Inside the Market’s roundup of some of today’s key analyst actions
Aritzia Inc.’s (ATZ-T) better-than-expected third-quarter 2024 financial results show “slight improvements with hopes for more to come,” according to Stifel analyst Martin Landry.
“As expected Aritzia lost market share during the quarter given a lack of product innovation,” he said. “This trend is expected to continue into Q4FY24 as the new spring/summer collection will mostly impact Q1FY25. We expect same-store-sales growth to return closer to historical levels in FY25, expecting a growth of 5.7 per cent, but our visibility is limited. Competition is intense in the apparel sector, and it’s not clear if the Aritzia brand is as hot as it was in 2021 and 2022. Store openings in calendar 2024 should help drive new customer growth and boost ecommerce sales.”
After the bell on Wednesday, the Vancouver-based clothing retailer reported revenues of $654-million for the quarter, up 5 per cent year-over-year and exceeding both Mr. Landry’s $621-million estimate and the Street’s expectation of $623-million. That was driven by same-store sales growth of 0.5 per cent, topping both the analyst’s projection of a 3.4-per-cent decline and the consensus of a 3-per-cent drop. Earnings per share of 47 cents was a decline of 30 per cent from a year ago, but it beat Mr. Landry’s 40-cent estimate and the Street’s 41-cent forecast due to higher revenues and lower expenses.
“Revenues increased faster in Canada despite all the store openings being located in the U.S. due to a slowdown in customer acquisition and reduction in spending by existing clients,” he said. “This trend appears to have reversed in Q4FY24 according to management.”
“Aritzia has had a slower innovation process in calendar 2023, which resulted in market share loss. However, management is excited about the new product line-up for the spring/summer 2024 collection, which is expected to represent 50 per cent of total products.”
While the company revised its slate of new store openings, delaying its new Chicago flagship store into fiscal 2025, Mr. Landry thinks its guidance for the fourth quarter of 2024 appears “conservative.”
“Management increased its FY24 guidance for revenue growth by approximately 100 basis points but maintained gross profit margin guidance unchanged,” he said. “The unchanged margin guidance suggests EBITDA margin pressure in the range of 200-250 bps in Q4FY24, a larger decline compared to our previous expectations of flat margins year-over-year. We have revised our estimates slightly to reflect management guidance and have increased our FY24 EPS estimates by 1 per cent. Our FY25 EPS estimates is reduced by 4.5 per cent to $1.85 driven by higher interest expense from higher lease liabilities reflecting Aritzia’s strong store opening cadence.”
With those changes, Mr. Landry raised his target for Aritzia shares to $34 from $32, keeping a “buy” rating after introducing his 2026 estimates, which include revenue growth of 11 per cent and a 7-per-cent gain same-store sales. The average target on the Street is $33.44.
“We see significant growth potential for Aritzia ... While gross margins are expected to be under pressure in FY24, we believe these issues are not permanent. In addition, the U.S. expansion should be margin accretive as price points in the U.S. are the same as in Canada, providing an approximate 25-per-cent lift in Canadian dollars,” he said. “Larger U.S. revenues also reduce Aritzia’s FX exposure as the company buys the majority of its products in USD.”
“In the last five years, Aritzia has experienced significant growth with EPS increasing at a CAGR [compound annual growth rate] of 23.5 per cent. The company has executed on an aggressive expansion plan in the United-States, where its brand awareness has increased significantly and where more than 50 per cent of the revenues are now generated.”
Elsewhere, a pair of analysts upgraded their recommendations:
* Raymond James’ Michael Glen to “outperform” from “market perform” with a $35 target, up from $32.
“Heading into Aritzia’s F3Q results, we acknowledge that we had some areas of concern, most notably with inventory, gross margin and the lingering impact of a mild fall/winter on markdown activity,” said Mr. Glen. “As such, we were recommending to investors to take a wait and see approach to the stock. That said, as we look through the F3Q numbers and assess the results (which were effectively ahead on all key metrics), we would state that Aritzia addressed many of our concerns head-on (particularly with inventory), and this provides a strong set-up as investors shift focus to a F2025 rebound scenario.”
