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

Seeing improved visibility for the second half of its fiscal year, Citi’s Walter Pritchard opened a 30-day positive catalyst watch for Shopify Inc. (SHOP-N, SHOP-T).

The analyst said the Ottawa-based ecommerce firm’s merchant additions in the second quarter were a “key driver of higher transaction volumes as many traditional brick & mortar retailers were forced to quickly establish online channels.” He now sees a “high likelihood” those gains will continue into the third quarter.

“We have re-oriented our model to reflect a more ‘real-time’ view of bottoms-up merchant activity, which gives us incremental confidence in SHOP’s ability to sustain recent elevated pace of growth,” he said. “Street estimates appear artificially low, especially on the transactional side, implying sequential declines in Q3 despite favorable GMV [gross merchandise volume] capacity dynamics outlined in our note below. Citi’s Street-high MS [merchandise solutions] estimate of $553-million (up 146 per cent year-over-year and 70 per cent of revenues) is now 30 per cent above consensus. Beyond Q3 we see upcoming holiday season as another accelerant of trends observed already in 2020, where we anticipate SHOP’s elevated GMV capacity and increased market share is poised to capitalize on the massive shift of commercial activity to online channels. Relatively speaking, we note that the retail market is still under-penetrated today which gives us confidence that these trends will continue for the foreseeable future.”

Mr. Pritchard said 2020 has “proven to be an accelerant of trends driving increased e-commerce adoption & penetration.” With its shares trading “sideways” since the release of its second-quarter earnings report, he expects “the next two quarters of sustained acceleration to make more believers out of investors.”

He raised his full-year 2020, 2021 and 2022 earnings per share projections to US$2.94, US$3.63 and US$4.21, respectively, from US$2.87, US$3.17 and US$4.21.

The analyst maintained a “neutral” rating with a “high risk” designation for Shopify shares and a US$1,200 target. The average target on the Street is US$1,107.94, according to Refinitiv data.

“While on the one hand, Street 2H estimates appear primed for another blowout print and numbers ‘reset,’ a longer-term FCF-based valuation aperture suggests that shares currently embed 28-per-cent 10-yr growth compound annual growth rate (assuming 20-per-cent OPM and 25 times long-term FCF multiple),” he said. “With SHOP currently trading at 32 times Citi EV/'21 sales (37 times Street), we are more confident in near-term setup & less-convinced that shares merit further multiple expansion from here."

“We rate Shopify shares as Neutral, High Risk because while we appreciate the magnitude of the TAM, an acceleration of secular tailwinds coming into focus, a strong management team and record of execution, we believe much of this is priced in at the current multiple — which earns a significant premium to the implied multiple of its growth/margin framework and implies a 10-year revenue CAGR that appears potentially too high.”


Precision Drilling Corp. (PD-T) is likely to log financial results that exceed expectations on the Street in both the third and fourth quarters as Canadian drilling activity shows signs of rejuvenation, according to ATB Capital Markets' Waqar Syed.

In a research note released Thursday, the analyst upgraded his rating for the Calgary-based drilling rig contractor to “outperform” from “sector perform,” noting Canadian activity is increasing despite remaining at historical lows.

Pointing to the “expectation of higher rig activity and margins than previously envisaged in Canada,” Mr. Syed raised his earnings before interest, taxes, depreciation and amortization (EBITDA) projections for 2020,2021 and 2022 by 2 per cent, 10 per cent and 9 per cent, respectively.

“PD has been gaining market share in Canada, where activity is inflecting higher – albeit from a small base. More importantly Canadian margins are improving for PD owing to cost reductions and rig mix shifting towards higher-spec rigs,” he said.

“The key driver of the change is higher than previously forecast drilling activity and margins in PD’s Canadian operations, based on the trends we have seen so far in the quarter and intelligence from channel checks regarding upcoming activity levels. For 2020 and 2021 we now project average rig count of 30.4 rigs (previous 27.7 rigs) and 28.2 rigs (previous 23.6 rigs), as it appears that PD is gaining more share than we expected. Moreover, owing to aggressive cost cuts and higher share of higher spec rigs in its Canadian rig mix, margins are likely to be higher than previously envisaged.”

