Inside the Market’s roundup of some of today’s key analyst actions
The recent “erratic” behaviour of chief executive officer Elon Musk may hurt Tesla Inc.’s (TSLA-Q) brand, according to Nomura Instinet analyst Romit Shah, leading him to downgrade his rating for its stock to “neutral” from “buy” in a note titled “No Longer Investable.”
"We have been one of the most bullish on TSLA shares since initiating coverage last October … We continue to believe that Tesla could be a lot bigger than it is today," said Mr. Shah. "The issue though is the erratic behavior of CEO Elon Musk. During the second quarter, the switch seemingly flipped … We are worried that this behavior is tainting the Tesla brand, which in terms of value is most important."
Mr. Shah does believe the company can continue to stand out from its competitors through innovation, and he thinks it will continue to grow in size.
"Mr. Musk's behaviour is well documented (taunting short sellers, NY Times interview, cave diver accusation, earnings call outburst, Joe Rogan podcast) and likely contributed to the onslaught of executive departures in recent months," he said. "Notwithstanding improving fundamentals, we believe that Tesla is in need of better leadership (an about face) and are moving to the sidelines until we see what happens with management."
He reduced his target price for Tesla shares to US$300 from US$400. The average target on the Street is currently US$315.45, according to Bloomberg data.
Projecting significant cash flow per share growth in 2020 when its DeBu offshore wind project in Germany comes online, BMO Nesbitt Burns analyst Ben Pham raised his rating for Northland Power (NPI-T) to “outperform” from “market perform.”
Mr. Pham thinks the coming “wall of cash” will lead to flexibility for capital return initiatives, including dividend increases.
His target for the Toronto-based company jumped to $28 from $25, which exceeds the average target among analysts covering the stock of $27.36.
"Given the significant upside potential, NPI now moves up to our Top 3 Best Ideas in Cdn. Energy Infrastructure," he said.
Citing recent management changes and improved execution, Wedbush analyst Michael Pachter upgraded Snap Inc. (SNAP-N) to “outperform” from “neutral.”
Mr. Pachter thinks the recent addition of new chief financial officer Tim Stone points to an increased focus on shareholder value, adding the departure of chief strategy officer Imran Khan, announced Monday, will make Mr. Stone more visible and important.
Also emphasizing the importance of vice-president of investor relations Kristin Southey, he raised his target to US$12.25 from US$11.50. The average is US$11.76.
"Negative free cash flow and a high portion of stock-based compensation relative to revenue has kept us on the sidelines, but the departure of [Mr. Khan and chief financial officer Drew Vollero] and their replacement by seasoned financial professionals increases our confidence that Snap can turn the corner in the foreseeable future," said Mr. Pachter. "The company has a significant opportunity to align its strategic priorities with those of its shareholders and to articulate those goals in a much more consistent and clear way."
Nike Inc.’s (NKE-N) campaign with controversial National Football League quarterback Colin Kaepernick was both "a stroke of genius” and a “subtle sign” of its strength, according to Canaccord Genuity analyst Camilo Lyon.
“We believe NKE’s new “Just Do It” ad campaign with Colin Kaepernick was a stroke of genius as it accomplished four key things,” he said. “First, it struck an emotional chord with people that incited a conversation, much as it was intended. Second, it was courageous in that NKE took a stand in support of a social issue where few (if any) companies have of late. Third, it spoke to NKE’s core consumers in a very NKE-esque provocative way that shows it understands them and the issues that matter to them. Fourth, it strengthened the ties with its sponsor athletes by showing them that NKE stands by them. To us, this premeditated move was another subtle but significant sign of NKE’s strength and confidence in its position in the marketplace, one that likely does more good than harm.”
Last week, shares of Nike initially dropped following the release of a campaign to commemorate the 30th anniversary of its “Just Do It” slogan featuring Mr. Kaepernick, a polarizing figure at the centre of the player protests during the U.S. national anthem. The shares have since rebounded and recouped losses
On Tuesday, Mr. Lyon raised his rating for Nike shares to “buy” from “hold,” seeing significant momentum for the sportswear giant.
“After two years of a soft product cycle that led to increased inventory levels, higher discounting, margin compression, and market share declines, NKE has regained its footing and is solidly marching back to top form,” he said. “Since last year's announcement of its new "Triple Double" strategy, NKE has most notably accelerated its product engine as evidenced by a flurry of new innovations and marquee collaborations. It also has increased its focus on the consumer experience via its SNKRS app, NikePlus membership, and other in store/ online consumer-centric initiatives. Speed initiatives via programs like Express Lane have also ramped up, and while they will require time to become meaningful contributors to sales/margins, the steps taken thus far point to longer-term positive gross margin gains, particularly in light of what has been a decade of margin pressure from persistently rising production/labor costs, until last year when production costs were flat to margins.
