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

Citi equity analyst Jon Tower thinks the “once euphoric reopening feeding frenzy” on North American restaurant stocks is now “a purge, brought on by supply chain disruptions, labour shortages, and, most-recently, multi-decade high input inflation.”

In a research report released late Monday, he initiated coverage of 20 stocks in the sector, handing out 7 “buys” ratings, 12 “neutral” ratings and a single “sell” recommendation (Cracker Barrel Old Country Store Inc., CBRL-Q).

“We are optimistic the restaurant consumer pushes through near- to medium-term inflationary pressures, with the backdrop of strong wage and jobs growth fueling spending power, grocery inflation providing some air cover, and discretionary wallet share shifting back to services/restaurants from durables (with inflation potentially helping accelerate the shift to the smaller ticket restaurant occasion),” he said. “However, as we move into 2H22/2023 we are more cautious of Street estimates giving restaurants broad credit for either commodity markets reversing (keeping in mind that geopolitical-driven commodity spikes happened after most companies last updated guidance) or sustaining high single-digit pricing into 2023. Negative revisions in restaurant profitability would only increase our skepticism of a broad and material acceleration in unit growth across the space – even if restaurants do achieve medium-term targets, many may regret the decision later.”

“We see the most upside opportunity in stocks where improving data/estimates can flip the market narrative to positive and shares are trading at an attractive absolute and relative valuation. Included in this group are Buy-rated DPZ, TXRH, YUM, WING, and CAKE. We also recommend investors stick with category leaders CMG and DRI, while also stepping up to an emerging growth name in FWRG. In the body of the note, we offer our perspective on key debates surrounding each name, where we are different and how we see this materializing into upside for shares over the NTM [next 12 months].”

Mr. Tower made four changes to the firm’s previous ratings, including a downgrade for Restaurant Brands International Inc. (QSR-N, QSR-T), the parent company of Tim Hortons and Burger King, to “neutral” from “buy.”

“We don’t believe the market is fully capturing ramping international store growth at Tims, Popeyes (and soon Firehouse), which can drive medium-term upside to net unit growth (NRG) numbers and long-term upside to profits; however, limited visibility into the economics of these nascent businesses means limited ability to layer into valuation,” the analyst said. “At the same time, we see above average room for near- to medium term estimate volatility tied to the Ottawa truckers protest on top of Omicron, limited Russia/China disclosures, potential pressure on supply chain profits from spiking commodities, and questions about co-investments that are likely part of any BK U.S. turnaround pitch in the coming quarters.”

Mr. Tower cut the firm’s target for Restaurant Brands shares to US$64 from US$71. The average on the Street is US$69.98, according to Refinitiv data.

“Our $64 price target is based upon a 15.5 times NTM 12-months from now EV/EBITDA multiple and 6.3-per-cent FCF yield,” he said. “We believe this multiple accurately balances the company’s accelerating global unit growth against limited visibility into economics in these newer markets and potential near-term headwinds tied to business disruptions in Canada, unknown Russia exposure and risk of a significant reinvestment cycle ahead for the Burger King U.S. business.”

The analyst’s other three rating changes were also notable. They were:

* Domino’s Pizza Inc. (DPZ-N) to “buy” from “hold” with a US$487 target, up from US$480. Average: US$466.97.

“We expect staffing challenges put outsized pressure on 1Q SSS [same-store sales] relative to 4Q; however, this was clearly guided to more than 2/3 of the way through the quarter, and our proprietary analysis of delivery availability and estimated times (measured at the majority of U.S. stores at peak times, daily) suggests labour dynamics are improving,” he said. “Combined with, in our view, a growing likelihood of higher price points around national value constructs, we believe investors can become increasingly confident that sales momentum builds through the year.”

* Krispy Kreme Inc. (DNUT-Q) to “neutral/high risk” from “buy” with a US$16 target, down from US$24. Average: US$17.78.

“The company has a clearly defined plan for its go-to-market growth strategy for the core Krispy Kreme brand as well as newer initiatives (e.g., Insomnia Cookies, snack line-up),” he said. “However, despite the company’s 84-year existence, this new strategy has a limited and bumpy track record. We believe investors will need to see a longer time series of the company delivering upon financial targets before rewarding shares with a higher multiple.”

