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

Canadian Pacific Railway Ltd. (CP-T, CP-N) is “hitting the sweet spot of accelerating volume, price and efficiency,” according to RBC Dominion Securities analyst Walter Spracklin.

On Wednesday, CP released largely in-line first-quarter 2018 financial results. Adjusted earnings per share of $2.70 met Mr. Spracklin’s projection and fell just 2 cents short of the street’s expectation.

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“As expected, tough winter weather conditions had a negative effect on earnings, however the industry-leading volume growth of 6 per cent has set the stage for a re-acceleration of earnings through the balance of the year,” the analyst said.

“CP saw mid- to high-teen growth in four of its nine segments. This momentum together with new recent customer wins is expected to further drive growth (particularly Intermodal) going forward. Overall, we see CP as having the best volume growth trends of the Class 1 rails in 2018.”

With the results, Mr. Spracklin raised his full-year 2018 EPS projection by 7 cents to $13.13, adding: “Our EPS estimate now goes to over 15 per cent, which is ahead of guidance for low double-digit growth. We note the likelihood that the company raises its guidance at the upcoming Investor Day - which we would see as a key catalyst to the stock.”

He kept an “outperform” rating for CP shares and raised his target to $258 from $256. The average target on the Street is currently $253.41, according to Thomson Reuters Eikon data.

“We see CP as in the sweet-spot for the key metrics we monitor: 1) strong volume growth expected to remain in mid-single digit territory; 2) pricing through 3 per cent as renewals coming in at close to 4 per cent; 3) continued efficiency, as new volume is absorbed by excess capacity leading to margin enhancement; and 4) solid shareholder returns in the form of higher dividends and share buybacks,” said Mr. Spracklin. “This reaffirms our positive view on CP, which remains our preferred rail in the group and a ‘Best Idea”’ in Transportation for 2018.”

Elsewhere, Raymond James analyst Steve Hansen kept an “outperform” rating and $260 target.

Mr. Hansen said: “We continue to recommend CP shares based on the firm’s: 1) reinvigorated growth prospects; 2) solid operating performance; 3) proven management team; and, 4) attractive relative valuation vs. its Class 1 peers.”

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Restaurant Brands International Inc. (QSR-N, QSR-T) possesses the opportunity for multiple expansion, said RBC Dominion Securities analyst David Palmer.

“We believe QSR represents the greatest potential upside story in 2018, but it will partly depend on Tim Horton’s Canada sales improvement, unit growth acceleration at Popeye’s and the initiation of a higher impact digital strategy,” he said. “These improvements can enable full appreciation of this combination of FCF yield (4.4 per cent for 2018 estimated) and long-term mid-teens shareholder return (EPS growth plus 3.3-per-cent dividend yield).”

Mr. Palmer said he came away from a March meeting with the company’s management “incrementally positive” that the company is making sales trends at its Canadian Tim Hortons locations a top priority.

“Alex Macedo, previous President of Burger King since 2013, assumed the role of president of Tim’s Canada in December,” the analyst said. “He will oversee a multiyear remodeling campaign, menu innovation (e.g. espresso platform and premium sandwich offerings), and digital ordering enhancements. Most importantly, Alex led BK U.S. to the most significant sales and franchisee-relation improvement in the U.S. fast food industry over that period. BK’s relationship with its franchisees was the most strained in the U.S. when 3G bought it— now those relations are among the best.”

Ahead of the April 24 release of its first-quarter results, Mr. Palmer maintained his above-consensus 2018 and 2019 EPS estimates of $2.71 (a rise of 29 per cent year over year and 4 cents ahead of the Street) and $3.06 (13 per cent and 8 cents), respectively.

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However, he did cut his first-quarter 2018 same-store sales growth projection for Canadian Tims to 0 per cent from 0.5-per-cent growth. The Street estimates a 1-per-cent rise.

With that drop, he lowered his target for the stock to US$72 from US$78 “to reflect sluggish Tim’s Canada trends—an item that impacts investor confidence more than earnings.” The average target is US$71.85.

