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

Following the “turmoil” in the stock markets late in 2018 and with increasing concerns over global economic growth this year, Industrial Alliance Securities analyst Blair Abernethy expects investors to favour “well capitalized, larger cap technology stocks over weaker, small cap names” in 2019.

“Those companies with healthy profit margins and high levels of ‘sticky’ recurring revenue are best positioned, in our opinion, to weather the storm,” he said. “Last year, technology stocks in Canada outperformed the broader index and, we believe, are positioned to do so again in 2019 as most valuations are reasonable and the software consolidators stand to benefit from a more favourable environment for software business acquirers.”

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In a research report released Thursday previewing the year in the Canadian technology sector, Mr. Abernethy said several familiar themes will play out.

“A number of major trends continued to play out in the technology sector in 2018 and, we expect, most will do so in 2019,” he said. “The major technology industry themes we are tracking include the years-long transition from on-premise enterprise software solutions to remotely run SaaS [software as a service] and cloud-based applications. This shift is steadily moving IT budget spending away from integration services and maintenance contracts toward subscription services.

“Increasingly, data creation, from IoT [internet of things] sensors and end-point devices, and data collection, which can then be leveraged by AI and ML technologies, are opening up new, often disruptive, applications for start-ups, established enterprise software companies, and the industries they serve. All enterprise software vendors are evaluating how to best incorporate AI/ML into their products and platforms in order to deliver more value to their customers.”

Mr. Abernethy named a trio of stocks he expects to outperform in 2019. They are:

OpenText Corp. (OTEX-Q. OTEX-T) with a “buy” rating and US$42 target. The average target on the Street is US$42.60.

Analyst: “We currently view OpenText as attractively priced, with a stable 73 per cent of its revenue base recurring in nature and EBITDA margins in the mid-to-high 30 per cent. Recent acquisitions, such as Liaison Technologies, reinforce the business model and should enable higher margins in coming years. We expect OpenText to take advantage of any economic slowdown and market turmoil to more aggressively pursue accretive acquisitions at more favourable pricing. Longer term, we believe that OpenText’s installed base of unstructured data management applications will become more important to customers as AI/ML applications proliferate within their enterprises.”

Kinaxis Inc. (KXS-T) with a “buy” rating and $88 target. The average is $96.96.

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Analyst: “We expect Kinaxis to continue to grow rapidly, with solid operating margins, throughout 2019 as its customers make long-term (10 years or more) decisions to adopt its technology in order to achieve significantly higher ROI [return on investment] from their supply chain operations. Kinaxis has a multi-year lead over its largest competitor and continues to widen this advantage through the incorporation of ML technology. Kinaxis has a significant, multi-year backlog that enables it to profitably run its business. More recently, the Company has successfully developed partnerships with leading systems integrators that should enable Kinaxis to continue to post double-digit revenue growth for the next few years.”

Absolute Software Corp. (ABT-T) with a “buy” rating and $10.50 target. The average is $8.89.

Analyst: “While relatively smaller in market cap ($325-million), we expect Absolute’s stock to outperform in 2019. Absolute has a solid balance sheet, is consistently profitable, and has 90 per cent of its revenue recurring in nature. In recent years, the Company has pivoted its strategy and expanded its product offering to enable it to apply its patented persistence capability to a broad range of use cases, including GDPR compliance and cybersecurity applications. The Company recently hired a new, high-profile CEO with a proven track record of managing rapid growth software businesses in the end-point management and security space. With activist investors on the Board, we see Absolute as a likely take-out candidate within the next two years.”


Seeing a less compelling risk-reward proposition in a more challenging multi-national branded space, Wells Fargo Securities analyst Ike Boruchow downgraded Canada Goose Holdings Inc. (GOOS-T, GOOS-N) to “market perform” from “outperform,”

“While we remain confident on the trajectory of the GOOS brand and the fundamental story that has developed since their IPO in 2017, we feel the risk/reward today is not as compelling as it once was (when shares were cheaper and upside to numbers seemed easier to come by),” said Mr. Bochurow.

