Inside the Market’s roundup of some of today’s key analyst actions
Canadian independent power producers, regulated utilities and infrastructure companies are seeing "sunnier days, but not yet ‘blue skies’," according to Industrial Alliance Securities analyst Jeremy Rosenfield, who thinks fundamental growth remains healthy with potential upside.
"The fundamental bottom-line growth outlook has not substantially changed following Q4/18 financial updates from companies across our coverage universe," he said. "We continue to see the potential for high single-digit earnings and cash flow growth over the medium term for several companies, with potential upside opportunities (catalysts) from development prospects for many (but not all)."
In a research report released Thursday, Mr. Rosenfield adjusted his valuations, price targets and ratings for companies in his coverage universe in light of softer yield expectations going forward.
"The pace of central bank tightening in Canada and the U.S. were key drivers of benchmark bond yields and equity performance in the Power, Utility & Infrastructure sectors in 2018, with rising rates contributing to sharp sector underperformance, as discussed in previous sector updates last year," the analyst said. "However, following a period of relatively weak economic data in late 2018/early 2019, market expectations have substantially moderated, such that current expectations now reflect a much more dovish view of macro-economic policy for the balance of 2019.
“At this point, consensus expectations indicate that both the Bank of Canada (BoC) and the U.S. Federal Reserve Board of Governors (U.S. Fed) are unlikely to raise target rates in 2019, and could potentially raise target rates by 25 basis points, at most, in 2020; further tightening appears highly unlikely at this point. Some forecasters believe it is more likely that the next action will actually be a cut (not a hike), although that appears less probable at this point.”
Mr. Rosenfield emphasized that stable rates "bode well" for investment in the sector, believing that environment will support low financing costs on large-scale, capital-intensive investments, leading to lower costs of capital.
"Low, stable rates would be a stimulus for sector growth, and could also be positive for funds flow into the sector, driving stronger stock performance, and valuation multiple expansion," he said.
Noting stock performance has rebounded thus far in 2019, he added: "Following a broad sector pullback in H2/18, and a sharp decline in late December 2018, share price performance in the sector has been very strong year-to-date. Notably, the sharp declines in 2018 closely resembled other recent periods of shifting market expectations surrounding the pace of central bank normalization in which the sector broadly declined, but then later came to be seen as buying opportunities for longer-term oriented investors (a buy-the-dip strategy."
Seeing a “robust” growth outlook for most, Mr. Rosenfield made one rating change in his report, downgrading Emera Inc. (EMA-T) to “buy” from “strong buy” based on recent share price appreciation. His target price for Emera shares rose to $52 from $51, which exceeds the average target on the Street of $49.36, according to Bloomberg data.
"Overall, EMA offers superior risk-adjusted potential returns for long-term investors in the regulated utility sector, underpinned by (1) a significant regulated utility business (95 per cent of adjusted earnings), (2) healthy forecast EPS growth (5-7 per cent per year, CAGR 2018-23), and (3) attractive income characteristics (5-per-cent yield, 4-5 per cent per year dividend growth through 2021, albeit with a high payout through 2020)," he said. "Although asset sales could create noise in 2019, we still expect that EMA will emerge as a low-risk regulated utility company, with stable earnings and cash flow that appeal to investors."
His target prices changes were:
Brookfield Infrastructure Partners LP (BIP-UN-T, “buy”) to US$47 from US$46. Average: US$45.08.
Algonquin Power & Utilities Corp. (AQN-T, “strong buy”) to $18 from $17. Average: $16.21.
AltaGas Canada Inc. (ACI-T, “hold”) to $18 from $16.50. Average: $18.25.
Canadian Utilities Ltd. (CU-T, “hold”) to $37 from $34. Average: $36.57.
Fortis Inc. (FTS-T, “buy”) to $52 from $48. Average: $50.55.
Valener Inc. (VNR-T, “hold”) to $25 from $23. Average: $23.08.
Brookfield Renewable Partners LP (BEP-UN-T, “buy”) to US$36 from US$35. Average: US$31.58.
Boralex Inc. (BLX-T, “strong buy”) to $23 from $22. Average: $23.25.
Capital Power Corp. (CPX-T, “hold”) to $32 from $30. Average: $31.14.
Innergex Renewable Inc. (INE-T, “strong buy”) to $17 from $16. Average: $15.91.
Pattern Energy Group Inc. (PEGI-T, “hold”) to US$22 from US$21. Average: US$22.41
TransAlta Renewables Inc. (RNW-T, “hold”) to $14 from $13. Average: $12.95.
“Although sector valuation remains in line with long-term historical average levels, rapidly rising stock prices have reflated relative valuation multiples, and could become a near-term hurdle if progress continues at the current pace,” said Mr. Rosenfield. “We are cautiously optimistic that multiple expansion can continue, for now.”
Seeing “dour sell side sentiment” for Apple Inc. (AAPL-Q) shares, Citi analyst Jim Suva said he’s remaining positive on the U.S. tech giant, raising his target price in a research note released Thursday.
