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

Expecting a “noisy” quarter when Empire Company Ltd. (EMP.A-T) reports its third-quarter results on Wednesday, Desjardins Securities analyst Keith Howlett lowered his rating for the grocery store operator to “hold” from “buy.”

“Empire’s 3Q FY19 results will require interpretation,” he said. “Results will include almost 8 weeks of Farm Boy, $45-million of store closure and labour agreement costs in western Canada, as well as the costs of a lettuce recall, generic drug reform and higher minimum wage rates. The $150-million of Project Sunrise savings which are to be realized in FY19 are weighted to 4Q. The spread between realized cost savings and year-over-year EBITDA growth in FY19 appears likely to be wider than we had thought.”

Mr. Howlett made the move despite noting improved grocery industry conditions over the past several months, pointing to modest inflation as an important tailwind as well as the “continued restraint” in industry square footage growth.

He’s projected same-store sales growth of 2.5 per cent, rising from 1.3 per cent in the third quarter of fiscal 2018. His revenue estimate of $6.28-billion exceeds the consensus on the Street ($6.233-billion) and the result of a year ago ($6.029-billion).

“Store closure costs and tangentially related labour adjustment costs of $45-million will be incurred in 3Q,” the analyst said. “The company will not be adjusting for these costs in its earnings report. To maintain consistency with the company’s reporting, we do not adjust for them in our estimates, but do adjust for them (add them back) in establishing our target price.”

To reflect both the cost of store closures and labour adjustments, he lowered his fiscal 2019 EPS projection to $1.42 from $1.63.

His target for Empire shares fell to $30.50 from $32. The average target on the Street is $32, according to Bloomberg data.

“Empire has aggressively begun to tackle its structural and efficiency shortcomings while taking steps to establish vectors of future growth (eg Farm Boy, Ocado relationship),” he said. “In baseball terms, we are still in the early innings. The extent to which the planned $500-million of Project Sunrise cost savings (generated over three years, FY18–20) are visible at the EBITDA line will be one of the key signposts of progress.”


Calling fiscal 2019 a “platform building year” for Unisync Corp. (UNI-T), Acumen Capital analyst Jim Byrne initiated coverage of the Vancouver-based uniform provider with a “buy” rating” on Tuesday.

“The nature of the business, with bigger contract rollouts, causes some lumpy quarterly results, and the timing of contracts can significantly impact financial results,” he said. “We expect 2019 financial results to show marginal growth in revenue and lower EBITDA margins as the company spends money in preparation for the Alaska rollout. Fiscal 2020 and fiscal 2021 results will be meaningfully better than 2019 with Alaska and WestJet hitting the bottom line. A large Department of National Defence contract could contribute significantly to the growth outlook longer term. News on the DND contract could also act as a positive catalyst for the shares.”

Mr. Byrne said the recent $19.5-million acquisition of Utility Garments Inc., which closed in October, has provided Unisync both “iconic” brands and a presence in the U.S. market.

“The company’s purchase of Utility Garments … has improved their exposure in the food service and retail segments with brands such as Tim Horton’s and Jean Coutu,” he said. “Based in New Jersey, Red the Uniform Tailor offers UNI a base of operations in the U.S. and, along with a newly leased facility in Nevada, will allow the company to expand the U.S. business further.”

Believing the company’s shares are currently selling at a discounted valuation, Mr. Byrne, who is the lone analyst on the Street currently covering the stock, set a target price of $4.50.

“Unisync shares trade at 22.9 times 2019 estimated enterprise value-to-EBITDA but just 6.4 times 2020 estimated EBITDA, compared with public peers at 10.4 times and 9.6 times, respectively,” he said. “We believe the 2020 valuation is more relevant to investors as it represents a steady state of operations. In our view, UNI could be an attractive takeover target by a number of larger players in the uniform business as their contract wins at WestJet and Alaska Airlines have raised their profile in the industry dramatically.”