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Mr. Boruchow thinks risks in China, forex and tourism are causing greater focus on the valuation of global brand companies than over the past two years.

“We do view the fundamental story here as quite compelling (GOOS remains one of the strongest multi-year growth stories under coverage), we simply feel that valuation is going to become more relevant as the brand matures, the branded space remains choppy and certainly if brand ‘heat’ begins to cool off a bit,” he said.

Pointing to concerns over a slowdown in Google trend search and Instagram engagement over the key holiday season, Mr. Boruchow lowered his target to $68 from $80, which is below the consensus on the Street of $86.39.


Canadian Pacific Railway Ltd. (CP-T, CP-N) capped off an “impressive” year with better-than-expected fourth quarter results, according to RBC Dominion Securities analyst Walter Spracklin, who sees the momentum continuing in 2019 following the release of “bullish” guidance.

“Q4 further reaffirmed our positive view on CP,” said the analyst.

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On Wednesday after market close, CP reported adjusted earnings per share of $4.55, exceeding the projections of both Mr. Spracklin ($4.35) and the Street ($4.24). Operating ratio, a key measure of a railway company’s performance, came in at 56.4 per cent, which also topped the analyst’s expectation (56.8 per cent).

Mr. Spracklin said the company’s guidance came in as he expected, featuring “strong” revenue ton mile (RTM) growth and a “favorable” pricing environment. He also sees further improvement to operational efficiencies.

“CP announced its 2019 guidance and pointed to ‘double-digit EPS growth’ on the back of mid-single-digit volume growth,” Mr. Spracklin said. “Pricing is currently trending in the 4% range, which management expects will prevail in Q1, suggesting that total revenue growth will be closer to 10%. With incremental margin running at 75 per cent, we believe this will translate into low-teens EPS growth, and we raise our 2019 estimated EPS to now reflect 13-per-cent growth (with a further 13-per-cent growth anticipated again in 2020).

“Looking back to the same report last year when management issued its 2018 guidance, we note that it guided then for ‘low-double-digit EPS growth’ but achieved closer to 30 per cent. With the guidance now for ‘double-digit growth,’ we see continued avenue for upside. Notably, on the question of capacity, management indicated that it has the capacity to double the rate of its current mid-single-digit growth without any adverse impact on operations or fluidity.”

His earnings per share projections rose for both 2019 and 2020 to $16.37 and $18.54, respectively, from $16.17 and $18.38.

Keeping an “outperform” rating for the stock, his target increased to $334 from $331. The average on the Street is now $300.34.

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“The volume pipeline looks solid, pricing is above trend, operating leverage is powerful, and EPS growth is strong relative to peers,” said Mr. Spracklin. “Valuation remains attractive, making CP a very compelling investment opportunity, in our view. We reiterate CP as our preferred name in the railroad sector today.”

Elsewhere, Desjardins Securities analyst Benoit Poirier hiked his target to $314 from $311 with a “buy” rating (unchanged).

Mr. Poirier said: “We maintain our bullish view on CP as we continue to see solid growth opportunities across a diversified range of commodities as well as opportunities for further OR improvements down the road. In addition, we believe the share buyback program will support the stock in the coming quarters.”


After Wednesday’s release of “solid” fourth-quarter results and “meaningful” expense reduction guidance for the current fiscal year, Desjardins Securities analyst Gary Ho increased his target price for shares of AGF Management Ltd. (AGF-B-T).

“Despite the stock’s 14-per-cent increase [Wednesday], it remains our preferred name in the sector, given its attractive valuation (3.0 times our estimated 2019 wealth management EBITDA; we value the S&W stake at a conservative $247-million), cost containment catalyst, improving management credibility and the S&W jewel, which potentially provides upside to our target price,” he said.

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Before market open, AGF reported adjusted earnings per share of 17 cents, topping Mr. Ho’s estimate by 3 cents and the consensus by 2 cents, due largely to better-than-anticipated performance from its wealth management segment.

