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

Raymond James analyst Andrew Bradford said 2020 has started off “with a bang” for Canadian oilfield service companies.

“Canadian producers began to ramp-up drilling and completions work early in December, and then even more noticeably in early-January, when the Canadian rig count was up as much as 20 per cent year-over-year,” he said. "Today as January closes out, drilling activity is up a more modest 5 per cent year-over-year, the rig count has flattened and it’s likely we’ve already seen the seasonal peak at 240-245 rigs. This will necessarily moderate near-term projections that may have looked more encouraging just 2 weeks ago.

“On balance, we expect both drilling and completions revenues will be nominally higher in 2020 than 2019. Importantly, improved cost structures - particularly from de-crewing fracturing spreads - will have a noticeable impact on 2020 margins.”

In a research note released Thursday, Mr. Bradford said there’s “more than sufficient cushion for downside risk” with Canadian OFS companies, noting: We think the market has developed exaggerated views of the downside potential for certain OFS companies and investors rationally protect themselves from these exaggerated downsides by requiring provocatively high FCF [free cash flow] yields. Excluding the high-indebeted companies with their negative FCF yields, Canadian OFS companies are averaging 22-per-cent FCF yields. When it comes to the larger drillers - ESI and PD - our analysis suggests the downside potential from lower crude pricing is much less dramatic than their current 44-per-cent and 42-per-cent Free Cash Flow yields suggest. If WTI crude were to drop to $49.50 (its lowest 12-month average since 2016), we estimate EBITDA from these two drillers would closely resemble the EBITDA we saw in 2017, at which rate FCF yields would range between 33 per cent and 36 per cent."

In his report, Mr. Bradford made a series of rating changes to stocks in his coverage universe after examining his downside scenario for WTI prices (of US$49.50).

He raised his rating for Ensign Energy Services Corp. (ESI-T) to “strong buy” from “outperform” with a $4.40 target, down from $5. The average on the Street is $4.05, according to Bloomberg data.

“Our estimates are at the low-end of the consensus range for both 4Q19 and 1Q20,” he said. “Enerflex’s low rate of bookings and resulting diminished backlog are strongly suggestive that Engineered Systems revenue will drop sharply, if not in 4Q19, then almost certainly by 1Q20. Interestingly, we perceive the low rate of bookings to be unquestionably low - particularly in the US. As such, we anticipate a booking recovery that will ultimately help EBITDA recover in 2H20.”

Conversely, Mr. Bradford downgraded the following stocks:

Calfrac Well Services Ltd. (CFW-T) to “underperform” from “market perform” with a $1 target (unchanged). Average: $1.28.

Analyst: “We expect CFW will generate $154-million EBITDA in 2020, though its $82 interest burden (which should be reduced by about $4-million upon closing of its exchange offering), its $92-milliob maintenance capital requirement, and $2 worth of SBC grants drag FCF into negative territory.”

CES Energy Solutions Corp. (CEU-T) to “outperform” from “strong buy” with a $3 target, down from $3.25. Average: $3.69.

Mullen Group Ltd. (MTL-T) to “outperform” from “strong buy” with a $12 target, falling from $12.50. Average: $11.67.

Questor Technology Ltd. (QST-X) to “market perform” from “outperform” with a $5.25 target (unchanged). Average: $6.29.

Trican Well Service Ltd. (TCW-T) to “market perform” from “outperform” with a $1.30 target, falling from $1.50. Average: $1.32.

Analyst: “We believe TCW may have been busier through early December than the consensus numbers indicate. We also expect 1Q20 will come in above the current consensus, but the intense cold across the prairies in mid-January could have been a fly in the ointment for any water handling equipment.”


RBC Dominion Securities analyst Walter Spracklin expects Canadian Pacific Railway Ltd.'s (CP-T, CP-N) industry-leading volume and earnings per share growth in 2019 to continue again this year, seeing its guidance as “significantly” conservative.

Before the bell on Wednesday, CP reported adjusted earnings per share of $4.77, exceeding the $4.64 estimate of both Mr. Spracklin and the Street.

"The tax rate, however, was 190 basis points lower than expected, which accounted for the entirety of the variance - and we therefore consider the core results in-line," the analyst said. "Tax aside, revenue came in better, but O/R was 110 bps worse, which we believe is what caused the initial weakness in the stock. Nevertheless, meeting its original double digit guidance in 2019 and achieving industry leading volume growth we consider a strong achievement for the company in 2019."

