Inside the Market’s roundup of some of today’s key analyst actions
Citing its “best-in-class” free cash flow growth and return on invested capital, Echelon Wealth Partners analyst Amr Ezzat added Photon Control Inc. (PHO-X) to the firm’s “Top Picks” list, touting its “attractive” valuation.
“With the stock currently trading at 11.9 times 2019 EPS [earnings per share] ex-cash, we believe Photon presents exceptional risk-reward characteristics,” said Mr. Ezzat.
“The company’s recently released backlog number was leaps ahead of our heightened expectations, pointing to a strong start for 2018. This together with recent bullish outlooks provided by the semicap players provide for continued best-in-class growth for Photon.”
Mr. Ezzat has a “buy” rating and $3 target for shares of Photon, a Richmond, B.C.-based optical sensor designer and manufacturer. The average target is currently $2.80.
“We note that the company’s stock has not participated in the semicap rally year-to-date, with Wafer Fabrication Equipment (WFE) stocks have rallied an average of 8 per cent versus Photon’s year-to-date stock performance of a 2-per-cent decline,” he said. “We recently nudged our estimates higher and upped our target to $3 per share from $2.75 per share, equating to a 21.5 times 2019 EPS (ex-cash.”
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Though he believes its internal issues will take time to repair, Raymond James analyst Steven Hansen upgraded Canadian National Railway Co. (CNR-T, CNI-N) to “outperform” from “market perform,” believing the stock’s recent decline largely reflects those problem.
Mr. Hansen acknowledged the railway faces “acute operational” headwinds in the first quarter, but he feels the end of winter will allow it, along with rival Canadian Pacific Railway Ltd. (CP-T, CP-N), to improve service and capitalize on what he sees as an attractive macro environment.
He maintained a target of $110 for CN shares. The average is $105.
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Demand drivers appear favorable for both CAE Inc.’s (CAE-T) civil aviation and defence segments, said BMO Nesbitt Burns analyst Fadi Chamoun, noting its backlog sits at record levels.
“EBIT growth in the Civil segment has averaged 11 per cent per year this cycle and the underlying demand drivers are favourable,” he said. “Passenger traffic growth is robust in most regions, the utilization rate of the global aircraft fleet is at record levels, and aircraft production rates are expanding to meet the growth in demand and airlines’ need for modern and cost efficient equipment.
“Business aviation market is improving. CAE’s training assets supporting the business aviation market have the capacity to deliver growth at very low incremental costs, in our view, and there are more signs of strengthening demand in the business aviation market.”
After five years of little to no growth in earnings from its defence segment, Mr. Chamoun expects an acceleration in the coming years, citing expanded defence budgets, a growing reliance on virtual training and outsourcing as well as CAE’s own expanding capabilities.
With an “outperform” rating, Mr. Chamoun raised his target for CAE shares to $26 from $24, which is higher than the average on the Street of $24.66.
“CAE is converting around 85 per cent of net income into free cash flow and has ample balance sheet capacity to support growth (preferably) and/or higher distribution,” he said.
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Canaccord Genuity analyst Raveel Afzaal expects “soft” first-quarter financial results from Mosaic Capital Corp. (M-X) after its pace of financial improvement fell short of expectations.
On March 28, Calgary-based Mosaic reported fourth-quarter 2017 revenue of $88.7-million, a jump of 74 per cent year over year and ahead of the projections of both Mr. Afazaal and the Street ($61.5-million and $65.1-million, respectively). However, adjusted EBITDA of $5.2-million, an increase of 57 per cent from the previous year, fell short of expectations ($6.2-million and $6.6-million, respectively).
“We have revised down our Q1/18 EBITDA forecast to $5.2-million (from $7.4-million) and our 2018 forecast to $35.4-million (from $39.3-million),” the analyst said. “On the conference call, management noted the Infrastructure division is expected to realize softer Q1/18 results year over year. We attribute this to lower demand for Bassi’s construction related services given the seasonal nature of its work and continued competitive environment impacting Ambassador Mechanical’s (HVAC) profitability. We also expect to see a year-over-year decline in Mackow’s profitability as product mix issues impacting its Q4/17 performance linger on (but to a lesser degree) in Q1/18.”
“[It is] difficult to estimate 2018 EBITDA with a lot of confidence based on 2017 results: This is owing to the noise created by (1) unseasonal weather conditions adversely impacting the performance of its construction related businesses in Q2/17, (2) two acquisitions for $45-million completed during the year and (3) start-up costs associated with geographical expansion of Mackow, Industrial Scaffold and Remote Waste.”
Maintaining a “buy” rating, he lowered his target for Mosaic shares to $7 from $9.50. The average is $7.63.
“Our TP is very sensitive to estimate revisions given low number shares outstanding and high leverage ($82-million preferred securities and $118-million debt),” said Mr. Afzaal. “The downward revisions in our forecasts result in our target price declining to $7.00 per share (9.5 times 2018 estimated EBITDA, unchanged). We maintain our BUY recommendation but expect the share price to trade side-ways in the near term. We believe in-line Q2 and Q3 results, securing additional capital in a non-dilutive manner (which Mosaic has successfully demonstrated in the past), and new acquisitions are potential catalysts for the current share price to reach/exceed our target price.”
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Northern Empire Resources Corp. (NM-X) is poised for “material” appreciation, according to Canaccord Genuity analyst Tom Gallo, touting its management team’s experience in advancing and transacting both exploration and production assets.
He initiated coverage of the Vancouver-based company, which is focused on its Sterling Gold Project in southern Nevada, with a “speculative buy” rating.