Raymond James analyst Frederic Bastien thinks the Street “overreacted” to both the termination of New Peformance Materials Inc.'s (NEO-T) acquisition agreement with Luxfer Holdings PLC (LXFR-N) and its “disappointing” fourth quarter results.

On Monday, shares of Neo Performance, a Toronto-based chemical manufacturing performance, dropped 37.4 per cent on the heels of a before-market announcement of the mutual termination of Luxfer’s proposed US$612-million acquisition.

Neo also reported fourth-quarter revenue of $109.4-million, which was consistent with the same period a year earlier but below expectations of $119.7-million.

"We acknowledge that the macro backdrop has weakened in recent months, and that the stock may remain under pressure until it rotates from arbitrage funds back into the hands of fundamental investors, but our job is to call out asymmetric return opportunities when we see them," said Mr. Bastien. "[Monday's] 37-per-cent price plunge (vs. the TSX up 1 per cent) has notably pushed NEO's valuation to 3.5 times forward EBITDA, versus an average of 7.8 times for a group of advanced material and chemical firms, and the 5.3-times its predecessor company averaged between 2007 and 2012.That's overly punitive, in our view, for a firm that continuously drives product innovation, generates healthy and growing free cash flow, and makes the electrification of the two trillion dollar auto industry possible. Accordingly we encourage patient value investors to buy NEO today."

Maintaining an “outperform” rating, Mr. Bastien lowered his target for the stock to $15 from $19.25. The average is $18.95.

“Although we see NEO’s 1H19 results coming in below those achieved in 1H18, our analysis suggests these challenges are not existential in nature,” he said. “The firm maintains a unique and defendable place in the rapidly growing market for engineered materials. Just as importantly, its management team is comprised of industry veterans with a wealth of experience and the capability to deliver outstanding returns to its shareholders.”

Elsewhere, seeing “better days ahead,” CIBC World Markets analyst Scott Fromson upgraded Neo Performance Materials Inc. to “outperform” from “neutral” with a $15 target, down from $18.

“We see little change to NEO’s sound long-term fundamentals, including growing markets for rare earths engineered materials, solid management and a strong balance sheet,” said Mr. Fromson. “As for China concerns, NEO has successfully operated in-country for 28 years, employing Chinese management. We see the sell-off as a buying opportunity and we stick our neck out on an upgrade.”

GMP analyst Stephen Harris raised his rating to “buy” from “tender” with a $20 target, up from $19.35.

Seeing an “attractive entry point,” Canaccord Genuity’s Yuri Lynk dropped his target to $16 from $18.78, keeping a “buy” rating.

Mr. Lynk said: “We like Neo’s wide-moat business and exposure to global mega-trends such as electric vehicle adoption, tighter emission standards, and the continued proliferation of smaller, lighter devices. The recent drop in the share price caused by the mutual termination of Luxfer’s (LXFR:NYSE I Not rated) bid to acquire the company has, in our view, created an attractive entry point into the stock. While no reason was given for the decision not to proceed with the acquisition of Neo, we believe, based on conversations we have had with Luxfer shareholders over the past few months, that the Neo acquisition was not well telegraphed and its relative size may have caused worries over integration and leverage risks. Importantly, we do not view the deal falling through as any indictment on Neo’s business or prospects.”


Credit Suisse analyst Allison Landry lowered his first-quarter rail estimates for North American railway companies by an average of 3 per cent on Tuesday to reflect the impact of “Snowmaggedon.”

However, she does think that the weather-driven volume shortfall could largely be made up in the second quarter.

“CSX and KSU should see a positive mix impact in Q1, helping to offset weaker than expected volumes (though we point out that QTD, CSX has the smallest delta and KSU has the largest vs. our initial forecasts,” she said.

“Given that the weather impact is largely transitory and doesn't change the core earnings power for the rails moving forward, our full-year 2019 forecasts are for the most part intact (down 20 basis points, on average).”

