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

“After a good run,” Scotiabank analyst Sumit Malhotra downgraded Bank of Montreal (BMO-T) on Thursday, a day after it reported second-quarter earnings that narrowly exceeded his expectations.

Adjusting for “one-time-ish items,” Mr. Malhotra said the bank’s core earnings per share came in at $2.37, up 8 per cent year-over-year and 5 cents higher than his forecast.

“However, our enthusiasm towards the ‘beat’ was tempered by the fact that it was underpinned by lower PCL ($176-million vs. our $206-million), largely reflecting $40-million of recoveries in the Financials portfolio,” he said. “While PCL exceeded net charge-offs by $105-million in 1H/19, we have noted that the sector-low 15 basis points core PCL ratio posted year-to-date is roughly half of the 15-yr average of 31 basis points for BMO, a differential we are mindful of given the robust corporate & commercial loan growth that the bank continues to generate (6 per cent quarter-over-quarter and 22 per cent year-over-year).”

Moving the stock to “sector perform” from “sector outperform,” Mr. Malhotra lowered his target to $109 from $112. The average target on the Street is $108.53, according to Bloomberg data.

“After the 1-per-cent reduction in our estimate (higher PCL and removal of share repurchases) BMO shares are trading at 10.0 times our 2020 estimate, a 2-per-cent premium to the sector average of 9.8 times,” he said. “Though we have been impressed with the greater sense of urgency that CEO White has instilled with respect to progression in both the US build-out and efficiency improvement, we expect that the next steps forward will be choppier as lower interest rates, market volatility, and credit cost normalization each present EPS headwinds. Accordingly, after a solid run we are lowering our rating on BMO shares to a Sector Perform.”

Elsewhere, CIBC World Markets analyst Robert Sedran maintained a “neutral” rating and $111 target.

Mr. Sedran said: “Did the bank beat, miss or come in line with expectations? Yes! Adjusted earnings came in $0.05 per share below our estimate … but … there was a $0.14 per share severance charge included in adjusted earnings … but … capital markets revenues seemed high and loan losses benefited from a recovery. So, after spinning ourselves into that circle, what do we call it? After digesting the results, we took estimates down slightly, which suggests results were close enough to expectations to call them roughly in line. That is not to say they were without questions as the CET1 ratio declined, U.S. pre-provision growth slowed (in part owing to a lower margin) and segment-level operating leverage was roughly nil. Look for those things to improve from here, in line with management comments. At the close, the shares traded at 10.5 our F2019 EPS estimate, compared with the peer average of 9.9 times. That relative multiple may have been the biggest reason the shares declined on earnings day.”


The selloff in Canada Goose Holdings Ltd. (GOOS-T, GOOS-N) following its fourth-quarter top-line miss and disappointing outlook appears overdone, according to RBC Dominion Securities analyst Kate Fitzsimons, pointing to its baseline earnings growth.

On Wednesday, the high-end winter clothing maker’s plummeted more than 31 per cent after it posted the slowest revenue growth in eight quarters alongside a forecast for 20-per-cent growth in 2020, which fell short of expectations on the Street.

Ms. Fitzsimons said the outlook “ruffled feathers,” however she believes the company’s algorithm is “intact.”

“In 4QF19, the U.S. grew 6 per cent and Canada 10 per cent (versus 28 per cent/36 per cent FY19 trend overall) despite the addition of three new North American stores suggesting that productivity levels in North America are starting to normalize in the home market as the law of large numbers kicks in,” the analyst said. “The team emphasized that they are pleased with the productivity coming out of the North American fleet, but given the seasonality of the business, a push into lower ticket spring, and still the philosophy on holding back inventory to create demand, the North American business took an optical step back in 4Q.

“Assuming low double-digit clips out of North America, reaching that 20 per cent plus three-year top line to the $1.4-billion target embeds 30 per cent plus Rest of World gains which appears reasonable given footage opportunity and vs. 61-per-cent growth in FY19. Looking to FY20, top line is likely to benefit from 8 openings (from 6 previously all in), returns on that 62-per-cent inventory build into 2Q/3Q, and more moderated NA growth vs. the 30-40-per-cent growth rates seen in the U.S. and Canada in prior years. Looking out, our FY22 model has 5 new openings per year, reaching 30 openings in FY22 vs. the long-term 30-50 store target.”

Ms. Fitzsimons increased her fiscal 2019, 2020 and 2021 earnings per share projections to $1.36, $1.70 and $2.12, respectively, from $1.30, $1.65 and $2.08.

