Inside the Market’s roundup of some of today’s key analyst actions
Though he called it a “great company” following Wednesday’s release of “impressive” fourth-quarter 2019 financial results, Credit Suisse analyst Brad Zelnick said he’s “stepping aside” on Shopify Inc. (SHOP-N, SHOP-T) due to its “lofty” current valuation and embedded expectations.
Accordingly, he lowered his rating for the Ottawa-based e-commerce platform to “neutral” from “outperform.”
“Despite another strong quarter from Shopify, our positive fundamental view on the company’s long-term opportunity, and belief in management’s strategy and ability to execute, we are downgrading,” he said.
“Not only is Shopify highly leveraged to increasing ecommerce penetration, but its solution suite in turn helps to accelerate ecommerce adoption (along with wallet share), thus creating flywheel effects. While [Shopify Fulfillment Network] could drive revenue and gross profit upside in years to come, these offerings remain nascent and could take longer than expected to generate meaningful revenue. We firmly contend Shopify is a great business and has one of the largest [total addressable markets] in our coverage universe, but we see a more balanced risk-reward at 28 times fiscal 2020 revenue and following 286-per-cent share price appreciation since the beginning of 2019 vs. 52 per cent IGV and 35 per cent SPX.”
In response to the results, which included better-than-anticipated gross merchandise volume growth and its largest quarter-over-quarter increase in take rate since 2015 with what Mr. Zelnick sees as “plenty of room to run,” the analyst raised his 2020 revenue projection to US$2.16-billion to US$2.14-billion.
He also hiked his target for Shopify shares to US$575 from US$450. The average target on the Street is US$542.98, according to Bloomberg data.
Elsewhere, PI Financial analyst Gus Papageorgiou raised his rating for Shopify shares to “buy” from “neutral” with a target of $830 (Canadian), rising from $604.86.
Paradigm Capital’s Kevin Krishnaratne increased his target to US$600 from US$500, keeping a “buy” rating.
He said: “Shopify’s differentiated platform is favourably leveraged to high-growth e-commerce trends and is the leading solution for merchants seeking simplicity in building an omni-channel experience to sell products wherever consumers may be. The company provides several front- and back-end tools required to build a business so that merchants can focus on their own core competencies. We view Shopify’s platform as an essential utility for merchants who rely on it as they grow in size, which should drive continued success for the company following impressive gains over its +10-year history.”
National Bank Financial analyst Maxim Sytchev said he’s “begrudgingly” maintaining an “outperform” rating for Finning International Inc. (FTT-T) following the release of its fourth-quarter results, expressing concern that it’s “once again sitting at the bottom of the historical valuation range” and noting, “in the past, shares rallied off these levels.”
Mr. Sytchev said the Vancouver-based Caterpillar dealer’s conference call displayed “not a lot of silver lining” for investors, emphasizing a “negative tone despite [an] emphasis on [free cash flow] generation.”
“Many toes have been stubbed on trying to time the behavior of the shares," he said in a research report wrapping up earnings season for TSX-listed equipment distributors. "When looking at the 10-year chart there is a clear range-bound dynamic around the investment thesis. We believe investors have to become cognizant that the good old days of China driving the macro bus are behind us and thinking that we could get back to 2012-2014 levels of mining / oil intensity is not realistic. We thought that the Chilean dynamic would play over a longer time-frame (discussed Here and Here); the macro uncertainty, however, played out much faster, leading to lower numbers in Q4/19E and compressed expectations for H1/20E (hence, we are now modeling a topline decline of 1.5 per cent vs. previous flat showing).
“At 1.7 times Price to Book value (longterm median of 2.3 times) and 12.6 times P/E on 2020E one would think that the expectations are low enough for the shares (even though Street numbers will have to come down as a result). Historically stepping into FTT at this level of book value provided a positive return; we are hoping for an anchor here; hence, keeping the Outperform recommendation.”
Mr. Sytchev did lower his target for Finning shares to $28 from $29. The average is $25.91.
Meanwhile, the analyst kept an “outperform” rating and $82 target (versus a $77.86 consensus) for shares of Toromont Industries Ltd. (TIH-T), noting he’s “not getting a sense there is a change in momentum or opportunity.”
“[Wednesday] morning’s conference call supported our original (positive) views on the quarter,” he said. "In an environment where CAT’s top line declined 8 per cent for Q4/19, 7-per-cent growth in Toromont’s Equipment Group is impressive, a function of company’s geographical skew and continued execution/investment in company’s future (both via the Hewitt transaction in 2017 and now by deploying rental fleet in previously under-penetrated geographies). Mining deliveries can clearly be volatile but over the medium term; we are quite optimistic about the company’s Eastern Canada infrastructure exposure. Rentals as well while having a marginally dilutive contribution should now play a more prominent role as these assets season. While clearly exhibiting a home-base bias, we want to be long Ontario / Quebec in these uncertain macro times.
“TIH shares are never cheap (trading at 20.8x times 2020 P/E and 18.6 times on 2021). Given the quality of the franchise (compounding entity; nice to see a 14.8-per-cent dividend increase to annualized $1.24 level) and nothing sinister on the macro horizon for now, we are comfortable with our positive stance on the shares.”
Citing an updated reserve price deck and a planned capital program that exceeds its cash flow, Industrial Alliance Securities analyst Michael Charlton lowered his rating for Birchcliff Energy Ltd. (BIR-T) to “buy” from “strong buy" in the wake of the release on Wednesday of in-line fourth-quarter production results that were record-setting for the Calgary-based intermediate oil and gas company.
