Inside the Market’s roundup of some of today’s key analyst actions
The rapid jump in e-commerce stemming from the COVID-19 pandemic is likely to provide a “sustained tailwind” to Shopify Inc.‘s (SHOP-N, SHOP-T) gross merchandise volume growth and merchant solutions revenue, according to Goldman Sachs analyst Christopher Merwin.
In a research note released before the bell, he raised his rating for the Ottawa-based e-commerce firm to "buy" from "neutral," believing it's likely to maintain its "hyper-growth for longer than the market expects."
Mr. Merwin said e-commerce penetration in the United States went from 16 per cent in the first quarter to 40 per cent in May following global shelter-in-place orders. The firm now expects U.S. e-commerce revenue will grow 29 per cent this year, rising from a previous 15-per-cent estimate.
“While we acknowledge that we have missed a significant run up in SHOP shares (up 140 per cent in the year-to-date), we would point out that SHOP has one of the largest TAMs [total addressable markets] in software, which we measure at $200-billion globally,” he said.
Mr. Merwin maintained a target price for Shopify shares of US$1,127. The average on the Street is currently US$887.70.
Elsewhere, Jefferies analyst Samad Samana raised his target to US$1,120 from US$725 with a “hold” rating (unchanged).
Following a “healthy” second-quarter earnings beat by West Fraser Timber Co. Ltd. (WFT-T), Raymond James analyst Daryl Swetlishoff thinks the current rally in lumber prices appears “more sustainable than 2018.”
"In spite of economic shutdowns and high unemployment levels, lumber pricing blew past all market observers expectations," he said. "The price hikes have revealed an under supplied industry scrambling to cover unabated demand from home-centers making up for lost time as ramping up production and reorganizing supply chains kept sawmill output tight for weeks. In 2Q18, lumber markets spiked on transportation delays which then crashed as producer inventory made its way to the market during 3Q18 as U.S. housing markets weakened. With year-to-date shipments outstripping production and positive U.S. housing indicators (including sub 3-per-cent 30-year FRM rates) we do not see the same scenario today. We believe WFT is well positioned to benefit from the upward move in building materials pricing and we forecast 3Q20 EBITDA over $250-million."
On Wednesday, West Fraser reported adjusted EBITDA of $135-million, normalized to include $42-million in duties but excluding a $7-million insurance claim. That result exceeded the projections of both Mr. Swetlishoff ($112-million) and the Street ($105-million).
With the result, the analyst raised his 2020 earnings per share projection to $4.24 from $3.66. His 2021 expectation rose by a penny to $7.83.
Keeping an "outperform" rating for West Fraser shares, he hiked his target to a Street-high of $74 from $70 previously. The current average is $60.67.
“With well-balanced regional diversity featuring a high U.S. South weighting (50 per centof overall capacity) West Fraser benefited from Southern Yellow Pine (SYP) lumber pricing rallying through 2Q20 (up US$17 per thousand board feet quarter-over-quarter),” he said. “Our constructive view on building materials markets is fueled by better than expected U.S. Housing demand, a robust repair and reno market as stay at home measures persist through the summer months, coupled by a lack of meaningful inventory as producers curbed supply following the outbreak of COVID-19. With low inventory and a strong U.S. housing macro we expect pricing to hold up better than the ‘boom & bust’ 2018 market. We expect WFT to materially benefit from current strong lumber markets and note despite the sharp rally since March lows, shares remain 50 per cent below levels during the 2018 lumber rally.”
Ahead of the release of its second-quarter financial results on Wednesday after the bell, Desjardins Securities analyst Michael Markidis trimmed his 2020 and 2021 funds from operations estimates for Allied Properties Real Estate Investment Trust (AP.UN-T).
He made the move to reflect an adjustment to his first-quarter NRI run rate and an enhanced provision for bad debt expenses.
His FFO projections are now $2.26 and $2.34, respectively, down from $2.32 and $2.37.
“Notwithstanding a recent contraction in demand for office space in AP’s two largest markets (downtown Toronto and Montreal), the balance between supply and demand is still favourable for landlords, in our view,” said Mr. Markidis.
“On April 29, AP noted that (1) it had collected 90 per cent of gross rent due in April, and (2) granted one-month deferrals to small independent tenants representing 8 per cent of total rent ... An operating update has not been broadly disseminated since. With regard to the April deferrals, we are now assuming that AP has submitted CECRA applications for most of these tenants. The anticipated write-off of forgone rent stemming from participation in this program is the primary driver behind the 2-cent reduction to our FFO/unit estimate for 2Q20, which now stands at 56 cents.”
