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Inside the Market’s roundup of some of today’s key analyst actions

Following “less bad than feared” second-quarter financial results, Spin Master Corp.‘s (TOY-T) “operating problems [are] on the mend,” according to D.A. Davidson’s Linda Bolton Weiser.

That led the analyst to raise her rating for the Toronto-based toy maker on Tuesday.

"We are upgrading to NEUTRAL from Underperform because:(1) TOY closed seven more DCs [distribution centres], and reiterated its expectation for a flat year-over-year 2H20 gross margin;(2) PAW Patrol's U.S. POS improved to negative 1 per cent from negative 17 per cent in 1Q20 and is now trending up in most markets; (3) 2Q20 operating cash flow improved by $77-million; and (4) Mighty Express and Gabby's Dollhouse should contribute to growth in 2021. We think TOY's valuation looks relatively fair," said Ms. Weiser.

On Aug. 5, Spin Master reported a revenue decline of 12.4 per cent to $281.1-million, exceeding the consensus projection on the Street of $255.1-million. Earnings per share of a 9-cent loss also topped expectations (a 17-cent loss).

Ms. Weiser emphasized the consolidation of the company's North American distribution network is now on schedule following early troubles.

“Management is planning to reduce the number of DCs from 18 at the end of 2019 to five by 2021,” she said. “TOY is currently at eight and expects to close another two by the end of 3Q20, followed by another one in 4Q20. TOY said on its 1Q20 call that it had 15, implying it closed seven between the 1Q and 2Q earnings calls.The consolidation should result in significant structural cost savings and be accretive to margins.”

Based on the results, Ms. Weiser increased her 2020 and 2021 earnings per share projections to 45 cents and $1, respectively, from 28 cents and 70 cents.

Her target for Spin Master shares increased to $27 from $20. The average on the Street is $29.20, according to Refinitiv data.


In response to recent share price depreciation, CIBC World Markets analyst John Zamparo raised his rating for Aphria Inc. (APHA-T) to “outperformer” from “neutral.”

“There is no fundamental change to our thesis on APHA, but the 8-per-cent decline in the stock since the company reported its FQ4 results now creates an attractive 25-per-cent upside to our target,” he said. “The company continues to take market share, and now touts a #1 spot in Ontario and Alberta. Its capital allocation has improved, as the company has jettisoned plans to spend over $40-million on the LATAM market. Finally, the company has visibility to an important achievement, which is generating positive operating cash flow and FCF in the next two and three quarters, respectively.

“While some Canadian cannabis firms have accomplished this on occasion, we believe APHA may be able to sustain this level of performance. The primary risk to our thesis is the existing US$100-million at-the-market equity offering. But we believe the 17 million shares that are to be tendered reflect a reasonable amount at more than 2 times ADV.”

Mr. Zamparo maintained a $7.50 target. The average on the Street is $9.05.

At the same, Mr. Zamparo lowered his financial projections for Aurora Cannabis Inc. (ACB-T) and Hexo Corp. (HEXO-T), prompting him to lower his target price for those stocks.

“Estimates are unchanged for the soon-to-be-reported quarters, but we have reduced our F2021 and F2022 sales forecasts for each company,” he said. “For ACB, our F2021 estimate declines by 8 per cent, while our F2022 forecast declines by 10 per cent. For HEXO, our sales estimates in F2021 and F2022 decline by 8 per cent and 14 per cent, respectively.”

“Aurora’s significant cost cuts and movement towards profitability should generate interest from investors, but its balance sheet (more than $500-million net debt) provides reason for caution in our view. For HEXO, the company is inching towards EBITDA-positive territory, but ongoing investments in capex, working capital and JV investments have created recurring equity raises.”

With a “neutral” rating, Mr. Zamparo lowered his target for Aurora shares to $20 from $24. The consensus is $16.16.

He maintained an “underperformer” rating for Hexo with a 90-cent target, down from $1 and below the $1.47 consensus.


Citi analyst Scott Gruber remains neutral on U.S. land drillers, expecting to see a “modest” rig count recovery over the next 12 months as companies focus on debt payment and drilled but uncompleted well (DUC) consumption.

Though he sees the three stocks in his coverage universe as “fairly valued,” Mr. Gruber downgraded Houston-based Nabors Industries Ltd. (NBR-N) to “sell” from “hold,” citing a struggling international land rig market, leverage and a “weak” free cash flow outlook.

“Entering this downturn, NBR’s International segment (more than 40 per cent of EBITDA) was a source of relative strength,” he said. “Yet, the U.S. market appears set to inflect positively now while weakness continues abroad. In particular, Nabors is witnessing a decline in active rigs within the key Saudi market, with dayrates also under pressure. We foresee EBITDA at NBR’s International segment declining by a third in 2021. While NBR has restructured to drive FCF, this headwind coupled with contract roll in the U.S. likely prevents healthy positive FCF in 2021. As such, we foresee the company making little progress to improve its leverage (at 3.7 times but heading to greater than 7 times). With so much debt, even if NBR’s market cap were at near-zero the 2022 multiple would not normalize at 5-5.5 times, however we see this as alright given early stage of a multi-year market recovery.”

