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

Given the recent “strong performance” of Dollarama Inc.’s (DOL-T) shares, Desjardins Securities analyst Chris Li does not expect the release of its third-quarter 2023 financial results on Wednesday to be a catalyst for further gains.

However, he thinks the earnings report is likely to “reaffirm that trends are progressing well and give investors confidence that mid- to high-teen percentage EPS growth next year is achievable.”

Mr. Li is projecting earnings per share of 68 cents, which is 2 cents lower than the consensus forecast on the Street due to “more conservative” gross margin and expense assumptions.

“We are forecasting 5.0 per cent, implying a three-year stack of 13 per cent, in line with the trend in the past two quarters,” he said. “Growth is driven by strong demand for consumables against the high inflation backdrop, and price increases and rollout of higher price points (smaller impact). One less Halloween day vs 3Q FY22 likely had a small impact.”

In a note released Tuesday, he trimmed his estimates for the retailer to reflect higher interest rates. His full-year EPS projections for 2023 and 2024 slid to $2.62 and $3.06, respectively, from $2.65 and $3.12.

He maintained a “buy” recommendation and $91 target for Dollarama shares. The average is $86.96.

“We maintain our positive long-term view,” said Mr. Li. “While valuation is above-average (26.3 times forward consensus P/E vs 24 times), we believe it is supported by the shift to discount, its outsized EPS growth, upside from higher price points and scarcity premium in the small Canadian market.”


National Bank Financial analyst Vishal Shreedhar expects to see sequential same-store sales growth from Empire Company Ltd. (EMP.A-T) when it reports second-quarter 2023 financial results on Dec. 15, however he warned technology issues have created “an overhang” for the grocer.

“Media reports suggest that Empire’s IT systems have been impacted by a cyberattack,” he said. “Our understanding is that IT challenges began in early November and that outages potentially exist across a broad variety of IT systems. Thus far, EMP has provided sparse details; we would anticipate further disclosures regarding this evolving issue. While each situation is unique, our review of cyberattacks at other companies suggests limited long-term impact.”

Mr. Shreedhar also expressed concern about slow growth from its Voilà e-commerce business, given declining online sales trends in the broader retail market. However, he continues to see it as a “long-term growth driver” and expressed optimism about the potential from technology gained by its partnership with British online grocer Ocado Group PLC.

“Empire has invested significantly in e-commerce, which is experiencing slowing growth,” he said. “There is investor concern that Voilà may not reach sufficient scale to become profitable. EMP expects Voilà's EPS dilution for F2023 to be about the same as in F2022 ($0.28). We highlight the potential for Ocado technology to allocate unused CFC space to non-grocery products should its food e-commerce aspirations not manifest as expected. Specifically, Ocado has suggested its technology is capable of handling non-food items; the company has clients such as Gap and American Eagle.”

For the quarter, he’s projecting earnings per share of 67 cents, a penny below the consensus estimate but one cent more than the result during the same period a year ago.

“Our expectation of flattish year-over-year EPS largely reflects sales growth (food inflation), benefits from Project Horizon (promotional optimization) and share repurchases, offset by costs related to the rollout of Voilà, SG&A deleverage and higher D&A,” said Mr. Shredhar. “We consider FR segment results to be more meaningful than total company results for the purposes of evaluating recurring earnings power (total company results include contribution from the Investments/Other income segment). For reference, we model FR EPS of $0.63 versus $0.60 last year.”

Mr. Shreedhar raised his full-year 2023 and 2024 revenue and earnings estimates modestly, but he maintained an “outperform” recommendation and $40 target for Empire shares. The average is $42.39.

‘Overly pessimistic’ view of retailers in challenging holiday season creates cheaper valuations

“We believe Empire has established a solid foundation for growth and anticipate further benefits related to Project Horizon,” he said. “In addition, we believe valuation is attractive, trading at 6.7 times NTM [next 12-month] EV/EBITDA for the Retail business (five-year average is 7.3 times)”.

