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

Pointing to the recent “significant outperformance” of its stock, Desjardins Securities analyst Maher Yaghi downgraded Cogeco Communications Inc. (CCA-T) on Thursday.

The move came on the heels of the release of “good” second-quarter financial results on Tuesday after market close.

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“Investors cheered the improved subscriber trends posted by CCA’s Canadian operations, as previous problems with the company’s CRM system appear to have been resolved,” said Mr. Yaghi. “While we see continued profitability improvement in the quarters to come, the stock’s valuation is now less attractive versus a year ago. The risk to our downgrade would be another cable acquisition in the U.S.; however, this upside risk is weighed down by CCA’s full exposure to wireline headwinds and lack of wireless assets.”

He added: “In addition, the sale of the Peer1 assets provides the company with capital to reduce leverage and accelerate its acquisitive drive in the U.S.. While financials were strong, subscriber trends in both Canada and the U.S. were somewhat weak. Management does seem to have re-established control of the new CRM system, and promotional activities in the back half of the year are expected to lead to improvement in subscriber loading. In the US, customer losses were higher than expected as expansions are lumpier, but overall, CCA continues to enjoy technological as well as pricing power there.”

In response to the quarterly release, Mr. Yaghi raised his earnings per share projections for fiscal 2019 and 2020 to $6.77 and $7.87, respectively, from $6.23 and $6.89.

However, he moved the stock to “hold” from “buy” with a target of $96, increasing from $90. The average on the Street is $95.55, according to Bloomberg data.

“Since we upgraded CCA last July, the stock has generated a total return of 21.7 per cent, largely exceeding the weighted average of its peers at 11.0 per cent,” he said. “Since the beginning of the year, the outperformance has been even more noticeable, as the stock has gained 31.7 per cent vs 9.3 per cent for its peers.”

Pointing to the rapid pace in which Cogeco closed the valuation gap with its peers, he added: “While fundamentally we believe CCA is walking a fine line between balancing profitability with subscriber loading and this is paying off with good profitability improvement, the stock’s valuation has materially increased, recently closing most of the discount gap vs peers. Our downgrade reflects our view on the stock, not on the company or management.”


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Dollarama Inc. (DOL-T) remains a “solid” operator with “industry leading margins and further growth opportunities in Canada that justify a premium valuation,” according to Industrial Alliance Securities analyst Neil Linsdell.

However, in reaction to a 22-per-cent appreciation in share price thus far in 2019, he lowered his rating for the discount retailer’s stock to “hold" from “buy.”

“Following the company’s Q4/F19 results release, we reduced the valuation multiple that we use to calculate our target price,” he said in a research note. “We now use an EV/EBITDA [enterprise value to earnings before interest, taxes, depreciation and amortization] multiple of 13.5 times, which is 3.0 times above the average multiple (of 10.5 times) that our industry comparables have traded at over the last five years. (The current average multiple of our comparables is 11.3 times.) This is half of the 6.0 times premium that DOL has enjoyed over the same time period, but we believe this lower premium is justified given the recently lowered growth expectations and slight margin pressure that we have seen over the past year. We maintain that a premium valuation to comparables is still justified however, given the simple value proposition, execution, Dollarama’s still relatively unchallenged dominance in the Canadian market, and the optionality of the Dollar City investment in Latin America.”

Though he noted Dollarama’s fiscal 2020 guidance implies “more modest” top-line growth than in the past with “slight” margin pressure, Mr. Linsdell maintained a target price of $39 for its share. The average on the Street is $39.25.


With trading volumes “starting to slow,” CIBC World Markets analyst Stephanie Price downgraded Descartes Systems Group Inc. (DSGX-Q, DSG-T) to “neutral” from “outperformer.”