Maintaining a “buy” rating for Allied units, the analyst lowered his target by a loonie to $52, matching the average on the Street.
Vermilion Energy Inc. (VET-T) “wrapped up a very challenging quarter on a solid note,” said Desjardins Securities analyst Scott Van Bolhuis.
On Monday before the bell, the Calgary-based company reported second-quarter funds from operations of 52 cents per share, down 52 per cent from the previous quarter due to the crash in oil prices. However, the result exceeded the projections of both Mr. Van Bolhuis (39 cents) and the Street (36 cents).
Quarterly production of 100,400 barrels of oil equivalent per day also topped expectations (95,300 boe/d and 97,700 boe/d, respectively, which the analyst said was “driven by record volumes in both Canada and the U.S. while reflecting only minimal negative effects from the COVID-19 pandemic.”
“Vermilion also announced that it has kicked off its 2021 budgeting process and noted that it will focus on free cash flow growth and debt reduction, which is encouraging,” he added. “Management also stated that the company will re-evaluate the dividend and decide when to reinstate a dividend and/ or buy back shares. Given the dividend was historically such a large part of the value proposition to shareholders, we expect it will likely come back in 2H20 or early 2021, albeit at a much lower level than previously.”
After raising his cash flow expectations for 2020 and 2021, Mr. Van Bolhuis increased his target for Vermilion shares to $7.50 from $7, keeping a "hold" rating. The average on the Street is $7.84.
“However, we believe the shares will remain range-bound in the context of volatile global oil prices,” he said.
Elsewhere, Raymond James' Jeremy McCrea maintained a "market perform" rating and $6.50 target.
“Historically, our thesis on VET was one of profitability,” he said. “As it relates to 2Q results, in most cases, a strong production and FFO beat would generally excite the market. In another viewpoint though, long-term investors might have some concern. 2Q was a very difficult market in terms of commodity prices (both for WTI and European gas prices). For a management team ‘focused’ on return of capital metrics, we’re a little surprised not to see any production shut-ins, especially given the contango in the market and ability to defer some of this production. From a return of capital perspective, it would have made economic sense to push new wells coming on stream out by a few months. Although current management indicates this was a decision done primarily from the old CEO, investors will likely want additional evidence the new management has profitability back as its core principle. With high leverage still, we maintain our Market Perform rating.”
Seeing “relatively limited” upside to his target price, Scotia Capital analyst Orest Wowkodaw downgraded Altius Mineral Corp. (ALS-T) to “sector perform” from “sector outperform” following Monday’s announcement that it has increased its ownership in its Alberta thermal coal royalty portfolio.
On Monday, St. John's-based Altius announced its acquired Liberty Metals & Mining Holdings LLC's 44.9-per-cent stake in the portfolio for $11.25-million. It now holds a 97.3-per-cent interest.
"While accretive to our valuation based on the heavily discounted acquisition cost, we view the overall transaction as mixed for the shares given the company's increased exposure to ESG-negative thermal coal," the analyst said.
Mr. Wowkodaw maintained a $12 target for Altius shares. The average on the Street is $14.96.
“In our view, increased thermal coal exposure is likely to weigh on the shares’ near-term multiple,” he said.
Desjardins Securities analyst Chris Li expects Gildan Activewear Inc.‘s (GIL-T, GIL-N) second-quarter results, scheduled to be released on Thursday before the bell, to be “highly challenged” by the impact of COVID-19.
“Focus will be on financial covenants, liquidity, FCF and sales trends post 2Q. Despite the current challenges, we believe GIL’s financial position remains solid,” he said.
For the quarter, Mr. Li is forecasting a 71-per-cent year-over-year drop in sales, including a 77-per-cent decline in imprintables and 40-per-cent drop in retail. Given that decline and the impact of fixed cost absorption from the idling of manufacturing facilities, he expects EBITDA and earnings per share losses of US$32-million and 40 US cents, respectively.
“Based on [last 12-month] EBITDA, GIL is likely close to breaching its covenant,” he said. “However, we believe there is flexibility in seeking temporary relief as evident back in April; GIL secured US$400-million of additional debt with its existing bank syndicate and increased its liquidity to US$950-million. Despite challenging conditions, we expect GIL to be FCF-positive in 2H, supported by converting inventory to cash, low capex and maintaining fixed cash costs at US$35–40-million per month.”
