Inside the Market’s roundup of some of today’s key analyst actions
Despite leading the market in both brand and technology, Tesla Inc.’s (TSLA-Q) recent string of “self-inflicted problems” could open the door for new entrants possessing strong financial backing, according to Canaccord Genuity analyst Jed Dorsheimer.
“Investments in autonomous vehicles continue to grow. Toyota recently announced a $500-million investment in Uber in an effort to develop driverless vehicles,” he said. “It also announced a $1-billion investment in Grab (Southeast Asia’s Uber equivalent) earlier in June. Although details were not disclosed, we are left wondering if Tesla should have been in the mix for those investments; the company’s volatile image could also leave it out of the discussion for future investments in autonomous driving capabilities.
In the wake of the announcement late Friday from chief executive Elon Musk to back away from his plan to take the electric car maker private, Mr. Dorsheimer said he feels “less confident” in Tesla’s ability to meet its Model 3 production guidance of 50,000 to 55,000 vehicles in the third quarter, admitting the “recent distractions” stemming from Mr. Musk’s proposal increases his risk profile.
“Mr. Musk noted that while sentiment was positive towards such a decision, most investors believed it would not be in the company’s best interest and urged him to keep the company public,” said the analyst. “Any funding received through this deal would also come with many contingencies and prerequisites attached, limiting what Tesla would be able to do with its much-needed cash. Although Tesla has managed to stem the outflow of cash in its most recent quarter, it is still burning cash at a rate that necessitates the Model 3’s success in order to achieve profitability. Mr. Musk’s recent behaviour, including the handling of the potential go-private deal, also underscores a need for strong and experienced leadership to minimize distractions during an extremely important time for the company.
“While we strongly believe in Tesla’s disruption and advancement of the automotive industry, it is important to keep the upcoming convertible note deadlines and vehicle production volume in scope. With $2.2-billion in cash at the end of Q2, Tesla only has enough cash to maintain operations for another six to nine months at its current rate. Although the company managed to stem the flow of cash burn from $1-billion to roughly $740-million quarter over quarter, Tesla has not managed to achieve profitability since its short stint in 2016. Q3 FY18 will be especially important, as we will see how the company performs with a full quarter at or above the 5,000 per week milestone for Model 3 production, which ought to bring the company to profitability; it expects to hit 6,000 per week by the end of August. With higher performance models and cash buyer Model 3s being prioritized, Tesla will be able to stave off cash concerns in the short-term. However, its upcoming debt obligations are cause for concern. With a $230M tranche due in November 2018 at $560/share and $920M due in March 2019 at $360/share, Tesla will need to secure profitability by the end of the year to maintain solvency.”
Mr. Dorsheimer is now projecting Model 3 quarterly production of 48,000, falling from 52,000, leading him to lower his earnings per share projection to a loss of US$8.18 for 2019, down from US$7.94. His 2019 EPS estimate fell to a US$2.45 profit from US$3.96.
Keeping a “hold” rating for Tesla shares, his target price fell to US$316 from US$336. The average on the Street is US$328.39.
“Despite the volatility that Tesla is experiencing, we believe the opportunity to capitalize on a mature electric and autonomous vehicle market is too great to give up,” the analyst said. “Especially considering that the market is still nascent, with paradigms just now being established, Tesla’s technology lead of 5-10 years still gives the company an edge for product development, in our view.”
In a research note released Tuesday on the semiconductor capital equipment space, Bank of America Merrill Lynch analyst Vivek Arya downgraded both Lam Research Corp. (LRCX-Q) and Applied Materials Inc. (AMAT-Q), predicting a slowdown in the wafer fab equipment industry is likely to linger.
Mr. Arya lowered his growth outlook for the wafer fab market to 7 per cent year-over-year from 10 per cent. He now projects a 2.5-per-cent decline in 2019 and 2.5-per-cent growth in 2020, falling from 2-per-cent and 5-per-cent growth, respectively.
"Most companies guided for a trough in Sep/OctQ followed by a return to growth starting in Dec/JanQ, but in our view it still remains unclear when spend will start to reaccelerate in earnest – we don’t expect YoY [year-over-year] growth to accelerate until at least 2H19,” the analyst said.