* Starbucks Corp. (SBUX-Q) to “neutral” from “buy” with a US$91 target, down from US$120. Average: US$110.52.

“On SBUX, we’re Neutral rated and see well-understood risks (Omicron and China lockdowns) as posing problems for near-term estimates, but recent management transition as well as U.S. laboUr shifts as posing unknown risks to out-year numbers, keeping us on the sidelines,” he said.


For investors seeking value in the telecommunications sector, Scotia Capital analyst Jeff Fan thinks Cogeco Communications Inc. (CCA-T) is poised for a “re-rating catch up” in the second half of the year.

“CCA’s EBITDA growth has been negative for the past three quarters due to higher cost, difficult year-over-year comparison and FX,” he said. “We think Q2/F22 will be the last quarter that will be impacted by these factors and we expect growth rates to accelerate in 2H/F22.”

Ahead of the release of the company’s second-quarter results after the bell on Wednesday, Mr. Fan is expecting revenue to rise 2.3 per cent year-over-year to $713-million, driven by a 2.5-per-cent increase in U.S. broadband and 3.1-per-cent jump in Canadian cable services. He’s projecting adjusted earnings per share of $2.17, up 0.3 per cent.

“During our conversation with the management team at our TMT conference, Cogeco reiterated that network expansion is expected to deliver higher subscriber growth in F23 and 200 basis points in higher EBITDA growth in F24,” he said. “Management is confident in improving its U.S. broadband net adds through F22 as the COVID situation improves and seasonal disconnection fades. Cogeco believes its U.S. broadband pricing power remains strong considering its limited footprint overlap and its Canadian wireless expansion will depend on MVNO terms.”

Keeping a “sector outperform” rating, Mr. Fan increased his target to $141 from $137. The average on the Street is $126.60.

“Cogeco is trading cheap on EBITDA but not as cheap on cash flow due to investments that are expected to generate returns,” he said. “Cogeco is currently trading at 6.7 times NTM [next 12-month] EV/EBITDA (vs. 7.2 times for QBR), 12 times NTM P/E, 6.9-per-cent NTM FCF yield (vs. 9.1 per cent for QBR) and 15.4 times NTM EV/Cash EBIT (vs. 10.9 times for QBR) . The premium cash flow valuation metrics are due to CCA’s temporarily depressed cash flow as a result of its higher capex in F22 and F23. For the shares to re-rate, we believe the drivers will be organic growth acceleration, U.S. broadband net adds y/y growth, plus resolution to its Canadian wireless investment plans. On Rogers’ ownership, we think that concern should have been alleviated due to Rogers’ recent successful senior notes offering to fund the Shaw acquisition.”


Seeing its “successful transformation complete,” BMO Nesbitt Burns analyst Deepak Kaushal initiated coverage of Calian Group Ltd. (CGY-T) with an “outperform” rating on Tuesday, seeing its path to $1-billion in revenue by fiscal 2024 as “achievable” and expecting its pace of acquisitions to grow with “continued value discipline.”

“Since fiscal 2015, CEO Kevin Ford has expanded diversification, innovation, customer base, and geographic exposure, through disciplined acquisitions, sustainable organic growth, and cultural transformation,” he said. “Over the past four years, this has doubled revenue and cash flow, and expanded gross margin by 500 basis points, while maintaining an average ROIC [return on invested capital] of 15 per cent, capping off a highly successful transformation in our view.”

“We are forecasting underlying organic growth of 10 per cent per year to $750 million revenue by F2024, supported by accelerating digital transformation in healthcare, communications, and government services, and a resurgence in military training and cybersecurity with rising geopolitical tensions. We also expect Calian to deploy $150 million in available debt capacity to acquire up to $300 million in revenue, to reach management’s $1 billion revenue goal. We expect this to drive continued margin expansion and free cash flow growth as the business scales.”

