Thursday’s analyst upgrades and downgrades

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

Following the release of better-than-anticipated second-quarter 2021 financial results, Industrial Alliance Securities analyst Neil Linsdell thinks the COVID-19 pandemic will be bring a “less severe impact than previously feared” for Dollarama Inc. (DOL-T).

“We remain cautiously optimistic given solid performance through a very difficult environment, and despite possible headwinds through Halloween,” he said.

On Wednesday before the bell, the discount retailer reported revenue and earnings per share of $1.014-billion and 46 cents, respectively, exceeding Mr. Linsdell’s projections of $951-million and 37 cents.

Dollarama sales climb as Canadians spend on cleaning supplies, summer products

Moving forward, the analyst sees traffic continuing to improve with all its stores now open. He also expects extra costs related to the pandemic, including labour and cleaning, to “gradually ease,” though he said “approximately two-thirds of these expenses will continue for the foreseeable future.”

“Q3 results could be significantly impacted depending on how parents across Canada will handle Halloween,” he added. “These seasonal purchases, which fetch above-average margins, could materially affect both revenue and profitability. Similarly, Q4, with Christmas and New Year’s, could be influenced by how shoppers decorate and entertain over the holidays.”

After raising his revenue and earnings expectations through fiscal 2023, Mr. Linsdell increased his target for Dollarama shares to $56 from $53, keeping a “buy” rating. The average target on the Street is $54.

Elsewhere, Wells Fargo’s Edward Kelly upgraded Dollarama to “equal weight” from “underweight” with a $55 target, rising from $44.

Desjardins Securities analyst Chris Li hiked his target to $55 from $51 with a “hold” rating (unchanged).

“Despite some near-term uncertainty around seasonal sales in 2H, we believe DOL’s strong value proposition and solid financial position make it a good long-term investment,” he said. “Following recent share price strength and with only a high-single-digit potential return, we would wait for a more attractive entry point.”

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Desjardins Securities analyst Chris Li said Alimentation Couche-Tard Inc.’s (ATD.B-T) “strong” first-quarter 2021 results show its “executing well in the uncertain COVID environment” and sees it remaining on track to double its earning by fiscal 2023.

On Monday, the Montreal-based company reported adjusted earnings per share for the quarter of 71 US cents, blowing past both Mr. Li’s 38-US-cent estimate and the consensus projection on the Street of 41 US cents. The beat was due to “very strong” U.S. fuel margins as well as “strong” merchandise same-store sales growth and “good” expense control.

“ATD’s strong 1Q beat underscores the resiliency of the c-store business, its strong execution and structural improvement in a competitive landscape with many small c-store competitors (60 per cent industry) struggling due to COVID,” he said. “We have increased our estimates.”

“Management stated that while COVID-19 has slowed some initiatives such as store remodelling, ATD has accelerated other initiatives such as localized pricing, expanding non-fuel locations especially with many retailers struggling, and innovation such as frictionless and touchless payments. ... We believe management’s initiatives will help drive organic growth, and coupled with M&A, ATD has a clear path to doubling its EPS/EBITDA by FY23.”

Mr. Li also emphasized the potential for M&A opportunities, particularly in the U.S., which he notes is its “largest market, highly fragmented and with meaningful synergies.”

The analyst raised his 2021 and 2022 earnings per share projections to US$1.78 and US$1.95, respectively, from US$1.44 and US$1.80 previously.

Keeping a “buy” rating for Couche-Tard shares, he also increased his target to $51 (Canadian) from $47. The average on the Street is $52.57.

“If small players continue to struggle, it may lead to better pricing discipline/share gains,” said Mr. Li. “We estimate this could support a share price of at least $67 in 3–4 years, implying low-teens average annual return. ATD’s financial position is strong, with leverage of 1.2 times and annual FCF of US$1.5-billion.”

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Canaccord Genuity analyst Aravinda Galappatthige thinks a higher bid for Cogeco Communications Inc. (CCA-T) is likely.