* CIBC’s Mark Petrie to “outperformer” from “neutral” with a $37 target, up from $30.
“Q3 results were ahead of expectations and brought a return to positive (albeit slightly) same-store sales (SSS) growth. Aritzia is delivering growth despite execution issues and consumer caution, and has numerous levers into F2025 and beyond. New store paybacks remain excellent. While we expect consumer spending to remain under pressure, we believe ATZ can outperform given moderated expectations,” said Mr. Petrie.
Meanwhile, analysts making target changes include:
* Canaccord Genuity’s Luke Hannan to $38 from $36 with a “buy” rating.
“All told, there are several positive takeaways from the quarter, in our view,” said Mr. Hannan. “Most notably: 1) comparable sales growth remained positive despite tough comps (Q3/F24 two-year stack: 23.3 per cent), with overall sales trends improving in both Canada and the US sequentially throughout the quarter; 2) inventory was down 22 per cent year-over-year as a result of higher markdowns (though product margins remained healthy), a key driver for the $172-million of FCF generation during the quarter which allowed Aritzia to pay down the full amount of the $100-million outstanding balance on its revolver sooner than expected; 3) the company remains on track to achieve a more balanced mix of newness vs. proven sellers, with sales of new products during the quarter having doubled year-over-year; 4) payback periods for new boutiques continue to be 12 months or less; and 5) Aritzia remains on track to deliver 500 basis points of year-over-year adjusted EBITDA margin expansion next year. Altogether, these developments support our positive view on Aritzia’s growth prospects moving into next fiscal year, and should lead to multiple expansion as investors’ confidence in the company’s outlook continues to improve.”
* BMO’s Stephen MacLeod to $32 from $31 with a “market perform” rating.
“Expect margin pressure to continue in Q4 (although moderating from “peak” pressures); expect 700 basis points 2024 adj. margin pressure. Positively, new store performance is a bright spot (paybacks 1-year or less) and the new DC successfully ramped in Q3. While management execution on 2025E margin rebuild could be positive for the stock, macro and margin headwinds are likely to weigh in the near term,” said Mr. MacLeod.
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National Bank Financial analyst Vishal Shreedhar expects difficult market conditions to continue to weigh on Saputo Inc. (SAP-T).
Ahead of the Feb. 8 release of the Montreal-based dairy company’s third-quarter 2024 results, he “moderated” his estimates for both its current fiscal year and 2025 to “reflect a challenging backdrop.”
“Fundamentally, we see significant operational improvement associated with numerous network optimization initiatives (automation/digital/rationalization) – this represents more than $500-million to EBITDA over the next several years, accepting SAP’s $2.125-billion EBITDA target (target partially based on volume and market conditions),” said Mr. Shreedhar.
“That said, we recognize that investor questions on SAP’s ability to achieve targets and deliver relatively consistent growth have intensified, particularly given heightened commodity volatility. We believe that attractive valuation sufficiently compensates the investor at this juncture.”
Pointing to “ongoing industry volatility and weakness in exports,” the analyst is projecting quarterly earnings per share of 39 cents, down 25.9 per cent year-over-year (from 53 cents) and below the consensus estimate of 44 cents. Revenue is expected to slide to $4.484-billion from $4.587-billion a year ago, which falls in line the Street’s expectation.
“In the U.S., we expect weaker results driven by a lower average block cheddar price, partly offset by volume growth (mainly in the dairy food products) and favorable F/X.,” he said. “We expect continued good performance in Canada. In International, we anticipate lower EBITDA year-over-year, reflecting lower export volumes, partly offset by pricing and efficiency initiatives. In Europe, we anticipate lower EBITDA year-over-year, reflecting higher input costs and an unfavorable mix, partly offset by higher pricing year-over-year and favorable F/X.”
Maintaining his “outperform” rating for Saputo shares, Mr. Shreedhar trimmed his target to $33 from $35 to reflect his lower estimate and valuation multiple. The average is $34.28.
“Looking forward (F2025+), we expect EBITDA growth driven (amongst other factors) largely by improvements in the U.S.; the U.K. and Australia are also expected to contribute,” he said. “We expect investor scrutiny to be focused on execution and improvements associated with the Global Strategic Plan, in addition to commodity prices. We believe that attractive valuation sufficiently compensates the investor at this juncture.”
