Inside the Market’s roundup of some of today’s key analyst actions
Walt Disney Co.'s (DIS-N) direct-to-consumer strategy is the “most ambitious attempt by any incumbent firm to respond to any FAANG threat,” according to Citi analyst Jason Bazinet.
He said the "pivot," which began with the 2017 purchase of BAMTech, is likely to accelerate in the wake of the recent US$71.3-billion deal with 21st Century Fox.
"The buy side generally agrees on four points: 1) Disney’s pivot is an astute strategic move, 2) There is room for more than two global SVOD apps (beyond Netflix and Amazon), 3) The pro forma firm has the requisite scale to compete with Netflix (globally) and 4) Investors will use a hybrid approach to value the firm (EPS multiple on the core + an EV per sub for DTC)," said Mr. Bazinet.
In a research note released late Monday upon resuming coverage of the stock following the Fox deal, Mr. Bazinet pointed to three areas of concern: fear the pivot won’t come fast enough; a drop in licensing revenue as older content gets placed on Subscription Video On Demand (SVOD) and a lack of certainty on subscription value ascribed to its main apps (Hulu, Disney+ and ESPN+).
He responded: "We expect: 1) A fairly aggressive pivot resulting in 10 million Disney+ subs, 31 million Hulu SVOD subs and 4 million (paying) ESPN+ subs by FY20, 2) We see modest risk to near-term licensing revenue, about $150-million in FY19 and $350-million in FY20, 3) We use Netflix as a proxy for Hulu’s SVOD service ($1,000 per sub) but give no value to Hulu’s linear subs. As for Disney+ and ESPN+, we assume both services will fetch $5 per month and carry these subs at $500 per sub."
Maintaining a “buy” rating for Disney shares, Mr. Bazinet raised his target to US$132 from US$126. The average is US$127.50.
"We believe Disney's multiple is depressed due to: 1) uncertainty surrounding Disney’s direct-to-consumer roll out; 2) the complexity forecasting future earnings following the Fox transaction; 3) fears of cord cutting. But we expect two factors to help Disney's multiple over the next 18 months," he said. "First, we expect EPS to accelerate in FY20 and FY21. Second, we believe Disney's strategic steps - including Disney+ and Hulu - will transition investors to value a portion of Disney on EV/Subscribers."
Elsewhere, Cowen analyst Doug Creutz raised his rating for Disney shares to "outperform" from "market perform" with a target of US$131, rising from US$102. The average on the Street is US$127.50.
"We view Disney's catalyst path for the next year as highly attractive, and believe Thursday's investor day will likely be a deck-clearing event for sentiment," he said.
“Disney has a very powerful pipeline of product that will play out over the balance of the year. On the film side, we believe Disney’s slate could drive a $3-billion calendar year Studio operating profit. We also believe the slate, principally the Q4:C19 releases Frozen 2 and Star Wars Episode IX, should set the stage for a re-acceleration in Consumer Products performance in 2020.”
In a separate note, Mr. Bazinet said the Disney deal makes sense strategically for Fox Corp. (FOXA-Q), however he’s awaiting a better entry point for its stock.
"We think Fox did the right thing by splitting the firm into two pieces," he said. "First, by selling the ‘cloud’ assets to Disney, it will allow the pro forma firm to accelerate its direct-to-consumer pivot. That’s not something standalone Fox (or Disney) could accomplish, in our view. Second, by retaining the ‘live’ assets – including news and sports – the new Fox is well positioned to thrive in a pay TV ecosystem that will undoubtedly shrink. That’s because live news and sports channels are a natural complements to cloud based services (like Netflix and Hulu). This, in turn, suggests affiliate fee trends per sub may be more favorable versus peers."
"When we compare new Fox to the old Fox, we see three main differences: 1) New Fox will generate about 50% of its revenues from advertising (~2x the level of old Fox), 2) New Fox’s equity is apt to be more sensitive to sports rights renewals than old Fox and 3) New Fox will need to buy TV rights to fill-out its schedule (since TV production was sold to Disney). This gives new Fox the flexibility to drop unpopular shows early (since they won’t need to reach a minimum number of episodes for off-net syndication viability). But, it also means tactical EPS shortfalls cannot be assuaged with one-time TV licensing revenue."
