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

Seeing its “path to profitability” as unclear amid high investor expectations, GMP Securities analyst Martin Landry lowered his rating for Canopy Growth Corp. (WEED-T) to “hold” from “buy” in a research note released Tuesday.

“While the cannabis industry is still in its infancy, and that a ‘land grab’ strategy still makes sense, we believe that Canopy will need to better articulate its path to profitability,” he said.

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“Investors will soon turn their attention to profitability levels and WEED could be the last one to generate positive EBITDA amongst our coverage universe.”

Believing its valuation “is reflecting significant revenue growth expectations, some of which may take longer than expected to occur,” Mr. Landry lowered his target price for Canopy Growth shares to $65 from $70. The average on the Street is currently $73.77, according to Bloomberg data.

Elsewhere, Canaccord Genuity’s Matt Bottomley hiked his target for Canopy Growth shares to $70 from $50, keeping a “speculative buy” rating, in the wake of Thursday’s release of better-than-anticipated third-quarter 2019 results, believing they reaffirm its dominant position in the Canadian recreational market.

Mr. Bottomley said: “For the quarter, Canopy reported net revenues of $83-million, a solid beat to our forecast of $73-million, which included net recreational sales of $59-million (or 8,300 kg), compared to our forecast of $45M. We note that the company’s recreational volumes for the quarter came in at 2x that of its closest competitor (Aurora), cementing Canopy as the No. 1 rec player in Canada right out of the gate.

“Although Canopy reported revenues well in excess of our expectations, we were slightly discouraged to see the company take a further step back from reaching profitability. Inventory/production costs came in at a lofty $65-million during the quarter (Canaccord Genuity estimate – $42-million), resulting in a relatively low adj. gross margin of 22 per cent (down from an already low base 28 per cent in the prior quarter). Management noted that the increased costs were largely attributed to sites in construction or not fully commissioned that added to costs without yet producing revenues, as well as other costs associated with developing edible and beverage products.”


In response to weaker-than-anticipated preliminary fourth-quarter results, Desjardins Securities analyst Frederic Tremblay downgraded his rating for Lassonde Industries Inc. (LAS.A-T) to “hold” from “buy.”

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On Friday after market close, the Rougemont, Que.-based juice maker announced it expects total sales of $425-million for the quarter, up 6 per cent year-over-year but down just less than 3 per cent organically. Mr. Tremblay was projecting sales of $446-million.

The analyst now projects EBITDA of $38-million, down from both his previous forecast of $51-million and last year’s result of $53.5-million.

“Management attributes the year-over-year profit decline entirely to its U.S. operations,” he said. “The U.S. posted an organic sales decline of more than 7 per cent, due in part to a delay in finalizing a new contract (as LAS.A looks to replace low-margin contracts). In addition, a rise in input costs (resin, production and transportation) more than offset ongoing selling price increases.”

“LAS.A is working diligently to improve its customer mix in the U.S. by moving away from low-margin contracts that leave little room for profitability when input costs rise rapidly. We are also encouraged by a recent decrease in resin prices. However, we see no signs of near-term improvements in the U.S. competitive, transportation and labour shortage environments. We had previously written about several of these headwinds, but the magnitude and length of their impact appear to be more significant than originally anticipated. Consequently, we are reducing our 2019 and 2020 revenue growth and profitability expectations.”

Ahead of the March 29 release of its full earnings report, Mr. Tremblay lowered his 2018, 2019 and 2020 earnings per share estimates to $9.63, $10.10 and $12.09, respectively, from $10.95, $12.83 and $14.50.

His target for its stock fell to $195, which is the current consensus target on the Street, from $210.

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“While some of these U.S. headwinds are temporary and the Canadian business appears robust, we take a more cautious view as certain challenges will likely persist,” said Mr. Tremblay.


Touting its “home field advantage,” CIBC World Markets analyst John Zamparo initiated coverage of Hexo Corp. (HEXO-T) with an “outperform” rating.

“We believe one name that presents investors with a greater element of safety in a cannabis industry plagued by uncertainty and risk is HEXO Corp.,” he said. “A landmark deal with Quebec’s wholesale buyer, paired with a partnership with one of the largest beverage companies in North America, and a knack for innovative product design help distinguish HEXO from many of its peers. Its balance sheet and pedigree of senior management may not match some other competitors, but we believe reasonable upside exists with a much higher floor than most other producers in the cannabis space.”

He added: “The willingness shown by provinces to reward homegrown companies that invest significant dollars locally to build infrastructure and generate employment has been very apparent through the growth of this industry, and we believe it will persist. We find it unlikely that – barring some unforeseen event – the province of Quebec will materially reduce its volumes with HEXO, and believe there will almost certainly be pricing compression, but once that time arrives, HEXO will be well on its way to formulating and branding derivative products that are more protected from margin compression.”

Mr. Zamparo set a $8.50 target for Hexo shares. The average is $9.43.

