Inside the Market’s roundup of some of today’s key analyst actions
As gas prices slump, Vermilion Energy Inc. (VET-T) “could become more vulnerable over time” to making its first ever dividend cut, according to RBC Capital Markets.
Analyst Greg Pardy lowered the oil and gas producer’s price target to $33 from $40 and downgraded his rating to “sector perform” from “outperform.” The median analyst estimate is $38.
“We continue to look favorably upon Vermilion’s diversified upstream portfolio, with our updated 2019-20 CFPS [cash flow per share] estimates falling 8 per cent and 9 per cent, respectively, on the heels of lower Brent, WTI and European natural gas prices,” he said in a note.
“Our dividend per share outlook for Vermilion remains unchanged at $2.76 per share in 2019-20, although its current yield of 10.0 per cent is quite elevated. The company’s dividend payout ratio would map to 104 per cent (excluding DRIP [dividend reinvestment plan]) under our 2019 outlook (operating cash flow of $920-million against $530-million of capital investment and a $423-million gross dividend), and 107 per cent under futures. We would love to see Vermilion remove its DRIP altogether, given that it serves to raise its absolute dividend requirements over time.”
Mr. Pardy added that, “At current levels, Vermilion is trading at a premium debt-adjusted cash flow multiple of 6.4x (vs. our Canadian Intermediate peer-group avg. of 3.9x) in 2019E, and 6.3x (vs. peers at 3.7x) in 2020E. We believe this premium is reflective of Vermilion’s diversified exposure to European gas and Brent pricing, and shareholder alignment.”
Even as eBay Inc. (EBAY-Q) reported stable second quarter earnings, Canaccord Genuity expects the e-commerce company to face continued headwinds for gross merchandise value (GMV).
Analyst Michael Graham raised his price target to US$40 from US$38 and maintain a “hold” rating. The median analyst estimate is US$42.
“After a rebound earlier this year, eBay stock has been fairly stable, reflecting continued low growth but with solid financial discipline and share buybacks. These results extend this framework, which is now supported by an ongoing strategic review which could potentially optimize the value of assets like Stubhub. That said, with continued challenges in growing eCommerce GMV, we believe it will take top-of-funnel growth for the stock to move materially higher, and we don't yet see clear signs this is happening,” he said in a note.
“Active buyer growth remained steady at 4 per cent, but Marketplace GMV declined ~5 per cent (1 per cent Fxn) due in part to headwinds stemming from US internet marketplace sales taxes and a macroeconomic slowdown in the UK. Transaction take rate was again a bright spot, expanding to 8.8 per cent, up 70 basis points year-over-year, helped by less low-ROI [return on investment] incentives and reaching the highest level of the last 8 quarters. The top-line slowdown was moderated by Stubhub GMV, which was up 6 per cent on an Fxn basis after declining by 2% last quarter.”
He added that, “Management expects third quarter revenue to grow 1 to 3 per cent Fxn and earnings per share to grow 10 to 15 per cent. Full year revenue guidance was lowered from $10.9-billion (mid-point) to $10.8-billion, and earnings per share was raised from $2.67 (mid-point) to $2.73.”
Credit Suisse raised Kinder Morgan Canada Ltd.'s (KML-T) rating on stable second quarter earnings.
Analyst Andrew M. Kuske upgraded the stock to a “neutral” rating from “underperform” and maintained its price target of $14. The median analyst estimate is $14.50.
“The rating change comes from share price depreciation creating excess return potential to our target along with the positive event of a Normal Course Issuer Bid [NCIB] announcement. In terms of Q2 2019 results, KML reported Q2 2019 adjusted earnings before interest, tax, depreciation and ammortization of C$53.3-million that slightly beat our C$52.75-million estimate, and was largely in-line with the Street’s C$53.04-million view (range C$49-million to C$56-million). Given the long-cycle nature of our coverage universe, we do not place undue emphasis on quarterly results,” Mr. Kuske said in a note.