Mr. Syed also projects Precision to lower its debt by $125-million in 2020 and by $80-million in 2021, cumulatively transferring 75 cents per share in value from debt holders to equity holders.

Also feeling investors are not properly valuing its drilling rigs, he raised his rating and hiked his price target for Precision to $1.25 from $1, which offers 36-per-cent upside. The average target on the Street is $1.26.


Canaccord Genuity analyst Yuri Lynk thinks a “strong” third quarter “appears to be on tap” for Badger Daylighting Ltd. (BAD-T).

“Badger is at the forefront of two megatrends: (1) growth in spending to renew aged infrastructure and (2) growth in safe-digging as the preferred excavation method. With a unique, fully integrated, and self-financing business model, we see bottom-line growth rates in excess of the broader market. More specifically, we believe Badger can double 80 per cent of its business (the U.S. portion) over the next four to five years. With the ERP implementation behind us, end-market demand recovering, and Q3/2020 expectations appearing reasonable, we would be adding to positions.”

Ahead of the release of its quarterly results on Nov. 4 after the bell, Mr. Lynk trimmed his EBITDA projection to $44.6-million from $45.7-million while maintaining a $167.7-million revenue estimate.

“Our revenue and EBITDA estimates are 4.3 per cent and 5.3 per cent above the FactSet consensus, respectively, and we see room for Badger to exceed our forecasts,” he said. "Specifically, we see upside to our revenue and gross margin estimates. Our revenue estimate implies a 9-per-cent year-over-year decline (on a 16-per-cent year-over-year decline in RPT, to $30,200) compared to a 10 per cent to 15 per cent quarter-to-date decline through early August and a 17-per-cent year-over-year decline in Q2/2020. With the economy opening up, revenue trends likely continued to improve through quarter’s end, whereas our estimate conservatively assumes little improvement from the early August run-rate.

“We also see room for gross margin to exceed our forecast of 32.7 per cent, which compares to 32.8 per cent in Q3/2019. Our Q3/2020 gross margin assumption is nearly flat year-over-year despite the progress management has made on lower fixed costs and improving direct labour. Thus, we see some room for Badger to exceed our estimate. As for SG&A, our estimate is in line with guidance of $10-million per quarter.”

Looking forward, Mr. Lynk said he sees “exciting” growth for the Calgary-based environmental services company from 2021 on.

“Safe-digging continues gain importance, especially with environmental, social, and governance (ESG) considerations top of mind,” he said. "The last thing a utility wants is to cause a deadly accident while digging around critical infrastructure. For this reason, we continue to see electric, gas, and telecommunication companies adopt safe-digging techniques. One recent example occurred in April of this year when Bell, Telus, Hydro Quebec and others developed joint directives for when work occurs near their buried infrastructure. These directives specify that only “soft excavation”, which includes hand digging and hydrovac excavation, is permitted until the underground infrastructure has been daylighted. Measures such as this are being taken all across North America, driving demand for Badger hydrovacs."

Mr. Lynk now expects 2021 EBITDA to increase by 33 per cent to $179-million. He also introduced a 2022 projection of $210-million.

Keeping a “buy” rating, he raised his target to $45 from $40. The average on the Street is $39.


Paramount Resources Ltd. (POU-T) is likely to benefit from a strong natural gas price environment in 2021, according to CIBC World Markets analyst Jamie Kubik, who sees it “supportive for cash flow, along with navigating its debt covenants.”

Though he remains “cautious” about the Calgary-based company’s debt levels, Mr. Kubik raised his rating for its stock to “neutral” from “underperformer.”

“We have raised our production expectations in conjunction with this update, which has favorable impacts to our cash flow expectations for the company,” he said.

Mr. Kubik raised his target to $3 from $1.75, pointing to a return potential of 41 per cent that is “more in line with the group average.” The average on the Street is $2.52.

He made the move in the firm’s research note previewing third-quarter results in the energy sector.

CIBC said: "The third quarter marked better stability in commodity prices and exhibited far less volatility than that demonstrated in Q2/20. Shut-in volumes returned through Q3/20; however, activity levels did not, and it was exceptionally quiet for field activity from operators, which is also highly indicative of an industry trying to find secure footing. While a resurgence in global economic activity and supply restraint were supportive for crude prices through July and August, the threat of economic contraction from a second wave emerging made September a different story, and it is pretty clear that the industry could remain in a state of purgatory over the next six, 12 or 18 months.