Expressing confidence in management’s ability to “accelerate growth and value creation moving forward,” Mr. Kaushal set a target of $95 per share. The current average of $82.71.

“We believe Calian has successfully transformed into a higher-growth, higher-margin solution provider without compromising its 40-year track record of profitability, value creation, and managed risk. We expect larger acquisitions and continued organic growth across all segments to deliver on management’s $1 billion revenue target by 2024. Furthermore, we believe wider recognition of Calian’s success and eventual large-cap status will strengthen valuation multiples,” the analyst added.

Concurrently, Mr. Kauhsal also initiated coverage of a pair of other tech stocks:

* MDF Commerce Inc. (MDF-T) with a “market perform” rating and $4 target. The average is $7.33.

“MDF is a turnaround prospect in e-procurement and e-commerce software that achieved early success but has recently lost confidence of the stock market, following a large strategic acquisition in e-procurement that significantly diluted equity holders and increased leverage,” he said. “Although default risk appears low, we think it will take time to rebuild investor confidence and believe equity risk will remain high until growth, margin and cash flow improve, or management pursues other strategic options to surface value.”

* Tecsys Inc. (TCS-T) with an “outperform” rating and $54 target, which is 74 cents lower than the consensus.

“We believe Tecsys is successfully transforming its sales and marketing strategy and business model to Software-as-a-Service, to strengthen its business,” he said. “We think Tecsys can leverage its leadership in the healthcare and complex distribution industries to sustain organic growth and expand margins, as supply chain technology has become more critical through the Pandemic. We believe the recent stock correction is overdone, and expect valuation to re-rate higher to SaaS peers, as near-term investments deliver scale and investor awareness.”


CareRx Corp. (CRRX-T) is “an emerging quality compounder and a clear leader in the specialty pharmacy space,” according to Desjardins Securities analyst Gary Ho, who sees “significant” competitive advantages from both scale and operating leverage.

He assumed coverage of the Toronto-based provider of pharmacy services to seniors living and other congregate care communities with a “buy” recommendation on Tuesday.

“Why we like the story. (1) Plenty of white space in a fragmented market (292,000 of Canada’s 425,000 beds are served by moms-and-pops), with CRRX well-positioned to gain market share organically/through M&A (could ultimately own 30‒40 per cent); (2) track record of integrating acquisitions and delivering significant synergies(40‒70 per cent); (3) multiple organic growth drivers, including expansion with existing customers, contract wins at less than 1,000-bed homes (could add 5,000‒8,000 beds/year) and larger RFPs, Revicare and ClassMed medical supplies, and VirtualCare partnership with THNK; and (4) scale benefits—procurement advantages, mega-sites (starting with Burlington) driving scale and efficiency, and the ability to absorb any future regulatory headwinds through cost containment,” he said.

For its first quarter of fiscal 2022, Mr. Ho is projecting year-over-year revenue growth of 104 per cent to $91.3-million, in line with the Street’s estimate of $92-million. He’s expecting adjusted EBITDA to jump 111 per cent to $8.6-million, narrowly below the consensus of $9-million.

“Key catalysts. (1) Continued execution, reaching EBITDA margin of 12 per cent and positive FCF by the end of 2022; (2) reaching 100,000 beds imminently, and 130,000 beds and $500-million in revenue by 2024 through organic growth (at least two-thirds or 20,000+ beds) and tuck-ins (one-third or 10,000 beds); (3) successful MPGL integration ($5-million synergies by 3Q22); (4) Burlington mega-site and proof of concept of the BD Rowa Dose, followed by megasites in Vancouver and east GTA; (5) growth in new verticals, eg correctional, group homes, addiction centres and NORCs,” he said.

Seeing CareRx shares as “attractively undervalued,” he set a target of $10. The average is $9.19.


Seeing its risk-reward proposition properly balanced, BMO Nesbitt Burns analyst Devin Dodge lowered his rating for Waste Connections Inc. (WCN-N, WCN-T) to “market perform” from “outperform” on Tuesday.

“While solid waste industry fundamentals remain favorable and the company has previously outlined a robust pipeline of organic capital expansion projects, we believe the current share price captures this upside and we struggle to find near-term catalysts that could push the stock higher. As a result, we have lowered our rating,” he said.

