Inside the Market’s roundup of some of today’s key analyst actions
Ahead of the release of its first-quarter financial results on Jan. 14 after the bell, Raymond James analyst Rahul Sarugaser lowered his rating for Organigram Holdings Inc. (OGI-T, OGI-Q), noting “even the sector’s strongest operators aren’t immune to [the first half of 2020] market headwinds.”
“We expect the cannabis sector will continue to see headwinds during the first three quarters of 2020 driven primarily by crashing wholesale prices, a sluggish Ontario retail roll-out, and Cannabis 2.0 products introducing slowly to the market (instead of the tidal wave investors might have hoped for),” said Mr. Sarugaser in a research note released Thursday.
“We expect these dynamics, among others, will yield weak 4Q19 earnings and a bottoming of the market during 1Q20, followed by a steady improvement in sales and slow recovery beginning in 2Q-3Q20 (among LPs that aren’t in a death spiral). Not until 4Q20 — when the attrition of poorer operators has mostly run its course and a clear divergence emerges between well-run, strategically adept operators — do we expect a material boost in revenues on account of Cannabis 2.0 products, coupled with positive stock performance across the sector’s remaining operators.”
Though he expects Organigram to report “strong” operational results, including a low cost of cultivation, Mr. Sarugaser thinks the Moncton-based producer will see its quarter “hampered” by similar sales obstacles as seen in the fourth quarter of 2019. Those include a slow retail roll-out both in Ontario and other provinces as well as product discounts and returns from provincial distributors.
That led him to reduce his quarterly revenue projection to $19.5-million from $28.1-million, which is essentially flat from the previous quarter. He also dropped his EBITDA projection to a $1.1-million loss from a $5-million profit.
“While OGI is by no means immune to the headwinds facing the Canadian cannabis market during 1Q-3Q20, we do consider it one of the industry’s strongest, most strategic operators — one that will stand up to current market pressures and thrive when the sector recovers, which we expect to occur during 4Q20,” he said. “We expect these dynamics to weigh on OGI’s 1H20 revenues ... but we see OGI emerging strong by the end of the year.”
Mr. Sarugaser lowered Organigram to “market perform” from “outperform" but maintained a $9 target for its shares. The average target on the Street is currently $6.83, according to Bloomberg data.
“We think there is a lot to look forward to with OGI’s Cannabis 2.0 debut and rolling product launches through the first half of 2020 (please see page 2 for further details on OGI’s Cannabis 2.0 efforts)," he said. "Once the company recovers from the hold-ups and false-starts Canada’s cannabis market proceeded through during 2019 — and once some of the space’s weaker operators fold in the face of these challenges — we expect OGI to emerge stronger than ever, and in a considerably healthier marketplace.”
Expecting a strong performance from the recent holiday season, Jefferies analyst Kyle McNealy raised his target price for shares of Apple Inc. (AAPL-Q) on Thursday.
He said an analysis of foot traffic at U.S. Apple stores as well as global web traffic “shows that Apple is set for a strong finish to calendar 2019."
Mr. McNealy also said Black Friday traffic was the best in three years for the tech giant.
He hiked his target for Apple shares to US$350, matching the high on the Street, from US$285. The average on the Street is US$274.55.
He kept a “buy” rating, calling the upcoming 5G cycle is “the biggest driver of our thesis”and calling “better than feared” iPhone 11 performance “a nice bridge to 5G."
Moving the electric carmarker to “neutral” from “outperform,” he said it’s time to cash in on recent big gains and seeing the risk/reward proposition as more balanced following a jump of 115 per cent in the last six months.
“We are moving to the sidelines, admittedly battle-weary after a hard-fought several years, including [approximately] 20-per-cent outperformance over the last year,” said Mr. Kallo, who said he recommends profit-taking after several years with an “outperform” rating and noting "contentious arguments with (evidently) high-conviction bears.”
Despite the downgrade, Mr. Kallo hiked his target for Tesla shares to US$525 from US$355, exceeding the consensus target on the Street of US$326.69.
“Expectations (particularly on the buyside) appear to be fairly calibrated and we think the positive estimate revision cycle is in its latter stages," he said. "That said, we would not short the stock and remain positively biased over the long run.”
Acumen Capital revealed their Top Ideas for 2020 in a research note released Thursday.
“Our focus remains on proven businesses that have historically shown solid execution against a well-articulated business plan,” said analysts Trevor Reynolds, Nick Corcoran and Jim Byrne.
The firm said it was seeking stocks based on five criteria: reasonable valuations in the context of historical trading ranges; strong free cash flow supported by recurring revenue; a business model able to growth both organically and through acquisitions; a strong balance sheet; and evidence of catalysts that may “result in a step change in the business.”
The group selected eight stocks from their special situations coverage universe. They are:
Badger Daylighting Ltd. (BAD-T) with a “buy” rating and $45 target. The average target on the Street is $43.63.
Mr. Reynolds: “With updated guidance, which we view as conservative, now accounted for, and the ERP system active across the majority of the fleet we view this as an attractive entry point for this high-quality name.”
Hamilton Thorne Ltd. (HTL-X) with a “buy” rating and $1.50 target. Average: $1.52.
Mr. Byrne: “In 2019, the company demonstrated its strategy with double digit organic growth while adding strategic acquisitions to strengthen its product and service offering. We believe 2020 will be a strong year for HTL as it gains further traction in the capital markets and continues to deliver strong financial performance.”