“With Direct at 52 per cent of sales in FY19 vs. just 11 per cent in FY16, the gross margin trajectory is likely less than the 300-600-basis points annual clip investors have seen in the last few years,” she said. “That said, we expect GMs can move higher, particularly as the Direct channel (27 per cent higher GMs) becomes a greater part of the business (est. 58 per cent in FY20). Certainly the fact that gross margins in both channels were up nicely in 4Q indicates that the path forward for both channels is higher in FY20 despite QoQ variability. Looking out, we expect baseline gross margins have 175- basis points of gross margin support from mix, on top of scale efficiencies as the company ramps up in-house production (47 per cent of down parkas made inhouse in FY19).”

Maintaining an “outperform” rating for the stock, she lowered her target to $75 from $90. The average on the Street is $71.62.

“Near-term, the proofpoint for GOOS shares will likely be in 2Q/3Q given model seasonality and finally inventory sell-through,” the analyst said.

Meanwhile, pointing to slowing revenue growth south of the border, Bank of America Merrill Lynch downgraded the stock to “neutral” from “buy” with a target of $54, dropping from $93.

“We are downgrading Canada Goose to Neutral (from Buy) and lowering our PO to C$54/US$40 (from C$93/US$70) based on 25 times our F2021 EPS of $2.15 (rolling forward our valuation base to F21 from F20) as we believe an outlook for slowing momentum in GOOS’ Direct-to-Consumer channel warrants a lower P/E multiple," the firm said. "GOOS reported F4Q19 adjusted EPS of C$0.09 (vs. our C$0.03) driven primarily by upside in wholesale revenue 12.6 per cent (vs. our 5.0 per cent) while Direct-to-Consumer growth of 29.1 per cent was in line with our model but broke a pattern of significant DTC revenue upside that GOOS had been posting since its IPO (Mar. 2017). In addition, U.S. revenue growth slowed to just 6 per cent, a significant deceleration from 40 per cent-plus growth the last 2Q’s despite an additional company owned store on top of 3 U.S. stores last year.”

Canaccord Genuity’s Camilo Lyon kept a “buy” rating but lowered his target to $82 from $95.

Mr. Lyon said: “GOOS reported solid Q4 EPS of 9 cents vs. our/consensus 4 cents/5 cent estimates, however, the quarter was not without its share of controversy. While wholesale sales growth of 12.7 per cent vs. our estimate of a 5-per-cent decline was a standout surprise, tepid Q4 DTC sales growth of 29 per cent vs. our 32-per-cent estimate was particularly underwhelming (as was the company’s explanation) given the addition of 5 new stores at the end of Q3 and the persistent cold weather that lasted through March, both of which should have driven far greater sales growth. We believe the company made a mistake by bringing out the spring floor set too early during the quarter, despite continued demand for cold-weather outerwear across Canada and the U.S.. The decision to set spring early was likely made due to the strong sell-thrus in Q3 that left fall/winter inventory depleted, so rather than display partial winter assortment, GOOS decided to show the full representation of its spring assortment instead. We believe this merchandising decision is not reflective of softening underlying demand for the brand, nor is it representative of the future growth prospects. While Q4 results were disappointing relative to our and Street expectations, we believe the stock’s 30% collapse is a dramatic over-reaction, particularly when considering the longer-term growth runway it has across regions, stores, and categories.”


Canadian Natural Resources Ltd.’s (CNQ-T) $3.8-billion acquisition of Devon Energy Corp.’s (DVN-N) Canadian assets “is a good deal that got even better amid a net purchase price of $3.25 billion,” said RBC Dominion Securities analyst Greg Pardy.

“The deal bolsters CNQ’s free cash flow generation by 13 per cent in 2020 under our base outlook, while allowing for some $1.1-billion of share repurchases this year,” said Mr. Pardy.

“Market concern surrounding CNQ’s pursuit of Jackfish had centered on the impact on the company’s normal course issuer bid. To this end, CNQ has repurchased approximately $500-million of its common shares year-to-date, and it is targeting about $1.1-billion for 2019.”

Mr. Pardy thinks Devon’s assets appear to be a “good fit” for the company, pointing to $135-million in target synergies and seeing the deal as accretive to his outlook. He emphasized the deal is “an illustration of acquiring cheaply when others are rationalizing their portfolios.”

“CNQ’s Kirby North and South operations are proximate to Jackfish and the undeveloped Pike leases. As we have seen before,” he said. “CNQ is adept at integrating acquisitions, driving down costs, and harnessing efficiencies.”

With an “outperform” rating, he increased his target for Canadian Natural shares to $46 from $45. The average on the Street is $47.67.

“At current levels, CNQ is trading at debt-adjusted cash flow multiples of 5.0 times (vs. 4.7 times for our North American Senior E&P peer group) in 2019 and 4.3 times (vs. peers at 3.9 times) in 2020,” he said. “In our view, CNQ should command a premium cash flow multiple vs. our peer group given its long-life, low-decline portfolio, substantial free cash flow generation, and improving balance sheet.”