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“While North American trade volumes remain solid, other indicators are starting to suggest slowing volumes, with global 3PL air freight traffic contracting 1.8 per cent in January, global container volume seeing the largest sequential decline (down 18 per cent) in the past eight years and the US PMI down 7 per cent since the beginning of the year,” said Ms. Price. "Descartes managed the 2009 recession well. Despite a 30-per-cent fall in North American transportation volumes, Descartes’ revenue continued to grow mid-single digit (from low-double digit) and EBITDA margins fell 100 basis points. The company offset the majority of the impact from: 1) cross-selling (focused on efficiency and automation) and 2) acquisitions (making three acquisitions including Porthus, one of its largest at the time).

“However, the company’s valuation was impacted, falling roughly two standard deviations below its mean. Since then Descartes has diversified, and we estimate that transactional revenue now represents 40 per cent of overall revenue, down from 50 per cent in 2009. Post recent acquisitions, the company has moved from net cash to net debt (2 times). With management comfortable with leverage at these levels, we assume that Descartes would have to raise equity if it found an attractive acquisition during the downturn.”

The analyst maintained a US$41 target, which exceeds the consensus of US$38.39.

“We continue see Descartes as a well-managed company with solid fundamentals, but at these levels we see the risk-reward as less compelling,” she said.


Expressing increased confidence in its ability to drive “hyper” revenue growth of 100 per cent or more after recent marketing meetings with its management, Raymond James analyst Brenna Phelan raised her rating for VersaPay Corp. (VPY-X).

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Believing the Toronto-based financial technology company is “is uniquely positioned to capitalize on a massive and materially underpenetrated market as B2B businesses increasingly see value in both the automation of the Accounts Receivable process and the ease in accepting digital payments that its flagship product, ARC, elegantly provides,” Ms. Phelan upgraded its stock to “strong buy” from “outperform,” seeing a “favourable” inflection point for both revenue growth and its share price.

“We think that VersaPay’s direct sales team plus its network of 18 VAR partners should deliver accelerating sales numbers through 2019, driving meaningful growth in ARC Subscription Revenue, as well as associated professional services, which is priced at 20 per cent of subscription price,” she added. “Our 2019 revenue forecasts are based on an ARR and backlog build outlook that is largely representative of what we think direct sales and VARs can deliver, as the direct sales team seasons and VARs get traction.

“In other words, we implicitly assume an only modest contribution from partnerships - e.g., RBC as well as the two partnerships that management expects to announce in the coming weeks.”

Ms. Phelan kept a target price of $3.30 for VersaPay shares. The average is currently $2.40.


Pointing to “the potential timing impacts of bringing high-impact Bakken wells online to corporate production,” Canaccord Genuity analyst Dennis Fong lowered his rating for PetroShale Inc. (PSH-X) to “speculative buy” from “buy.”

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On Wednesday, the Calgary-based oil company reported production for the fourth quarter of 6,014 barrels of oil equivalent per day, missing the forecast of both Mr. Fong and the Street (6,931 and 6,900 boe/d, respectively). Adjusted cash flow per share of 5 cents fell in line with expectations.

“PetroShale was negatively impacted by weather delays in the North Dakota Bakken resulting from colder-than-expected temperatures (and the impact of the polar vortex in Q4) as well as high winds, which hindered drilling and workover rigs,” said Mr. Fong. “Further to this, the company had to shut-in wells to protect from offset third-party hydraulic fracturing. While we do not have concerns around the well productivity in the heart of the Fort Berthold Bakken, we see an increased risk of production shut-ins and one-time delays which could have large impacts on a company of PetroShale’s size.”

Mr. Fong lowered his production expectation to 7,975 boe/d from 10,964 boe/d in reaction to the company’s guidance. His 2020 projection dipped to 11,675 boe/d from 15,495 boe/d.

With that, his CFPS estimate fell to 43 cents from 56 cents, though “partially offset by improving netback fundamentals throughout the year.”

His target for PetroShale shares remains $2.75, which exceeds the consensus of $2.25.

Elsewhere, Peters & Co Ltd analyst Harbie Jawanda downgraded the stock to “sector perform” from “sector outperform” with a $1.75 target, down from $2.