Mr. Li lowered 2020 and 2021 EBITDA projections to US$165-million and US$436-million, respectively, from US$283-million and $447-million. His full-year 2020 EPS estimate slid to a 13-cent loss from a 36-cent profit.
He kept a “buy” rating and $25 (Canadian) target for Gildan shares, matching the current consensus on the Street.
“We expect trading to be volatile in the near term as visibility remains limited,” the analyst said. “We believe there is long-term value with GIL trading at only 9.5 times 2019 EPS. The big unknown is how long it will take GIL to return to its pre-pandemic earnings level. Our 2021 EPS estimate implies a 65-per-cent recovery to the 2019 level.”
Due to the impact of rising COVID-19 infection rates on many of its key markets, Citi analyst Stephen Trent opened a 90-day negative catalyst watch on American Airlines Group Inc. (AAL-Q).
“We see downside risk on unit revenue and increasing risks of consumer trip cancellations/avoidance, as many could shun the carrier’s fuller flights,” he said. “Meanwhile, it remains unclear how American Airlines eventually refocuses on profitability and growth, as a burgeoning debt load could dominate management’s attention.”
Mr. Trent trimmed his 2020 earnings per share projection to a loss of US$16.07 from a US$14.86 loss. His 2021 and 2022 estimates slid to profits of US$1.16 and US$2.89, respectively, from US$1.50 and US$3.01.
Keeping a “sell” rating for American Airline shares, he cut his target to US$11 from US$14. The average on the Street is US$11.75.
“American Airlines’ substantial debt load vs. its peers and the lower visibility on its post-COVID-19 earnings stream seems to make forward P/E valuation a little harder to defend,” he said. “For these reasons, Citi now shifts its valuation methodology from forward P/E to EV/EBITDA, now applying a 6-times multiple to 3Q'21 – 2Q'22 EBITDA. This multiple is roughly in-line with American’s historical, adjusted four-year average and considers the significant importance of the carrier’s net debt within its enterprise valuation relative to its peers.”
Beyond Meat Inc. (BYND-Q) is “helping to accelerate substantial change in the diets of consumers,” according to Canaccord Genuity analyst Bobby Burleson.
However, in a research report released Tuesday, he initiated coverage of Los Angeles-based company with a “hold” rating, believing its “lofty valuation precludes a higher rating, with the stock trading at a significant premium to its peer group.”
“With a broadening consumer brand portfolio and healthy distribution footprint in both the food service and retail sales channels, BYND is positioned for strong top-line growth and margin expansion. Principal revenue drivers include further growth in storefronts, new food service opportunities, and the introduction of new products. We believe margin expansion is likely on higher production unit volumes and supply chain and manufacturing efficiencies,” said Mr. Burleson.
He set a US$140 target for Beyond Meat shares. The average on the Street is US$106.27.
At the same time, he initiated coverage of Calyxt Inc. (CLXT-Q) with a “buy” rating and US$8 target (versus a US$6.25 consensus) and Marrone Bio Innovations Inc. (MBII-Q) with a “buy” rating and US$1.80 target (versus US$1.78).
“Each company is developing innovative products that offer sustainable solutions to challenges facing the world’s agriculture and food production. BYND is a leading alternative protein company, while CLXT and MBII are agriculture biotechnology companies, with CLXT focused on gene editing and MBII on biologicals for crop protection and crop nutrition,” he said.
Calling its current valuation “mind boggling,” Bernstein analyst Toni Sacconaghi downgraded Tesla Inc. (TSLA-Q) to “underperform” from “market perform” on Tuesday, believing it “now even looks expensive versUs large cap growth tech.”
"Despite our relatively bullish stance on electric vehicle evolution, and structural advantages we believe Tesla may hold, we find it difficult to justify Tesla's current valuation even under our most bullish/imaginative scenarios," he said.
Mr. Sacconaghi kept a US$900 target, which falls below the US$1,191.98 average.
“On a 12 month time horizon (and even more so, a multi-year time horizon), it has become increasingly difficult for us to imagine how Tesla’s stock can continue to outperform the S&P500, mirroring our broader skepticism about the sustainability of the growth’s outperformance in the tech sector amid the current once-in-a-decade widening of valuation spreads,” he said.