“In our 2018 Outlook, we discussed the multiple year outperformance of large cap franchised restaurant stocks—with YUM, QSR, and MCD up 56 per cent, 84 per cent and 57 per cent from 2015-2017,” he said. “Even with this outperformance, we believe this trio’s combination of 5-8-per-cent revenue growth, consistent long-term double-digit total return, and near 100-per-cent FCF [free cash flow] conversion make these Outperform-rated names particularly compelling in the world of large cap consumer. That said, we see QSR’s relative valuation as an opportunity. Consider the 4-turn discount of QSR versus YUM on 2019 EPS and the attractive FCF valuation versus peers. In our view it is a result of three things: 1) the core YUM investor in the US sees a healthy big brand in Taco Bell, 2) Yum has turned around multiple brands (e.g. KFC U.S. and more recently Pizza Hut U.S.), and 3) Yum has demonstrated a clear and proactive digital strategy. While the market under appreciates BK’s 10%+ global franchised revenue growth, we believe that QSR can close these perception gaps through improved TH Canada sales performance, digital capability building and accelerating Popeye’s unit growth.”


RBC Dominion Securities analyst Sabahat Khan raised his target price for shares of Roots Corp. (ROOT-T) in response to better-than-expected fourth-quarter 2017 financial results and the reiteration of its fiscal 2019 guidance.

On Wednesday, the Toronto-based retailer reported consolidated quarterly revenue of $130.0-million, an increase of 17 per cent year over year and exceeding the forecasts of RBC and the Street of $123.0-million and $124.6-million, respectively. Gross profit of $76.8-million (a 20-per-cent rise from the previous year) also topped Mr. Khan’s forecast ($72.1-million).

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Adjusted EBITDA of $36.7-million also beat the estimates of Mr. Khan ($35-million) and the Street ($33.7-million), due largely to a year-over-year jump in sales and gross margin improvement of 1.44 per cent. He attributed that margin result to the company’s United Brand Range (UBR) initiative, favourable foreign exchange rates and a shift in product mix.

With the earnings report, Roots stressed it was on track to reach its goal of generating 20 to 22 per cent of its direct-to-consumer (DTC) sales through its e-commerce channel by the end of the 2019 fiscal year.

“To deliver against this target, Roots has improved its online storefront, enhanced its mobile commerce capabilities, and improved the integration of its e-commerce platform with its retail stores,” said Mr. Khan. “The company rolled out its new e-commerce site in F2017, which included a new visual design, improved mobile functionality, a simplified online ordering process, and increased personalization capabilities. The company has also improved the integration between its social media platforms and its e-commerce site (e.g., a new Roots product showcased on Instagram will lead to Roots’ e-commerce website).”

Mr. Khan hiked his revenue expectations for 2018 and 2019 to $369.1-million and $437-million, respectively, from $360.8-million and $431.1-million. His earnings per share forecasts rose to 84 cents and $1 from 75 cents and 96 cents.

He kept a “sector perform” rating and increased his target by a loonie to $13. The average target on the Street is currently $14.89.

“Looking ahead, we expect investor focus to remain on productivity at new and renovated stores, SSS [same-store sales] performance, and the company’s margin profile as it rationalizes its product portfolio while also investing in increased marketing,” said Mr. Khan.

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Meanwhile, Credit Suisse analyst Michael Binetti called the results a “strong finish” to 2017, raising his target to $13 from $12 with a “neutral” rating (unchanged).

Mr. Binetti: “We were impressed by a high quality 4Q beat. And while FY19 targets were reiterated, ROOT is entering ’18 with top-line momentum (SSS up 15 per cent in 4Q vs 10 per cent in 3Q, a 12 point acceleration in the 2-year stack rate vs 3Q-and compares get 6pp easier in 1Q). And GMs should continue to benefit in 1H from ongoing quality of sales initiatives (SKUs will be down 40 per cent from peak by mid-18 vs down mid-20′s in ‘17). But compares get tougher through the year and we see offsets from increased marketing/wages-so near-term EPS upside largely relies on top-line outperformance from here (with majority of growth through ’19 expected to be driven in home Canadian market despite 99-per-cent awareness). While we continue to see long-term brand expansion opportunities (U.S., footwear, leather), we think current valuation (16 times our ’18 EPS) balances risk/reward.”