Ms. Landry said CSX Corp. (CSX-Q) remains her favoured name in the sector. With an “outperform” rating, she raised her target for the Jacksonville-based company to US$85 from US$81. The average on the Street is US$76.05.

“We think the market is underappreciating the FCF story at CSX - the stock is trading at 15 times our 2021 FCF estimate, versus 19 times and 18 times for NSC and UNP,” she said. “CSX can handle 20-30 per cent more tons on its network as a result of PSR-enabled capacity increases, which tells us that mid-term capex (3-5 years) will remain subdued. Consequently, FCF generation should be robust for the foreseeable future. “

She also made the following target changes:

Union Pacific Corp. (UNP-N, “outperform”) to US$192 from US$186. Average: US$176.42.

Canadian Pacific Railway Ltd. (CP-N/CP-T, “outperform”) to US$234 from US$230. Average: US$225.86.

Ms. Landry maintained an “outperform” rating and US$96 target for Canadian National Railway Co. (CNI-N, CNR-T). The average is US$89.66.


Expecting 2019 to represent a peak rate of earnings growth as an uncertain macro environment will make future increases more difficult, Bernstein analyst David Vernon lowered his rating for Canadian Pacific Railway Ltd. (CP-N/CP-T) to “market perform” from “outperform.”

Pointing to strong execution as a means of delivering revenue upside, Mr. Vernon trimmed his target to US$211 from US$213, falling short of the US$225.86 average.


After the weekend crash of a second of its 737 MAX planes, Edward Jones analyst Jeff Windau downgraded Boeing Co. (BA-N) to “hold” from “buy,” expecting the accidents to “result in additional expense and some delay in orders, which, from a business perspective, could pressure financial results.”

“Both flights had similar patterns after takeoff, raising some concerns about the automation of the flight control system,” said Mr. Windau. “A primary downside risk to shares, in our view, is the continued concern about safety in the 737 Max 8, leading to order cancellations.”

He did not specify a target price for Boeing shares. The current average target on the Street is US$445.80.


Seeing Tesla Inc. (TSLA-Q) “hitting an air pocket in demand that is coming earlier than we expected,” Morgan Stanley analyst Adam Jonas reduced his first-quarter deliveries projection by 23 per cent to 48,000 units to “allow for sluggish U.S. sales and potential impediments to international deliveries.”

His fiscal 2019 total company volume estimate of 362,000 now sits at the low end of the company’s guidance of 360,000 to 400,000.

“The company is undergoing multiple transitions with sales momentum slowing, shift to online channels, management changes, setting a foot into China and the early Model Y unveil among other developments,” said Mr. Jonas, who also dropped his Model 3 transaction price estimate. “We continue to see the stock as fundamentally overvalued while potentially strategically undervalued.”

After reducing his 2019 and 2020 earnings per share projections to US$1.30 and US$6.69, respectively, from US$4.17 and US$10.22, Mr. Jonas dropped his target price for Tesla shares to US$260 from US$283. The average on the Street is US$324.06.

He kept an “equal weight” rating.

"For what many investors believe to be a high growth tech firm, Tesla has made notable moves to cut costs/prices and stimulate orders,” said the analyst. “We are not inclined to buy now as we don’t believe we’d be compensated for the amount of risk we’re taking. The potential longer-term ‘resolution’ of the Tesla story as we approach nine years after its IPO may require a few more chapters to play out.”


In other analyst actions:

Mizuho Securities analyst David Clark initiated coverage of Canadian Natural Resources Ltd. (CNQ-T) with a “buy” rating and $45 target. The average target on the Street is $44.95.

LifeSci Capital initiated coverage of Bellus Health Inc. (BLU-T) with an “outperform” rating and $2.90 target. The average is currently $2.27.

Cormark Securities resumed coverage of ShawCor Ltd. (SCL-T) with a “buy” rating and $28 target, which falls 90 cents below the consensus.

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