“We think the anemic state of reinvestment is here to stay through 2021, but these seeds will also be sown at some point. We are reminded that the energy industry is one of brute force, and how much capital is put into the energy ecosystem directly impacts how much production comes out. Under this premise we are therefore becoming increasingly bullish on the set-up for crude prices in the 2022/2023 timeframe with the potential for demand levels to normalize as economies re-emerge and supply impacts are felt. For the near term then, and as winter weather approaches, we remain more bullish towards natural gas-weighted stocks versus crude-weighted. Given some of the larger-cap equities (ARX and VII) continue to screen as relatively inexpensive versus smaller-cap peers, we maintain a bias towards these equities as solid places to allocate capital over the coming period.”


Equity analysts at Echelon Capital Markets unveiled their “Top Picks Portfolio” for the fourth quarter, calling it “an aggressive, catalyst-rich portfolio of high-growth entrepreneurial companies.”

In the third quarter, the portfolio returned 15.6 per cent, outperforming both the S&P/TSX Small Cap Index (6.6 per cent) and the broader S&P/TSX Composite Index (4.7 per cent). Year-to-date, it has returned 24.3 per cent (versus 27.4 per cent and 32.9 per cent, respectively).

“The S&P/TSX Small Cap Index has now outperformed the broader TSX Composite across the last two quarters, reflecting an aggressive recovery from the 38.12-per-cent Q120 decline when it significantly underperformed the 20.9-per-cent decline for the broader Composite Index,” the firm said. “We look for investors to remain focused on the high-quality small cap names with specific catalysts or underlying secular growth within an environment where low interest rates are expected to persist.”

“We have benefitted from positive catalysts with take-outs, product launch, mine development/resource enhancement, and regulatory approvals all common events. We specifically strive to select stocks that are catalyst-rich supported by proven execution, positioned for high growth, and backed by strong economics."

The firm made four additions to its list:

  • Osino Resources Corp. (OSI-X) with a “speculative buy” rating and a $2.30 target. The average target on the Street is $2.45.
  • Converge Technology Solutions Corp. (CTS-X) with a “speculative buy” rating and a $3.30 target. Average: $3.30.
  • CloudMD Software & Services Inc. (DOC-X) with a “speculative buy” rating and a $2.90 target. Average: $2.80.
  • Mdf Commerce Inc. (MDF-T) with a “buy” rating and a $15 target. Average: $10.67.

The portfolio features six returning stocks:

  • Drone Delivery Canada Corp. (FLT-X) with a “speculative buy” rating and a $1.60 target. Average: $1.55.
  • Quisitive Technology Solutions Inc. (QUIS-X) with a “speculative buy” rating and an $1.40 target. Average: $1.25.
  • AYR Strategies Inc. (AYR.A-CN) with a “buy” rating and a $23 target. Average: $21.70.
  • Green Thumb Industries Inc. (GTII-CN) with a “buy” rating and a $25 target. Average: $27.19.
  • Revival Gold Inc. (RVG-X) with a “speculative buy” rating and a $1.80 target. Average: $1.90.
  • Photon Control Inc. (PHO-T) with a “buy” rating and a $2.75 target. Average: $2.83.

The stocks removed by the firm were: Integra Resources Corp. (ITR-T); WELL Health Technologies Corp. (WLT-T); Protech Health Medical Corp. (PTQ-T); CareRX Corp. (CRRX-T); Antibe Therapeutics Inc. (ATE-T); Canadian Apartment Properties REIT (CAR.UN-T) and InterRent REIT (IIP.UN-T).

“Our quarterly returns typically include a wide range of performance within the group reflecting on the high beta of the Portfolio and our focus on catalyst-driven names. However, Q320 saw a much greater-than-usual breadth of returns with the performance of WELL Health, AYR Strategies, and Green Thumb Industries driving our outperformance,” the firm said.


The resiliency displayed by the North American waste sector during the second quarter is set to continue, said RBC Dominion Securities analyst Walter Spracklin.

