Inside the Market’s roundup of some of today’s key analyst actions
Following a “solid” second quarter, RBC Dominion Securities analyst Paul Treiber sees Descartes Systems Group Inc. (DSGX-Q, DSG-T) “well positioned, with resilient organic growth and potential upside through M&A.”
After the bell on Wednesday, the Waterloo, Ont.-based software company reported revenue of US$143-million, up 17 per cent year-over-year and above both the analyst’s US$140-million estimate and the consensus on the Street of US$141-million due to “better” organic growth and higher contribution from the GroundCloud and Localz acquisitions. That led to adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of US$61-million, up 12 per cent and also above expectations (US$60-million and US$61-million, respectively).”
Mr. Treiber emphasized the “resiliency” of Descartes’ organic growth, which has “likely troughed.” He said it “reflects the company’s mix-shift to structurally faster growing segments of the market.”
“Q2 constant currency organic growth was 6 per cent, above the 5 per cent in our model. Excluding PS/license/hardware, core Services organic growth was 9 per cent, similar to last quarter and is effectively de-coupled from freight volumes (e.g. U.S. import volumes down 15 per cent year-over-year last 3 months). Baseline implies 8-per-cent organic growth Q3. As a result of a mix-shift to faster growing segments and solid cross-selling/up-selling, Descartes has moved from sustaining mid-single digits organic growth to high singles. Following Q2, we are increasing our organic growth estimates to 7.5 per cent FY25e, up from 5.0 per cent previously.
With its baselines for the third quarter implying stronger-than-anticipated revenue, the analyst said the company’s recent acquisitions are “performing better than expected” and sees the potential for further M&A activity.
“Descartes paid $6-million contingent consideration (i.e. earnout) Q2 and expects another $23-million 2H,” he said. “In the previous 3 years, Descartes only paid a total of $5-million contingent consideration. The increase reflects: 1) Descartes’ conservative assumptions when making acquisitions (resulting in lower upfront cash payments and takeout valuations); and 2) better post-acquisition performance (growth and profitability). Recent acquisitions with large potential earnouts include NetCHB, XPS Technologies, and GroundCloud. GroundCloud contributed an estimated $9.2-million revenue Q2, above the $8.5-million in our model and $7.8-million Q1. Similarly, Localz contributed an estimated $0.6-million revenue Q2, above the $0.5-million in our model ($0.1-million Q1).”
“Management is seeing a more attractive M&A environment as valuations have declined to a more ‘reasonable’ range. Moreover, management highlighted that there are a number of quality assets for sale and more motivated sellers given macro uncertainty. Management suggested acquisitions are possible 2H. Descartes remains well capitalized with a net cash position of $221-million ($2.55/share) Q2, up from $175-million Q1, and has $350-million available under its credit facility. Descartes has not made any repurchases under its NCIB that was announced in June 2022.”
Raising his revenue and earnings expectations for fiscal 2024 and 2025, Mr. Treiber increased his target for Descartes shares to US$100 from US$95, maintaining an “outperform” rating. The average target on the Street is US$85.13, according to Refinitiv data.
“Our Outperform thesis reflects Descartes’ ability to compound capital through balancing acquisitions and organic growth over the long-term,” he said. “Additionally, Descartes’ M&A model is counter-cyclical, as the pace of acquisitions is likely to increase in an uncertain macro environment. Descartes is trading at 24 times FTM [forward 12-month] EV/EBITDA, below supply chain & fleet management peers (37 times) and its 5-year historical average (27 times, 19-36 times range). Our $100 target reflects our revised estimates and equates to 31 times calendar 2024 estimated EV/ EBITDA (29 times prior), given better visibility to growth.”
Elsewhere, Stephens’ Justin Long raised his target by US$1 to US$94 with an “overweight” rating.
To reflect “the scarcity value inherent” in First Quantum Minerals Ltd. (FM-T) as “a large, liquid, cashflow positive copper miner,” BMO Nesbitt Burns analyst Jackie Przybylowski raised her valuation multiple for its shares, leading her to upgrade her recommendation to “outperform” from “market perform” on Thursday.
“The most meaningful challenge at FM has been the relatively high geopolitical risk exposure of its key assets,” she said. “In our view, the risks in Zambia have been meaningfully improved since the election of Hakainde Hichilema in 2021. We also see a strong probability that the “Law 9″ mining code replacement in Panama is resolved before October 31. More recent challenges, including strike notice by a Cobre Panama union, are unlikely to have a meaningful negative impact to the operation as we expect a collective bargaining agreement before the workforce is in a legal strike position on September 8 or shortly thereafter and market weakness in anticipation of this event represents an attractive entry point opportunity, in our view.”