“In addition, we believe the gross margin headwinds the company has faced over the past 2.5 years are set to reverse, thus yielding an opportunity to recapture at least ~100bps of promotionally driven margin degradation and DTC mix, and over 100 basis points of production cost gains via its "man rev" data/manufacturing initiatives over the next 2-3 years. In aggregate, we see newly introduced platforms coupled with forthcoming innovations sparking the next multi-year run for NKE. These elements, underpinned by NKE's transformation to an experientially driven company, combine to form catalysts to sustaining mid-teens EPS growth for the next three years, an outlook that is increasingly visible and reflective of F2021 earnings power approaching $4.00.”
Mr. Lyon hiked his target for Nike shares to US$95 from US$78. The average target on the Street is US$83.57.
CIBC World Markets analyst Paul Holden sees “significant” potential upside for Element Fleet Management Corp. (EFN-T) through strategic options available to its new management.
Ahead of the release of conclusions from its ongoing strategic review, which he expects to be announced as soon as late September, Mr. Holden raised his rating for its stock to “outperformer” from “neutral.”
“For the core fleet business, we expect cost reductions of $40-million-$50-million and a top-line growth of 6-8 per cent,” said Mr. Holden. “These conclusions are based on peer benchmarking and are core to our expectation for margin expansion through 2020E. An ROAA [return on average assets] of 4.0-per-cent looks achievable. We assume that management will liquidate 19th Capital, resulting in a BV hit of $190-million to $283-million. This may necessitate a common equity raise of $200-million (our base-case assumption) to keep financial leverage in check.
“Optimizing the balance sheet will be made easier by reducing the dividend and we assume a 50-per-cent reduction. Selling the ECAF notes and other non-core assets may not have a material impact on leverage, but will help clean up the story. We think the $200-million equity raise and dividend reduction will put Element in a good position to repay convertible debt without having to take further shareholder dilutive actions.”
He added: “The decision to sell or keep the Australia and New Zealand (ANZ) operations is one of the more interesting choices facing management. We think the value as a public company may be maximized by keeping it (EPS will be higher), but that there is potential M&A upside by selling ANZ (est. value at $500-million-$700-million and North America through separate transactions.”
Mr. Holden raised his target price to $10 from $7, which exceeds the consensus of $7.82.
“We assume a multiple re-rate to 11 times after returning the core business to full potential, liquidating the troublesome 19th Capital and optimizing the balance sheet,” he said.
His target fell by a loonie to $61, which is a penny less than the consensus.
In a separate note, Mr. Gresh initiated coverage of MEG Energy Corp. (MEG-T) with an “underweight” rating, expressing concern about its debt load and suggesting natural de-levering could take an extended period of time given a lack of asset sales potential.
Mr. Gresh’s target is $8.50, versus the average of $11.33.
Credit Suisse analyst Cameron McKnight initiated coverage of Caesars Entertainment Corp. (CZR-N) with an “outperform” rating and calling it his “Top Pick” among gaming stocks.
“The company is one of the largest U.S. gaming operators, with eight Las Vegas Strip and 22 Regional properties,” he said. “We like CZR’s mix of domestic gaming exposure, and we like the dynamics of its markets. While CZR is well liked on the sell side, investors are cautious and concerned about the economy and the Las Vegas Strip. CZR currently trades at 8.0 times EBITDA, a slight premium to MGM’s OpCo valuation, and a multiple closer to Regional than Las Vegas peers. Its 9.2-per-cent free cash flow yield is extremely attractive.”
His target for the stock is US$13. Consensus is US$13.78.
“We see a 7.5-per-cent 2017-2020 EBITDA CAGR [compound annual growth rate] from continued market growth, share gains, and new projects and acquisitions,” said Mr. McKnight. “We think CZR can outperform on the Strip and in Regional markets from reinvesting in long-neglected assets. We think assets like the Flamingo, designed in the 1940s and not ever repositioned, with key center-strip locations and substantial daily foot traffic, should see an outsized return from renovations. CZR is investing in a significant convention center behind its center-Strip properties. CZR recently acquired the near-monopoly Indianapolis assets of Centaur Gaming at an attractive multiple, for which the addition of table games could be worth another $0.50-0.75/share.”
In other analyst actions:
RBC Dominion Securities analyst Amit Daryanani downgraded Western Digital Corp. (WDC-Q) to “sector perform” from “outperform” and dropped his target to US$70 from US$95. The average on the Street is US$97.85.
“We think NAND oversupply will persist through mid-2019 and GMs are unlikely to stabilize for next several quarters resulting in sustained downward revisions for [forward 12-month] estimates (we see GMs stabilizing mid-2019),” he said.
Lake Street Capital Markets analyst Brooks O'Neil initiated coverage of Viemed Healthcare Inc. (VMD-T) with a "buy" rating and $10 target, which tops the consensus of $9.75.
With files from Bloomberg News