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“Growth is getting closer” for Alamos Gold Inc. (AGI-N, AGI-T), according to RBC Dominion Securities analyst Michael Siperco.
He upgraded its shares to “outperform” from “sector perform” on Thursday, pointing to the opportunities stemming from the development plan for its Puerto Del Aire project at its Mulatos mine in Mexico as well as ongoing expansion milestones at its Island Gold mine in Ontario and the potential of its Lynn Lake project in Manitoba.
“We expect a positive update from Mulatos in 1Q24, with a development plan for the PDA underground deposit,” said Mr. Siperco. “We now model a 2ktpd [thousand tons per day] milling operation, $100-million in capex, and initial production at a 100kozpa [thousand ounces per annum] run-rate in 2026, extending mine life through 2034 (with potential for additional resource growth/mill expansion) and driving a 50-per-cent increase in our NPV8-per-cent for Mulatos (15 per cent of NAV).”
“The Island P3+ expansion continues to advance well, on time and budget for 1Q26, with 50 per cent of capital spent/committed to date. The expansion should roughly double production to 300kozpa (one of the largest mines in Canada, 50 per cent of NAV) and bring mine AISC below $800/oz. 2024 is a critical year for construction and underground development, with the shaft sinking having commenced in 4Q23 and the start of mill expansion construction.”
Raising his NAV8-per-cent valuation by 26 per cent, largely due to the increase at Mulatos, he hiked his target for Alamos shares to US$16 target from US$12, topping the US$14.60 average on the Street.
“Our updated estimates see AGI trading at a 20-per-cent premium to intermediate producer peers on a P/NAV basis and well above peer averages on a per-share basis through 2026,” he said. “By 2027, however, we model almost 50-per-cent organic production growth (from Island and PDA) and 40-per-cent higher EBITDA at spot. We see the stable production, strong track record of execution, organic growth, and exposure to Canada as justifying the current premium to peers.:
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While Canadian technology stocks are unlikely to repeat the performance of 2023, RBC Dominion Securities analyst Paul Treiber and Maxim Matushansky still see the potential for “healthy” returns this year.
“The S&P/TSX Info-Tech sub-sector delivered a total return of 69 per cent in 2023, which was the best performing sub-sector in the S&P/TSX Composite and the highest return for the sub-sector since 2020,” they said in a report released Thursday. “While we believe the S&P/TSX Info-Tech sub-sector is unlikely to repeat the performance of 2023, we expect a solid year. We believe healthy returns are likely to be more widespread across Canadian techstocks in 2024 than 2023, given: 1) valuation multiples for many Canadian tech stocks may rise in 2024; 2) organic growth and profitability may improve through 2024; and 3) the Consolidators are likely to continue to create shareholder value.”
While much of the gain a year ago came from Shopify Inc. (SHOP-T) and and Constellation Software Inc. (CSU-T), which jumped 124 per cent and 55 per cent, respectively, and combine to account for 73 per cent of the sub-sector, they expect 2024 increases to be more broad-based.
“Our view that valuation multiples for most Canadian tech stocks may rise in 2024 reflects: 1) valuation multiples for Canadian tech are below historical averages; 2) risk-free rates may decline in 2024; and 3) visibility to growth stabilization and/or improving profitability may improve,” they said. “The valuation of the average stock in our coverage universe is 8 per cent below its 10-year average and 20 per cent below its 5-year average. In comparison, the valuation of the S&P 500 Tech sub-sector is 40 per cent above its 10-year average and 21 per cent above its 5-year average. Moreover, the median stock in our coverage universe is trading 43 per cent below its peer group, which is steeper than the historical discount of 31 per cent. Regarding interest rates, we estimate a 100 basis points decline in the 10-year U.S. Treasury yield would equate to a 17-per-cent increase in the DCF valuation of the average stock in our coverage universe.”
They predict organic growth and profitability “may improve” in 2024. They note consensus estimates call for 18 of their 21 covered companies to be profitable, up from 16 in 2023 and 13 in 2022.