“Notables include: (a) for the NCIB, KML is authorized to purchase up to 10 per cent of the public float; (b) Q2 2019 Cochin [Pipeline System] volumes of 96 mbbl [one thousand barrels] per day versus 88 mbbl/d in Q2 2018; (c) Terminal Bulk Transload tonnage was 0.9 MMtons [million metric tons] versus 1.0 MMtons in Q2 2018; (d) EBDA for Terminals was C$51.1-million versus C$53.6-million a year ago; (e) Pipelines EBDA was C$11.3-million versus C$10.2-million in Q2 2018 – primarily driven by increased volumes on Cochin; and, (f) KML also entered into an automatic share purchase plan (ASPP) in tandem with the NCIB to purchase restricted voting shares.”
‘KML’s NCIB is a near-term positive, but broader strategic questions exist with the company’s positioning and sponsor’s longer-term intent.”
Lower steel prices in the wake of eliminated U.S. tariffs could weigh on short-term results at Russel Metals Inc. (RUS-T), according to Raymond James Ltd.
Analyst Frederic Bastien lowered the company’s price target to $27 from $31 and maintained its “outperform” rating. The median analyst estimate is $31.
“Steel prices have corrected to the tune of 15 per cent to 20 per cent since mid-May, when the Trump Administration agreed to lift tariffs from Canada and Mexico. Importantly for Russel, Canadian plate has borne the brunt of the recent price squeeze (because limited domestic production had created a pricing disconnect during the yearlong trade standoff). Prices have also fallen amid oversupply, but the commodity appears to be stabilizing now that steelmakers have taken some capacity offline. At any rate, we feel compelled to lower our margin expectations for Russel’s Metals Service Centers since the drop in steel prices has been more pronounced than we previously anticipated,” he said in a note.
“According to the Metal Service Center Institute (MSCI), Canadian and US industry volumes were down a respective 8 per cent and 9 per cent year-over-year. There were two factors behind the big declines. Last year, many buyers stocked up on inventory in an effort to front-run the tariffs, pushing 2Q18 service center shipments abnormally high and setting up a tough comp for 2Q19. This year, the opposite transpired, as customers opted to draw down their inventories and wait for steel prices to form a bottom before stocking back up again. None of this surprises us, plus we have reason to believe Russel fared better than the average service center because of its successful value-add push.”
Even so, Mr. Bastien said that he is still confident in the stock. “Notwithstanding this outcome, our view remains the stock should be bought based on its attractive valuation and juicy dividend yield, the company’s strong balance sheet and management’s track record of shareholder value creation.”
Alimentation Couche-Tard Inc. (ATD-B-T) could face sales pressure due to potential e-cigarette regulations, according to BMO Capital Markets.
Analyst Peter Sklar lowered the stock’s price target to “market perform” from “outperform” and maintained its price target at $84. The median analyst estimate is $89.60.
“Previously, we noted that the strong demand for e-cigarettes and vapes has had a meaningfully positive impact on Alimentation Couche-Tard's U.S. merchandising same-store sales (SSS) comp. However, we are increasingly concerned about regulatory bans and interventions due to increased underage usage. For example, San Francisco recently became the first city in the United States to ban the sale of e-cigarettes. In addition, a U.S. District Court Judge recently imposed on the FDA a requirement to review and approve e-cigarette applications, which will create further uncertainty for the e-cigarette category,” Sklar said in a note.
He said that Couche-Tard's U.S. merchandising same-store sales will decline to 2 per cent in fiscal year 2020, about half of the level of fiscal year 2019.
“We believe given the potential for more stringent e-cigarette regulations and the stronger merchandise sales Couche-Tard will be comping against in FY2020, it may be difficult for Couche-Tard to experience additional multiple expansion within our investment horizon and these headwinds may result in multiple compression. In the last five years, Couche-Tard has traded within a EV [enterprise value]/forward EBITDA [earnings before interest, tax, depreciation and amortization] range of 10x to 12x. It is currently at the high end of the range, trading at approximately 12x.”
In other analyst actions:
CIBC upgraded Cenovus Energy to “outperform” with a price target of C$16.50.
Canaccord upgraded First Quantum Minerals to a “buy” with a price target of C$16.
CIBC downgraded Trican Well Service to “neutral” with a price target of $1.50.
RBC downgraded Vermilion Energy to “sector perform” with a price target of C$33.
Bank of America downgraded Aurora Cannabis to “neutral” from “buy” and lowered its U.S.-listed stock to US$8 from $10.