Inside the Market’s roundup of some of today’s key analyst actions
Though Paramount Resources Ltd. (POU-T) beat the Street with its financial results for a second consecutive quarter, Raymond James analyst Kurt Molnar thinks “what comes next matters more.”
"In the past, performance in that regard has been spotty at best, but we think we are at the very beginning of a new business paradigm for Paramount on: (1) disproportionate focus on their best assets (that also challenge for top assets in the Basin; (2) focus on the optionality that a consistent and large free cash flow stream can offer (they highlight the potential for an effective net free cash flow per annum of $400 million per year before the end of 2021 while the equity value today is only $1 billion); (3) focus on liquidity and hedging to protect that premise and the timeline to get there; (4) continued focus on ways to liberate value from non-core assets and (5) ongoing attention to finding and proving up their next great asset (Duvernay oil and new Montney Oil)," the analyst said.
Based on the bullish view of the Calgary-based company's future, Mr. Molnar raised his rating for its stock to "strong buy" from "outperform" in a research note released Thursday.
Before the bell on Wednesday, Paramount reported first-quarter production of 81,296 barrels of oil equivalent per day, exceeding the 81,000 barrel forecast from both Mr. Molnar and the Street. Cash flow of $100.5-million easily topped projections as well ($78-million and $84-million, respectively).
"The beat was largely a function of strong gas price realizations, that some will argue as transitory. We agree," he said. "But capital costs per well and other cash costs on are track for material improvement in 2019 and beyond at the same time that we think the Wapiti project has upside in its forecast condensate rates, which would bring double or triple benefits if that comes to be. The revenue line would gain with higher condensate and less gas, operating costs would be reduced as the fee function is a question of gas volumes and the plant capacity secured of 150 mmcfd would “last longer/cover more future growth” if the amount of gas in the produced stream is a materially lower percentage.
"So many of the strong positives we see are iterative or offer ripple benefits after the fact. We fully expect the Company will find a source of funds for their Karr expansion (NuVista just announced similar success) and it is even possible that the existing Karr infrastructure could be monetized for cash. Even without a Karr monetization we also think it is possible that the next stage of Wapiti gets pulled forward on top of this stage happening early too."
Mr. Molnar increased his target to $17.50 from $17. The consensus target on the Street is $10.75, according to Bloomberg data.
"In behind all this we see the potential for a free cash flow stream from a future Duvernay oil focus that might be as big or bigger than Wapiti/Karr that can be either diversification to sweet oil in the portfolio or purely accretive to the free cash flow picture coming from Karr and Wapiti," he said. "Finally we note the short position in the stock continues to grow as many speculate about the opposite side of the coin we just identified above. That scenario is possible but increasingly doubtful in our view. In this regard, if our new paradigm (yes we hate the word too) view is correct then the short position will act as a sling shot in a market that rarely sees aggressive or panicked buying."
Bird Construction Inc.'s (BDT-T) path to improved earnings is “taking much longer to complete,” said Raymond James analyst Frederic Bastien, leading him to lower his rating for its stock in response to “disappointing” first-quarter results.
On Tuesday, the Mississauga-based company reported an adjusted EBITDA loss of $3-million, missing the projections of both Mr. Bastien and the Street (profits of $2-million and $5-million, respectively).
"The negative variance to our forecast principally stems from harsh winter weather conditions in Central Canada, which resulted in major project delays and caused BDT's top-line target to miss management's target by as much as $30-million (and ours by $47-million)," said Mr. Bastien in a research note released Wednesday afternoon. "The contractor also faced additional challenges with one of its P3 projects changing in scope and incurring additional costs to meet substantial milestones. Since these modifications were performed at the request of the client, we have reason to believe Bird will be successful in recouping the extra costs down the road. Still, to address systemic performance issues with the office overseeing this job, Bird restructured operations and put a new management team in place. That does not guarantee this project won't experience additional margin erosion in the year."
He added: "We were right to expect 2019's harsh winter weather to cause Bird Construction to miss consensus expectations for 1Q19. What we failed to predict are some unexpected scope changes beyond the company’s control as well as self-inflicted execution issues driving earnings well off our Streetlow forecasts. These combined challenges do not have us questioning BDT's ability to ramp up its historical normal earnings back to the $25-million range, but it will likely take an extra quarter or two for the company to get there (our revised forecasts suggest Bird will now achieve this run rate over the 3Q19-2Q20 period). Because of this we feel it is prudent to lower our recommendation down a notch."
Moving Bird to “outperform” from “strong buy,” Mr. Bastien also lowered his target to $9 from $10.50, which exceeds the consensus of $8.63.
"There are still good reasons to be long the stock. We recognize that our investment case for Bird is taking frustratingly long to play out and that our Nov. 8, 2018 upgrade to Strong Buy, in hindsight, was premature. But with the Cedar Valley Lodge and OPP Phase 2 Modernization projects coming into full production soon and the CNL Research Centre and Ottawa Confederation Line Extension projects adding an incremental $600-million to Bird’s order book, we still see potential for the stock to produce above-average returns over the next 12-18 months. In meantime, BDT’s healthy dividend yield (more than 6 per cent) ensures investors are getting paid generously to wait."