However, in the wake of the proposed deal from Altice USA Inc. and Rogers Communications Inc., he thinks Gestion Audem Inc., which is the controlling shareholder representing the Audet family, will be difficult to win over.

Andrew Willis: Altice USA CEO knows how to charm his way through a takeover

“While the 30-per-cent premium was attractive, a breakdown of the offer reflects the fact that the transaction translates to 7.8 times for the Canadian asset (including smaller Radio assets) and 9.7 times for the U.S. assets,” said Mr. Galappatthige. “There is likely a fair bit more that both Altice and Rogers can pay. A modest assumption of 20-per-cent opex synergies lowers the multiple of the Canadian assets to Rogers to 6.6 times. Altice too is likely to generate synergies, and in any event, given its own trading valuations and U.S. comps, we see the prospect of even 11 times for ABB. If we assume a 1x increase to the offered multiples (8.8 times for Rogers but nearly 7.5 times post synergies, 10.7 times for Altice), the potential offer would represent $160 per share.”

Beyond the Audet family, which showed an initial lack of interest in selling its shares, Mr. Galappatthige said there are other players to consider in evaluation future moves.

“This includes the Caisse (Caisse du placement du Quebec), the independent members of the board, and even the government of Quebec itself,” he said. “If the bid price climbs significantly there will be increased pressure from public shareholders and (potentially) even from the Caisse, given its 21-per-cent position in the U.S. assets. While the board may reject the initial offers as inadequate, it gets harder to maintain that position from an independent standpoint as the offer price rises beyond a certain point. Could this create pressure on Gestion Audem to reconsider? Against this, is the consideration of the extent to which the Quebec government would agitate against the movement of the head office outside the province. We are already hearing concerns from the political establishment in this regard.”

He added: “All this seems to suggest a rather binary situation. Either we see an increased bid shortly and Gestion eventually relents to a significantly higher price, or an even higher bid is rejected and Cogeco’s thesis is impacted by the demonstrated reality that it is not currently for sale and may not be up for sale for a very long time (if at all), which can translate to a lower share price than pre-Altice/Rogers announcement. However, we believe that this may not necessarily be the case. Even in the event that the latter scenario plays out, CCA can still move ahead with a value realizing reorganization of the corporate structure to allow its U.S. assets to trade separately in the US markets, which could likely yield a higher value. This can serve to at least partly pacify public shareholders. Moreover, we cannot fully reject the prospect of a U.S.-only divestiture.”

Keeping a “buy” rating for Cogeco Communications shares, seeing “clearly more upside than down,” Mr. Galappatthige raised his target to $123 from $108. The average on the Street is $118.

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RBC Dominion Securities analyst Paul Treiber expects The Descartes Systems Group Inc. (DGSX-Q, DSG-T) to report second-quarter results on Sept. 9 that exceed expectations on the Street, seeing a stronger global trade environment since it provided its outlook.

He also anticipates the Waterloo, Ont.-based tech firm’s third-quarter guidance may prove better than previously anticipated.

“While several trends are mixed, Descartes is well diversified and seems likely to benefit from stronger demand for e-commerce and trade content,” said Mr. Treiber.

For the second quarter, he’s projecting a 4-per-cent year-over-year rise in revenue to US$83.8-million, exceeding the consensus estimate of US$81.5-million. His EBITDA and earnings per share forecast of US$33.2-million (up 10 per cent) and 14 US cents, respectively, also top the Street’s view (US$32.5-million and 12 US cents).

“Our estimates imply Q2 revenue at 108.8 per cent of baseline, above Descartes’ 4-quarter average of 105.3 per cent,” the analyst said. “The larger delta reflects the improved global trade environment compared to baseline (based on April volumes). Our Q2 adj. EBITDA estimate equates to 125.4 per cent of Descartes’ Q2 baseline for $26.5-million, below the 4-quarter of average of actuals to baseline of 126.8 per cent.”