TD Securities’ Brian Morrison increased his target by 50 cents to $17, keeping an “action list buy“ rating.

CIBC’s Matt Bank moved his target to $14 from $12 with an unchanged “neutral” rating.


Long-dated assets and high-multiple stocks feel the impact of rising rates, said National Bank Financial analyst Maxim Sytchev in a research note previewing first-quarter earnings reason for Canadian industrial products companies.

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“Borrowing from George Soros again, we are not ‘predicting, we are observing,‘” said Mr. Sytchev. “Utilities, real estate, anything with lack of inflation protection have been underperforming. Whether or not the ‘dot plot’ game will demonstrate a less steep tangent over the coming 12 months, expectations are still being reset. SNC (via 407) and WSP (given premium valuation) are the two names that stand out for us given the backdrop.

“For SNC, instead of trading at 9.2 times 2018 estimate price-to-earnings it could be closer to 12 times, while it’s still hard to argue for greater than 10 times EV/EBITDA multiple for WSP despite stellar execution. On the flip side, inflation has historically been hedged via commodities; given our coverage universe’s almost 50-per-cent median exposure as either 1st or 2nd derivate to base / precious metals and oil, investors should remain over-exposed to equipment dealers (hence becoming more constructive on Toromont on top of Finning) and E&Cs in general. AutoCanada is the most recent addition to our coverage and we like the company’s trajectory now as the ‘peak’ auto sales fears subside while Alberta concentration rhetoric is being addressed via platform diversification.”

Ahead of the release of its quarterly results on April 25, Mr. Sytchev upgraded his rating for Toromont Industries Ltd. (TIH-T) to “outperform” from “sector perform,” maintaining a target of $63, which is 31 cents less than the consensus target.

“TIH shares are now trading at the same level as post the original Hewitt transaction jump (and hence having given up the 7-per-cent drift post); more importantly – a) Hewitt’s contribution appears to be more robust than modeled; b) QC/ON infra budgets are showing sustained momentum; c) mining pick-up will benefit the company’s key geographies (base + precious metals); and d) 2019 estimated P/E valuation at 16.9 times has to be counterbalanced by TIH ROE [return on equity] cresting again above the 19-per-cent mark in 2019.”

“We believe that TIH is once again compelling on a relative basis; hence upgrade to Outperform, $63.00 price target remains unchanged (15-per-cent upside from current levels).”

The analyst downgraded Ritchie Bros Auctioneers Inc. (RBA-N, RBA-T) to “sector perform” from “outperform” and lowered his target to US$35 from US$37. The average is US$32.51.

“On RBA, the shares have performed much stronger than expected post our November 2017 upgrade (up 25 per cent versus TSX at down 5 per cent),” said Mr. Sytchev. “We are also more concerned now about how OEMs will be allocating capital with all the tariff mongering. When examining our prior organic growth assumptions of 8.5 per cent in H2/18E and 13.5 per cent in 2019 (now at 6.5 per cent and 11.0 per cent, respectively), we are starting to believe that the pace of inflection is more representative of a more benign equipment supply environment (i.e., where OEMs will be managing their capacity carefully).

“With revised organic assumptions, our target price drops to US$35.00 (from US$37.00), leaving a more muted 7.0-per-cent potential upside (hence moving to Sector Perform). Please note that in both Toromont and Ritchie Bros. cases we are not making a call on Q1/18E showing, but are mindful of how the market is assessing companies’ six- to 12-month prospects.”


Invesque Inc. (HLP.U-T) offers unique North American senior housing, skilled nursing and health care asset exposure, according to Industrial Alliance Securities analyst Brad Sturges.