Mr. Bazinet maintained a "neutral" rating and US$40 target for Fox shares, which falls short of the consensus of US$45.81.
"Three factors keep us on the sidelines: 1) We’re not sure the sell side has reflected new costs associated with WWE rights, 2) The NFL renewal in CY22 could emerge as an overhang on the shares, 3) The ad exposure is high given the duration of the economic expansion (and quasi-inverted yield curve)," he said.
“We are always leery of stepping off the gas on compounding, high quality companies but mechanistically applying a higher multiple to justify an Outperform recommendation does not give much room for error,” he said. “While the entire market is looking forward to the China/U.S. trade resolution, given numerous innuendoes of an impending deal in the press and S&P 500 rallying 15 per cent year-to-date, we are not convinced that the old adage of ‘buy the rumour, sell the news’ is not going to transpire here. At the high level, the positives are well impounded in market’s expectations for both. As an aside, seasonality (on a longterm basis) is not kind to either WSP or TIH over the upcoming three months.”
Mr. Sytchev maintained a target of $70 target for Toromont shares. The average target on the Street is $68.86.
“Consensus appears to fully bake in Hewitt margin normalization (on top of revenue rebound); additionally, given the pace of positive earnings revision dynamic, we wonder if the quantum of improvements can be maintained,” he said. “1) Execution and balance sheet deleveraging post Hewitt have been beyond impressive (in addition to most end markets also performing well for the company - i.e., Ontario, QC infra, Ontario gold and QC base metals). However, since the closing of the acquisition, Toromont 2019/ 2020 estimated EPS forecasts have been revised upward by 19 per cent and 14 per cent, respectively (these are not trivial jumps); 2) We also like to back into longer duration expectations for the company by imputing 2022 estimated EPS generation at 17.0 times price-to-earnings (long-term median is 15.5 times). According to our numbers, on reasonable assumptions, share price CAGR [compound annual growth rate] now stands at 3.7 per cent. The only way to get to 10.0-per-cent CAGR over the same time frame (while of course ignoring a potential recession drawdown), is to push P/E to 19.0 times and increase top-line growth to 12-per-cent CAGR in 2021 and 2022; we believe this is too aggressive.”
He also kept his target of $75 for WSP, which falls short of the $77.41 average.
“WSP has been a steady performer, in major contrast to the likes of SNC and Stantec," said Mr. Sytchev. "But at 11.6 times 2019 estimated EV/EBITDA, the shares are once again pushing the high end of the valuation envelope. In addition: 1) growth expectations towards 65,000 headcount have already been telegraphed; 2) there is no concern around the Brexit outcome in expectations while private spending is not immaterial to WSP’s UK exposure; 3) even modeling a large-scale M&A leaves 11% upside on presumed synergies coming in year one; and 4) margin expectations at the top end (towards 12.5 per cent) could be a stretch.”
Canaccord Genuity raised its oil and gas price deck assumptions on Tuesday in reaction to the increase in prices seen in the first quarter.
The firm's WTI and Brent forecast for 2019 rose to US$60 and US$65 per barrel, respectively, from US$50 and US$60. Its long-term WTI projection rose to US$60 from US$50 with its Brent assumption remaining US$65.
It tightened its Ed Light-WTI differential estimate to US$7.50 per barrel in 2019 (from US$10.00) and to US$8 from US$7 for 2020.
"On the back of the mandatory curtailments, we saw differentials narrow significantly in Q1/19 both for heavy and light oil," the firm said. "In the interim, we believe the markets will remain volatile given the tightness between supply and egress out of Western Canada especially in light of the ramp-down of crude-by-rail to 175,000 barrels per day by February given the challenging economics. We continue to believe differentials should widen out from current levels into year-end, as the marginal barrel is transported by rail. We have tightened our WCS-WTI basis to US$16.90/bbl in 2019 (from US$23.00/bbl) and have increased our long-term diff to US$22.00/bbl in 2020+."
With those changes, the firm’s cash flow estimates rose for most companies in its coverage universe.
Analyst Anthony Petrucci upgraded Nuvista Energy Ltd. (NVA-T) to “buy” from “hold” with a $6 target, rising from $5. The average is $7.85.
