Inside the Market’s roundup of some of today’s key analyst actions
Dollarama Inc. DOL-T beat estimates for its fiscal first-quarter earnings, while also generating the strongest same-store sales growth in more than six years, despite the pressures of inflation, labour shortages, and supply chain constraints.
“Dollarama’s value offering is well-received by customers, showcasing the company’s ability to perform well in times of economic turmoil,” Stifel analyst Martin Landry wrote.
He raised his target price on Dollarama’s stock to $82 from $80.50, while maintaining a “buy” rating, pointing to strong quarterly earnings of $0.49 per share, compared to Bay Street’s average estimate of $0.47.
Looking ahead, Dollarama is poised to benefit from changing consumer behaviour, as Canadians look for value in the face of high inflation, Mr. Landry said.
The introduction of higher price points, including products costing up to $5, will also allow the company to expand its selection while protecting its profit margins. “It will enable Dollarama to sustain and manage its gross margins levels in the face of continued inflationary pressures,” Mr. Landry said.
Several other analysts also raised their target prices on the stock. Patricia Baker at Scotia Capital increased her target to $81 from $79 while maintaining an “outperform” rating.
“We anticipate outperformance through the remainder of 2022 given the defensive nature of the business, unique operating model, and the multiple levers at its disposal to manage logistics and costs challenges,” she wrote.
RBC Dominion Securities analyst Irene Nattel also hiked her target price to $81 from $79 while keeping an “outperform” rating on the stock, pointing to the retailer’s “unique business model that enables DOL to sustain industry-leading margins.”
Meanwhile, Canaccord Genuity analyst Derek Dley sees Dollarama’s stock as “appropriately valued.” He maintained a “hold” rating, while raising his target to $72 from $70.
iA Capital Markets Neil Linsdell also sees the stock as “fully valued” after a run in Dollarama’s share price over the last few years, prompting him to downgrade in the stock to “hold” from “buy” while keeping a target price of $76.
After a “spring cleaning” in tech sector valuations, Scotia Capital has initiated coverage on six U.S. software companies.
The selloff in tech stocks gained momentum in late March, as persistent inflation made aggressive central bank tightening a necessity. But the space has stabilized over the last couple of weeks, leading many investors to wonder if the bottom is in.
“Our call is that it is too early to tell, as most investors are cautious on 2022 and 2023 numbers and need more visibility before stepping in,” Scotia analyst Nick Altmann wrote.
“We take a long-term approach to our ratings, and we acknowledge a choppy software tape, macro ambiguity, and rising rates, among other variables, likely to make for tougher sledding in the near term.”
Through a longer-term lens, there are several names with solid growth prospects, the opportunity to improve margins, and make acquisitions, Mr. Altmann said. It helps that software valuations have taken a big hit, from a peak of roughly 23 times enterprise value to forward sales, down to about 7 times.
Here are the companies being initiated:
-Amplitude Inc. AMPL-Q at a “sector outperform” rating and a price target of US$25
-Confluent Inc. CLFT-Q at a “sector outperform” rating and a price target of US$27
-Freshworks Inc. FRSH-Q at a “sector perform” rating and a price target of US$16
-GitLab Inc. GTLB-Q at a “sector outperform” rating and a price target of US$62
-HubSpot Inc. HUBS-N at a “sector outperform” rating and a price target of US$550
-Twilio Inc. TWLO-N at a “sector outperform” rating and a price target of US$215
Disappointing quarterly results posted by Enghouse Systems Ltd. ENGH-T are overshadowing the company’s opportunity to build value through acquisitions, according to RBC Dominion Securities analyst Paul Treiber.
On Tuesday, Enghouse released its second-quarter financials, which included a 7.1-per-cent decline in organic growth, causing its share price to decline by 18 per cent on Wednesday.
The shortfall mainly stems from Vidyo, a video-conferencing company Enghouse acquired in 2019. Vidyo’s annual revenues have declined from a peak of $95-million to roughly $30-million currently, according to Mr. Treiber’s estimates.
And yet, Enghouse has still managed to realize an internal rate of return of about 45 per cent on its acquisition of Vidyo by virtue of a low purchase price, Mr. Treiber said.
“Shareholder value creation on Vidyo validates Enghouse’s M&A model, where the low purchase price is sufficient to realize attractive returns under a conservative outlook.”
Considering the recent correction in tech sector valuations, additional deals could be a catalyst for Enghouse shares.
“Enghouse recently increased its M&A team in anticipation of more deals, its ‘actionable’ M&A pipeline is improving, and has a near all-time high of $206-million net cash,” Mr. Treiber said.
He lowered his price target to $45 from $50 while maintaining an “outperform” rating.
While Stingray Group Inc. RAY-A-T has bolstered its revenues through investing in new initiatives, growth seems to be coming at the expense of profit margins, CIBC World Markets analyst Scott Fletcher said.
On Wednesday, the company reported fiscal fourth-quarter sales results that beat forecasts by 4 per cent, but adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) missed expectations by 15 per cent.
“Investments in product development and sales and marketing coupled with increased contribution from the lower margin retail advertising business have impacted the profitability outlook,” Mr. Fletcher said.
The fiscal year just ended for Stingray saw the company in recovery mode, as it sought to diversify and offset declines in its Pay TV business.
For the fourth quarter, EBITDA margins of 28.9 per cent came in well short of the consensus forecast of 35.2 per cent – the result of additional spending as well as a shift toward the lower-margin retail advertising business. It now looks like margins will be “lower for longer,” Mr. Fletcher said.
He lowered his target price on Stingray’s stock to $8.50 from $9.50, while keeping an “outperformer” rating.
North West Company Inc. NWC-T maintained flat revenue and decent profits in its first quarter, despite the Street’s predictions of a dropoff.
On both the top and bottom lines, the company slightly beat forecasts, showcasing its resiliency in a tough environment, said iA Capital Markets analyst Neil Linsdell.
High inflation and the phasing out of pandemic income support programs for consumers have both affected the company’s operations.
Consumers are shifting away from higher-margin general merchandise and toward food, which puts pressure on the company’s overall profit margins. That strain is exacerbated by the limitations in passing on soaring prices to the consumer.
“The company has maintained a good position despite being impacted by the normalization of shopping behaviour, inventory level temporarily mismatching demand, and lower consumer spending power in core markets,” Mr. Linsdell wrote.
Given the recent pullback in the company’s share price, Mr. Linsdell upgrade the stock to “buy” from “hold,” while sticking to a $39 target price.
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