“Sterling, a development-ready asset (300,000 ounces) with low initial capex (CG estimate US$40-million) accounts for nearly half our target price, or 75 per cent of NM’s current market cap,” said Mr. Gallo. “It provides near-term optionality through direct development, joint venture, or sale. NM could likely fund Sterling with equity, though we see selling the asset as the most likely outcome, shifting focus to what we view as the two priority projects. The Crown Block hosts the remaining inferred resources (400,000 ounces) and offers the most immediate resource expansion and growth potential. We look for NM to work toward 1 million ounces in the Crown, a critical mass which would justify development (CG US$125-million capex) and which we view as attractive for potential consolidators. Finally, the central claim group is highly prospective, offering significant exploration upside, in our view.
“Overall, we see a base case opportunity for the cumulative development of several smaller deposits (CG estimate 2023), either by NM or a consolidator, with the potential for a more significant discovery, backed by the likely sale of Sterling.”
Mr. Gallo said he views Northern Empire as an “attractive” investment option due to several factors, including:
- A management team experienced in the gold sector, led by executive chairman Doug Hurst, who was a founding member of both International Royalty Corp. and Newmarket Gold.
- Sterling has “the right address.” The analyst said: “The property, which hosts Carlin-style mineralization, high-grade gold samples at surface, and a permitted heap leach opportunity, is located in low-sovereignrisk Nevada. We also note drill success from neighbor and fellow junior explorer Corvus Gold (KOR-X) with mineralization tracing toward NM's property.”
- The company possesses the “right technique,” adding: “Through prospecting, NM has identified new gold targets with mineralization at surface in areas previously unexplored. Using its newly adapted geologic model, we believe the company has the potential to materially expand the known resource, vectoring in on targets using inexpensive exploration techniques combined with a modern, systematic approach.”
Mr. Gallo set a target price of $2 per share. The average is currently $1.75.
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Though he said his enthusiasm for the generic pharmaceutical sector remains “tepid,” RBC Dominion Securities’ Randall Stanicky sees a “multitude of sizable pipeline catalysts” for Mylan M.V. (MYL-Q) ahead of both an April 11 analyst meeting and expected product launches.
He raised his target price for Pennsylvania-based company, expecting an “attractive near-term trade opportunity.”
“Why make a short-term trading call on MYL now?” said Mr. Stanicky. “Four reasons: (i) Our new analysis on the generic Advair opportunity implies potentially meaningful EPS upside in 2019 with upcoming mid-Jun Target Action Date (TAD) an important catalyst. (ii) Behind generic Advair are two additional major opportunities with near-term action dates including Neulasta (June) and RESTASIS (July) that can both add further EPS upside but also serve as a reminder of the magnitude of pipeline support behind its U.S. generic business (30 per cent of total) - this will be a major focus at next week’s analyst meeting. (iii) We think Street numbers are more reasonable now (albeit second-half weighted) with improving 2019 outlook (we modestly raised numbers on greater risk-adjusted generic launch contribution); a change in stance for us; and importantly (iv) Valuation has pulled back significantly with a widening spread to TEVA (2019 estimated EV/ EBITDA 8.3 times versus 9.7 times) that we think is unsustainable and adds support to MYL shares (that would imply MYL up 30 per cent on move to parity) - more realistically we see that spread converging particularly given our out-year TEVA P&L concerns.”
Mr. Stanicky expects the analyst meeting to focus on a pair of themes:
- “Breadth of global footprint with emphasis on the 60 per cent of the revenue base that is OUS and growing (North America outlook flat).”
- "Depth of pipeline with emphasis on complex products and upcoming action dates in Jun/Jul on generic Advair, Neulasta and RESTASIS (with discussion around BOTOX and other complex targets).”
Keeping a “sector perform” rating for Mylan shares, Mr. Stanicky’s target rose to US$45 from US$44. The average is US$49.80.
“We continue to think the generic sector recovery is going to be prolonged (we moved to a more neutral view earlier this year from 2 years of being cautious),” he said. “That will continue to weigh on confidence around P&L visibility. It will also be a hurdle to generalist flows returning to the sector, at least for the time being (our sense is MYL remains well owned among the hedge fund community). Additionally, we still do not see the financial flexibility that MYL does at 3.8 times net debt to 2018 estimated EBITDA (after $1-billion share repurchase ahead of first-time guidance).”
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Though he has “high confidence” that Constellation Brands Inc. (STZ-N) will have more years of 8 to 9-per-cent EBIT growth, Stifel analyst Mark Swartzberg downgraded the Corona beer and Svedka vodka maker to “hold” from “buy,” citing its current valuation.
Lowering his target to US$228 from US$245, Mr. Swartzberg said the “market is pricing in substantial beats and those will be tough to generate.” Shares of the Victor, N.Y.-based company have jumped just over 40 per cent over the past 12 months.
The average target on the Street is US$252.
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In other analyst actions:
TD Securities analyst Michael Van Aelst downgraded Saputo Inc. (SAP-T) to “hold” from “buy” with a target of $45, down from $50. The average target on the Street is $44.44.
“We are in what appears to be the trough of a very challenging dairy-commodity cycle, and Saputo will arguably feel this pressure.” he said.
Scotia Capital analyst Phil Hardie initiated coverage of Fairfax Financial Holdings Ltd. (FFH-T) with a “sector perform” rating and $725 target, which sits above the average of $714.55.
Hartleys initiated coverage of Copper Mountain Mining Corp. (CMMC-T) with a “buy” rating and target of $2.83. The average is $2.06.
David Leeder