He moved both stocks to "neutral" from "buy" based on limited earnings growth stemming from slowing demand and noting margins sit at peak levels.
Mr. Arya lowered his target price for Lam Research shares to US$200 from US$235. The average target is currently US$238.91.
His target for Applied Materials fell to US$49 from US$65. The average is US$62.32.
In the wake of the conclusion of its long strategic process, which explored potential sale options, there remains value in Pure Multi-Family REIT LP (RUF.U-X, RUF.UN-X), according to Raymond James analyst Ken Avalos, who cautioned that sentiment remains a headwind.
On Friday, the company's shares dipped with the announcement that a special committee of independent directors terminated its process to seek a potential sale. The group was set up on April 5 after Electra America made a proposal to buy the REIT for US$7.59 per unit.
"Post Friday’s carnage, the stock trades at an 8-per-cent discount to NAV [net asset value], while the broader U.S. multi-family REIT group trade at a 5-per-cent discount," said Mr. Avalos. "We think there’s value at these levels, but we also think institutional support will be sparse in the short-term; the majority felt the apparent pricing of the initial bid was fair and to some, management now appears entrenched. Over the long-term, we also expect that the competition to generate alpha and hopefully thirst for return will outweigh any negative sentiment that currently exists or the gap between management and the bidders could be resolved."
Maintaining an "outperform" rating, his target for Pure units rose to US$7 from US$6.50. The average is $9.33 (Canadian).
"Admittedly, Pure Multi trades at a small discount to the U.S. peer group (an 8-per-cen discount versus 5 per cent; an 18 times 2019 AFFO [adjusted funds from operations] multiple versus 21 times), however this could simply be a reflection of its smaller size and thinner trading liquidity," he said. "It does have a superior growth profile (2Q18 SPNOI [same-property net operating income] growth was 5 per cent versus U.S. peers at 2 per cent; 14-per-cent FFO growth versus 4 per cent), but that’s a function of coming off a lower base (FFO fell in each of 2016 and 2017). In the end, we think the stock is fairly valued at NAV. Given the 8-per-cent upside (6-per-cent yield), we remain an Outperform."
Elsewhere, CIBC World Markets' Dean Wilkinson lowered his target to US$7.50 from US$7.75 in a note released Monday.
Mr. Wilkinson said: "With the strategic process complete, the REIT and investors can now fully focus on the REIT's operations and growth opportunities, which have been largely on hold for the duration of the strategic review (at least from an investor perspective). We continue to like RUF's high-quality portfolio of garden-style, multi-family apartments located primarily in the U.S. Sun Belt region, which is characterized by more landlord-friendly sub-markets (e.g., higher turnover rates and a lack of rent controls compared to its Canadian peers) and favorable supply/demand dynamics with above-average population and employment growth.
"We maintain our Outperformer rating, reflecting a strong internal growth profile and an attractive valuation compared to its peers and see the current unit price weakness as a good opportunity for investors with a long-term view."
Believing the market is undervaluing the growth potential for Estee Lauder Companies Inc. (EL-N), Morgan Stanley analyst Dara Mohsenian raised his rating for its stock to “overweight” from “equal-weight” based on “its favorable exposure to high growth channels within the high growth prestige beauty category.”
“We believe a sharp stock pullback since mid-June has created a compelling entry point, and the market is not fully recognizing EL’s robust LT growth potential,” he said. “Previously, despite our bullish long-term view on EL’s growth, we were concerned about outsized valuation, and four specific risk points that we now see as resolved or priced in. First, risk associated with a China slowdown now appears to be priced in, with EL’s stock underperforming HPC peers by 2,400 basis points since its June peak. (Note: We don’t dismiss China risk; we just see it as now more priced in.) Second, below-consensus initial FY19 EPS guidance has already played out, and third, ad claim issues risk has also passed given EL indicated it would not be material on its Q4 call. Last, there still is risk the market could shift to a more defensive posture away from more discretionary names such as EL, but strong US macros have reduced this risk.”