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“As is the case for other companies in our cannabis coverage universe, our revenue and EBITDA estimates for HEXO are below consensus, but we have a high degree of conviction that HEXO can achieve these numbers,” said the analyst. “Furthermore, the company’s joint venture with Molson presents intriguing upside, and the courtship of a partner with production and distribution expertise should not be understated. We expect further relationships with established partners are still to come, perhaps in cosmetics, which we assess briefly in this report. But even absent another major partnership, we believe HEXO’s future as an innovator is bright.”

Elsewhere, Oppenheimer gave Hexo an “outperform” rating and $7 target, seeing the potential for global growth and calling its partnership with Molson Coors as a significant development and shows its ability to execute.


Crown Capital Partners Inc. (CRWN-T) is attractive at its current price, according to Acumen Capital Research analyst Trevor Reynolds, pointing to its “strong” leadership team, “compelling” valuation and stable base business.

He initiated coverage Calgary-based corporate investment management company with a “buy” rating.

“CRWN is run by a well-seasoned and highly qualified management team,” said Mr. Reynolds. “President and CEO Chris Johnson co-founded CRWN in 2000 (17+ years), while Brent Hughes (CCO) joined the team shortly thereafter in 2001. The remaining members of the team boast strong resumes in relatable fields. The core management group has successfully executed over $720-million in private debt deals since the company’s formation. We view the executive team’s strong investment track record as key to the CRWN story and note a strong alignment of shareholder interests based on the insider ownership position of 10 per cent (fully diluted) by key members of the team.”

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Mr. Reynolds emphasized Crown’s lending arm concentrates on businesses with annual revenue of $50-million to $500-million, providing it an addressable market of close to 6,000 companies. He called it the “known lender of choice for mid-market companies that are unable to meet the criteria of traditional lenders due to perceived risk profiles, or capital requirements that are too small to access the high yield debt market.”

“While CRWN will take on opportunities other lenders pass up for any number of reasons, the company looks to avoid distressed situations,” he said. “The investments do not always work out as planned, however management’s diligence in underwriting deals generally results in strong returns for shareholders (15-per-cent gross lifetime IRR). In total, management has executed on over $720-million in loans over the past 18 years via over 50 transactions, of which only three have generated a negative IRR.

“Today the company is currently focused on market share capture in the onsite combined heat and power generation space. Several factors have contributed to the power opportunity including unreliability of the grid, material power price increases which is a trend that is expected to continue, and improved generator technology. While the opportunity remains early stage, significant progress has been made to date, and management has set lofty capital deployment targets over the coming years. With operators in place and the sale ramp up underway in Ontario, CRWN is now looking for operators in other jurisdictions (Alberta and the Eastern U.S.) to further capitalize on the opportunity.”

With Crown currently trading at 0.9 times book with a 6-per-cent yield, Mr. Reynolds set a target price of $11.80 per share, which exceeds the current average of $11.49.

“Overall, solid underlying loan performance on the corporate lending business while the power income streaming opportunity has the potential to double CRWN’s business over the next 2-3 years,” he said.


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Following a “significant” reduction in its operating ratio during implementation of Precision Scheduled Railroading (PSR), RBC Dominion Securities analyst Walter Spracklin downgraded his rating for shares of CSX Corp. (CSX-Q) to “sector perform” from “outperform.”

“However, we believe that the low-hanging fruit has been picked and that further O/R improvements will be more incremental,” said the analyst. “In addition, we believe that volume will be affected as CSX continues to rationalize lanes in its intermodal business. We anticipate that these factors will constrain earnings growth at CSX.”

His target for CSX shares fell to US$78 from US$80. The average is US$76.39.

At the same time, Mr. Spracklin also lowered Norfolk Southern Corp. (NSC-N) to “underperform” from “sector perform,” believing it has “the lowest likelihood of success of completing PSR.”

“While inroads have been made toward on-boarding managers with PSR expertise and the company has issued solid targets that (if achieved) would indicate it is heading in the right direction, we point to several issues that in our view suggest a higher likelihood that PSR is not likely to be fully implemented,” he said.

“First, the company has guided to only a 100 basis point improvement in O/R. This is a very tepid pace that pales in comparison to prior PSR implementations (CP saw O/R reduction from the year prior to PSR of >680bps in year 1 and 1,000 bps by year 2, while CSX saw 400bps in year 1 and 1,020 bps by year 2). Second, the strategy is at odds with itself, in that the company is guiding toward a 3-year revenue growth CAGR of 10 per cent in the highly service-sensitive area of Intermodal, which is expected during a period when it will be fully implementing the service-disruptive PSR model. It is important to note that implementing PSR requires tearing down the current operating model and rebuilding a new one. It involves reducing the level of resources provided to the customer and a meaningful cut to the infrastructure that has traditionally backed that service. And, past implementation of PSR has shown that service-sensitive segments such as Intermodal in fact decline during PSR—they certainly do not grow at double-digit CAGR’s.”

His target for Norfolk Southern fell to US$178 from US$180. The average is currently US$189.86.


Seeing a “more constructive market backdrop” for copper miners, Citi analyst Alexander Hacking raised his rating for both Freeport McMoRan Inc. (FCX-N) and Southern Copper Corp. (SCCO-N) in a research note released Tuesday.