Meanwhile, Raymond James analyst Chris Cox increased his target to $47 from $46 with an “outperform” rating.

Mr. Cox said: “This was a strategically on-point transaction. Not only is this the right time in the cycle for a company like Canadian Natural to be undertaking consolidation in the sector, but the attractive acquisition multiple reinforces our belief that any financial benefit from consolidation will likely be realized by the acquirer. While the transaction does weigh slightly on the company’s leverage profile and increases the exposure to heavy oil differentials just as we expect differentials to widen out again, these risks are largely mitigated by the attractive transaction multiple and immediate free cash flow from the assets.”


Tesla Inc. (TSLA-Q) is “stalling as a niche automaker,” according to Barclays analyst Brian Johnson.

“Model 3 demand is stagnating in the US, the company still doesn’t have a path to significant auto profitability and solar storage installations have declined sequentially over the past two quarters,” he said.

“While Mr. Musk is pivoting to the remaining ‘hyberbull’ full robotaxi scenario, his efforts to spring excitement around Tesla’s full self-driving capabilities was broadly met with the appropriate skepticism. We expect more investors to gravitate back to Tesla’s near-term fundamentals of demand, profitability, and cash generation, areas that are now more exposed as the blue pill thesis washes away.”

He dropped his target for Tesla shares to US$150 from US$192 with an “underweight” rating (unchanged). The average on the Street is US$276.72.

“Two years ago, we outlined our ‘reality’ based view of why we disagreed with the optimistic dreams of TSLA admirers, and saw TSLA as overvalued," he said. “While for much of the two intervening years the market disagreed with our view, recent price action – even in the face of a successful fund raise – indicates that more market participants are coming around to our view.”


Descartes Systems Group Inc. (DGSX-Q, DSG-T) had a “good start to the year,” said Raymond James analyst Steven Li.

On Wednesday after the bell, the Waterloo, Ont.-based tech company reported revenue for its first quarter of US$78-million, up 16 per cent year-over-year and beating the consensus projection on the Street of US$78.6-million. Adjusted EBITDA of US$28.7-million was an increase of 30 per cent and also ahead of expectations (US$28-million).

“Unlike other businesses, an increasingly dynamic environment (trade wars, changing tariffs and duties, Brexit adding new borders etc.) can be a boon for DSG,” said Mr. Li. “With complexity comes increasing reliance on DSG to assist in managing global logistic networks. Similarly, the explosion of ecommerce is putting the onus on businesses to deliver products cost effectively and quickly to businesses and consumers. As such, there is increasing value in supply chain participants being able to connect with multiple parties on a single platform. DSG remains a great way to play the changes in the global trade landscape.”

With a “market perform” rating, the analyst raised his target for its shares to US$36 from US$33. The average target is currently US$41.72.

Elsewhere, Laurentian Bank Securities analyst Nick Agostino hiked his target to US$37 from US$35 with a “hold” rating.

Mr. Agostino said: “Fundamentals remain intact with DSG continuing to see organic growth opportunities fueled by a changing regulatory environment, complex logistics ecosystems, and growing interest in telematics, delivery visibility and data-driven solutions. Furthermore, ongoing global trade tensions have added another layer of end market demand in recent quarters, and should persist for the near-term. Despite in line sales and an EBITDA beat, our only concern is that the cost of acquisitions and higher guided tax rate will hinder EPS growth, as witnessed in FQ1.”


Taking a near-term cautious stance on the gold sector, JPMorgan analyst John Bridges downgraded Eldorado Gold Corp. (ELD-T), New Gold Inc. (NGD-T) and Kinross Gold Corp. (K-T) to “underweight” from “neutral.”

He did not specify a target for the stocks. The averages are $6.92, $1.26 and $5.35, respectively.

“[An] increasingly inverted U.S. yield curve suggests the dollar could just be firming into typical recessionary strength and seasonally this is the time when gold can begin its summer time- out,” he said.


In reaction to the release of its updated five-year outlook on Wednesday after the bell, BMO Nesbitt Burns analyst Randy Ollenberger upgraded Tourmaline Oil Corp. (TOU-T) to “outperform” from “market perform, saying he views the plan "positively."

“Tourmaline announced an updated five-year plan with an increased focus on generating surplus cash flow for shareholders,” he said.

“The company’s production guidance over the plan is unchanged despite a material reduction in capital spending. The change in capital spending translates into an increase in cumulative surplus cash flow of over $835 million.”

He maintained a $23 target. The average is $27.12.


In other analyst actions:

BMO’s Tamy Chen raised CannTrust Holdings Inc. (TRST-T) to “speculative outperform” from “market perform” with an $11 target, up a loonie but below the average of $12.80.

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