Elsewhere, Scotia’s George Doumet trimmed his target by $1 to $42.50 with a “sector outperform” rating.

“We expect the same themes we saw with earlier grocer reporting – namely sequential improvements in SSS trends, modest pressures on food gross margin (offset by internal initiatives at EMP.a), and higher SG&A spend resulting from tight labour conditions,” he said. “That said, we are modestly below consensus expectations for the Q2 quarter, but remain constructive on the name, with the shares currently trading at a discount to the three-year historical valuation (12.5 times NTM [next 12-month] P/E vs. 13.6 times) and unwarranted (in our view) differentials vis-a-vis MRU and L (5.8 times and 4.3 times NTM P/E discount to MRU and L, respectively vs. three-year historical discount of 3.4 times and 1.8 times).”

Desjardins Securities’ Chris Li reduced his 2023 and 2024 EPS estimates to $2.86 and $3.11, respectively, from $2.87 and $3.13. He kept a “buy” rating and $44 target.

“Our [second-quarter] EPS estimate of $0.66 is slightly below consensus of $0.68 due to our more conservative gross margin and/or SG&A assumptions,” said Mr. Li. “While industry challenges and recent IT system issues will weigh on results in the near term, we believe they are largely temporary and will ease once food inflation normalizes and economic conditions improve next year. We believe EMP’s large valuation gap vs peers (11.5 times forward P/E vs 16.6 times and 18.4 times for L and MRU, respectively) largely reflects the near-term risks. Patience is required.”


Canaccord Genuity analysts Derek Dley and Luke Hannan thinks it’s time for investors to “turn to offence” with consumer stocks.

“While concerns around a recession in early 2023 have become the consensus view, we believe this is reflected in a portion of our Consumer Discretionary names,” they said. “Furthermore, the narrative around bloated inventory levels was well addressed by our preferred names on the back of Q3/22 results, and we have begun to witness an easing of freight-related backlogs and costs, which should provide a tailwind to our Top Picks in 2023.

“With the Consumer Discretionary index trading in line with its historical average P/E ratio at 14.5 times, compared to the Consumer Staples index, which is trading at a historically wide premium to the broader S&P Composite index, we have become more constructive on the Consumer Discretionary names.”

In a research note titled Holiday Wishlist, the analysts said 2022 brought out the defensive attributes for many Consumer Staples companies in their coverage universe.

“With the challenging macro backdrop, spearheaded by a rapid increase in the interest rates across all developed economies, Consumer Staples was one of the few sectors to generate positive returns during the year,” they said. “Furthermore, as inflation reached 40-year highs in Canada, the consumer spending environment deteriorated, with many consumers feeling the pinch from higher mortgage costs, higher costs for groceries, and a jump in fuel prices.

“Amid this backdrop, the Canadian grocers generated strong performance throughout the year, as they were able to pass on record-high food price inflation to consumers, which led to robust same-store sales and overall top-line growth. Couche-Tard was another company which benefited from the defensive shift by many investors, capitalizing on what was a robust fuel margin environment and a pickup in merchandise sales growth within its convenience stores.”

For 2023, the analysts named three top picks. They are:

* Aritzia Inc. (ATZ-T) with a “buy” rating and $67 target. The average on the Street is $61.86.

They pointed to “strong brand momentum” on both sides of the border as the Vancouver-based company continues to build its U.S. retail network. They thinks EBITDA margins will “benefit from scale and normalization of freight” and see a “healthy balance sheet” with its shares trading below best-in-class retail peers.

* Alimentation Couche-Tard Inc. (ATD-T) with a “buy” rating and $68 target. The average is $70.05.

The analysts think the Quebec-based retailer possesses a “structural advantage” from fuel margin strength and benefits from “steady” convenience store performance. They called its balance sheet “pristine” and providing “significant flexibility” with its shares having an “attractive valuation” given its organic growth profile and M&A potential.