Capital Power Corp.'s (CPX-T) acquisition of the 875MW Goreway Power (GP) combined-cycle natural-gas fired power plant in Ontario clearly continues its shift toward contracted capacity outside in Alberta, said Industrial Alliance Securities analyst Jeremy Rosenfield.
Upon resuming coverage of the stock, following the April 29 acquisition for $387-million in cash and $590-million in associated debt as well as a concurrent $130-million subscription receipt offering and $150-million preferred share offering, Mr. Rosenfield raised his rating for the stock to “buy” from “hold.”
“From a strategic perspective, the GP transaction builds on previously announced diversification initiatives by CPX, including other contracted gas acquisitions (e.g., Decatur, York/East Windsor),” he said. "The GP asset will further diversify CPX’s operations outside of Alberta (pro forma 50 per cent of EBITDA from Alberta vs. 55 per cent previously), and away from coal (pro forma 70-per-cent gas/renewables vs. 65 per cent previously).
"Fundamentally, the increase in contracted cash flows and greater diversification outside of Alberta could improve the investor perception of CPX. Furthermore, we continue to see higher relative valuation attributed to contracted gas/renewable assets in the current market environment (vs. coal assets); thus, this transaction could potentially provide some uplift to CPX’s shares over the medium term via higher valuation multiple (closing some of the gap with Canadian IPP peers)."
Pointing to a “favourable” asset valuation and the elimination of the “potential for overhang” via the equity and preferred share offering, Mr. Rosenfield increased his target for Capital Power shares to $34 from $32. The average on the Street is $32.58.
“CPX offers investors (1) a mix of contracted (more than 70 per cent) and merchant cash flows, (2) longer-term leverage to rising power prices in Alberta, (3) contracted growth projects expected to drive mid single-digit FCF/share growth, and (4) an attractive income profile (6-per-cent yield, 7-per-cent dividend growth through 2021, with a 45-55-per-cent FCF payout ratio),” he said. “In light of (1) increasing exposure to contracted cash flows, and (2) further diversification outside of Alberta, we see greater potential for CPX’s shares to experience valuation multiple expansion; accordingly, we are upgrading CPX.”
Elsewhere, BMO Nesbitt Burns analyst Ben Pham downgraded Capital Power to “market perform” from “restricted” with a $30 target.
Pointing to its valuation following the release of “light” first-quarter results, Echelon Wealth analyst Gianluca Tucci lowered his rating for Tucows Inc. (TC-T) to “hold” from “buy.”
“The stock has had a very impressive run since our upgrade to BUY from HOLD on Feb. 13 (up 25 per cent) – we would encourage and welcome a pause and refresh as its Ting Internet business continues its development and advancement and hence move our rating to HOLD due to our return to target being nominal,” he said.
On Wednesday, the Toronto-based internet services and telecommunications company reported revenue and adjusted EBITDA of $79-million and $9.4-million, respectively, falling short of Mr. Tucci’s forecast of $82.7-million and $10.4-million. Earnings per share of 26 cents also missed his projection (by 4 cents).
“The miss was entirely attributable to the Network Access division (particularly Ting Mobile) which generated $23.3-million in revenue versus our $26.4-million expectations,” the analyst said. “It should be noted that TC experienced its worst quarter of carrier penalties ever at Ting Mobile coupled with a rare decrease in data usage per account; TC expects to soon report on more profitable and productive carrier relationships.”
With the results, Mr. Tucci dropped his target for Tucows shares to $125 from $130, which is the current average on the Street.
“We continue to believe the next major growth catalyst for TC lies in its fibre business,” he said. “Today’s 7.7K fibre customers add roughly $7.7-million in run-rate gross profit. We believe we could see fibre customers and homes passed of approximately 10-15K and 40-50K, respectively, by 2019-end, which would yield $10-15-million in incremental annual run-rate gross profit. For context, fibre customers and homes passed ended 2017 and 2018 at 4.5K/16.0K and 7.0K/28.1K, respectively, showing impressive early stage growth. We believe TC will continue to add strategic Ting towns that fit its profile and grow the addressable opportunity and resulting visibility in its next growth leg of fibre internet access to the home. Our HOLD rating considers upside potential as to fiber expectations with the multiple concurrent builds underway.”
Seeing its top-line recovery running ahead of schedule, RBC Dominion Securities analyst Kate Fitzsimons expects Ralph Lauren Corp. (RL-N) to enjoy further progress through fiscal 2020, featuring margin expansion led by gross margin improvement and a “likely” return to opex leverage.
"Despite the shares increasing 20 per cent year-to-date, we see another leg up in 2019 as RL's recovery continues," said Ms. Fitzsimons, leading her to upgrade its stock to "outperform" from "sector perform" ahead of the release of its fourth-quarter financial results on May 14 before the bell.