“Record production rates and record low operating costs are a great way to close out a challenging year,” said Mr. Charlton. "Birchcliff looks to carry this momentum into 2020 as the Company previously announced it had two rigs working at each core property and four wells already drilled this year, with completions on the horizon. Of particular interest this year will be Birchcliff’s first Montney D4 well at Gordondale, which may add another potential Montney development layer. Following the release of its five-year plan and low maintenance capital requirements, sustainable FCF can be seen on the horizon to support enhanced shareholder value through stable dividends, future debt reductions, and NCIB repurchases.
“Birchcliff continues to trade at a 65-per-cent discount to its PDP less net debt value of $4.90/share, at a fraction of its estimated NAV per share of $17.67; this may be a bargain opportunity in this growth and dividend story headed to FCF.”
The analyst reduced his target for Birchcliff shares to $4.25 from $4.50. The average on the Street is $4.11.
In response to its “negative” outlook for 2020 and beyond, Canaccord Genuity analyst Kevin MacKenzie lowered his rating for Pretium Resources Inc. (PVG-T) to “hold" from “speculative buy."
On Wednesday before the bell, the Vancouver-based company released fourth-quarter results that exceeded expectations.
However, at the same time, Pretium also cut its 2020 preliminary guidance ahead of the release of an updated life-of-mine plan for its Brucejack high-grade gold underground mine.
That led to Mr. MacKenzie’s downgrade as he wishes to see “operational execution around it.”
He dropped his target for Pretium, which also announced a management shakeup, to $12.50 from $18.50. The average is $14.05.
Credit Suisse analyst Judah Frommer initiated coverage of a pair of powerful U.S. warehouse retailers on Thursday.
Seeing a “positive” risk/reward proposition for investors with its stock trading at or near all-time low valuation and their narrowest premium to grocery ‘peers’ and widest discount to COST since coming public," he gave Massachusetts-based BJ’s Wholesale Club Holdings Inc. (BJ-N) an “outperform” rating with a US$25 target. The average on the Street is $28.18.
“Recognizing that BJ’s product mix and key performance metrics are fairly closely aligned with traditional food retailers’, we believe that valuation should more adequately reflect the consistent cash flow stream inherent to a warehouse club that is membership fee income (MFI),” said Mr. Frommer. “Progress on BJ’s internal initiatives should, in our view, move BJ more squarely into the warehouse club camp. The productivity and valuation garnered by Costco, the paragon of the club model, are far from the medium-term realm of possibility for BJ’s, but an acceleration in comps, continued margin improvement, and ample white space should widen this retailer’s valuation gap to traditional food retailers.”
Mr. Frommer gave Costco Wholesale Corp. (COST-Q) a “neutral” rating and US$328 target, which exceeds the US$310.16 consensus.
“Costco is one of the highest-quality consumer staples retailers domiciled in the U.S., and a clear standout within our coverage universe," he said. "The stock’s re-rating over the past year, however, gives us pause and we see risk/reward as fairly balanced at these levels. Outsized sales productivity, operating efficiency, market share gains, and the ability to further monetize a deep customer data set are all extremely compelling fundamental aspects of the story, but valuation relative to its own history and the broader market appears stretched at a time we anticipate (still healthy) growth to slow.”
After a fourth-quarter earnings beat, Laurentian Bank Securities analyst Nauman Satti raised his target for shares of Hydro One Ltd. (H-T), pointing to sector-wide tailwinds.
“We were pleased with Q4/19 and annual results, albeit given the heavily rate-regulated model, quarterly performance is not indicative of a trend,” he said. “We believe that the company is on track to execute their strategic plan (5-per-cent earnings growth, 5-per-cent dividend growth, 5-per-cent rate base growth). EPS, EBITDA and revenue came in ahead of our and Street estimates and year-over-year performance was aided by a relatively weak Q4/18 comp period (OEB decision in relation to deferred tax asset) alongside Avista charges. The stock price has shown relative strength, up 41 per cent (from Jan/ 2019), surpassing the overall utilities sector (up 30 per cent).”
Maintaining a “hold” rating for the stock, he moved his target to $27 from $24. The average target is currently $27.27.
Elsewhere, Raymond James’ David Quezada increased his target by a loonie to $28 with a “market perform” rating.
Mr. Quezada said: “We take a positive view of Hydro One’s strategic focus on the Ontario market and continue to believe the company can deliver solid EPS growth by utility standards (5 per cent annually) by focusing on productivity gains and cost reductions across its footprint. Further, we expect strong progress on cost reductions improves the company’s case when it comes to its LDC consolidation (providing evidence of its ability to drive cost reductions) - something that could represent potential upside to the company’s current growth outlook. At end of the day, the company’s strategy and capital plan translates into a derisked 5-per-cent growth across the board for rate base, EPS, and dividends with upside coming from Hydro One Telecom and potential M&A. With 70-80 per cent of the company’s capital program focused on sustaining capex, the execution risk of the company’s capital program is low, in our view.”
In other analyst actions:
Barclays analyst John Aiken raised Power Corp. of Canada (POW-T) to “equal-weight” from “underweight” with a target price of $36, rising from $31. The average is $36.57.
Stifel Canada analyst Robert Fitzmartyn upgraded ARC Resources Ltd. (ARX-T) to “buy” from “hold” with a $10 target (unchanged), which exceeds the consensus by 40 cents.
Stifel’s Justin Keywood initiated coverage of Medexus Pharmaceuticals Inc. (MDP-X) with a “buy” rating and $6 target. The average is $6.94.
RBC Dominion Securities analyst Paul Quinn raised Western Forest Products Inc. (WEF-T) to “sector perform” from “underperform” with a $1.25 target, up from $1 but below the average of $1.40.
MORE TO COME