He maintained a US$35 target for Nabors shares. The average on the Street is US$26.26.

At the same time, Mr. Gruber trimmed his target for shares of Calgary-based Precision Drilling Corp. (PD-T) to $1.10 from $1.20, keeping a “neutral” rating. The average is $1.26.

“Our 3q EBITDA moves slightly higher to $38-million (from $36-million) as lower average day rates are more than offset by continued cost cuts (our expected rig count in both Canada and the U.S. are largely unchanged),” he said. “We expect blended day rates (spot and contracted) will bottom in 1q/2q before a marginal spot rate recovery in 3q. Our 2021/22 EBITDA similarly rises lower cost estimates, to $160/257-million (from $113/218-million).”

Mr. Gruber also lowered his target for Patterson-UTI Energy Inc. (PTEN-Q) to US$4.50 from US$4 with a “neutral” rating. The average is US$3.78.


Following the release of better-than-anticipated second-quarter financial results on Monday, Canaccord Genuity analyst Matt Bottomley raised his financial expectations for Curaleaf Holdings Inc. (CURA-CN) and reaffirmed the Massachusetts-based cannabis company as the top pick in his coverage universe.

“Curaleaf reported strong Q2/20 financial results that came in just above our forecasts and the company’s guidance on the top line, while significantly beating our expectations on adjusted EBITDA/profitability for the period,” he said.

Curleaf reported revenue of US$165.4-million, up 12.2 per cent from the previous quarter and topping both management’s guidance (US$160-million) and Mr. Bottomley’s projection (US$165.2-million). The increase came from organic growth, the first full quarter of contributions from its recently acquired Select brand products and the closing acquisitions in Connecticut and Maine.

“With COVID-19 causing temporary retail closures in MA and NV, Curaleaf estimates that its managed revenues would have been US$26-million higher if not for state mandated retail shutdowns in the period (which have begun to normalize into Q3),” said the analyst. “As a result, normalized for these impacts and with Grassroots now closed, we note that Curaleaf currently has a revenue run-rate that is likely in excess of US$750-million – making CURA by far the largest global cannabis company by revenues.”

“On the back of another impressive quarter, we have updated our model for Q2/20 actuals, a faster ramp to FCF positivity (expected by Q4/20), higher sales in IL and PA (core Grassroots markets) and a rebound in Select sales.”

Keeping a “speculative buy” rating for Curaleaf shares, Mr. Bottomley increased his target by a loonie to $16. The average on the Street is $15.09.


Raymond James analyst Rahul Sarugaser upgraded Avicanna Inc. (AVCN-T) on Tuesday, citing his optimism motivated by a “recent succession of positive announcements, which we believe will precipitate a revenue inflection.”

On Monday before the bell, the Toronto-based biopharmaceutical company focused on cannabinoid-based products reported revenue and EBITDA of $0.71-million and a $2.5-million loss, respectively, exceeding the analyst projections of $0.5-million and a $2.8-million loss.

"We believe two important, recently-reported events will contribute to a material revenue inflection point for AVCN, beginning 2H20 and accelerating into 2021," he said. "1. AVCN's recent partnership with Red, White & Bloom for distribution of Pura H&W products through the U.S., targeting big-box stores, and; 2. Medical Cannabis by Shoppers' (owned by Loblaw [L-T]) launch of AVCN's RH Phyto products in Canada."

Moving the stock to “outperform” from “market perform,” Mr. Sarugaser maintained a $2.50 target for Avicanna shares, matching the consensus on the Street.


Invesque Inc. (IVQ.U-T) is “showing tremendous leadership and doing the right thing given [the] circumstances,” said Echelon Partners analyst Frederic Blondeau, who sees its current valuation remaining “attractive” for long-term investors.

Last week, the Indiana-based healthcare real estate company reported largely in-line second-quarter financial results. Funds from operations of 16 US cents per unit matched Mr. Blondeau's projection and fell a penny below the consensus on the Street. Net operating income fell narrowly lower than his estimate.

"In our opinion, Symphony continues to represent the bulk of the risk relating to IVQ, notably as we also believe that State of Illinois continues to show what seems to be significant financial weaknesses (as discussed several times in previous notes). Management mentioned having provided Symphony Care Network a rent deferral of 50 per cent for the month of April and a rent deferral of 25 per cent for the months of May, June, July, and August. Management also mentioned being in discussion with Bridgemoor, about which IVQ is also assessing whether it is a right operator for the Company.

“Although we think many possibly suitable strategies are currently on the table, it is likely too early to discuss any of these alternatives, including potential asset sales, at the current stage.”

With the results, Mr. Blondeau trimmed his 2020 and 2021 expectations. His adjusted FFO per share estimates slid to 69 US cents and 72 US cents, respectively, from 66 US cents for both years.

Maintaining a “hold” rating, he lowered his target to US$3.50 from US$4. The average on the Street is US$3.20.


Spark Power Group Inc. (SPG-T) is “amped up for a strong second half recovery,” according to Desjardins Securities analyst David Newman.