Coupled with expense guidance of a 4-per-cent reduction, exceeding his 1-per-cent expectation, Mr. Ho raised his 2020 EPS estimate to 65 cents from 57 cents.

Keeping a “buy” rating for the stock, his target rose to $7.50 from $7. The average is $6.82.

“We foresee a few near- or medium-term positive catalysts: (1) improving fund performance leading to 60 per cent of AUM [assets under management] above median over three years; (2) net retail flows improving relative to industry; (3) investors recognizing a proper valuation for S&W; (4) the cost-containment story driving EBITDA margin expansion; and (5) restoring management’s credibility,” the analyst said.


Pointing to reduced risks at its Vogtle nuclear power plan in northern Georgia, Citi analyst Praful Mehta upgraded Southern Co. (SO-N) to “neutral” from “sell” following a recent site visit.

“Challenges related to earned hours and labor issues are mostly addressed and support our upgrade,” he said.

“As Vogtle moves to the testing phase, we do worry about potential risk but these likely come up in Q3/Q4 2019. We keep a watchful eye. For now, near-term momentum and progress support our upgrade to Neutral.”

His target for Southern shares rose to US$50 from US$45. The average is US$46.47.

“The company generates nearly all of its earnings from its regulated and contracted operations and is investing the majority of its capital over the next five years into these businesses,” said Mr. Mehta. “While we see the dividend yield remaining stable, we think growth will be challenged by the company’s high leverage and limited load growth in its service territories.”


Ahead of the release of its first-quarter 2019 financial results on Jan. 29, Raymond James analyst Kenric Tyghe increased his target price for shares of Metro Inc. (MRU-T).

“While the broader macro backdrop remained relatively weak in quarter, Food CPI in Metro’s quarter accelerated to roughly 1.7 per cent (on Fresh CPI of 2.7 per cent),” he said. “We believe that, while competition remained elevated, Metro (given the weighting of its footprint and promotional capabilities) capitalized on the acceleration of Food CPI (supporting our 1.6-per-cent same-store sales estimate, versus 1.2 per cent in the prior year quarter).

“Our revenue estimate of $3,918 million (versus consensus of $3,903 million) is supported by both the solid expected SSS growth, and the addition of Jean Coutu. We expect initial procurement synergies following the acquisition, in addition to positive mix, to drive a 77 basis point increase in gross margins to 20.3 per cent. We expect above consensus sales, combined with gross margin expansion (and expected flat SG&A margins) to deliver adjusted EBITDA of $321.2 million (versus consensus of $315.9 million). Our $0.69 adjusted EPS estimate is therefore also above consensus of $0.67.”

Maintaining an “outperform” rating, Mr. Tyghe raised his target to $51 from $47. The average is currently $48.46.


In other analyst actions:

Tudor Pickering & Co analyst Matthew Murphy upgraded Canadian Natural Resources Ltd. (CNQ-T, CNQ-N) to “buy” from “hold” with a target of $42, rising by a loonie. The average on the Street is $45.18.

Mr. Murphy also upgraded MEG Energy Corp. (MEG-T) to “buy” from “hold” with a target of $8, down from $9 and below the consensus of $8.29.

BMO Nesbitt Burns analyst Peter Sklar upgraded Restaurant Brands International Inc. (QSR-N, QSR-T) to “outperform” from “market perform” with a target of US$74, jumping from US$58. The average is US$66.97.

National Bank Financial analyst Gabriel Dechaine downgraded Great-West Lifeco Inc. (GWO-T) to “sector perform” from “outperform” and lowered his target to $31 from $37. The average is $33.40.

Macquarie initiated coverage of Enbridge Inc. (ENB-T, ENB-N) with an “outperform” rating and $56 target, exceeding the consensus of $54.23.

The firm also initiated coverage of TransCanada Corp. (TRP-T) with a “neutral” rating and target price of $58. The average is $62.71.

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