* Uni-Select Inc. (UNS-T) with a “buy” rating and $46 target. The average is $46.25.

The Boucherville, Que.-based automotive refinish and industrial paint company has “a history of outperformance in challenging economic backdrops,” they said, seeing it in the “early innings of driving operational excellence.” They see a balance sheet “primed for industry consolidation” and “attractive valuation considering defensive characteristics.”


Seeing “diversification with capital discipline,” ATB Capital Markets analyst Amir Asif assumed coverage of Baytex Energy Corp. (BTE-T) with a “sector perform” recommendation on Tuesday.

“Baytex Energy has a diversified asset base both by location and by commodity type, providing a diversified cash flow base,” he said. “This diversified cash flow base, combined with its focus on debt reduction and share buybacks, should allow for modest production growth and a strengthening balance sheet at the same time.

“The Company began share repurchases in May of this year, with 3.8 per cent of shares outstanding repurchased to date. The pace of buybacks is expected to double once net debt decreases from $1.1 billion currently to $0.8 billion, a level we expect the Company to reach some time in Q2/23.”

The analyst said the two key assets that differentiate the Calgary-based company are its Clearwater play at Peavine and its early-stage Pembina Duvernay play.

“The Clearwater play at Peavine is delivering some of the best industry Clearwater wells to date, with third quarter volumes averaging 8.2 mboe/d [thousand barrels oil equivalent per day] (approximately 10 per cent of corporate production),” he said. “The Pembina Duvernay play is earlier stage, with Q3/22 production of 3.4 mboe/d (4 per cent of corporate production). However, with the Company owning 200 sections with 100-per-cent WI in the volatile and black oil window, this play could add meaningful asset value over time relative to the limited current EBITDA contribution. 2023 guidance is expected on December 7.”

Mr. Asif raised the firm’s target for Baytex shares to $9 from $8. The average target on the Street is currently $9.05.

In a separate note, Mr. Arif assumed coverage of Gear Energy Ltd. (GXE-T) with a “sector perform” recommendation, pointing to “improving sustainability and torque to heavy oil pricing.”

“Gear Energy is a heavy oil-weighted producer with assets focused in Alberta and Saskatchewan,” he said. “The Company has been improving its sustainability, with debt paid off, capital allocation to waterfloods, and capital spending to reduce remaining ARO. The Company’s asset base remains heavy oil focused, with plenty of drilling opportunities in its three core areas – Lloydminster, SE Saskatchewan, and Central Alberta. The improving sustainability and economic drilling should allow Gear to maintain modest production growth while spending significantly less than cash flow. Additionally, Gear provides meaningful torque to movements in WCS and WTI pricing given its heavy oil weighting.”

He reduced the firm’s target for Gear shares to $1.80 from $2. The current average is $1.97.


Raymond James analyst David Quezada thinks Capital Power Corp.’s (CPX-T) Investor Day event last week “represented a constructive update illustrating CPX’s well-rounded opportunity set including the repowering of its natural gas facilities, robust North American renewables pipeline and sizable opportunity in CCS [carbon capture and sequestration].”

Maintaining a “market perform” rating for its shares, he raised his target to $53 from $49 based on a higher earnings forecast for 2023. The average on the Street is $51.92.


In other analyst actions:

* With “critical mass in place,” Bloom Burton analyst Prasath Pandurangan thinks CareRX Corp. (CRRX-T) “looks primed for sustained growth.” He initiated coverage of the Toronto-based provider of specialty pharmacy services to seniors with a “buy” recommendation and $4.50 target on Tuesday. The average is $6.09.

* TD Securities’ Steven Green cut New Gold Inc. (NGD-N, NGD-T) to “reduce” from “hold” with an 85-US-cent target. The average is US$1.14.

* Eight Capital’s downgraded Stelco Holdings Inc. (STLC-T) to “sell” from “buy” with a $43.25 target. The average on the Street is $47.73.