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Green Growth Brands Inc. (GGB-CN) possesses the most experienced retail team in the North American cannabis space and the ability to access a large distribution network “at little to no cost,” according to Paradigm Capital analyst Corey Hammill.

“We believe this provides GGB with a fundamental competitive advantage, which, paired with the lucrative market opportunity, has the potential to generate half-a-billion in annual revenue for the company within the next five years,” said Mr. Hammill, who initiated coverage of the Toronto-based company with a “buy” rating.

Emphasizing its "seasoned" retail methods," Mr. Hammill added: GB’s approach to cannabis retail will focus on how selling takes place versus just what sells, which is unique to the current service that is considered the “industry norm”. GGB’s team has visited 100 cannabis stores across the U.S. and observed that shelves are disorganized, price points are confusing, lines are long and brands are often undistinguishable. Leveraging its considerable experience, the company is looking to differentiate itself by developing high-quality, innovative products which it will display in well laid out assortments. GGB’s goal is to create a structured, educational experience for all types of users in order to maximize retention rates and, over time, increase average spending. ... With the likelihood of cannabis crop commoditization over time, we believe the ability to attract and retain customers will separate top-tier retailers from the rest of the pack. This approach to retail applies to both its cannabis store business and its newly landed CBD business."

Mr. Hammill did not specify a target price for Green Growth shares. The average target on the Street is currently $8.50.

"As the retail environment for cannabis products evolves, we expect it to look increasingly like all other types of specialty retail businesses," he said. "Specialty retail companies trade at 3–4 times forward revenue while the wellness category, which is a good proxy for Green Growth’s CBD business, trades at 2.5–3.0 times revenue. Given the early stage but aggressive retail build-out strategy, we believe it is appropriate to assign a higher near-term revenue multiple. We then project a moderating trend in that multiple over time. Following that we replace an absolute target price with what we regard as a more useful range of scenarios and multiples, that provide a directional indication of potential share price trajectory. This yields a near-term support for the share price at $5.00, increasing to $9.00 or more over four years. This is supported by our discounted cash flow analysis, which produces a range of potential target prices between $7.00 and $10.00."


Awaiting evidence of “significant” upside from its expanding Services segment, Credit Suisse analyst Matthew Cabral initiated coverage of Apple Inc. (AAPL-Q) with a “neutral” rating in a research report on IT hardware companies released on Thursday.

“As Apple's iPhone matures, the company is looking to transform itself into a more recurring, higher-growth, and ultimately higher-value business as it pushes to increasingly monetize its massive 900 million iPhone installed base,” he said. “We recognize the potential in the shift to Services, which we expect will reach $65-billion in revenue by FY21, but believe it will take time for that view to play out. Near-term upside from here likely requires the multiple to re-rate higher; investor perception of Apple as a hardware-centric company will be hard to shake against a backdrop of double-digit iPhone sales declines (Credit Suisse estimate is down 11 per cent year-over-year in calendar 2019), in our view. With the stock up 40 per cent from its Jan low and near a peak multiple (15 times CY20 EPS), we remain on the sidelines awaiting a better entry point and/or line-of-sight to significant Services-led upside to break out of the historical valuation range.”

He set a US$209 target for Apple shares. The average is US$193.10.

At the same time, Mr. Cabral gave “outperform” ratings to the following stocks.

NetApp Inc. (NTAP-Q) with a US$89 target. Average: US$75.35.

Analyst: “NetApp is in the sweet spot of the ongoing enterprise push to hybrid cloud, with a differentiated and consistent storage experience that spans traditional on-premise and all three major public cloud providers. We believe the company’s Data Fabric strategy, centered on enabling that consistency, is a clear advantage for customers looking to ‘future-proof’ their investment in traditional storage arrays. The rapid growth of NetApp’s all-flash business (more than 60 per cent of storage mix) is a driving force behind ongoing outperformance vs. the wider storage market, with all-flash share (23.5 per cent in CY18) nearly twice as high as the company’s storage share overall. We also see a coming inflection in high-margin Services, as it catches up to the nine straight quarters of Product revenue growth. This, coupled with tailwinds to Product gross margins and ongoing opex discipline, should drive significant margin expansion ahead.