MTY Food Group Inc. (MTY-T) with a “buy” rating and $72 target. Average: $63.43.
Mr. Corcoran: “While we believe that Management has continued to create shareholder value through accretive acquisitions and other initiatives (ex. focusing on organic growth and changing the management structure), there was significant noise throughout the year primarily from the acquisition of Papa Murphy’s. We believe there will be multiple expansion through 2020 as Management continues to execute on its business plan and the market regains confidence in the story.”
Park Lawn Corp. (PLC-T) with a “buy” rating and $36 target. Average: $34.60.
Mr. Byrne: “Management invested in their integration efforts in 2019, and we anticipate some margin expansion in 2020 and beyond as they continue to execute on their strategy. Organic growth through investments in their mausoleum properties and cemetery lands should augment the revenue and EBITDA growth rates.”
People Corp. (PEO-X) with a “buy” rating and $11.50 target. Average: $11.46.
Mr. Byrne: “PEO had great success in 2019, increasing its market share through acquisitions and organic growth, and carries strong momentum into 2020. We believe the Company will have another active year of acquisitions, providing numerous catalysts for the shares.”
Questor Technology Inc. (QST-X) with a “buy” rating and $6.25 target. Average: $6.21.
Mr. Reynolds: “On a go forward basis we expect quarterly results to remain a moving target while a continually increasing focus on air quality, fugitive emissions, and ESG has created an exceptionally strong tailwind for QST’s best in class incineration technology. The focus in 2020 will be on execution by the sales team in key markets along with the ramp up of the data capture program.”
Richards Packing Income Fund (RPI.UN-T) with a “buy” rating and $50 target. Average: $50.
Mr. Byrne: “We anticipate 2020 should be better with the cessation of trade tensions with China. In addition, we anticipate the company will be looking for M&A opportunities to expand its distribution business and supplement its organic growth.”
Sangoma Technologies Corp. (STC-X) with a “buy" rating and $3 target. Average: $2.99.
Mr. Corcoran: "STC was the stronger performer in our coverage universe for the second consecutive year in 2019 with a return of 100.8 per cent (following a return of 77.1 per cent in 2018). With a proven track record of acquisitions and strong organic growth, we believe the positive momentum will continue in 2020.
EBay Inc. (EBAY-Q) is “losing relevance for consumers,” according to Jefferies analyst Brent Thill
Prompted by the results a recent e-commerce survey, he downgraded its stock to “underperform” from “hold,” believing the company is seeing ““sluggish growth as e-commerce competition intensifies in new and used goods.”
Believing a declining market share “questions the viability and relevance of eBay’s Marketplace,” Mr. Thill dropped his target to a Street-low of US$31 from US$38. The average is currently US$39.71.
Though he’s encouraged by the long-term prospects for methanol despite recent market volatility, Raymond James analyst Steve Hansen lowered his financial expectations for Methanex Corp. (MEOH-Q, MX-T), citing weaker-than-anticipated fourth-quarter pricing and the impact on his 2020 outlook.
“Global methanol prices broadly underwhelmed our 4Q19 expectations, seemingly pressured by a collision of variables that included soft traditional/GDP-linked demand (i.e. auto, construction), weak MTO affordability and, until recently, healthy (uninterrupted) supply,” the analyst said. “That said, after an extended period of ‘bouncing along the bottom’, we’re encouraged by the modest updraft in Chinese spot prices over the past 6 weeks, a pattern underpinned by more typical supply outages and a gradually firming macro/energy (demand) backdrop.”
Mr. Hansen’s earnings per share projection for 2020 slid to US$1.37 from US$2.50. He also introduced a 2021 estimate of US$3.03.
Keeping an “outperform” rating for Methanex shares, his target sunk to US$48 from US$50, which remains above the consensus of US$41.14 on the Street.
“Notwithstanding recent macro volatility, we continue to remain optimistic on the prospects for 2020, a view underpinned by gradual improvements to the macro backdrop, higher energy prices, and ultimately higher methanol prices — to which Methanex boasts significant FCF leverage,” said Mr. Hansen.
Credit Suisse analyst Kaumil Gajrawala thinks Coca-Cola Co. (KO-N) is “considerably different compared to a few years ago.”
That led him to raise his rating for its stock to “outperform” from “neutral,” calling it “a better business, growing faster, and generating more cash supports a higher multiple than today’s parity valuation to our coverage.”
“In a return to its asset-light roots, revenues should grow faster and ROIC [return on invested capital] is improving,” said Mr. Gajrawala . We expect revenues to grow at the high-end of Coke’s 4 per cent to 6 per cent algorithm for several years, driving margin expansion and therefore earnings and cash flow ahead of consensus."
The analyst raised his financial projections for Coke “well above consensus,” and now projects 36-per-cent higher earnings share growth over the next three years. That’s in contract to near-zero growth since 2013.
That bullish stance led him to increase his target for its shares to US$64 from US$54. The average on the Street is US$59.26.
“The benefits of the structural changes at Coke are reinforced by positive commentary from bottlers, retailers and other industry contacts in recent months, driving us to upgrade KO shares,” he said.
In other analyst actions:
Mr. Reardon also cut Brookfield Renewable Partners LP (BEP-UN-T) to “sector underperform” from “sector perform” with a $55 target (unchanged), which falls below the $57.20 average.
Wells Fargo Securities analyst Neil Kalton raised Hydro One Ltd. (H-T) to “overweight” from “equal-weight” with a $29 target, up from $26 and above the $24.89 average.
With files from Bloomberg