"We expect Apple to raise its dividend in April and increase its buyback authorization by another $100-billion while generating an estimated $60-65-billion of free cash flow each year as we look ahead," said Mr. Suva. "From a holdings perspective, Apple shares are no longer in the SP500 Growth Index Funds and have completely transitioned to being represented in the Value Index Fund yet in our marketing meetings, many growth investors have a negative view on the shares with short interest as a percentage of free float the highest it has ever been over the past 2 years."
Mr. Suva does not expect Apple to unveil a 5G iPhone or folding iPhone until 2020, seeing "muted" hardware enhancements. Instead, he expects a focus on premium user experiences, noting "most early adopters experience sub-optimal battery or other user experiences."
"While this may seem boring or unlikely to cause an iPhone upgrade cycle, that is exactly correct; no one expects an upgrade cycle as we expect iPhone units to decline 15 per cent in fiscal 2019 and 1 per cent in FY20 (down 15 per cent in calendar 2019 and up 5.9 per cent in CY20)," he said. "2019 will likely be a year when the new iPhone will see modest enhancements with enhanced camera functionality being the most notable.
"Apple is expected to hold an event on March 25. In the past, Apple has typically provided updates to their iPad, Apple Watch and software. We expect this year’s event to focus on services and specifically on content subscription/streaming services in which Apple is likely to bundle original content with other streaming subscription services (HBO, Showtime, etc.) and may couple this offering with other news subscriptions in a package bundle. Netflix has already announced that it will not be part of these services. Overall we do not expect this to be a big catalyst for the stock but a continuation of Apple’s strategy to drive higher recurring subscriptions/purchases from their active installed base of 1.4 billion devices. During the December quarter, Apple noted its paid subscription base hovered at 360 million subscriptions, including Apple Music and other media content."
Mr. Suva said he's not expecting Apple to preannounce negative results again, despite modelling a decline in iPhone sales (in dollars) of 21 per cent year over year.
He added: "Falling memory pricing has the potential to help future gross margins but likely the negative year over year growth the next few quarters will absorb this potential upside. Services continue to be a positive now, approaching 20 per cent of total sales and expected to grow 12 per cent year-over-year on average over the next few quarters. Critically important is that the installed user base (900 million iPhone installed base, 1.4 billion installed base of all devices) continues to grow."
Maintaining a "buy" rating for Apple shares, Mr. Suva hiked his target to US$220 from US$170. The average on the Street is US$182.71.
"Apple shares currently trade at 15.5 times PE (15-per-cent discount to the market) and 13.5 times PE excluding cash and this compares to 17 times in Sept 2018 (1 times relative to the market)," he said. "This valuation contraction is attractive to us given the significant lift we expect from capital returns and as services continue to contribute a higher portion of revenues. We expect the valuation discount of Apple shares to the market to gradually decrease (from 15 per cent to 10 per cent) as services grow as a percent of total sales."
Elsewhere, seeing the possibility for a 20-per-cent rally over the next year, Needham analyst Laura Martin upgraded Apple to "strong buy" from "buy."
"We anticipate better than previously expected results from both Services and Wearables, Home and Accessories, as well as valuation upside created by falling churn and strong barriers to entry," she said.
Ms. Martin increased her target to US$225 from US$180.
With a “DRAM [dynamic random access memory] crash in full effect,” Citi analyst Christopher Danely downgraded Micron Technology Inc. (MU-Q), believing the chip maker “is trying its best but you can’t outswin a tsunami.”
In the wake of the release of "weak" quarterly results and lower-than-expected guidance after market close on Wednesday, Mr. Danely moved Micron shares to "sell" from "neutral."
"The company believes that the memory market will improve in the second half of calendar 2019 but based on our checks and our supply/demand model we believe memory ASPs could bottom in 2H19, not 1H19," he said. "We expect Micron EPS to bottom at $0.21 in C4Q19 and book value to trough at $30 in C2Q19."
"Micron is executing well and returning capital. However, we believe that NAND supply is growing in excess of demand following massive NAND industry capex in 2017 and 2018. DRAM spot pricing has fallen 49 per cent since the January 2018 peak while NAND spot pricing is down 30 per cent from peak and DRAM customers are correcting inventory."
Mr. Danely lowered his fiscal 2019 revenue and earnings per share projections to US$22.5-billion and US$5.89, respectively, from US$24.6-billion and US$6.87.
With the downgrade, his target for its stock fell to US$30 from US$35. The average is US$48.04.
"Micron reported weak results and guided well below Consensus due to the memory crash and cut capex," he said. "While these are appropriate steps, we believe estimates and the stock should remain under pressure due to the DRAM crash. We lower estimates and downgrade to Sell."
Following a drop in guidance from BMW, BMO Nesbitt Burns analyst Peter Sklar downgraded both Magna International Inc. (MGA-N, MG-T) and Martinrea International Inc. (MRE-T) to “market perform” from “outperform.”
“We believe the announcement reflects how difficult it is for auto manufacturers to grow earnings during a period of flat to declining vehicle production volumes, which the global auto market is currently experiencing," he said.
