income demographics whereas the U.S. dollar stores are skewed toward low-income consumers who are impacted by lower tax funds/food stamp benefits. Competition in the U.S. is also heating up with price reductions. Our sense is that competition in Canada remains largely rational.”

While he raised his 2024 and 2025 EBITDA and revenue projections, Mr. Li reiterated a $93 target for Dollarama shares with a “buy” recommendation. The average is $90.39.

“We maintain our positive long-term view and expect share price appreciation to largely track EPS growth,” he concluded.

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In a separate note, Mr. Li said Saputo Inc.’s (SAP-T) fourth-quarter 2023 results, scheduled to be released on Thursday, are likely to “reflect continuing favourable trends and reaffirm our confidence in 14–15-per-cent EBITDA growth this year.”

“While long-term earnings visibility is limited by dairy commodities outside SAP’s control, our positive view is based on its relatively attractive EBITDA growth (approximately 15-per-cent CAGR [compound annual growth rate]) in the next two years, mainly driven by the realization of strategic plan benefits (network optimization, cost reduction),” he said. “This should result in valuation (10.5 times forward EBITDA) moving closer to the 12 times average.”

Predicting “the favourable recovery trends experienced year-to-date to continue,” Mr. Li is projecting EBITDA of $396-million, up from $260-million during the same period a year ago and in line with the Street’s forecast of $402-million. Earnings per share are expected to grow to 41 cents from 26 cents in fiscal 2022, also tracking the consensus projection (42 cents).

Increasing his full-year earnings forecast for 2023 and 2024, Mr. Li kept a $43 target and “buy” rating. The average is $42.63.

“While long-term earnings visibility is limited by dairy commodities outside SAP’s control, our positive view is based on its relatively attractive EBITDA growth (15-per-cent CAGR) over the next two years, mainly driven by the realization of strategic plan benefits (network optimization, cost reduction, etc),” he said.

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Taking a bullish outlook for natural graphite demand, Eight Capital analyst Anoop Prihar initiated coverage of Montreal-based SRG Mining Inc. (SRG-X) with a “buy” recommendation, believing it will create value from its wholly owned Lola Graphite Project in southeast Guinea, which could begin producing concentrate as early as 2025.

“Although SRG will initially produce a graphite concentrate, the Company’s ultimate goal is to become an integrated producer of Coated Spherical Purified Graphite (CSPG) and supply anode/battery manufacturers directly,” he said. “The Company is currently completing a Preliminary Economic Assessment (PEA) evaluating the potential to build a CSPG refinery in Europe, North America, the Middle East, or Africa, which is expected to be released in the summer of 2023.

“In the interim, we expect the economics surrounding graphite concentrate production to be supported by the on-going strength in Electric Vehicle (EV) sales.”

In a report released Monday titled Graphite: Charged Up and Ready to Roll, Mr. Prihar, currently the lone analyst covering SRG, set a target of $1 per share, representing a 54-per-cent total potential return.

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“Despite an attractive valuation (10-per-cent P/NAV of only 0.49 times) and a robust Cu price environment,” Scotia Capital analyst Orest Wowkodaw resumed coverage of Nevada Copper Corp. (NCU-T) with a “sector perform” rating on Monday, citing “heightened operating and balance sheet risks.”

“Our previous estimates, valuation, and investment recommendation were placed Under Review in July 2022 due to heightened liquidity/going concern risks which also resulted in the suspension of most mining activities,” he said. “After spending the past few quarters rehabilitating the asset and raising capital, the Pumpkin Hollow underground mine in NV appears poised to restart in Q3/23.”

Seeing the potential for a “markedly larger” open-pit operation and improved liquidity, Mr. Wowkodaw set a 30-cent target. The average is 40 cents.

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In other analyst actions:

* Canaccord Genuity’s Aravinda Galappatthige bumped his PopReach Corp. (POPR-X) target to 55 cents from 50 cents, keeping a “speculative buy” recommendation. The average is 57 cents.

“PopReach reported strong Q1/23 results [last] week that beat our estimates on both the top and bottom lines and reflected mid-teen organic growth year-over-year (pro forma),” he said. “Amidst a challenging ad environment and a weakened macro backdrop, we view the results as quite impressive.”

* Ahead of its Thursday earnings release, CIBC’s Kevin Chiang raised his target for Transat AT Inc. (TRZ-T) to $3.50 from $2.50 with an “underperformer” rating. The average is $3.55.

“We expect results will highlight the continued strength and pent-up travel demand benefitting the Canadian airline industry. We also expect TRZ to raise its F2023 adjusted operating margin targets. While TRZ’s recovery is ahead of schedule, our cautious stance on the name reflects its elevated debt position,” he said.