"Our prior Sector Perform rating was based on our view that top-line visibility into RL’s turnaround was harder to achieve," she said. "With 2019’s return to growth a year ahead of plan, we see Ralph Lauren as shifting to offense, with the heavy lifting on distribution cleanup, SKU [stock keeping unit] count reduction, and supply chain work now behind it and traction under way with customer acquisition work. Looking out the next few years, we see greater visibility to RL’s $7-billion revenue target (low single-digit to mid single-digit CAGR from $6.3-billion today) and mid-teens margin target from 11 per cent today, as AUR [average unit retail] improvements and positive mix shifts drive gross margin gains. Importantly, we see RL’s global revenue base and diverse supply chain as key assets in the event of increasing Chinese tariffs. Into FY20/21, we see a potential bottom-line boost from opex leverage as the step-function on marketing lessens and expense controls/productivity efforts yield results.
“All in, we have greater confidence in RL’s low- to mid-teens earnings algorithm toward $12+, with valuation at 16 times reasonable for an earlier-stage turnaround story. For FY20, we look for RL’s top-line and margin progress to continue, led by AUR gains and traction with customer acquisition work. In FY20, we expect RL’s GM to improve from 61.6-per-cent levels today, but we see a return to potential SG&A leverage. Ex marketing, we estimate that RL’s core SG&A rate leveraged in FY19, with that trend likely continuing into FY20 as productivity efforts take hold. Taken together, we see potential for SG&A leverage in FY20 as the marketing step-function moderates.”
Ms. Fitzsimons increased her target for Ralph Lauren shares to US$145 from US$135. The average on the Street is US$141.90.
"Our price target of $145 is based on 19 times our FY20 EPS estimate of $7.55, which is a premium to RL’s 3-year average of 16 times given early-stage top line and margin turnaround story," she said. "We believe that RL should trade at a premium to average apparel peers (VFC, PVH) trading at 16 times. To the extent that the RL turnaround continues to take shape into FY20, we’d expect upside to the multiple from today’s 16x level closer to that 19-times level."
In a separate note, Ms. Fitzsimons downgraded American Eagle Outfitters Inc. (AEO-N) to “sector perform” from “outperform.”
"While we remain impressed by AEO's comp growth and share gains over the last few years, we see a more balanced risk/reward on the shares, particularly as AEO's positive comp run enters its 5th year," she said. "With valuation at 14 times FY1 EPS, we expect the shares are pricing in aerie's growth prospects."
Her target for the retailer’s stock remains US$24, which sits 17 US cents lower than the consensus.
"Our original OP on AEO shares hinged on the fact that the brand's more democratic positioning, 30-per-cent denim exposure, and growth vehicle aerie drove market share gains in a declining mall traffic environment rife with retailer bankruptcies and store closures," the analyst said. "With AEO's comp run now entering its fifth year, we expect upside on AEO's 8.5-per-cent margin (vs. specialty peers 8 per cent) will be harder to achieve from here. Certainly an increase in tariffs from 10 per cent to 25 per cent on Chinese-sourced apparel would impact AEO more vs. other companies under coverage."
Canaccord Genuity analyst Matt Bottomley initiated coverage of Columbia Care Inc. (CCHW-NE), formerly known as Canaccord Genuity Growth Corp., with a “speculative buy” rating.
“Based in New York and founded in 2012, Columbia Care has grown to be a multi-state operator (MSO) with one of the largest portfolios of vertically integrated licenses in the United States (in many highly regulated markets),” he said. “The company’s assets span 15 states/regions (including the #1 market share in New York State and a planned international export hub in Malta) and has a cumulative reach to 50 per cent of the total U.S. population. In addition, CCHW has a well aligned management team with total insiders owning 42% of the company at this time. Perhaps more importantly, we believe the company is also executing on a differentiated, patient-centered approach. Management employs a strict focus on operational execution, IP, data analytics and product development/commercialization as part of its long-term strategy. We believe this will become increasingly important as the market continues to evolve and medical vs. rec opportunities begin to diverge.”
He set a target of $20 for its shares.
In other analyst actions:
Canaccord Genuity analyst Anthony Petrucci upgraded Crescent Point Energy Corp. (CPG-T) to “buy” from “speculative buy.”
GMP analyst Robert Fitzmartyn upgraded Peyto Exploration & Development Corp. (PEY-T) to “buy” from “hold” with a $9.50 target. The average on the Street is $9.
TD Securities analyst Cherilyn Radbourne upgraded Finning International Inc. (FTT-T) to “buy” from “hold” and increased her target by a loonie to $29, which exceeds the consensus by 22 cents.
TD Securities’ Jonathan Kelcher downgraded Tricon Capital Group Inc. (TCN-T) to “buy” from “action list buy” with a $13.50 target, down from $14.50 and 14 cents less than the consensus.
TD Securities’ Bentley Cross upgraded Torstar Corp. (TS-B-T) to “buy” from “hold” with a $1.25 target. The average is $1.35.
Scotiabank analyst Vladislav Vlad raised Step Energy Services Ltd. (STEP-T) to “sector outperform” from “sector perform” with a $3.75 target. The average is $4.07.
Eight Capital analyst Craig Stanley upgraded Wesdome Gold Mines Ltd. (WDO-T) to “buy” from “neutral” and kept a target of $5.25, which falls short of the $5.70 average.