Expecting First Quantum “will be attractive to investors who are bullish long-term copper as well as larger diversified, base metals, or gold companies as potential acquisition target,” Ms. Przybylowski raised her target for its shares to $40 from $35. The average on the Street is $36.75.
“We see FM as the lowest risk among our outperform-rated base metals names (FM, HBM, MTAL),” she said. “FM production is H2-weighted after external challenges in H1, but operations are positioned to perform reasonably well going forward. For investors with a higher risk tolerance we continue to recommend Hudbay, then MTAL on valuation and ‘blue sky’ upside potential. We see more significant upside and better value from higher-risk names Hudbay (risk from more severely H2-weighted production) and MTAL (still relatively unknown).”
Calling it a “strong luxury growth brand on sale,” Raymond James analyst Rick Patel initiated coverage of Canada Goose Holdings Inc. (GOOS-T) with an “outperform” rating on Thursday.
“As a luxury performance outerwear brand, we see GOOS mostly driving strong growth from new distribution and also increases from new adjacent product categories,” he said. “We see Canada Goose more than doubling its footprint while remaining smaller than luxury competition. Category expansion is in early innings and showing progress. We acknowledge volatile trends in North America and China over the last year – near-term macro may be choppy but the bigger picture suggests the company has ample room to grow and expand profitability.
“We model revenue up 19.5 per cent/up 13.0 per cent in FY24/FY25 (long-term algo target of 20-per-cent CAGR [compound annual growth rate]), making Canada Goose among the fastest growing global brands. We estimate operating margin expansion from 14.4 per cent in FY23 to 16.4 per cent in FY25E (FY28 target 30 per cent), with gross margin rate expansion from a growing DTC [direct to consumer] mix, and opex leverage on strong growth. Valuation is attractive with a P/E of 12.5 times (five-year average is 25 times).”
Mr. Patel said he sees a risk-reward proposition for investors that “strongly favors upside over the long term” and pointed to several factors in justifying his bullish stance.
He said: “What we like: 1) GOOS has one of the strongest planned growth algorithms in our coverage, with a five-year target CAGR for revenue of 20 per cent and plans to expand EBIT margins from 14.4 per cent in FY23 to 30 per cent in FY28 (from FY19-FY23, revenue CAGR was 10 per cent and EBIT rate contracted 1,050 basis points to 14.4 per cent). 2) We view its strategy to grow direct-to-consumer (DTC) by more than doubling its store footprint will drive new customer growth; selective expansion should help ensure its luxury brand doesn’t become diluted). 3) We see significant room to expand international markets; China in particular is an opportunity near term (COVID recovery) and long term (growing footprint). 4) Category diversification is accelerating, creating new ways to drive revenue and repeat business, while also modestly reducing seasonality. 5) We see significant margin expansion ahead from a growing DTC mix, (driver of higher GM rate), $150-million of costs savings, and expense leverage on strong revenue growth; we see EBIT rate expanding from 14.4 per cent in FY23 to 16.5 per cent in FY25 (vs. a five-year target of 30 per cent).”
Calling it “very strong brand that is still in the very early innings of its life cycle,” the analyst set a target of $26 per share. The average on the Street is $27.75.
“We believe its growth drivers over the next few years, including new distribution (stores) and innovation (products), are clear and compelling,” Mr. Patel said. “GOOS’s average customer is also high-income and skews younger (Millennials and Gen Z are 50 per cent of revenue) – we think these consumers will be more resilient than most if macro worsens. Our bullish thesis focuses on levers GOOS can pull to drive longer-term growth while also improving profitability.”
Parkland Corp.’s (PKI-T) “favourable guidance revisions demonstrate improving execution,” according to National Bank Financial analyst Vishal Shreedhar.
After the bell on Tuesday, the Calgary-based company increased its 2023 earnings before interest, taxes, depreciation and amortization (EBITDA) expectation to $1.8-billion to $1.85-billion from $1.7-billion to $1.8-billion. It also said it now expects its achieve its goal of $2-billion in adjusted EBITDA by 2024, a year earlier than previously anticipated, pointing to “integrating acquired companies, capturing synergies, and driving organic growth and cost efficiencies.”