“Our model calls for constant currency organic growth to decelerate to 1 per cent Q2, down from 3 per cent Q1 and 5 per cent Q4/FY20. COVID-related disruptions to global trade are likely to weigh on Descartes’ transactional and non-recurring revenue. Stronger demand for some of Descartes’ services like trade content could offset contraction in transaction volumes and customer churn. We expect organic growth to improve to 3 per cent Q3 and 5 per cent Q4.”

Pointing to an improved global environment and the expected contribution of its US$12-million acquisition of the U.K.-based Kontainers platform, Mr. Trieber also projects Descartes’ third-quarter baselines may top forecasts.

“Q3 baseline above $82-million revenue and $27-million adj. EBITDA would point to Q3 actuals above consensus ($85-million revenue, $34-million adj. EBITDA) given the historical average delta between actuals and baseline (105.3 per cent of revenue, 126.8 per cent of adj. EBITDA),” he said. “Our outlook assumes that constant currency organic growth rises to 3 per cent Q3 from 1 per cent Q2.”

With that improved view, Mr. Treiber raised his target for Descartes shares to US$67 from US$57 with an “outperform” rating (unchanged). The average on the Street is US$50.96.

“The company has achieved 15 per cent per annum compounded growth in FCF/share over the last 10 years as a result of its disciplined organic and M&A growth strategy,” he said. “Our Outperform thesis is based on: 1) continued valuation creation through acquisitions; 2) organic growth acceleration on the shift to more strategic segments; and 3) network effects fuel margin expansion and FCF growth.”

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Citi analyst Paul Lejuez said “strong momentum” continues for Costco Wholesale Corp. (COST-Q).

On Wednesday, the Washington-based retailer reported comparable same-store sales growth for August, excluding has price decreases and foreign exchange, of 14.5 per cent with its Canadian operations seeing a 15-per-cent increase. Mr. Lejeuz had forecasted a 6-per-cent rise. Ecommerce jumped 101.6 per cent year-over-year, rising from 76.1 per cent in July.

“COST posted another month of strong mid-teens comps,” the analyst said. “Traffic was positive for the second consecutive quarter, and Ecom accelerated. The company experienced a continued acceleration in softlines, which was +mid teens (vs low teens in July and low single digits in June) and this included good results in men’s/women’s apparel and small appliances (yes, this is considered softlines).”

Based on the results, he increased his fourth-quarter and full-year 2020 earnings per share estimates to US$2.97 and US$8.69, respectively, from US$2.89 and US$8.61.

Keeping a “neutral” rating, he raised his target for Costco shares to US$365 from US$345. The average is US$346.31.

“We like long-term positives of the COST story including its membership format, its merchandising strategy, its low prices, the draw of its ancillary businesses, its e-commerce initiatives, its geographic diversification, the steady nature of margins, and cash returns to shareholders,” said Mr. Lejuez. “We expect these factors to drive ongoing strength in SSS [same store-sales] growth and membership sign-ups as COST continues to generate strong EPS growth via the top line. But with COST trading at the upper end of its historical ranges, we see these positives priced into the stock at current levels.”

Meanwhile, RBC Dominion Securities’ Scott Ciccarelli hiked his target to US$400 from US$381, keeping an “outperform” rating.

Mr. Ciccarelli said: “Strong value proposition and the Retail Lift continue to drive very solid top-line results for Costco. In August, U.S. core comps were +14.3 per cent, driven by strong demand activity across most of the store (except for gasoline and human-centric services like the food court). We continue to view Costco as both an ‘offensive’ and ‘defensive’ equity given its strong value proposition and remain buyers of COST.”

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Scotia Capital analyst Benoit Laprade thinks the “unprecedented” levels reached by building product prices since April lows are “clearly unsustainable.”

Though he expects a decline in the coming quarters, he sees limited downside risk for paper and forest product equities, noting they’ve lagged underlying commodities “meaningfully on the way up.”