He initiated coverage of the Indiana-based health care real estate company with a “buy” rating.

Formerly Mainstreet Health Investments Inc., the company was rebranded in November of 2017 following the acquisition of Care Investment Trust LLC.

“Invesque is uniquely positioned in the Canadian REIT/REOC landscape as the only Canadian-listed entity to solely focus on owing a diversified portfolio of North American senior housing, skilled nursing and healthcare related properties,” said Mr. Sturges. “Invesque’s portfolio is largely triple-net leased with a 12 year )plus lease renewal options) weighted average lease term (WALT), and embedded average contractual rent escalators of 2.3-per-cent annually for in-place triple-net leases.”

“Despite having limited access to the Canadian public equity capital markets, Invesque has successfully sourced several strategic transactions by issuing common and convertible preferred equity to strategic third-party vendors and investors. The result of such acquisition activity sicne November 2017 has successfully reduced its North American real estate portfolio concentrations to: 1) its largest operating tenant, Sympthony Post Acute Network (Symphony); 2) its largest geographoic concentration in the State of Illinois; 3) Invesque’s exposure to the U.S. skilled nursing facility (SNF) and transitional care community (TCC) real estate sector.”

Mr. Sturges set a price target of US$9.75. The average target is US$9.46.

“Led by CEO Scott White, Invesque’s senior management team has established a historical track record of creating value for its shareholders,” he said. “With a potential sizeable pipeline of third-party acquistion opportunities available to the company, Invesque may continue to be an active net acquirer of North American seniors housing, SNFs/TCCs, and other strategic healthcare real estate.”


Expressing increased confidence about the economic potential of the GTA Central Gaming Bundle after an update to the expansion at Woodbine Racetrack, Canaccord Genuity analyst Derek Dley raised his target price for shares of Great Canadian Gaming Corp. (GC-T).

On Tuesday, the City of Toronto’s Executive Committee discussed the plan to increase Woodbine’s gaming facility. The venue is part of the GTA Central Bundle acquired by Ontario Gaming GTA LP, of which Great Canadian holds a 49-per-cent interest.

“Importantly, the meeting provided some further clarity behind the expansion plan and economics of the property,” said Mr. Dley. “The OGGLP is planning to develop the Woodbine Racetrack in two phases. In Phase 1, the partnership is planning to add 2,000 slots and 300 tables to the facility as well as a performance venue, nine restaurants and two hotels. The development is expected to be completed by 2022, with the partnership expecting to spend $1.3-billion over the course of the development. Phase 2, for which development is expected to begin beyond 2022 and to cost $700-million, will include the addition of 1,000 hotel rooms.

“As well, as part of the original Woodbine RFPQ, the OLG identified that the property’s potential development, which is based on adding 2,000 additional slots and 300 tables, would bring the property’s annual gaming revenue to between $900-million and $1.1-billion, up from the $600-million the property generated in gaming revenue in 2014, while also providing the City of Toronto with upwards of $26.5-million in hosting funds. In Tuesday’s meeting, the City commented that its hosting funds are now expected to be between $26-31 million after the development is completed, which, in our view, implies that there is likely more upside to the $1.1-billion gaming revenue estimate provided by the OLG.”

Keeping a “buy” rating for Great Canadian shares, Mr. Dley increased his target to $41 from $38. The average is $39.

“We are comfortable increasing our multiple given the improved economic clarity provided for the GTA Central Bundle, which we have yet to include in our estimates,” he said. “In our view, the awarding of the West GTA & GTA bundles are transformational events for Great Canadian, allowing the company to meaningfully increase its earnings potential, capitalize on future growth opportunities within Ontario, and reduce its dependence on the highly profitable River Rock casino. However, given the disclosure relating to these bundles remains limited, we admit our forecasts are subject to volatility in the near-term.

“Meanwhile, the company boasts a collection of well-positioned, highly profitable casino properties, which are likely to demonstrate stable revenue and EBITDA growth that can be accelerated through renovation and expansion initiatives over the course of our forecast period.”

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