Mr. Mohsenian raised his target by US$1 to US$160, exceeding the consensus of US$156.20.
“EL is now our top household products pick, although we continue to prefer beverages names (including OW-rated Constellation Brands, Coca-Cola European Partners, and Pepsi, with EL ahead of Monster in our pecking order),” he said.
In a separate note, Mr. Mohsenian raised his rating for Coty Inc. (COTY-N) to “overweight” from “equal-weight,” seeing an inflection point.
“Historically, we have been unconvinced about Coty’s prospects, arguing it was disadvantageously positioned within the attractive and high growth beauty category, and that PG deal risks/targets were more onerous than company and market perceptions, with valuation and consensus estimates generally not appropriately reflecting these concerns,” he said. "With Coty shares off 40 per cent year-to-date and 65 per cent from their all-time high in June 2015, we now see risk/reward as compelling, particularly after four sell-side downgrades in the last two weeks."
His target for Coty fell to US$14.50 from US$17, versus the consensus of US$14.45.
Mr. Mohsenian added: “We see three key factors going forward that should catalyze stock outperformance: (1) We believe visibility that Coty can return to steady (albeit muted) topline growth going forward is building. (2) We see 1.5/2.5-per-cent upside to adjusted consensus EBIT in FY19/20 based on our detailed profit build. (3) We see the prospects of an increased JAB stake post the two-year lock-up restriction around the RMT deal as a potential favorable catalyst or sentiment driver. (4) Last, we don’t see these positives as priced in, with compelling valuation with Coty trading at only a 13. times FY2020 estimated P/E, 9.9 times EV/EBITDA, and a 9.2-per-cent FCF yield, which is at the very low end of CPG peers.”
The analyst is projecting adjusted EBITDA growth of 16 per cent year-over-year to US$22.9-million, matching the consensus on the Street. His revenue estimate of US$68.2-million exceeds the Street (US$67.5-million) and represents a 19-per-cent jump.
“Robust global trade and eCommerce are helping sustain Descartes’ organic growth at 5-year-plus high,” said Mr. Treiber in a research note released Tuesday. “Descartes has made two acquisitions since Q1 results, deploying $37.0-million capital. The acquisitions are not reflected in Street estimates and should help offset FX headwind.”
He maintained an “outperform” rating and US$38 target for Descartes shares. The average is US$36.21.
“We believe the network effects inherent in Descartes’ business model are unique among the consolidators in our universe," said Mr. Treiber. “Descartes has delivered 1060 basis points margin expansion between FY08 and FY18 on economies of scale as the company has deployed capital on acquisitions. Our Outperform thesis is based on: 1) strategic acquisitions fuel network effects; 2) consistent margin expansion and FCF [free cash flow] growth; and 3) large, untapped acquisition opportunity.”
Expressing increased confidence in its same-store sales and earnings per share upside, Credit Suisse analyst Michael Binetti hiked his target price for Lululemon Athletica Inc. (LULU-Q) shares ahead of Thursday’s release of its second-quarter financial results.
“Despite the big trade-up post 1Q earnings, LULU’s stock has outperformed (up 11pp last 2 months versus XRT up 5pp) amid read-throughs suggesting strong 1Q momentum even as compares toughened in 2Q (8 pp tougher vs 1Q),” he said. “We’re raising our 2Q SSS including FX to 11.5 per cent versus 10.5 per cent previously (Street: 9.6 per cent). From our checks, we think ongoing strong product momentum & further low hanging fruit on digital improvements should drive SSS upside. Further, we see FY18 guide as extremely conservative on both the top- & bottom-line.”
Mr. Binetti raised his second-quarter earnings per share estimate by 2 US cents to 50 US cents. His full-year projection rose to US$3.28 from US$3.25.
Keeping an “outperform” rating for its stock, his target rose to US$154 from US$125. The average is US$126.86.
In other analyst actions:
Cormark Securities analyst David McFadgen initiated coverage of Pollard Banknote Ltd. (PBL-T) with a “buy” rating and $25 target. The average on the Street is $25.50.