While acknowledging the presence of organic growth investment opportunities, Mr. Dodge thinks the Toronto-based company “appears to have less cushion to absorb unanticipated costs than peers.”

“We believe WM has been less aggressive in pushing through discretionary price hikes compared to others,” he said. “Though management expects to re-price its book of business through 2022 as contracts cycle through their annual reset dates, we suspect there is less cushion available to absorb unexpected bumps in H1/22 (vs. peers) such as higher fuel and pandemic-related costs.

“We believe WM has a strong pipeline of organic capital projects including self-developing landfill RNG opportunities and recycling/MRF investments. As outlined earlier this year, WM expects to invest more than $1.6-billion into these initiatives through 2025. We believe the returns on these investments are attractive and expect these projects to be key contributors to earnings/ FCF growth as they come online ratably over the next several years.”

Emphasizing a lack of near-term catalysts, he maintained a target of US$174. The average is US$146.99.

“We have tweaked our forecast but the impact to our 2022 and 2023 adjusted EBITDA estimates are nominal,” said Mr. Dodge. “The stock has rebounded nearly 20 per cent since the lows in mid-February and the total return to our target price has declined into the single digits. At this point, we are not inclined to raise our estimates and/or the multiple.”

Elsewhere, Oppenheimer’s Noah Kaye raised his target to US$152 from US$144 with an “outperform” rating.


Canaccord Genuity analyst Matthew Lee raised his financial projections for Roots Corp. (ROOT-T) following a “strong” fourth quarter to reflect his expectation for a higher gross profit, though he warned rising labour costs and elevated shipping costs will continue to weigh.

Last week, the Toronto-based retailer reported revenue of $121.3-million, up 22 per cent year-over-year and above both Mr. Lee’s $119.9-million estimate and the consensus forecast of $117.4-million. Adjusted EBITDA rose 17 per cent to $30.6-million, also topping expectations ($24.1-million and $24.5-million, respectively).

“In Q4, industry-wide supply chain challenges continued to put pressure on gross margins while shipping delays led to foregone sales,” the analyst said. “Despite this, gross margin increased year-over-year from 59.8 per cent to 61.3 per cent, which we believe is largely reflective of tactical marketing reductions. Specifically, in Q4, the company only had 19 promotional days vs. 26 in Q4/20 and 66 in Q4/19. This promotional restraint led to a DTC gross margin increase of 150 basis points year-over-year and a 610 bp increase vs. Q4/19. Going into 2022, management expects to see inflationary cost pressures with minimum wage increasing in Ontario and freight costs remaining elevated. We forecast F22 EBITDA margins of 14.4 per cent (vs. 14-per-cent margins in F20 ex. subsidies) as strength in gross margins is offset by potential supply chain disruptions and wage increases.”

Mr. Lee thinks the company’s plan to explore international expansion could “provide an additional growth avenue for the firm over the medium-long term.” He also thinks the success of its high-end Studio collection could “strengthen its perception across its entire customer base while supporting further margin expansion.”

Emphasizing the importance of digital expansion in fiscal 2022, he raised his target for Roots shares to $4.50 from $3.75, keeping a “hold” recommendation. The average is $4.80.

“While Roots’ brand and omnichannel strategy continue to resonate with consumers, and we are constructive on geographical expansion, we maintain our HOLD rating based on the opaque outlook around supply chains and the geopolitical environment,” he said. “After our estimate adjustments, our target increases.”


In other analyst actions:

* Citing a “a sharp share-price and valuation correction since mid-January,” TD Securities analyst Sean Steuart upgraded West Fraser Timber Co. Ltd. (WFG-N, WFG-T) to “action list buy” from “buy” with a US$120 target, down from US$125 and below the US$153.62 average.

“West Fraser’s share price has declined 28 per cent from the Q1/22 peak,” he said. “This pullback is consistent with direct comps, but, in our view, opens a compelling investment window, given the company’s long-term ROCE track record, robust capital structure, and scale.”