With the quarterly results, the railway company's management announced 2020 guidance of high single- to low double-digit EPS growth on mid-single digit volume, which Mr. Spracklin said equates to EPS of $17.76 to $18.41. That meets the consensus expectation of $18.31.

“Despite the seemingly in-line guidance, a number of indications were made on the call that suggest meaningful conservatism in this guidance (including guidance for a more than 900 basis points improvement in O/R [operating ratio] in Q1; as well as the indication that CP’s volume guidance is not predicated on a back-end loaded 2020 rebound and should be evident as of Q1),” he said. “Summed up by the CEO on the call: “[We expect to] meet and exceed on the revenue side, and meet and exceed on the cost side ... and I’d be highly surprised if we didn’t meet or exceed on earnings”. We believe this colour provided on the call around the conservatism triggered the inflection in the share price - and we expect this momentum to continue.”

"Plugging in the inputs from the call, we have difficulty getting to an EPS level that is not meaningfully above the top end of the guidance range. Accordingly, we are taking up our EPS estimates, which were already above consensus and above guidance."

Accordingly, Mr. Spracklin increased his EPS projection for 2020 to $18.63 from $18.57. His 2021 estimate rose to $20.60 from $20.51.

Also seeing upside to his own estimates, he raised his target for CP shares to $391 from $380, pointing to "industry leading volume and operating performance outlook."

He kept an “outperform” rating. The average on the Street is $365.27.

“We are increasing our multiple to 19 times, from 18.5 times, reflecting CP’s volume outlook and operating performance that are both best amongst peers in our view,” said Mr. Spracklin. Our multiple represents a premium to peers reflecting strong volume and operating momentum partially offset by a relatively narrower network footprint and revenue mix."

Elsewhere, Desjardins Securities analyst Benoit Poirier raised his target to $368 from $355.

“Despite current economic uncertainties, management remains confident in its ability to generate positive RTM [revenue ton mile] growth in 2020 as it leverages unique growth opportunities on its network,” said Mr. Poirier. “We maintain our Hold rating as we believe CP’s growth prospects are already reflected in its share price.”

Believing CP’s “path forward remains solid,” Citi’s Christian Wethebree maintained a “buy” rating and US$295 target.

“We are increasing our 2021 EPS estimate slightly to C$20.50 from C$20.35, as we expect a somewhat better revenue cadence exiting 2020,” he said. “Expectations were elevated for CP’s results, but the beat and solid outlook should keep shares moving higher.”


CIBC World Markets analyst Mark Jarvi says Canadian energy infrastructure segments continue to deliver “solid” returns, led by Power companies.

We continue to believe investors should be positioned in names that not only provide solid yield but also diversified, tangible growth that could help mitigate any potential multiple compression over time,” he said. “Our Q4/19 estimates are generally below consensus but our medium- to longer-term outlooks remain positive.”

In a research report previewing fourth-quarter earnings season, Mr. Jarvi lowered Fortis Inc. (FTS-T) to “neutral” from “outperformer,” noting “the stock has re-rated post the closing of an equity financing in Q4 that improved the company’s funding outlook.”

“At the current trading level, the implied total return to our target is a modest 2.6 per cent, below the level we look for in an Outperformer-rated stock,” he said. “We still view Fortis as a top-quality name with strong diversification and continue to view it as a core holding in the space and a name that deserves to trade at a premium to Canadian names. The stock has regained that premium over the last two months after outperforming North American utility peers. We would continue to hold the shares but are less inclined to add to positions at the current levels. Our price target is based on 21 times the average of our 2020 and 2021 Adjusted EPS estimates. Shares currently trade at 21.7 times and 20.5 times our 2020 and 2021 estimates, respectively. Fortis’ average P/E (FY2) trading multiple has been 17.4 times over the last five years and has peaked out at 21.0 times.”

He increased his target by a loonie to $58. The average on the Street is $57.01.


Though he feels “disciplined actions should eventually pay off,” Citi analyst Jim Suva thinks 2020 is likely to be “challenged” for Celestica Inc. (CLS-N, CLS-T).

“Celestica is in the midst of making some difficult decisions of disengaging some customers which the company feels are not economically profitable enough for the risk and reward and not meeting its ROIC [return on invested capital] hurdle rates,” he said. “Longer term, this should help the company’s profitability and focus but near term sales will be quite challenged evidenced by the 11-per-cent sales decline in 2019 and our projection of a 7-per-cent decline in 2020 while other competitors are seeing growth in sales and EPS [earnings per share]. Accordingly we rate the shares a Sell rating until we have visibility the company has bottomed this disengagement process and stabilizes its business.”