Mr. Petrucci raised Bonterra Energy Corp. (BNE-T) to “buy” from “hold” with a $9 target, up from $7.50. The average is $9.23.
Believing its competitive position has weakened ahead of “Sheet Tsunami” period in the United States from 2021-2022, Credit Suisse analyst Curt Woodworth lowered United States Steel Corp. (X-N) to “underperform” from “neutral.”
"When the next wave of low cost, HRC [hot-rolled coil] focused sheet supply ramps in the U.S., HRC prices should move to $610 per ton on EAF metal spread long-term average," he said. "We model 2022 HRC at $610 per ton and forecast X to generate $475-million in EBITDA. Since 2016, X has seen maintenance / outage cost expense rise from $950-million to $1.5-billion with U.S. Flat Rolled capex rising to $820-million in 2018 from $111-million in 2016. This two year FCF delta of negative $1.25-billion is central to our downgrade thesis as the pathway is not clear towards higher ROI on this spend. Note X FCF in total for 2017 and 2018 after dividends was only $163-million (with HRC at $695 per ton)."
His target dropped to US$13 from US$21. The average is US$23.80.
Pointing to slower-than-anticipated progress from its Brazilian facility and a pullback in monoammonium and diammonium phosphate (MAP and DAP) pricing, Raymond James analyst Steve Hansen downgraded Itafos (IFOS-X) to “market perform” from “outperform.”
On Monday, the pure-play, integrated phosphate producer reported fourth-quarter results that modestly exceeded Mr. Hansen's projection and featured a "record" performance from its Conda operations in Idaho.
However, Mr. Hansen expressed concern over its "lagging" Brazilian operations, noting efficiency is "still lagging."
“While operational strides were achieved, management revealed that its original efficiency improvement plan (EIP) ultimately fell short of expectations, leading management to introduce a new ‘repurpose plan’ aimed at optimizing the site’s finished product mix—now targeting a portfolio of higher-grade SSP, micronutrient SSP (SSP+), and value-added P-K compounds,” he said. "Itafos will procure high-grade phosphate rock from domestic third parties and, once operational, its own Farim project. We understand the plan will commence in earnest in 2Q19, with improved financial results expected to materialize through 2H19.
“We continue to see significant unrealized value in IFOS shares, with the current price giving little-to-no credit for growth-orientated assets (Arraias, Farim). The challenge, in our view, is unlocking this value while Arraias struggles. Given the obstacles encountered (i.e., beneficiation chemistry), we regard the new ‘repurpose’ strategy as logical, offering enhanced margin opportunity /improved competitive position. That said, we also believe it carries execution risks, and feel its prudent to demand proof of execution before we resume our constructive rating.”
Mr. Hansen lowered his target for Itafos shares to $2 from $3.25.
Pointing to its share price outperformance thus far in 2019, National Bank Financial analyst Greg Colman downgraded Calfrac Well Services Ltd. (CFW-T) to “sector perform” from “outperform” with a target of $4.35, which falls short of the $5.32 consensus.
Mr. Colman upgraded Step Energy Services Ltd. (STEP-T) to “outperform” from “sector perform” and raised his target to $3.75 from $3. The average is $3.92.
Seeing an enticing valuation and growth opportunities through next year, D.A. Davidson analyst Linda Weiser initiated coverage of Spin Master Corp. (TOY-T) with a “buy” rating.
Ms. Weiser says the Toronto-based company’s shares, which are currently trading at 15.6 times 2020 EPS estimate (versus 18 times for Hasbro), are attractive for a company targeting mid- to high-single-digit organic sales growth.
She also thinks its debt-free balance sheet and strong free cash flow should enable it to aggressively pursue acquisition opportunities, which could become more numerous in the aftermath of Toys ‘R’ Us liquidation.
Her target of $51 matches the consensus on the Street.
Pointing to their current valuations, Barclays analyst Matthew Murphy lowered his rating for a trio of mining stocks to “equal-weight” from “overweight.”
Conversely, he upgraded OceanaGold Corp. (OGC-T) to “overweight” from “equal-weight” with a $4.50 target. The average is $4.91.
In other analyst actions:
Barclays reinstated coverage of Enbridge Inc. (ENB-T) with an “overweight” rating and $55 target. The average is $55.64.
With files from Reuters