Inside the Market’s roundup of some of today’s key analyst actions
FirstService Corp. (FSV-Q, FSV-T) ended 2019 on a “good note” with “solid” fourth-quarter results and an encouraging outlook for the new year, said Raymond James analyst Frederic Bastien.
Seeing “excellent” revenue visibility moving forward, he raised his rating for the Toronto-based real estate services company to “outperform” from “market perform,” declaring: “this stock is going up!”
“FirstService’s 4Q19 results were reflective of a company that continues to capitalize on powerful urbanization trends, a highly fragmented market for property services across North America, and the lower-for-longer interest rate environment,” said Mr. Bastien in a research note released Wednesday after the bell.
“With the U.S. housing sector on firm footing and the risks to the domestic economy fairly contained in this election year, we expect FSV to grow earnings at a healthy pace and sustain its multiple over the next 12-18 months.”
For the quarter, FirstService reported adjusted EBITDA of US$64-million, exceeding the projections of both Mr. Bastien (US$60-million) and the Street (US$62-million). He said the beat was “broad based” in nature with both its operating segments (FirstService Residential and FirstService Brands) topped estimates in revenue and profitability."
“Our 5-per-cent organic growth target for FSR this year is predicated on the residential property manager capturing an outsized share of new condo developments and finding the right balance between contract wins and retention rates,” the analyst said. "It seems reasonable FSB could do even better than that. For one, steady growth in home equity values and shifting preferences for luxurious living spaces should drive renovation activity further, to the benefit of franchises like California Closets and Floor Covering International. We also see opportunities for management to meaningfully enhance the Century Fire platform this year and scale the recently acquired Global Restoration businesses with pace.
After increased his earnings per share estimates for 2020 and 2021 to 77 US cents and US$1.06, respectively, from 69 US cents and US$1.02, Mr. Bastien hiked his target price for FirstService shares to US$120 from US$105. The average target on the Street is US$110.50.
Elsewhere, RBC Dominion Securities’ Matt Logan moved his target to US$112 from US$106, keeping a “sector perform” rating.
Mr. Logan said: “FirstService closed the books on 2019 with solid and in-line Q4 results. Looking ahead, we think a quiet year for storm activity in 2019 provides a nice set-up heading into traditional hurricane season (i.e., June–November). We also see potential upside over the next few years as Management works to double the size of its restoration business over the medium-term.”
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With its cash flow generation remaining “robust,” Dell Technologies Inc. (DELL-N) is “on a path to reduce debt over the coming years,” according to RBC Dominion Securities analyst Robert Muller.
However, expressing concern over high leverage and seeing limited catalysts in its core business, Mr. Muller said he’s staying on the sidelines, leading him to initiated coverage with a “sector perform" rating on Thursday.
“We base our rating on DELL’s higher risk due to leverage, its top-tier provider position for storage, servers, and PCs, and its holdings of VMware and the resulting exposure to continued hybrid cloud adoption and software containerization that should fuel VMware and Dell Technologies Cloud,” he said.
Mr. Muller said the Texas-based tech giant’s high leverage limits flexibility and “magnifies” the potential impact of any potential macro slowdown.
“On a fully consolidated, gross basis, we calculate Dell’s LTM leverage at 4.6 times, well above peers,” he said. “To its credit, management is proactively paying down debt with the intention to approach ratings agencies about an IG rating once core debt reaches 3 times, which we estimate will occur early in CY21. While the benefits of delevering should lead to an increasing multiple, we approach our valuation cautiously.”
He set a target price of US$56 per share, which falls below the consensus on the Stret of US$60.74.
“Dell’s majority ownership of VMware should help drive top-line revenue growth as VMW capitalizes on its exposure to the hybrid-cloud in areas such as softwaredefined data centers, software-based storage, networking, and security as well as desktop and app virtualization,” the analyst said. “Additionally, due to a mix-shift toward VMW within Dell, we expect Dell’s overall operating margins to rise. It’s also worth noting that VMW also acts as a natural hedge should virtualized storage (vSAN) cut into Dell’s core storage business. Finally, we believe that VMW should benefit from the ongoing trend into containers/ kubernetes, which allows portability with code/applications.”
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Seeing the potential for the recent rise in methanol prices to be “short-lived,” Citi analyst Eric Petrie lowered his financial expectations for Methanex Corp. (MEOH-Q, MX-T).
“Methanol prices have improved recently due to production outages, but near-term demand could be impacted by falling oil prices and planned MTO maintenance,” he said. “IHS sees demand risks as MTO producers could opt to purchase ethylene/propylene requirements instead of methanol, but infrastructure needs to be built out, and it is still early to quantify any impact from China’s single-use plastic bans. Energy-related applications are 45 per cent of global methanol demand and Brent oil prices have moved down to $55 per barrel compared to $66 at the beginning of the year. Citi’s Global Head of Commodities Strategy, Ed Morse, revised down Brent oil price forecasts for 1Q20 to $54/bbl (down $15), 2Q20 to $50 (down $18) and 3Q20 to $53 (down $10) noted slowing growth due to the coronavirus.”
Pointing to that reduced outlook, Mr. Petrie shrunk his earnings per share projections for 2020, 2021 and 2022 to 74 US cents, US$2.01 and US$2.02, respectively, from 92 US cents, US$2.35 and US$3.31.