On Wednesday after the bell, the Toronto-based electronics manufacturing services company reported fourth-quarter financial results that narrowly exceeded expectations on the Street. Sales and adjusted EPS of US$1.49-billion and 18 US cents, respectively, topped the consensus projections of US$1.47-billion and 15 US cents.

The company's first-quarter guidance also fell in line with estimates.

Though the company thinks its restructuring will largely be completed by the end of 2020, Mr. Suva said additional work may be needed given its revenue trajectory.

"Following a year in 2019 where sales declined -11 per cent we project Celestica will see another year of sales declines in 2020 which we estimate at 7 per cent," he said. "This comes at a time when many other EMS companies are posting sales growth, margin expansion and EPS growth.

"As 2020 progresses the rate of the year over year sales declines will likely get worse given the customer disengagements."

With his “sell” rating for the stock, Mr. Suva raised his target to US$7.50 from US$7.25, noting “the company is making progress on its operating profit margins faster than we anticipated.” The average target on the Street is currently US$8.83.

“We acknowledge the 2019 stock underperformance has set a low bar and the company is trading at 20-per-cent FCF [free cash flow] yield and 1.3 times price to tangible book value,” said Mr. Suva. “However, our experience shows disengagement and program exit with top customers typically cause stock turbulence for several quarters.”

Elsewhere, Canaccord Genuity’s Robert Young increased his target to US$9 from US$7, keeping a “hold” rating.

Mr. Young said: “Celestica reported a beat to close the year, with an in-line guide and balanced commentary suggesting that management’s view for 2020 has not changed materially since the last report. The company intends to be aggressive on its original program review next quarter, guiding to $100-million of reduced revenue in the Enterprise segment. The impact of the Cisco disengagement appears to be backend weighted, so we continue to model revenue declines through 2020 alongside steady expansion in the company’s margin profile. The company reiterated its view that the semicap end market is improving and the segment has regained profitability. Celestica appears on track to get back to the targeted 5-6-per-cent ATS segment OM% range and enterprise-wide OM% of 3.75-4.5 per cent – the company’s previously communicated and reiterated targets. We are incrementally positive since last quarter and expect the stock to edge up on the results. With largely unchanged EBITDA estimates, we are reiterating our HOLD rating and raising our price target to US$9.00 (US$7.00) benefitting from period roll-forward and an increased forward cash position as working capital related to Cisco unlocks.”


Though CGI Inc. (GIB.A-T, GIB-N) “continues to have a resilient business model,” Desjardins Securities analyst Maher Yaghi lowered his financial estimates for the Montreal-based firm after its quarterly results fell short of expectations.

"The narrative of accelerating organic revenue growth has taken a step back with 1Q FY20 results, as the top line missed expectations and bookings were also underwhelming," he said. " However, year-over-year margin improvement resumed even after adjusting for IFRS 16. While results were below expectations, we believe [Wednesday's] decline creates a buying opportunity, as CGI remains a quality company with significant earnings growth and a solid balance sheet to undertake accretive acquisition."

Shares of CGI fell 7.9 per cent on Wednesday after it released earnings that displayed the lowest organic revenue growth in six quarters, which Mr. Yaghi called “disappointing.”

“We estimate CGI’s organic growth was 1.4 per cent year-over-year, down from 4.4 per cent last quarter,” he said. " However, we expect revenue growth to improve in the next few quarters as a result of greater certainty on the UK’s political landscape, pre-election spending increases in the U.S. coupled with improved revenue generation from recent acquisitions following the run-off of underperforming contracts.

“While the stock reacted negatively [Wednesday] as a result of lower organic revenue growth, we believe the company’s business model remains resilient. Management has invested significant resources in recent years to improve the IP portfolio and client relationships, and surveys continue to indicate good satisfaction with CGI’s capabilities. Coupled with an onshore client-centric model and expected continued growth in industry IT spending, we expect results to improve in the back half of the year."

Despite this positive outlook, Mr. Yaghi reduced his 2020 and 2021 earnings per share estimates to $5.03 and $5.68, respectively, from $5.16 and $5.88.

Maintaining a “buy” rating, his target for CGI shares slid to $118 from $120. The average is currently $112.70.