CDW Corp. (CDW-Q) with a US$117 target. Average: US$101.80.

Analyst: “As the largest U.S. value-added reseller (VAR), CDW provides diversified exposure to U.S. IT spending without concentrated vendor, product, or vertical risk. CDW’s size is a structural advantage in a fragmented market, enabling investments in talent and tools to capitalize on the rising complexity of small and medium-sized business (SMB) IT demand; we expect accelerating share gains as a result. Further, CDW’s international push is just getting started; we see opportunity for expansion into new geographies, bolstered by the success of CDW’s 2015 UK acquisition. We estimate sustainable double-digit EPS growth (11-per-cent ’18-'21 estimated CAGR), driven by mid-single-digit revenue growth, modest margin expansion, and ongoing share repurchases supported by strong FCF.”

International Business Machines (IBM-N) with a US$173 target. Average: US$144.1.8

Analyst: “IBM is standing on the precipice of change, with the pending Red Hat (RHT) acquisition marking a landmark shift in strategy and bringing a potential return to true revenue-driven EPS growth vs. years of over-reliance on lower-quality drivers. The combination significantly improves IBM’s positioning in the rapid push toward hybrid cloud, bringing together the platform, incumbency, and expertise necessary to help customers with the vast majority (80 per cent) of applications that have yet to migrate to the public cloud. We see meaningful financial opportunity longer term, as we estimate 10-per-cent FCF accretion within three years that should enable sustained dividend growth (4.4-per-cent yield currently) despite rapid debt repayment. We see a potential negative surprise from sizeable near-term EPS dilution (11-per-cent impact in CY20E); we are undeterred, as the biggest drag is from the required writedown of Red Hat’s deferred revenue under GAAP accounting which has no material impact on FCF and should fade quickly thereafter. Further, the acquisition has yet to close; while IBM is confident in a 2H19 timeline, we nonetheless acknowledge it represents risk to our view.”

Xerox Corp. (XRX-N) with a US$42 target. Average: US$32.83

Analyst: “Xerox is in the early stages of a multi-year margin expansion and FCF self-help story that is underappreciated by the market, particularly with the stock trading at a 13.3-per-cent calendar 2020 estimated FCF yield. Despite ongoing challenges to revenue growth (declines through ’21 on Credit Suisse estimates) against a secularly declining industry backdrop, we see significant opportunity trapped in inefficient spending and working capital (WC) that new management intends to unlock. 2019 marks an important turning point; we expect margin expansion to result in profit dollar growth for the first time in several years. This, plus the return of buybacks, should drive double-digit EPS growth in CY19. We see further tailwinds thereafter as benefits from the $1.5-billion cost-savings plan continue and the pace of revenue decline eases.”

Besides Apple, Mr. Cabral gave “neutral” ratings to the following:

Hewlett-Packard Co. (HPQ-N) with a US$21 target. Average: US$24.42.

Analyst: “Following the separation of HPE in 2015, HP Inc. has ramped innovation across both PCs and Printing which significantly improved the company’s positioning. While we expect continued PC market share gains, we are more concerned about the recent deterioration in Supplies within the Printing segment (70 per cent of total profit). We do not think the stock will rerate until investors regain confidence in the steady-state outlook for Supplies, which will likely take time given the (inventory-fueled) return to growth in FY18 led to optimism that HP had finally turned the corner. That said, robust FCF (11.5-per-cent CY20 estimated yield) should provide support to valuation, leaving us Neutral.”

Pure Storage Inc. (PSTG-N) with a US$23 target. Average: US$25.46.