“We expect that West Fraser will remain aggressive in pursuing asset-base growth while returning surplus capital to shareholders. In our view, West Fraser is attractively valued, especially given our forecast of above-trend mid-term free cash flow.”

* Calling it “an attractive high-growth name, trading at its lowest valuation since late 2020,” CIBC World Markets’ Nik Priebe initiated coverage of Goeasy Ltd. (GSY-T) with an “outperformer” recommendation and $200 target. The average on the Street is $225.

“Goeasy (GSY) participates in an attractive market characterized by limited competition, and benefits from a mature balance sheet with access to lowcost sources of funding and minimal interest rate sensitivity,” he said. The macro backdrop appears conducive to strong credit demand and should support the goal of achieving 50-per-cent loan growth over the next two years. We believe the normalization of credit performance should be manageable, but we will continue to monitor the rate of inflation and wage growth to inform our expectations”

* JP Morgan’s Jamie Baker cut his Air Canada (AC-T) target to $29 from $31, maintaining an “overweight” rating. The average is $29.87.

* JP Morgan’s Phil Gresh raised his target for Cenovus Energy Inc. (CVE-T) to $30, exceeding the $24.76 average, from $29 with an “overweight” rating.

* In response to a first-quarter production beat, BMO Nesbitt Burns’ Ryan Thompson raised his Endeavour Silver Corp. (EDR-T) target to $6 from $5.75 with a “market perform” rating. The average is $7.56.

* In a first-quarter earnings preview report, Barclays’ John Aiken cut his targets for Great-West Lifeco Inc. (GWO-T, “equalweight”) to $41 from $45 and Manulife Financial Corp. (MFC-T, “overweight”) to $34 from $36. The averages on the Street are $42.22 and $31.75, respectively.

“Despite challenges, we anticipate core earnings to hold in; cost controls could dictate relative performance: With some factors supporting fourth quarter earnings that we view as non-recurring, we believe that meaningful sequential growth for GWO and MFC will be difficult,” he said. “Overall, we anticipate that the various segments will continue to show underlying growth but relative performance will likely be dictated by how strong expense controls are during the quarter, with GWO (weakening) and MFC (strengthening) heading in opposite directions in terms of costs.”

“We anticipate that the macro environment will be positive for both GWO and MFC, with Manulife likely able to achieve the $100-million in investment gains contribution to core earnings, despite the volatility in equity markets. While the insurers have significantly reduced their exposure to interest rates, we anticipate that the lifts by the central banks will benefit the first quarter and future quarters and, while the current shape of the yield curve does not provide an ideal operating environment for life insurers, higher yields should lead to improved profitability for a life insurers operation over the long term.”

* After announcing a higher-than-anticipated first-quarter catastrophe loss estimate on Monday, Scotia’s Phil Hardie cut his Intact Financial Corp. (IFC-T) target to $200 from $201 with a “sector outperform” rating. The average is $208.25.

“We remain constructive on Intact, given its defensive characteristics, solid growth outlook, and sustainable mid-teen ROE supported by a favourable pricing environment,” he said.

* Scotia Capital’s Mario Saric trimmed his Minto Apartment Real Estate Investment Trust (MI.UN-T) target to $24.50 from $24.75, keeping a “sector perform” rating. The average is $27.30.

* BMO’s Jackie Przybylowski lowered her Teck Resources Ltd. (TECK.B-T) target to $57 from $61 with an “outperform” rating. The average is $55.

“We are updating our Teck estimates for the Q1/22 actual coal sales volumes and realized prices as disclosed by the company this morning. Both metrics are negative as compared with our previous estimates and have resulted in a drop to our forecasted EBITDA and EPS,” she said.

“In our view, coal volumes and prices were likely the most significant risks to Teck’s upcoming Q1/22 earnings update, so this release [Monday] likely reduces that risk for the company’s upcoming April 27 before market open release. We continue to like Teck’s near-term cash flows which are boosted by the current (still historically high) coal prices, and for its transition in 2022 towards ‘greener’ metals, including growth in copper with the expected completion of the QB2 project later this year.”

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