In other analyst actions:
* Ahead of the release of its second-quarter results on Aug. 5, Credit Suisse analyst Brad Zelnick raised his target for Toronto-based Ceridian HCM Holdings Inc. (CDAY-N, CDAY-T) to US$55 from US$49 with an “underperform” rating. The average on the Street is US$76.93.
“The environment has improved since our checks in March/April, but it’s too early to point to any broad based recovery and the variability of outcomes remains high. 1) Business is ‘unfrozen’, but sequential improvement remains vertical specific (e.g. better in manufacturing, education, still challenged in retail, airlines, hospitality); 2) Government stimulus has helped to some degree, but no one has explicitly said ‘We will keep a certain number of jobs because of PPP loans’; 3) New logo wins continue to face a very challenging environment; 4) Dayforce Wallet/On demand pay continues to generate very positive feedback and is a differentiator for CDAY,” the analyst said.
* Following Monday’s release of quarterly results that exceeded his expectations, Raymond James analyst Chris Cox increased his target for shares of MEG Energy Corp. (MEG-T) by a dollar to $6 with a “market perform” rating (unchanged). The average is $4.68.
“As a long-term play on an oil price recovery, we believe few names offer the upside potential that MEG does. While this is at least in part due to the elevated balance sheet, we view the leverage and liquidity profile as manageable and well-known risks,” said Mr. Cox. “Supporting this view, our estimates point to a balanced funding profile over the next 12-18 months at strip pricing, even with the roll-over of an attractive hedging profile that insulated the 1H20 results. Our enthusiasm to the long-term risk-reward balance is tempered by a more cautious positioning near-term toward a potential oil price recovery. Furthermore, we view the need to catch up on sustaining capital coming out of this price collapse as a factor potentially weighing on the initial recovery for the stock.”
* Raymond James analyst Steve Hansen raised his target for Methanex Corp. (MEOH-Q, MX-T) to US$21 from US$18.50 with a “market perform” rating (unchanged). The average is US$21.65.
“We are increasing our target price ... to account for our view that incipient signs of recovery (green shoots) have started to emerge after a confluence of macro variables drove methanol prices to decade lows in 2Q20,” he said. “That said, while we’re encouraged by these early signals, we’ve elected to maintain our neutral rating until further evidence of demand recovery and supply discipline emerge.”
* In response to its Monday announcement of new contracts worth US$123-million, Canaccord Genuity analyst Yuri Lynk raised his target for AirBoss of America Corp. (BOS-T) to $31 from $27 with a “buy” rating. The average on the Street is $25.75.
“AirBoss’ impressive EBITDA generation should drive down its already modest debt even further,” he said. “We forecast the company will be net cash positive in Q2/2021. Therefore, we continue to see upside to the dividend and believe the company is well positioned to move on select M&A.”
* Paradigm Capital analyst David Davidson initiated coverage of Northern Dynasty Minerals Ltd. (NDM-T) with a “buy” rating and $5 target. The average on the Street is $2.45.
“Northern Dynasty’s Pebble project is a world-class project that ranks among the largest undeveloped copper-gold deposits in the world,” he said. “Over the past few years, the company has achieved significant de-risking milestones, including the most recent announcement from the US Army Corps of Engineers recommending the preferred development alternative of an 85-mile road to the port. With the final Environmental Impact Statement (EIS) received on July 24, and the Record of Decision (RoD) expected 30–45 days thereafter, the Pebble project’s remaining permitting will be out of federal hands and up to the State of Alaska, who holds a favourable view of the project. "
* Scotia Capital analyst Konark Gupta trimmed his target for Air Canada (AC-T) to $23 from $26, keeping a “sector outperform” rating. The average target on the Street is $23.92.
* Echelon Wealth Partners analyst Amr Ezzat reinstated coverage of Calian Group Ltd. (CGY-T) with a “buy” rating and $74 target. The average on the Street is $63.67.
“Calian is a quality diversified operation with a deep bench, an underleveraged balance sheet, and a solid track record of value creation through acquisition and innovation,” he said. “The Company has all the bells and whistles an investor would seek out in a quality company. The stock has tripled in the last three years, as management transitioned its philosophy and growth strategy from what was a ‘steady Eddie’ operator with stable revenues/earnings, to one seeking to capitalize on growth in a more aggressive fashion.”
David Leeder