The analysts also emphasized the potential from “consolidators” that include Constellation Software, CGI Group Inc. (GIB.A-T) and Open Text Corp. (OTEX-Q/OTEX-T).
“Consolidators to continue to create shareholder value,” they added. “The Consolidators are disciplined allocators of capital. These companies tend to be counter-cyclical in deploying capital on acquisitions, in that they are able to find value in out of favour companies and have the capital to deploy in periods of financial or economic duress. While Constellation and OpenText deployed record amounts of capital on acquisitions in 2023, we believe the other consolidators are likely to deploy more capital on acquisitions in 2024 than 2023, given: 1) sellers’ valuation expectations may decline; 2) targets may more proactively consider selling themselves; and 3) underlevered balance sheets.”
The analysts’ top five Canadian technology ideas for 2024 are:
- Constellation Software Inc. (CSU-T) with an “outperform” rating and $3,900 target. The average on the Street is $3,418.13.
- Shopify Inc. (SHOP-N, SHOP-T) with an “outperform” rating and US$100 target. Average: US$73.16.
- Kinaxis Inc. (KXS-T) with an “outperform” rating and $220 target. Average: $215.96.
- Open Text Corp. (OTEX-Q/OTEX-T) with an “outperform” rating and US$53 target. Average: US$50.41.
- Calian Group Ltd. (CGY-T) with an “outperform” rating and $65 target. Average: $73.88.
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CIBC World Markets software and services analysts Stephanie Price and Scott Fletcher expecting improving profitability across the sector in 2024.
“It was a strong 2023 for the software sector, with the S&P Software Index up 58 per cent, driven by stabilizing interest rates and new technologies, notably GenAI,” they said in a Thursday report.
“However, our coverage universe underperformed the Index, returning only 10 per cent, primarily on the back of demand-related concerns at certain companies. As we look into 2024, we expect that lower rates and an improved macro outlook could lead to a recovery in enterprise IT spending, propelling a recovery at some of the technology names that underperformed in 2023. That being said, the interest rate and IT spending environments remain fluid. As a result, our top picks are a mixture of lower-risk options (CSU and GIB.A) and names that significantly underperformed in 2023 and appear poised for a recovery (DND and TIXT).”
The analysts are projecting an average 1.39-per-cent year-over-year increase in adjusted EBITDA margins in 2024, pointing to “a stabilizing demand environment and the cost-cutting initiatives implemented by a number of tech companies in 2023.”
“We expect DCBO to post the strongest margin improvement (590 basis points) as the company continues to scale its profitability,” they said. “We also expect KXS to see margin improvement in 2024 as the company focuses on profitability after several years of investment.”
Both analysts made a series of target price adjustments to stocks in their coverage universe.
“Valuations are still attractive,” they noted. “The Rule-of-40 remains a good predictor of returns, with DND scoring well on this basis. We also see value in KXS and DCBO, with EV/Sales multiples for mature software and SaaS names converging through 2023 despite higher organic growth at the SaaS names. Looking back to 2019, the average discount between mature software and SaaS multiples was three turns vs. 0.3 times currently. We foresee upside for SaaS valuations if central banks lower their policy rates.”
Ms. Price’s changes include:
- Constellation Software Inc. (CSU-T, “outperformer”) to $3,800 from $3,100. The average on the Street is $3,418.13.
- Converse Technology Solutions Corp. (CTS-T, “neutral”) to $4.50 from $4. Average: $6.47.
- Docebo Inc. (DCBO-Q/DCBO-T, “outperformer”) to US$58 from US$49.81. Average: US$52.43.
- Kinaxis Inc. (KXS-T, “outperformer”) to $185 from $200. Average: $215.96.
- Open Text Corp. (OTEX-Q/OTEX-T, “neutral”) to US$44 from US$42. Average: US$50.42.
- Softchoice Corp. (SFTC-T, “neutral”) to $17.50 from $19. Average: $21.36.
- Telus International Inc. (TIXT-N/TIXT-T, “outperformer”) to US$21.50 from US$19. Average: US$10.96.
Mr. Fletcher made these changes:
- Dye and Durham Ltd. (DND-T, “outperformer”) to $23 from $25. Average: $21.43.