* JP Morgan’s Jeremy Tonet cut his AltaGas Ltd. (ALA-T) target to $28 from $30 with an “overweight” rating, while CIBC’s Robert Catellier raised his target to $34 from $32 with an “outperformer” rating. The average is $31.53.

“Solid medium-term guidance and a 6-per-cent dividend bump should be a material positive for shareholder confidence in light of the company’s commitment to risk management and cost reduction,” said Mr. Catellier. “The company’s strategy is largely unchanged, with a focus on reducing leverage to the 4.5-5.0 times range and leveraging the structural advantage from its existing assets to grow energy exports. Taken as a whole, the 2023 guidance could be a relief for the stock as it has sold off following the Q3/22 earnings miss.”

* Mr. Tonet also lowered his target for TC Energy Corp. (TRP-T) to $64 from $67 with a “neutral” rating. The average is $65.05.

* BMO’s Ryan Thompson raised his Fortuna Silver Mines Inc. (FVI-T) target to $6, above the $5.82 average, from $5.75 with an “outperform” rating.

“The updated Sunbird resource estimate at Seguela adds 279koz to the mine’s indicated resource categor,” he said. “At the same time, the inferred category for Sunbird has increased to 506koz from the 350koz estimated in March; the grade also increased. Overall, we are now assuming 1.720Moz of mined gold over the LOM at Seguela, up from our prior assumption of 1.551Moz. This caused our NAV for Seguela to increase to $558-million from $505-million and our target has increased to $6.00 from $5.75. Drill results from other targets are also encouraging.”

* Credit Suisse’s Andrew Kuske raised his Gibson Energy Inc. (GEI-T) target to $25 from $22.50 with a “neutral” rating, while Raymond James’ Michael Shaw cut his target to $25.50 from $27 with a “market perform” rating. The average is $25.50.

“As per typical practice, Gibson Energy Inc. (GEI) released the annual capital budget for 2023 that looked to be largely in line with expectations with a degree of upside from potential project awards in the core Alberta-centric operations,” said Mr. Kuske. “GEI continues to run a fully funded capital program that is matched with considerable discipline in relation to a total capital return objective (dividends, share buybacks and de-leveraging). In our view, further growth validation is required from the core infrastructure business to help being more constructive on the stock. Positively, near-term differentials will look to aid cash flow and earnings generation with a potential upside bias.”

“We believe GEI’s core business is well positioned in Alberta with high returning capital opportunities on the horizon. Beyond Alberta, growth remains more elusive, but several near-term dynamics are positive for the Marketing business with wider Western Canadian differentials – albeit that should structurally change in time.”

* RBC Dominion Securities’ Josh Wolfson reduced his Kinross Gold Corp. (KGC-N, K-T) target to US$4.50 from US$6. The average is US$5.20.

“Kinross shares have performed well in recent months, in our view supported by higher gold prices, and the company’s aggressive $300-million buyback in 4Q that will conclude over the coming weeks,” said Mr. Wolfson. “Following corporate updates by Kinross in 3Q, our valuation has been negatively impacted, and we ultimately view the company’s go-forward outlook as hinging upon the direction of gold prices — below $1,750 per ounce, we forecast buybacks will cease and leverage will increase, while above $1,900 per ounce larger buybacks could occur. We reduce our target ... following model updates.”

* CIBC’s Bryce Adams lowered his Osisko Mining Inc. (OSK-T) target by $1 to $5.25, below the $5.42 average, with an “outperformer” rating.

“Last week, Osisko Mining provided highlights from its Windfall feasibility study (FS), which we view as conservative, but view the operating cost and capital estimates as robust. We have updated our model to reflect the FS assumptions and on the following pages provide a scenario analysis for upside scenarios, mostly related to average feed grades, but also overall resource expansion,” he said.

* BoA Securities’ Matthew DeYoe hiked his Sigma Lithium Corp. (SGML-Q, SGML-T) target to US$47 from US$37 with a “buy” rating. The average is $53.16 (Canadian).

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