“Last quarter, PKI expressed confidence in achieving the high end of its prior 2023 EBITDA guidance,” said Mr. Shreedhar. “We believe favourable crack spreads in 2023 are the primary contributor to the increase in 2023 EBITDA guidance.
“We understand the accelerated 2024 EBITDA target reflects organic growth, synergy capture, optimized supply advantage and MG&A efficiencies ($100-million target by 2025).”
The analyst raised his 2023 EBITDA estimate to $1.828-billion from $1.764-billion. His 2024 projection jumped to $1.92-billion from $1.81-billion.
Keeping an “outperform” rating, Mr. Shreedhar increased his target for Parkland shares to $43 from $39. The average on the Street is $43.65.
“We reiterate our positive view on PKI’s current strategy, which seeks to: (i) shift away from acquisitions towards integration, synergy capture and organic growth, (ii) divest non-core assets, and (iii) deleverage and return excess capital to shareholders,” he said. “If PKI successfully executes against this strategy, we see share price upside driven by improved ROIC [return on invested capital], cash generation and capital return. (2) PKI trades at 6.8 times our NTM [next 12-month] EBITDA vs. the 5-year average of 8.1 times.”
Eight Capital analyst Felix Shafigullin thinks New Pacific Metals Corp.’s (NUAG-T) Carangas project in Bolivia remains “remains a substantial source of value not currently recognized by the market.
On Tuesday, the Vancouver-based miner released the maiden mineral resource estimate for the 98-per-cent-controlled open-pit silver-rich polymetallic project. It sees total indicated mineral resources of 214.9 million tons, including 205.3 million ounces of silver and 1,588.2 thousand ounces of gold.
“In our view, the market does not currently recognize the value of the Carangas project as ‘the next big thing’ for NUAG,” said Mr. Shafigullin. “An investor buying NUAG at the current share price of $3.35 would acquire exposure to the Silver Sand project that we value at $3.27/share while getting exposure to Carangas essentially for free. We therefore view NUAG as fundamentally undervalued: based on our estimates, investors buying the stock today are getting two largescale silver projects with total resources of 884 Moz AgEq for the price of one.”
With the MRE “substantially” exceeds his “conservative” estimates in the upper zone, the analyst raised his target for New Pacific Metals shares to $6.75 from $5, maintaining a “buy” recommendation. The average target on the Street is $5.56.
“The conceptual open pit at Carangas constrains the MRE and extends to a maximum depth of 600m incorporating the deep gold-bearing zone below the near-surface silver zone,” he noted. “With the mineralization within the pit-constrained MRE area starting at or near surface, the conceptual pit has a low stripping ratio of 1.8:1. NUAG has discovered more gold-dominant mineralized zones below the pit constraint (not included in the MRE) that demonstrate size and grade profiles similar to those at the gold-bearing zone within the MRE. This discovery highlights the potential to add an underground component to future Carangas resource updates. In addition, the deep gold mineralization remains open to the northeast in the Central Valley, underscoring additional resource growth opportunities outside of the current pit constraints.”
National Bank Financial analyst Maxim Sytchev summarized ATS Corp.’s (ATS-T) Investor Day event as “qualitative in nature but [showcased the] company’s capabilities and entrenched expertise in secularly expanding areas.”
Following the Wednesday event in New York, he reiterated his “positive stance” on the Cambridge, Ont.-based automation solutions provider’s shares.
“We believe investors will appreciate hearing from divisional leadership and management reiterating positive funnel commentary, even through there are some concerns that shorter-cycle peers have been experiencing peak organic growth lately when it comes to immediate outlooks,” said Mr. Sytchev. “There is also limited scope for upping the numbers in the short term. That being said, the make-up of the investment thesis – 1) evolving U.S. healthcare regulatory backdrop that benefits biologics business; 2) rapid growth in insulin-related drugs (estimated at around 5 per cent of Life Sciences business now); 3) likely additional EV contracts from other OEMs; 4) increasing penetration of services / digital offerings that create a more sustainable revenue tail; 5) onshoring; 6) labour shortages; 7) end-clients need to scale faster (and cheaper) – all lead us to believe that organic compounding supplemented by M&A growth (at least to the similar extent as in the previous five years) should work in investors’ favour.”
The analyst said the event included updates on “several growth opportunities” across its key segments.
