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

In the wake of recent share price “weakening,” Desjardins Securities analyst Keith Howlett upgraded his rating for Loblaw Companies Ltd. (L-T) to “buy” from “hold” on Thursday.

"Loblaw’s food business is performing well and has been offsetting the headwinds of the pharmacy business," said Mr. Howlett. "The company has exited a five-quarter period of intense financial pressure, both from generic drug reforms and from major increases to minimum wages, with modestly higher EPS. The company is generating substantial free cash flow after spending on initiatives to build upon its industry-leading market position."

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On Wednesday before market open, the retailer reported adjusted earnings per share of 84 cents, exceeding Mr. Howlett's 82-cent projection.

"Loblaw posted same-store food sales of 2.8 per cet (adjusted by 80 basis points to exclude general merchandise and in-store pharmacy sales, and the impact of a late Easter) and same-store drugstore sales of 2.5 per cent (adjusted by 30 basis points for the late Easter)," he said. "Internally measured food inflation was slightly lower than the 3.3 per cent as measured by Statistics Canada. Grocery store traffic was essentially flat with same-store sales growth being driven by higher transaction size. Adjusted EBITDA increased by $25-million or 3.4 per cent.

"Loblaw has the best developed loyalty program among grocers in Canada, and has, at least for the moment, the most developed digital and online strategy."

Mr. Howlett did lower his earnings per share projections for both 2019 and 2020 to $4.16 and $4.68, respectively, from $4.40 and $4.99 to account for the impact of IFRS 16 and increased depreciation related to the spin-out of Choice REIT.

He maintained a $70 target for Loblaw shares, which falls below the current consensus target on the Street of $72.33.


There’s “lots to like” with Fortis Inc. (FTS-T) following its “modest” first-quarter earnings beat, according to Raymond James analyst David Quezada.

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Calling it a “core holding in the long run,” he raised his rating for the St. John’s-based utility company to “outperform” from “sector perform.”

"We consider Fortis to be a high quality, well managed company with a irreplaceable set of assets and solid rate base/earnings growth prospects," the analyst said. "That said, we also believe the stock's current valuation resides above the mid-point of the historical trading range which, given where expectations for bond rates reside renders the name fairly valued, in our view."

On Wednesday, Fortis reported earnings per share of 74 cents, which was 2 cents below Mr. Quezada's projection but 2 cents above the consensus forecast on the Street.

“Relative to our forecasts Central Hudson’s performance came in well ahead of our expectations supported by the benefit of a rate filing and timing differences surrounding rate order and operating costs,” he said. “Meanwhile, relative to 1Q18′s adj. EPS of $0.70 current results benefited from colder temperatures at UNS, the Central Hudson rate order, FX, improved earnings at ITC (rate base growth) and better performance at Fortis TCI. Lower margins at Aitken Creek, lower rainfall which decreased production at Belize Hydro, some planned outages at UNS, and the reduced ROE incentive adder at ITC were all partial offsets.”

Mr. Quezada maintained a target price of $55 per share. The average on the Street is $51.43.

"With our recent move to Market Perform on each of Fortis and Emera we now maintain a neutral view on 3 of the 4 utilities we cover," he said. "This is primarily driven by P/E ratios, that, by our estimates have now moved materially above the mid-point of historical ranges. Of course, we acknowledge that another leg down in rates could drive upside in the names but we would also argue that the potential for this is somewhat widely known. We note that as recently as December consensus expectations had called for tightening via several 2019 rate hikes. This contrasts withthe current view of flat rate expectations, or potentially a rate cut. Regardless, we believe thischange in sentiment is reflected in valuations.

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“With a combination of sector leading diversification, attractive rate base/earnings growth, and strong regulatory relationships fostered by a decentralized business model we maintain a constructive stance on Fortis’ fundamentals. Moreover, we continue to see potential for additional projects outside of the company’s current capital plan including the Lake Erie Connector, resiliency related projects in BC, and renewables in Arizona. We see these projects adding to what is already solid momentum provided by the leave to construct order from the OEB on Wataynikaneyap tranmission project in Ontario (a $587-million investment for Fortis) and the Oso Grande wind project in New Mexico (a $492-million project). Further, FTS should also see a lift from ongoing rate cases at UNS (TEP) and FortisBC, while a decision on the MISO base ROE complaints should alleviate a source of uncertainty.”


Despite calling it “a beautiful company with a beautiful valuation,” RBC Dominion Securities analyst Nik Modi lowered his rating for The Estée Lauder Companies Inc. (EL-N).