“Given the late stage of the auto cycle and the headwinds for vehicle manufacturers as highlighted by BMW’s announcement, we expect that investor sentiment will remain suppressed.”
Mr. Sklar said it is unlikely either Martinrea and Magna will “experience meaningful multiple expansion within our investment horizon.”
He lowered his target for Martinrea shares to $14 from $18, falling below the average of $17.50.
His target for Magna dipped to US$55 from US$64, versus a consensus of US$57.91.
Following the release of “exceptional” third-quarter financial results, Alimentation Couche-Tard Inc.'s (ATD-B-T) brand and balance sheet are “ready for more opportunities,” according to Desjardins Securities analyst Keith Howlett.
"The financial results of 3Q FY19 are not likely to be replicated soon, as U.S. fuel margin exceeded 29 US cents," he said. "Beyond the staggering fuel margin in the U.S., the business posted solid convenience store sales, with same-store growth of 4.5 per cent in the U.S., 4.9 per cent in Canada and 2.9 per cent in Europe. The board of directors increased the quarterly dividend by 25 per cent to C$0.125. The company intends to obtain authorization for a share buyback for up to 4 per cent of the Class B shares. Our expectation is that the authorization will be used sparingly, as management remains focused on growing the business organically and by acquisition, with the aspiration of doubling the business within five years.
"Management appears increasingly enthusiastic about the reverse synergies (food offerings, merchandising programs, store floor layouts, labour scheduling, etc) that are flowing from the Holiday acquisition in Minnesota (in December 2017)."
Despite the beat, Mr. Howlett lowered his 2019 and 2020 earnings per share projections to US$3.44 and US$3.33, respectively, from US$3.62 and US$3.40.
However, he raised his target for Couche-Tard shares to $80 from $77, keeping a "buy" rating. The average on the Street is $81.68.
"Couche-Tard is experiencing strong sales lifts from the conversion of CST Brands’ sites (Cornerstore brand) to Circle K in the U.S. and Canada," he said. "In addition to sales success in individual local trading areas, the Circle K store network in the US is now of the scale required for joint national promotions with leading CPG companies. In Europe, management has branded both the convenience stores and the fuel offering as Circle K, dramatically increasing the potential of its loyalty program. Couche-Tard is building a global brand that will more fully capitalize on the company’s strong balance sheet and will even better monetize the company’s operational skills."
Elsewhere, CIBC World Markets analyst Mark Petrie raised his target to $82 from $80 with an “outperformer” rating (unchanged).
Mr. Petrie said: “Couche-Tard continues to benefit from the move toward a unified, global brand under Circle K. Rebranding in Europe is nearly complete and U.S. has progressed well, both with good results. We expect continued benefits in marketing, procurement and loyalty. Holiday is now fully integrated, and attention turns to reverse synergies. With early wins already in private-label and centre-store merchandising, Couche-Tard is piloting various Holiday foodservice options and store layouts. However, the biggest near-term win will likely come from Holiday’s tested and efficient labour scheduling model, which we estimate could lead to a 50 to 100 basis points improvement in ATD.B’s opex in fiscal 2020.”
Calling its growth prospects “rock solid,” CIBC World Markets analyst Chris Couprie initiated coverage of Granite Real Estate Investment Trust (GRT-UN-T) with an “outperformer” rating.
“Granite possesses many of the hallmarks of a favourable REIT investment: exposure to strong market fundamentals, a credit-rated balance sheet, reputable management, an AFFOPU growth profile that exceeds the Canadian REIT average, a strong track record of distribution growth, and a development program to drive further value creation,” he said.
“Now being led by CEO Kevan Gorrie (former CEO of Pure Industrial REIT, which was acquired by Blackstone in early 2018), Granite is in the midst of a strategic transformation whereby the REIT will increase its exposure to the U.S., to warehouse/logistics facilities, and to e-commerce, while reducing its exposure to the REIT’s single-largest tenant, Magna International, one of the world’s largest manufacturers of auto parts. As the REIT executes on this strategic initiative, we think there is potential for valuation to improve.”
He set a $69 target, which tops the consensus of $67.17.
In other analyst actions:
Pointing to a slower-than-expected build-out of production facilities and roll-out of medical and recreational product lines within Canada, Canaccord Genuity analyst Derek Dley downgraded Green Organic Dutchman Holdings Ltd. (TGOD-T) to “hold” from “speculative buy” with a $5 target, falling from $6.50. The average on the Street is $8.05.
National Bank Financial analyst Patrick Kenny upgraded Enbridge Inc. (ENB-T) to “outperform” from “sector perform” with a target of $59, rising from $55. The average is $55.51.
National Bank’s analyst Mike Parkin lowered Alamos Gold Inc. (AGI-T) to “sector perform” from “outperform” with a target of $7.25, rising from $7. The average is $8.72.
TD Securities analyst Daniel Earle downgraded Superior Gold Inc. (SGI-X) to “hold” from “buy” with an 80-cent target, down from $1.15. The average is $1.41.
With a file from Bloomberg News