Analyst: “Pure Storage is 100-per-cent leveraged to the rapidly growing all-flash storage space, which brings faster performance and ease-of-use benefits vs. traditional spinning disks. We estimate a more-than $14-billion addressable market by CY21 (an increase of 17 per cent ’18-'21 estimated CAGR), driven by increased penetration of Mid-Range storage (arrays $25k-$100k) as NAND prices resume their downward trajectory. That said, Pure’s all-flash market share has stalled at 12 per cent (-0.8pts y/y in CY18) as storage incumbents have significantly improved their positioning, both organically and through M&A. With our sales estimates of $1.8-billion/$2.2-billion in FY20/FY21 largely in-line with current FactSet consensus, we initiate at Neutral awaiting a meaningful reacceleration in all-flash share and/or greater operating margin expansion.”

Dell Technologies Inc. (DELL-N) with a US$65 target. Average: US$66.33.

Analyst: “Dell is the last truly end-to-end IT ‘superstore,’ with PCs, Infrastructure, and Software all under one roof. This strategy has paid off so far, with a strong CY18 driven by a robust IT spending backdrop and share gains across all major markets. Further, the ‘family’ of businesses, including core Dell (ex-public subs), VMware, Pivotal, and SecureWorks, is well positioned for the coming shift toward Hybrid Cloud, which we believe represents the future of enterprise IT. This approach, however, has come at a hefty price, leaving the company with more than $50-billion of debt that is likely to constrain capital allocation for years to come. In addition, Storage is key to the core business, in our view; we are concerned incremental share gains will prove more difficult as Dell still has work to do to converge multiple, legacy Mid-Range products (and customer bases) into a cohesive offering.”

Mr. Cabral gave an “underperform” rating to Hewlett Packard Enterprises Co. (HPE-N) with a US$14 target, which falls short of the average on the Street of US$17.

“HPE is in a difficult spot, with an over-reliance on traditional on-premise hardware that has left the company on the wrong side of the coming shift toward hybrid cloud,” he said. “Servers (Compute), the largest segment at 45 per cent of sales, has lost 3pts of unit share over the past two years, even after adjusting for the intentional exit from the low-margin Tier 1 cloud provider market. We are concerned about the cascading impact of this sustained weakness on high-margin maintenance services (Pointnext) that account for 65 per cent of total profit. Last, prolonged restructuring and ‘transformation’ costs have weighed on FCF, driving net income conversion well below enterprise-focused hardware peers; we are skeptical that the gap will close, with a trade-off between slowing cost take-out programs and profitability that likely persists.”


In other analyst actions:

Barclays analyst Phillip Huang downgraded Cogeco Inc. (CGO-T) to “underweight” from “equal- weight” with a target of $78, rising from $61. The average is now $94.

Macquarie analyst Brian Kristjansen upgraded Crescent Point Energy Corp. (CPG-T) to “outperform” from “neutral.” He raised his target to $6.50 from $5.50, which falls short of the average on the Street of $6.80.

Mr. Kristjansen also upgraded Peyto Exploration & Development Corp. (PEY-T) to “neutral” from “underperform” with a $7.25 target. The average is $8.84.

Macquarie’s Brian Bagnell upgraded Husky Energy Inc. (HSE-T) to “neutral” from “underperform” and raised his target by a loonie to $15. The average is $16.79.

Goldman Sachs analyst Abhinandan Agarwal upgraded First Quantum Minerals Ltd. (FM-T) to “buy” from “neutral” with a $20 target, rising from $15 and above the consensus of $19.32

Mr. Agarwal also raised Lundin Mining Corp. (LUN-T) to “buy” from “neutral” with a target of $8.25, rising from $7.25. The average is $8.50.

RBC Dominion Securities analyst Nelson Ng downgraded Boralex Inc. (BLX-T) to “sector perform” from “outperform” with a target of $20, down from $22 and below the $23.32 average.

TD Securities analyst Aaron MacNeil downgraded Source Energy Services Ltd. (SES-T) to “reduce” from “hold” with a $1.20 target (unchanged). The average is $1.77.

Mr. MacNeil also downgraded Calfrac Well Services Ltd. (CFW-T) to “hold” from “buy” with a $4.25 target, falling from $5.50. The average is $5.24.

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