- Information Services Corp. (ISV-T, “outperformer”) to $30 from $29. Average: $28.15.
- Thomson Reuters Corp. (TRI-N/TRI-T, “neutral”) to US$138 from US$130. Average: US$132.52.
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TD Securities’ Sean Steuart downgraded Interfor Corp. (IFP-T) to “hold” from “buy” on Thursday in response to recent share price appreciation.
“The downgrade largely reflects relative share-price outperformance and expanded valuation parameters. Interfor’s share price has climbed 44 per cent since late-October — outpacing average share-price gains of 22 per cent for peers over the same duration,” he said. “In our view, the relative outperformance reflects increased investor comfort with the company’s balance sheet, given an improving macro backdrop. Interfor Q3/23-ending net debt-to-cap of 29 per cent contrasts with net cash balances of its larger lumber peers.
“We expect that constrained 2024 capex plans will contrast against most lumber-focused peers. Interfor is planning to lower 2024 capex by 30 per cent year-over-year (to approximately 60 per cent of DD&A) as a means of managing free cash flow. With relative balance-sheet strength, we expect more aggressive discretionary spending from CFP and WFG over our forecast horizon.”
His target rose to $27 from $24. The average is $28.80.
“Following the 44-per-cent share-price rally over the past three months, we are comfortable moving to HOLD at the bottom of what we expect to be an extended lumber price cycle,” he added. “We are comfortable with Interfor’s liquidity position, but the company’s midterm deleveraging focus, though prudent, risks a relative deterioration in ROCE as it underspends versus peers.”
Conversely, Mr. Steuart upgraded Cascades Inc. (CAS-T) to “buy” from “hold” with a $16 target from $13.50. The average on the Street is $14.70.
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In other analyst actions:
* Following the release of an updated preliminary economic assessment for its Falchani project in Peru, Eight Capital’s Puneet Singh lowered his American Lithium Corp. (LI-X) target to $5 from $8.40 with a “buy” rating, pointing to a lingering legal battle in the country over 32 disputed concessions. The average is $5.51.
* JP Morgan’s John Royall moved his Canadian Natural Resources Ltd. (CNQ-T) target to $102 from $101 with a “neutral” rating. The average is $97.04.
* TD Securities’ Michael Van Aelst increased his target for George Weston Ltd. (WN-T) to $205 from $195 and Loblaw Companies Ltd. (L-T) to $150 from $140 with a “buy” recommendation for both. The averages are $194.86 and $142.75, respectively.
* TD Cowen’s John Kernan raised his Lululemon Athletica Inc. (LULU-Q) to US$549 from US$546, exceeding the US$503.96 average, with an “outperform” rating.
* After assuming coverage, CIBC’s John Zamparo raised his Restaurant Brands International Inc. (QSR-N, QSR-T) target to US$88 from US$82, exceeding the US$81.18 average, with an “outperformer” rating, while Wells Fargo’s Zachary Fadem increased his target to US$80 from US$75 with an “equal-weight” rating.
“We are positive on Restaurant Brands’ outlook for 2024,” said Mr. Zamparo. “Significant firepower remains in the Burger King (BK) U.S. reinvestment plan, Tim Hortons (TH) can take market share through menu innovation and growth in underpenetrated dayparts, and we believe the company can return to 5-per-cent unit growth, even as peers have closed the gap. Valuation is fulsome at 22.2 times 2024E EPS; however, we believe EPS growth has upside (CIBC estimates up 10 per cent in 2024 vs. consensus up 6 per cent). We favour RBI’s defensive business model, and the brands’ ability to persevere in tougher economic times.”
* BMO’s Étienne Ricard raised his TMX Group Ltd. (X-T) to $35 from $32, above the $33.50 average, with a “market perform” rating.
“Looking into 2024, earnings growth appears set to accelerate underpinned by contributions from VettaFi, strength in derivative volumes and more constructive capital formation,” said Mr. Ricard. “The net result is low double-digit earnings growth prospects with upside optionality from improving macro. Consistent execution is yielding results with TMX’s valuation closing the gap to global exchange peers.”
David Leeder