“CGI has a solid backlog of opportunities and strong operational controls. We continue to expect EPS growth to average around 10 per cent per annum over the next two years,” said Mr. Yaghi. “Combined with a very healthy balance sheet to undertake accretive M&A transactions, CGI continues to have the key ingredients for share price outperformance, in our view.”


Tesla Inc. (TSLA-Q) is “solidly positioned as the leader of the EV revolution,” said Canaccord Genuity analyst Jed Dorsheimer following Wednesday’s release of “strong” fourth-quarter results that exceeded the Street’s expectations.

“While vehicle deliveries had been previously reported, the benefits from the company’s initiatives in improved margins and cost structure continue to bear fruit, resulting in strong earnings,” he said.

“Critically, the company ended the quarter with $6.3-billion in cash and generated $1.0-billion of free cash flow in the quarter, which should finally put to rest any balance sheet concerns.

Maintaining a “buy” rating, Mr. Dorsheimer hiked his target for Tesla shares to a new Street-high of US$750 from US$515. The average among analysts covering the stock is US$431.56.

“We ... are setting a new PT of $750 based upon applying a 30-times multiple to our new FY21 EPS estimate of $25.03,” he said. “We see this multiple as appropriately reflecting the large opportunity that the company has in disrupting the legacy transportation industry.”


With its margins “under pressure,” Acumen Capital analyst Jim Byrne lowered his rating for Currency Exchange International Corp. (CXI-T) to “hold” from “buy” in the wake of the release of fourth-quarter financial results he deemed “negative.”

“CXI continues to demonstrate solid top line growth but expense items continue to grow at faster rates putting further pressure on profitability,” said Mr. Byrne.

On Tuesday after the bell, the Orlando-based company reported revenue for the quarter of $11.5-million, up 11.7 per cent year-over-year and narrowly above the analyst’s $11.4-million estimate. Adjusted EBITDA of $1.9-million, however, fell short of his $2.6-million expectation, due largely to higher-than-anticipated operating expenses.

“CXI has successfully grown top line revenues for the past several years,” said Mr. Byrne. “Unfortunately, this revenue growth has been putting pressure on margins as the company has added staff, services, and systems in place as a larger entity. EBITDA margins continue to grind lower. Costs associated with the Exchange Bank and the proposed Montreal acquisition continue to impact results.”

With his lower rating, he reduced his target to $20 from $26.

“We are disappointed with the recent financial results and while we continue to like the business, until the company can provide evidence of improved profitability we will move to the sidelines,” the analyst said.


Despite a “modest” beat with its fourth-quarter revenue and operating income results, the magnitude of Facebook Inc.'s (FB-Q) results “wasn’t as great as expected or as generated historically,” said RBC Dominion Securities analyst Mark Mahaney.

Regardless, he still sees the social media giant as “fundamentally friendly,” despite lowering his target for its stock to US$255 from US$270 with an “outperform” rating (unchanged). The average on the Street is US$244.17.

“FB had been rallying strongly into EPS, and the multiple had almost recovered to pre-Cambridge Analytica days,” said Mr. Mahaney. “So we think expectations were high. And they weren’t met. We call this an Expectations Correction – as opposed to a Fundamentals Correction. We have lowered our 2020 estimated revenue growth from 25 per cent to 22 per cent, and with no change in expenses, our bottom-line estimates drop more. So we’re less near-term constructive. We would expect FB shares to pause. But fundamentally, we believe FB’s very strong ROI will emerge mostly unscathed from the ad targeting changes & FB will benefit from a banner ’20 Ad Year (Olympics, Elections). So growth should stabilize/improve in H2:20. And we still see FB as very well long-term positioned – thanks to monetization opportunities like WhatsApp, Instagram commerce/Checkout, Payments & AR/VR (Oculus). And we believe valuation (18 times P/E or 16 times P/E ex-cash) remains very attractive.”


In other analyst actions:

Seeing commodity weakness persisting through 2020, RBC Dominion Securities analyst Arun Viswanathan lowered Dow Inc. (DOW-N) to “sector perform” from “outperform” with a US$54 target, down from US$59. The average is US$57.09.

“While we are downgrading DOW to Sector Perform (from Outperform), our thesis speaks more on the industry weakness, rather than DOW’s performance,” he said. “We continue to believe DOW has demonstrated strong execution, despite market weakness and has well defined plans on FCF generation (11-per-cent FCF yield in 2020E).”

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