"What a ride. After almost a decade of recommending the stock, we are downgrading EL shares to Sector Perform from Outperform," he said. "EL remains one of the best managed companies across our coverage, but we are struggling to take up our DCF-based [debt-adjusted cash flow] price target (which assumes peak EBIT margins of 23 per cent and a 7-per-cent revenue CAGR over the next 10 years) enough to justify an Outperform."

Though Mr. Modi acknowledged the company's broad-based top-line momentum, he doesn't think it can be sustained at its current level for the longer term.

"This was the sixth straight quarter Estee Lauder maintained or accelerated constant currency sales growth on a 2-year average basis, now trending at 14 per cent from 8 per cent in September 2017," he said. "This was also the sixth straight quarter the company delivered 20 per cent or more constant currency sales growth in APAC [Asia/Pacific] and seventh straight quarter of 15 per cent or more sales growth in skin care. Skin care (including all sub categories), travel retail and e-commerce (the company's highest margin category and channels) were also all up strong double-digits. While EL is clearly firing on all cylinders, even the biggest bulls on the stock would have to admit these trends are not sustainable."

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“We have always respected management’s commitment to long-term reinvestment, in good times and bad. This commitment was especially clear at the company’s analyst day earlier this year. Historically, EL management was quick to invest in e-commerce and did not shy away from reinvesting in China and travel retail during periods of deceleration - all of which is meaningfully paying off today. In this context, we support EL’s focus on U.S. reinvestment in the near-term looking forward. One thing this management team has proven over the years is that they can solve even the biggest challenges.”

After raising his 2019 and 2020 earnings per share projections to US$5.19 and US$5.75, respectively, from US$5 and US$5.59, he increased his target for the stock to US$178 from US$173. The average is US$177.67.

Elsewhere, D.A. Davidson & Co analyst Linda Bolton Weiser downgraded Estee Lauder to "neutral" from "buy."


After a “return to solid footing,” Raymond James analyst Kurt Molnar raised his rating for Granite Oil Corp. (GXO-T) to “outperform” from “market perform.”

"The update was very good news that has us upgrading the stock," he said. "The ops update included the Company’s first new well operation since May 2018 and ongoing frack innovation appears to be paying dividends. The new well was reported with a well test of 838 b/d. While this is clearly early data, it is an impressive start and is additive to continued reservoir management efforts that delivered 1Q19 average production of 1,585 Boed (vs. 1,618Boed in 4Q18) despite no new wells in the quarter.

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"All of this info, along with improved oil differentials derive full year 2019 guidance of $17-million ofcash flow from only $6-million of capex (vs. our prior estimates of $13-million of cash flow from $10-million of capex). This means exit 2019 estimated debt and run rate cash flows should be at levels last seen by the Company in late 2017. We have long argued this might be one of the best oil projects in the Basin and this update may be the first step to returning to fight for that title. Sadly, the Company is too small to fall on many institutional investor screens but that is an opportunity for others."

He increased his target for the stock to $2 from $1.40, which exceeds the consensus of $1.27.


There’s “substantial” valuation upside in Brookfield Business Partners L.P. (BBU-N, BBU.UN-T) over the medium to long term, said RBC Dominion Securities analyst Geoffrey Kwan, pointing to its “strong” investment record.

“Q1/19 Company EBITDA was better than our forecast, driven by Westinghouse (helped by strong but lumpier service revenues for new projects),” he said. “BBU has been active in 2019 with more than US$1-billion invested or pending (Clarios invested, Healthscope pending), which should be positive for NAV growth.”

“We believe that investors should not focus on a specific quarter’s financial metrics, as they can vary significantly quarter-to-quarter and year-over-year, which makes accurately forecasting a specific quarter’s financial results difficult. The reasons for this primarily reflect: (1) the nature of BBU’s financial disclosure; (2) little to no publicly available financial information for many of BBU’s investments; (3) the frequency with which BBU makes new investments and monetizations; and (4) many of BBU’s investments are cyclical and/or were purchased during periods of financial difficulty for the acquired company, which can lead to significant changes in financial results in a given quarter. Consequently, we think that investors should focus on normalized trends in financial performance and also commentary regarding financial performance at BBU’s various investments.”

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After raising his financial expectations to include the acquisition of Clarios, Mr. Kwan increased his target to US$45 from US$43 with a “sector perform” rating (unchanged). The average on the Street is US$46.75.

“Given a mid-teens implied total return in line with the average of our coverage universe, we maintain our Sector Perform rating,” he said.