On Aug. 12, the Oakville, Ont.-based company reported earnings before interest, taxes, depreciation and amortization (EBITDA) for the second quarter of $9.1-million, exceeding both Mr. Newman’s $8.5-million estimate and the consensus projection of $8.7-million, due, in part, to the benefits of the Canadian Emergency Wage Subsidy program.

“This quarter was challenged by COVID-19 delays/cancellations on several commercial and industrial contracts, offset by strong U.S. demand in the Renewables segment, Orbis’ AltaLink contract in Technical Services and acquisitions,” he said. “SPG’s board of directors restarted the strategic review process on Aug. 4.”

“With financial aid from the CEWS program ($8.0-million recognized in 2Q) and the U.S. Paycheck Protection Program (US$1.8-million loan, expected to be forgiven), SPG was able to retain its workforce and resume full salary to all employees (which was previously reduced by 20 per cent). The business has been resilient amid COVID-19, aided by its diverse customer base and contracted/recurring revenue (80 per cent). With the trough in the rearview mirror, management expects sequential improvements across all segments and is re-evaluating some imminent, attractive M&A opportunities.”

After raising his 2020 and 2021 earnings and free cash flow expectations, Mr. Newman increased his target for Spark shares to $2.50 from $2.25, maintaining a “buy” rating. The average on the Street is $2.33.


Despite a “healthy” second-quarter earnings beat, Raymond James analyst Steve Hansen lowered his earnings expectations and target price for shares of Chemtrade Logistics Income Fund (CHE.UN-T) to account for a weaker-than-expected chlor-alkali outlook through the second half of the year and into 2021.

"At the same time, while we continue to admire steady improvements in the firm's core water treatment business, we maintain our cautious view with respect to lingering COVID-related headwinds weighing on the firm's acid (SPPC) and chlor-alkali (EC) segments," he said.

Keeping a “market perform” rating, Mr. Hansen trimmed his target to $9 from $12. The average is $7.61.


Seeing a path to its second-quarter revenue blowing past expectations on the Street and “serving as a near-term catalyst for additional share appreciation,” RBC Dominion Securities analyst Alex Zukin raised his financial expectations for Zoom Video Communications Inc. (ZM-Q).

“While most investors are fearful of looking at names trading at 25 times calendar 2022 estimated revenue, we remain very bullish on ZM and believe that this quarter once again has the potential to deliver much better than expected revenue upside vs. consensus expectations,” he said. “Our detailed download data and model deep dive points to the potential for $579-595-million in revenue (16 per cent greater than consensus of $498-million). While the biggest unanswered question will remain how the company will comp the current staggering growth rates in the out year, we think the near-term catalyst will mostly be driven by how much higher numbers go. We move our base case estimates up for the quarter and the year to $520-million (up 257 per cent year-over-year) & $1.842-billion (up 196 per cent year-over-year), respectively, both of which are street high.”

Mr. Zukin said download and monthly active user metrics show a "moderation" from April peaks, however they remain "significantly" above pre-COVID levels.

"We believe looking at monthly trends shows that ZM likely ended F1Q21 with a base of ARR [annualized revenue run rate] $1.861-billion which combined with strong download activity supports material upside to the current quarter, even in a scenario where churn from monthly cohorts remains above historical averages (an assumption embedded in guidance)," he said. "Our new model gives investors the ability to flex both monthly churn assumptions as well as download and ARPU [average revenue per user] figures to paint a long term growth picture. Our upside scenario sees a path to revenue of 579 million (up 297 per cent year-over-year) in F2Q21 and $2.061-billion for the year with 35 per cent and 30-per-cent potential upside to our base case estimates in the out year."

With that view, Mr. Zukin increased his 2021, 2022 and 2022 earnings per share projection to US$1.31, US$1.61 and US$2.24, respectively, from US$1.28, US$1.56 and US$2.18.

Maintaining an “outperform” rating, he raised his target for Zoom shares to US$300 from US$250. The average is US$229.25.


In other analyst actions:

* Canaccord Genuity analyst Luke Hannan resumed coverage of The Alkaline Water Company Inc. (WTER-Q, WTER-CN) with a “speculative buy” rating and US$3.25. The average on the Street is US$3.33.

“In our view, WTER’s revenue growth outlook is best-in-class, supported by higher water SKU penetration in existing locations, new distribution wins (particularly in the high-volume c-store segment), and the launch of its new CBD vertical,” said Mr. Hannan. “In the context of high levels of top-line growth, combined with attractive optionality should the FDA clarify the legality of CBD ingestibles, we believe shares are undervalued at current levels.”

* After raising his second-half earnings expectations to reflect higher Ag & Turf margins, Citi analyst Timothy Thein hiked his target for Deere & Co. (DE-N) shares to US$198 from US$165 with a “neutral” rating (unchanged). The average on the Street is US$182.67

“DE sits near the top of our coverage group, as well as broader Industrials, on Citi’s crowding index,” he said. “Bearish positioning amongst HF’s has also been reduced, as we estimate current short interest of 3.2 million shares is down from the recent high of 5 million. Bottom line, expectations of a beat/raise (we expect net income guide goes to $2-2.2-billion) are high heading in to FY3Q results.”

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