“MEOH estimates global methanol demand improved 3 per cent year-over-year in 2019, led by 7-per-cent growth in energy-related applications and a roll over for traditional applications,” he said. “Methanol supply has run above historical averages for the year with meaningful Iranian volume into China. The company reached record production in 2019 of 7.6 million tonnes helped by low cost investments and securing incremental natural gas deliveries. On G3, MEOH has hired an investment bank to seek other potential partners for 30-per-cent ownership.”
Maintaining a “neutral” rating, Mr. Petrie lowered his target for Methanex shares to US$39 from US$41. The average on the Street is US$40.62.
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Desjardins Securities analyst Benoit Poirier raised his financial estimates for Calian Group Ltd. (CGY-T) after “solid first-quarter results across the board.”
“We are impressed by CGY’s robust organic growth posted in 1Q, which gives us more confidence that management’s growth strategy will unlock value,” he said. “We believe [Thursday’s] investor day is a great opportunity for investors to revisit the story and buy the shares.”
On Wednesday, the Ottawa-based company reported revenue of $99-million for the quarter, up 24 per cent year-over-year and above the projections of both Mr. Poirier ($87-million) and the Street ($91-million). Adjusted earnings per share of 67 cents also topped expectations (49 cents and 53 cents, respectively).
“The company also increased its FY20 guidance after completing two acquisitions and posting robust organic growth of 22 per cent in 1Q,” the analyst said. “We are pleased with the revised guidance, which is well above consensus and our forecast. We remain confident in management’s ability to leverage its balance sheet to create value with its M&A strategy.”
With the results, Mr. Poirier raised his revenue and adjusted earnings per share expectations for both 2020 and 2021. That led him to hike his target for Calian shares to $50 from $43, which tops the consensus of $48.75.
He maintained a “buy” rating.
“We believe the event [Thursday] will help investors better understand the growth prospects of CGY’s newly created operating segments: Advanced Technologies, Learning, Health and Information Technology,” he said.
Elsewhere, Acumen Capital’s Jim Byrne kept a “buy” rating and $50 target.
Mr. Byrne said: “We believe CGY offers investors a unique opportunity in the small cap sector with solid organic growth, some margin expansion, and potential catalysts associated with further M&A.”
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Seeing supply/demand conditions “highly likely to improve further as the year progresses," Raymond James analyst Chris Caso raised Micron Technology Inc. (MU-Q) by two levels to “strong buy” from “market perform.”
“Our more bullish view is no longer unique, as sentiment has improved sharply due to recent price increases,” said Mr. Caso. “Those price increases, occurring in the seasonally weakest part of the year, indeed surprised us."
With "pricing stabilizing in the slow part of the year” coupled with with limited supply growth, he thinks it’s “reasonable to assume tighter supply conditions have a more favorable effect on pricing” in the second half of the year.
Pointing to “a number of secular/seasonal growth catalysts,” Mr. Caso set a target price of US$70 per share. The current average target on the Street is US$65.67.
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Norbord Inc.'s (OSB-T, OSB-N) fourth-quarter earnings miss is overshadowed by the “healthy” state of oriented strand board (OSB) market amid a “strong” macro backdrop south of the border, according to Raymond James analyst Daryl Swetlishoff.
“ As we have seen in recent months, U.S. homebuilding stocks have staged an impressive rally amid improved fundamentals with lower mortgage rates and improved consumer confidence," he said. “Earnings reports from U.S. homebuilders have pointed to higher January buyer traffic, lower December inventories (top 25 markets down 14 per cent year-over-year), and months’ supply of inventory reaching record lows, prompting homebuilders to maintain positive outlooks through 1H20.
"This bodes well for OSB pricing which has started to gain traction in recent weeks after hovering in the low US$200 per thousand board feet level for several months, the most recent benchmark NC OSB 7/16” price was at US$245/msf with order files reportedly pushed into March, suggesting that pricing momentum should continue as we head into the spring building season. We also expect improved European results with lower delivered log costs and more operating days.”
Though its quarter results fell short of his expectations, Mr. Swetlishoff raised his 2020 earnings per share projection by a loonie to $3.78.
That led him to increase his target for Norbord shares to $54 from $46 with a “strong buy” rating (unchanged). The average target on the Street is $44.81.
“Our Strong Buy rating is a function of Norbord’s leverage to strong US housing fundamentals coupled with a tightening supply dynamic," he said. "We highlight Norbord’s torque to increasing OSB prices, with each US$10/msf in the commodity resulting in a $50-60-million impact to EBITDA or $4-5 per share in our model. We also expect more cash returned to shareholders under the variable dividend policy. NA 1Q20 earnings should improve seasonally plus we expect better European results. We highlight OSB has minimal exposure to uncertain Asian markets.”
Meanwhile, CIBC World Markets’ Hamir Patel increased his target to $45 from $38 with a “neutral” rating.
“With 55 per cent of North American OSB consumption tied to new home construction, Norbord has significant leverage to the strong U.S. housing market,” he said.
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In other analyst actions:
Citing its relative outperformance and valuation, which he thinks “arguably limits takeover potential," TD Securities analyst Menno Hulshof cut MEG Energy Corp. (MEG-T) to “hold” from “buy” and lowered his target price to $9 from $9.50. The average target on the Street is $8.68.
David Leeder