“Management reiterated its 15-per-cent EBIT margin target (vs. 13.3 per cent in F2023, likely achievable in the next four years) and highlighted the levers it will pull to get there (although the same levers have been disclosed before),” he said. “These include part/design/product/project standardization, supply chain management, synergies from acquired business (M&A will likely continue at the same pace ($1.4-billion since F2017) as the last five years (criteria here remains ROIC > WACC, the latter estimated at about 10 per cent), portfolio realignment towards higher margin after-sales services and operating leverage enabled by the long-term benefits of increased capex ($100-million annually) diverted towards ATS innovations and growth capex that yields high(er) ROIC results.”
Mr. Sytchev reiterated his “outperform” rating and $65 target. The average is $69.57.
“While 22 times P/E on F2025E is not ‘cheap’, we believe ATS shares can grow into that valuation,” he said. “Superimposing a 15-per-cent operating margin target four years out would put ex-IFRS EBITDA in the $520-plus million range and NAV at $78 (without accounting for any M&A).”
Elsewhere, Stifel’s Justin Keywood maintained a “buy” rating and $75 target.
“Overall, we were impressed with the level of management depth and see the business as continuing to scale well with higher margins and an assumed greater trading multiple ahead,” he said.
“ATS is laying the foundation to become a much larger company and starting with people, as part of the three key pillars of the ABM (people, process, performance). In that regard, management depth and quality was clear at the inaugural U.S investor day. The automation industry is in the midst of benefiting from several secular tailwinds, including, supply chain de-risking, labor constraints, rising wages and union action, among other trends, and we see ATS as one of the few ways to gain pure play exposure at reasonable valuation. As scale builds, both organically and through M&A, margins should follow and lead to a greater multiple and higher stock price. De-risking the view is a solid management team with a track record of execution. ATS currently trades at 13.5 times EBITDA vs. peers at 17 times and we maintain our street high $75.00 target.
In other analyst actions:
* TD Securities’ Arun Lamba initiated coverage of Arizona Sonoran Copper Co. Inc. (ASCU-T) with a “speculative buy” rating and $2.50 target and Faraday Copper Corp. (FDY-T) with a “speculative buy” rating and $1.10 target. The average targets on the Street are $3.37 and $1.57, respectively.
* Stifel’s Cole Pereira increased his target for shares of CES Energy Solutions Corp. (CEU-T) to $5, exceeding the $4.50 average on the Street, from $4.25 with a “buy” rating.
“CEU has materially outperformed in the past month (up 32 per cent vs. our coverage universe average of 7 per cent), however we see further near-term valuation upside from multiple factors,” he said. “In summary: (1) Underappreciated strength in CEU’s FCF profile with the highest EBITDAS-FCF conversion and lowest EV/FCF multiple in 2023 within our coverage is supporting meaningful shareholder returns; (2) Market share capture and its production focus has offset broader declines in U.S. activity; (3) Recent input cost deflation could sustain margin expansion; and (4) Narrowing the valuation gap with its closest peer ChampionX (covered by Stephen Gengaro) could drive its valuation higher, and we estimate an equity value of $4.34-6.85 per share (13-79-per-cent upside) at 5-7 times 2024E EBITDAS vs. 4.6 times currently and CHX at 9.0 times. There are no changes to our estimates or Buy rating, but we have increased our target price to $5.00 per share to reflect our view on incremental valuation upside.”
* In response to an increase to its 2023 production guidance and a reduction to its capital spending plan, ATB Capital Markets’ Patrick O’Rourke raised his target for shares of Hammerhead Energy Inc. (HHRS-T) to $20 from $17 with an “outperform” rating. Others making changes include: CIBC World Markets’ Jamie Kubik to $20 from $17 with an “outperformer” rating and Stifel’s Cody Kwong to $21.50 from $20 with a “buy” recommendation. The average is $20.80.
“Between a compelling production growth story that is transitioning to a meaningful FCF generator by the end of 2023, while also proving out a deep and high quality drilling inventory along the way, investors will have plenty to chew on over the remainder of this year,” said Mr. Kwong. “Given the quality and depth of inventory Hammerhead controls, we believe the challenging task of aggregating shares on any liquidity events in the future will be well worth the returns.”
“Given operations at Penasquito remain suspended, we have updated our forecasts for Q3 to reflect a lower contribution from this mine as we believe even if the situation is resolved in the near term, there would be minimal production in the quarter given the expected ramp up times,” he said. “We continue to note NEM’sproduction is weighted to Q4/23 with higher production at numerous operations including Ahafo, Akyem, NGM, Cerro Negro and PV and potentially higher production from Penasquito should it restart.”