“Citi’s global commodity team is bullish copper noting that exchange inventory is at 10-year lows and Chinese weakness appear to be turning (credit, infrastructure/grid spend),” said Mr. Hacking. “Key copper equities are down 30-40 per cent year-over-year with significant rebound potential and upside to Citi’s long-term copper price.”

The firm now expects copper prices reach US$6,800 per ton (US$3.08 per pound) by the end of the year, with a long-term target of US$7,500 (US$3.40).

“The current copper price ($6,200/t) is above its long-term cost support ($5,500/t), but still presents a relatively attractive entry point for investors looking for upside to incentive prices ($6,500-$8,500/t), in our view,” he said.

Mr. Hacking moved Freeport, based in Phoenix, Ariz., to “buy” from “neutral” with a target of US$16 (from US$16). The average on the Street is US$13.97.

“Core assets in the Americas are strongly cash generative and even more valuable given recent geopolitical events,” the analyst said. “The main overhang continues to be Grasberg which is undertaking a massive shift to underground mining which eats up FCF and carries some operational risk. Longer-term Grasberg’s environmental footprint may become an issue again.”

His rating for Southern Copper jumped by two notches to “buy” from “sell” with a target of US$41, rising from US$33. The average is now US$34.48.

“The stock is the most expensive in the group on multiples (EBITDA, normalized FCF); yet carries the lowest risk profile given its geopolitical and asset mix,” he said. “Our Sell rating was based on valuation and political risk in Mexico. The stock has pulled back substantially and political risk appears to have moderated based on statements from Mexico’s new President. We still see headline risk in Mexico given possible continued political conflict with the company. Yet, the government has emphasized the importance of mining to the country and material changes to mining regulation or steep changes in taxation appear unlikely.”

At the same time, Mr. Hacking raised his target price for shares of First Quantum Minerals Ltd. (FM-T) to $18 from $14, maintaining a “buy” rating. The average is $19.06.

“FM remains our top pick given growth and 2021+ FCF yield, although we caution significant risk remains in Zambia,” he said. “We believe FM can re-rate upwards in a flat price environment with FCF from Cobre Panama.”


Citing valuation, Nomura analyst Simeon Siegel downgraded Lululemon Athletica Inc. (LULU-Q) to “neutral” from “buy” in the wake of a 24-per-cent rise in share price thus far in 2019.

Despite the move, the analyst expects comparable same-store sales strength to continue, leading him to raise his target for its stock to US$157 from US$140. The average is US$161.44.

Mr. Siegel also lowered Ulta Beauty Inc. (ULTA-Q) for the same reason. Its stock is up 25 per cent.

His target for the Illinois-based company rose to US$311 from US$305, versus the consensus of US$314.35.


After updating his model to reflect fourth-quarter results, Citi analyst Robert Morris downgraded Occidental Petroleum Corp. (OXY-N) to “neutral” from “buy” to reflect a lower midstream outlook.

"While we knew OXY’s valuation was susceptible to multiple expansion as the Midland-MEH spread ultimately returned to more normal levels, the day of reckoning has arrived much sooner than expected with the slowdown in drilling/completion activity across the industry in the Permian Basin and with the anticipation of expanded Permian oil pipeline takeaway capacity in the coming quarters,” said Mr. Morris. “With the company’s Q1’19 midstream net income guidance coming in much lower than expected and utilizing strip prices to gauge the forward Midland-MEH strip spread, we have lowered our Midstream net income forecast to $495-million from $1.1-billion (and $1.8-billion in 2018), and for 2020 to $238-million from $418-million. Our upstream projections improve slightly. Thus, based on our current commodity price forecasts and concurrent with a 10-per-cent/13-per-cent reduction in 2019 CFPS/NAV estimates, we are reducing our 12-month price target to $72/share (from $80).”

The average target on the Street is currently US$76.92.


With its core U.S. business “accelerating and set to show upside to consensus estimates” for both the first quarter and 2019, Stephens analyst Will Slabaugh upgraded McDonald’s Corp. (MCD-N) to “overweight” from “equal-weight.”

“Consensus models a deceleration in 2-year trends throughout 2019 ... which we believe provides room for positive surprises,” he said.

“Investors’ earnings expectations have been appropriately reset since 4Q18, though we expect the sell-side to modestly come down.”

Believing its valuation “no longer reflects much of the defensive premium from recent months,” Mr. Slabaugh hiked his target to US$200 from US$180, exceeding the consensus of US$198.92.

“Core to our thesis is the decision to move some of its marketing power to local co-ops, improvements at breakfast, lapping the D123 introduction (particularly hurt breakfast), and likely increased menu innovation,” the analyst said.


In other analyst actions:

Macquarie analyst Gus Papageorgiou upgraded Kinaxis Inc. (KXS-T) to “outperform” from “neutral” with $95 target. The average on the Street is $97.45.

GMP analyst Ian Gillies downgraded Inter Pipeline Ltd. (IPL-T) to “hold” from “buy” with a $23 target, down from $26. The average is $25.50.

Eight Capital analyst Ralph Profiti reinstated coverage of Hudbay Minerals Inc. (HBM-T) with a “buy” rating and $10 target. The average is $9.61.

With files from Bloomberg and Reuters

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