In the wake of the release of in-line second-quarter headline results, RBC Dominion Securities analyst Paul Treiber thinks “forward looking indicators are strengthening” for CGI Inc. (GIB.A-T, GIB-N).

“With the increasing likelihood of higher organic growth, further margin expansion, potential upside through acquisitions, and a defensive underlying business, we believe CGI’s valuation premium to peers is likely to be sustained or expand further,” he said.

On Tuesday, the Montreal-based company reported adjusted earnings per share of $1.17, up 12 per cent year-over-year and a penny better than Mr. Treiber’s forecast. Revenue of $3.07-billion represented a 4-per-cent jump and also met the analyst’s expectation ($3.08-billion).

“Reported constant currency organic growth was 4 per cent Q2, above our estimate for 2.9 per cent and CGI’s TTM [trailing 12-month] average of 1.8 per cent,” he said. “Growth stems from conversion of healthy TTM bookings (1.13-times TTM book-to-bill) to revenue, revenue synergies from acquisitions, traction of CGI’s software/IP in key markets, and a healthy underlying client demand environment. Management indicated that CGI’s new deal pipeline is strong, with a higher quality mix of revenue (software, outsourcing). Though Q2 bookings rose to only $3.26-billion (1.06-times book-to-bill) below our estimate for $3.41-billion, the shortfall stems from a protested contract in Northern Europe ($150-million) that is expected to be resolved in 1-2 quarters. Following the quarter, we are increasing our FY20 constant currency organic growth estimate from 3.2 per cent to 3.5 per cent.”

Maintaining an “outperform” rating, Mr. Treiber raised his target to $108 from $100. The average is now $99.50.

“CGI is currently trading at 12.3 times FTM EV/EBITDA [forward 12-month enterprise value to earnings before interest, taxes, depreciation and amortization], towards the high-end of its 5-year historical range (7.9-12.6 times) and above global IT services peers (10.3 times),” he said. “We believe CGI’s valuation premium to peers is warranted given the improving visibility to growth and lower risk in CGI’s buy-and-build strategy.”

Meanwhile, Desjardins Securities analyst Maher Yaghi increased his target to $101.50 from $94.50 with a “hold” rating (unchanged).

Mr. Yaghi said: “GIB reported 2Q FY19 results which were largely in line with expectations. The company accelerated its organic revenue growth for a third consecutive quarter, now reaching 4 per cent year-over-year. However, we highlight this remains below many key industry peers. Valuation remains elevated compared with historical levels, and for this reason we prefer to wait for a better entry point.”


AltaCorp Capital’s David Kideckel initiated coverage of Fire & Flower Holdings Corp. (FAF-X) with a “speculative buy” rating, becoming the first analyst on the Street to give provide coverage of the Toronto-based company.

“F&F’s proprietary digital platform, Hifyre, integrates the Company’s e-commerce, in-shop retail, customer experience functionality, analytics and an extended mobile application experience to provide a deep understanding of personalized consumer behaviors and trends,” he said. “As the cannabis sector continues to evolve, so too will consumer preferences in specific products and product formats. The Hifyre platform will provide F&F with meaningful retail market intelligence, allowing the Company to better understand their customers in order to consistently provide the ultimate retail experience, thereby optimizing each customer’s needs. In our view, this in-house digital platform demonstrates F&F’s ability to be forward thinking and will ultimately position the Company as a leading premium cannabis retailer in Canada.”

He set a $2.50 target for its shares.

“Our rating is reflective of the regulatory risk associated with the timing of additional retail licenses issued by each province as well as the uncertainty in demand for the Canadian recreational cannabis market,”said Mr. Kideckel.


In other analyst actions:

Vertical Research Partners analyst Robert Stallard downgraded Bombardier Inc. (BBD-B-T) to “hold” from “buy.”

National Bank Financial analyst Greg Colman upgraded Pason Systems Inc. (PSI-T) to “outperform” from “sector perform” with a $23.50 target. The average on the Street is $25.10.

TD Securities analyst Greg Barnes downgraded Cameco Corp. (CCO-T) to “hold” from “buy” with a target of $17.50, down from $20. The average is $17.96.

Conversely, Accountabilty Research analyst Harriet Li raised Cameco to “buy” from “hold” with a $17.50 target, rising from $16.

D.A. Davidson & Co. analyst Steven Chercover upgraded Domtar Corp. (UFS-T) to “buy” from “neutral.”

Wolfe Research analyst Daniel Galves downgraded Tesla Inc. (TSLA-Q) to “peer perform” from “outperform.”

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