“We estimate equities are discounting lumber prices in the $410-$430 range (US$ per thousand board feet) and an OSB price of approximately $300 (US$/Msf.), well below current record prices and below our 2021 forecasts ($438 and $315, respectively) underpinning our revised targets,” said Mr. Laprade. “We also took this opportunity to adjust our C$/US$ Q3/20 forecast.

“This record and unexpected cash influx combined with reduced capex plans will not only greatly strengthen balance sheets, but may also lead to (1) increased spending on growth and high-return projects, (2) dividend payments (WY and OSB are the best candidates), (3) stock buybacks (although companies will be more careful in a COVID-19 context), and (4) M&A.”

In a research report released Thursday, the analyst hiked his earnings expectations for companies in his coverage universe through 2021. That led him to increase his target price for their shares.

“While great uncertainty remains with respect to next year’s macro environment and its impact on the housing market, the longer this strong demand lasts, the shorter the window is before the next seasonal pickup in demand,” he said. “Favourable demographics, low(er) for long(er) interest rates, several years of underbuilding, and an old housing stock also provide tailwinds in coming quarters.”

“One of our preferred valuation methodologies (EV per shipments) still shows that all lumber and OSB shares are trading below 2018 levels despite record commodity prices (well above 2018 levels). The data suggest that despite positive year-to-date returns, stocks are still trading at an attractive entry point at current levels.”

His changes were:

• Canfor Corp. (CFP-T, “sector outperform”) to $23 from $17.50. The average on the Street is $20.
• Interfor Corp. (IFP-T, “sector outperform”) to $24 from $20. Average: $20.92.
• Louisiana-Pacific Corp. (LPX-N, “sector perform”) to US$35 from US$31. Average: US$35.38.
• Norbord Inc. (OSB-T, “sector outperform”) to $56 from $49.50. Average: $51.22.
• West Fraser Timber Co. Ltd. (WFT-T, “sector perform”) to $77 from $63. Average: $79.50.
• Western Forest Products Inc. (WEF-T, “sector outperform”) to $1.40 from $1.25. Average: $1.26.
• Weyerhaeuser Co. (WY-N, “sector perform”) to US$31 from US$30. Average: US$32.

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There are positive signs of activity picking up through the fall for PrairieSky Royalty Ltd. (PSK-T), according to Raymond James analyst Jeremy McCrea.

“With PSK not providing official guidance and many of PSK’s royalty payors withdrawing guidance earlier in the year, 3Q20 volume forecasts for PSK has a lot of uncertainty to say the least,” he said. “Based on our discussions with other management teams however, we do believe there has been a trend of bringing back production that was shut-in during 2Q. With updated GeoSCOUT data for July, we can see that broader trend playing out. For example, as a proxy for production, we take gross production on PSK’s royalty lands. As seen, volumes in July have rebounded to levels back above April (and up 23 per cent from levels in May). With higher commodity prices in August and September, we suspect more production to ultimately come back onstream.”

“What we believe investors are waiting to see is an improvement in activity levels. ... Activity has started to pick up, especially with well licensing. What the charts don’t quite show is that nearly half of the wells licensed in August (111 wells) were licensed in the last five days, likely setting up for a strong September. We suspect the increase was a result of 2Q board room discussions highlighting better sentiment and commodity prices and although management may not have made formal capex guidance changes, it is easy to start getting locations and licenses ready for a formal capex increase with 3Q results.”

After raising his cash flow per share projections for the third and fourth quarters, Mr. McCrea increased his target for PrairieSky shares to $13 from $12.50 with an “outperform” rating. The average on the Street is $11.53.

“There is no other company quite like PrairieSky in our view - despite the company still down 40 per cent year-to-date (XEG: down 46 per cent),” he said. “Between its essentially no leverage position and its ability to see some of the highest ‘value creation’ in the mid-cap sector (given limited need for capital), there should be considerable long-term comfort for investors. Concerns on spending this year have hurt share performance but we are starting to see a number of indicators of activity plans picking up through the fall.”

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Canaccord Genuity analyst Yuri Lynk thinks AirBoss of America Corp.’s (BOS-T) recent share price weakness presents investors with an attractive buying opportunity.