“Strong share price performance was a theme again in Q3, with the waste majors outperforming the S&P 500 by 300 basis points during the quarter,” he said in a research report previewing the sector’s earnings season. "We attribute the outperformance to the resilience displayed during Q2, continued strength of the economic recovery/reopening, and the elevated levels of M&A activity seen during the quarter - all of which we anticipate will continue going forward.

“While reported volumes in Q2 came in largely inline with our expectations, commentary from the majors on recent trends was noticeably better than feared. We expect these trends persisted during Q3 with the economic reopening progressing during the quarter, and expect to see improvement most pronounced in the commercial and industrial subsegments.”

Expecting pricing to remain steady as churn stabilizes, Mr. Spracklin raised his target price for stocks in his coverage universe. They are:

* GFL Environmental Inc. (GFL-N/GFL-T, “outperform”) to US$30 from US$28. The average on the Street is US$23.28.

“We continue to view GFL as representing the most attractive upside opportunity in our waste coverage,” said Mr. Spracklin on the Toronto-based company.

“With $2.7-billion (Canadian) deployed on two deals in the span of 7 weeks, GFL meaningfully transformed their U.S. footprint and further cemented their position as the #4 player in the NA waste industry. With both deals expected to receive final closing approval by the time GFL reports its Q3 results, we will be looking for colour on integration plans and any updates to the expected delevering cadence going forward.”

* Waste Connections Inc. (WCN-N/WCN-T, “outperform”) to US$122 from US$112. Average: US$113.76.

“We will be listening for commentary regarding 1) recent volume trends, particularly in commercial, industrial and E&P; 2) any updates to 2020 guidance; 3) colour around M&A activity and the potential impact the U.S. election could have on the M&A outlook longer-term; and 4) any changes to the current pricing environment, particularly in regards to the competitive behavior and customer churn levels,” he said.

* Republic Services Inc. (RSG-N, “sector perform”) to US$96 from US$90. Average: US$101.

* Waste Management Inc. (WM-N, “sector perform”) to US$115 from US$109. Average: US$119.21.


In other analyst actions:

* Following a period of outperformance, Wells Fargo analyst Jonathan Reeder downgraded Brookfield Renewable Partners LP (BEP-N, BEP-UN-T) to “equal weight” from “overweight” with a price target of US$53, rising from US$50 and above the US$49.83 consensus.

* Scotia Capital analyst Mark Neville increased his target for Linamar Corp. (LNR-T, “sector outperform”) to $55 from $53. The average on the Street is $47.33.

“U.S. auto sales have, thus far, proved to be very resilient through the pandemic – rebounding much faster than anticipated. In fact, industry sales were down ‘only’ 9 per cent in Q3 vs. the 34-per-cent decline in Q2,” he said. A strong demand environment coupled with low industry inventory levels, in our opinion, should translate into a significant sequential improvement in earnings for the Canadian auto suppliers in 2H/20. In fact, we anticipate Q3 being the start of a multi-year earnings recovery for the automotive supply chain. We have increased our 2H/20 estimates for the group (MGA up 15 per cent, LNR up 18 per cent, and MRE up 13 per cent) and would anticipate Q3 consensus estimates to trend higher into results. While we have left our 2021 estimates largely unchanged at this time – given macro/COVID-19 related uncertainty – in our view, they appear to be quite conservative based on current industry sales trends. Despite this, the Canadian suppliers still trade at discounted multiples on our 2021 estimates relative to what we consider to be appropriate mid-cycle multiples. As such, we continue to see meaningful upside potential in equity values for the group."

* Credit Suisse analyst Allison Landry raised her target for shares of TFI International Inc. (TFII-N/TFII-T, “outperform”) to US$56 from US$52. The average is US$50.

“Given continued strength in demand and tight capacity, we are raising earnings estimates across the trucking and logistics sectors. We note that the Market Demand Index has reached historical highs, while dry van spot rates are tracking up 34 per cent year-over-year in the most recent week,” she said.

* Jefferies analyst Stephanie Wissink moved her target for Spin Master Corp. (TOY-T, “buy”) by a loonie to $34, exceeding the average of $29.90.

* National Bank analyst Greg Colman cut his target for Horizon North Logistics Inc. (HNL-T, “outperform”) to $6 from $6.25. The average is $5.36.

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