“AirBoss stock price has dropped by over 17 per cent since the announcement of strong Q2/2020 results on Aug. 10,” he said in a research note released Thursday. “This weakness accelerated on August 31, potentially in response to a story published by Bloomberg news that day reporting on HHS canceling several contracts for ventilators. Recall, HHS is the same government agency that awarded AirBoss Defense Group (ADG) its US$121-million contract back on July 27, its largest ever contract award. However, we do not see ADG being affected by the cancellation news as it does not supply ventilators but rather a different product aimed at an entirely different user base.”

Mr. Lynk said he continues to see the Newmarket, Ont.-based company “well positioned” to benefit from the increased requirements for personal protective equipment.

“We believe long-term demand for PAPRs, filters, and hoods remains strong given continued low stockpiles of such PPE, as evidenced by seven northeastern states announcing they would form a consortium to procure $5-billion of PPE annually,” he said. “Additionally, we note ADG’s next 12 months bid funnel sits at $250-million. On the military side, we are in the midst of the largest US DoD budget request in history at $750-billion, bolstering the outlook for ADG’s gas masks, filters, gloves, boots, and route clearance equipment. Longer term, blast gauge remains a game changing $650 million annual revenue opportunity for ADG.

“We also see attractive balance sheet optionality for AirBoss. The net debt-to-EBITDA (TTM) ratio stands at just 0.7 times, providing management with numerous capital allocation options that could create further value for shareholders.”

Mr. Lynk kept a “buy” rating and $32 target for AirBoss shares. The average is currently $28.67.

“We would use recent weakness as an opportunity to add to positions,” he said.

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Scotia Capital analyst Mario Saric trimmed his financial estimates for Allied Properties REIT (AP.UN-T) in response to Tuesday’s announcement of a private placement of 4.1 million units at $37 each for gross proceeds of $153.3-million.

“The offer price is 21 per cent and 27 per cent below our prior Current and Forward NAVPU [net asset value per unit] respectively, and a 24-per-cent discount to AP Q2/20 IFRS NAVPU of $48.52,” he said. “In some ways, we think the announcement is a bit of a surprise (pricing and timing), but in other ways, AP has made its commitment to both development and a fortress balance sheet very clear, citing a preference to issue equity over sales of partial interests in assets to fund development.”

Keeping a “sector outperform” rating, Mr. Saric lowered his target to $53.50 from $55. The average is $51.18.

“We still believe AP is an attractive Value & Growth play,” he said. “We reiterate our positive thesis post solid Q2/20 results. While AP is suffering from negative office sentiment on economic and WFH concerns and some questions may surface on the timing of the raise, we think AP’s high-quality and differentiated portfolio should outperform, while we estimate the market is currently pricing in an excessive 1,100 basis points of occupancy erosion (to low-80 per cent vs. historical AP low of 90 per cent). We agree with buying here.”

Meanwhile, CIBC World Markets’ Chris Couprie sliced his target to $46.50 from $49 with an “outperformer” rating.

Mr. Couprie said: “Despite the placement being slightly dilutive to our estimates, the REIT continues to boast a sector-leading balance sheet and offers exposure to data centres, which have seen requests for higher power allocations from some tenants during the pandemic (returns on incremental capital investment

to increase power allocations expected in the double-digit %s). We reduce our target price to $46.50 (was $49.00), in line with our new NAV, as investors may not apply the historic premium until more certainty develops over the broader office market environment. With the units trading at a rare discount to NAV (its own historic average is a 5-per-cent premium), we continue to favour Allied within the office REIT sector and we maintain our Outperformer rating.”

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In other analyst actions:

Deutsche Bank upgraded both JPMorgan Chase & Co. (JPM-N) and Bank of America Corp. (BA-N) to “buy” from “hold.” The firm’s target for JPM rose to US$115 from US$105, but it remains 44 US cents below the consensus. Its BAC target rose to US$29 from $27, exceeding the US$28.61 average.

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