Inside the Market’s roundup of some of today’s key analyst actions
Canadian small-cap precious metal stocks are no longer underweight, according to CIBC World Markets analyst Cosmos Chiu, who thinks there's still "attractive" names to buy in the sector despite a recent run-up in price.
"The bullish run in gold and silver has had a big impact in small-cap land, whereby the weighting of these equities alone has now reached 21 per cent of the S&P/TSX Small Cap Index, a level seen in prior gold bull markets and a lofty level that may force the generalist to finally step back into some of the smaller-cap precious metals equities," he said.
"This segment of the market has typically had more of a niche audience over the past decade given its higher perceived risk attributes. Given the strength and positive outlook for the underlying commodities, and improving balance sheets, project economics, and free cash flow profiles for several names within our universe, we recommend SSR Mining, Detour Gold, Dundee Precious Metals, B2Gold, Osisko Mining, Equinox Gold, and Osisko Royalties to increase weightings to the sector within the small-cap land."
In a research report released Tuesday, Mr. Chiu made a trio of target price changes. They are:
Detour Gold Corp. (DGC-T, “outperformer”) to $23 from $27. Average: $23.68.
Equinox Gold Corp. (EQX-X, “outperformer”) to $10.50 from $1.85 following recent share consolidation. Average: $10.63.
“Gold has continued to march higher over the past few months, building momentum on the back of increased global trade tensions, declining real rates, and concerns of a global economic slowdown gathering steam,” said the analyst. "On the back of our bullish call on the commodity since the start of the year, we also flagged a number of times over the past several months that the weighting of precious metals equities within the S&P/TSX had been steadily inching higher. Historically, a weighting of 8 per cent or more in the S&P/TSX has forced domestic generalist funds to increase their weighting to the sector. Needless to say, the impact on the small-cap index has been more pronounced given the sell-off in energy equities vs. outperformance of precious metals equities over the past several months. In fact, the weightings of Energy and Materials were almost equal at 26 per cent and 24 per cent, respectively, a year ago, and are now skewed sharply in favour of Materials at a weighting of 28 per cent vs. Energy at 13 per cent.
“We continue to see no signs of rate hikes on the horizon over the next several years, and historically have seen gold continue on an upward trajectory beyond the last rate cut. Not too late to increase weightings to the sector and stock picking remains key to de-risking exposure to this sector.”
Fundamentals for U.S. truckload companies are “bottoming,” according to Citi analyst Christian Wetherbee, who is becoming more constructive on the sector following a “disappointing” year in terms of both volume and pricing.
"Within Transportation, the Truckload sector is earliest in the cycle to work with shares typically outperforming as the second derivative in freight volume and pricing turns positive and estimates are cut," said Mr. Wetherbee. "While macro cross-currents remain, and we risk being early, our data suggest trends are stabilizing as opposed to worsening, thus our move to get more constructive.
“Transportation data measured across multiple modes appears to be stabilizing over the last two months, after a challenging 1H19. To capture this trend, we measure year-over-year (YoY) changes in 21 data points covering Trucks, Rails, Airfreight and Shipping, and our data suggests that YoY volume declines peaked in May, but began to get less-worse in June and July. Early August trends also appear encouraging, with TL indicators (MDI, DAT, etc) suggesting a further stabilization of YoY declines. Importantly, the set up improves quickly as the calendar moves forward. First off, we are entering the fall peak season, which is historically more retail driven, which benefits TL’s high consumer exposure, and secondly, comps get progressively easier, particularly in 1H20 as TL rates collapsed early in 2019.”
His target for Green Bay-based Schneider rose to US$23 from US$22. The average on the Street is US$22.44.
Mr. Wetherbee’s target for Omaha-based Werner jumped to US$40 from US$32, which exceeds the average on the Street of US$35.81.
At the same time, Mr. Wetherbee added Knight-Swift Transportation Holdings Inc. (KNX-N) to the firm’s “Focus List.”
He maintained a “buy” target and US$40 target for its stock. The average is US$42.40.
“We believe that Knight-Swift’s multiple has settled at a trough and it should benefit from the second derivative improvement in freight volume and pricing,” the analyst said. “More specifically, we expect Knight-Swift’s forward P/E multiple to expand in the coming months as data improves, with the multiple likely to benefit from the trend in year-over-year spot rate changes improving in particular. We note that Knight-Swift’s multiple has recently bottomed at a much lower level than either Schneider or Werner, with the recent trough being particularly pronounced when compared to historical troughs that occurred at much higher levels, and we believe any improvement in rate expectations should lead to solid upside.”
Great Pacific Capital Corp.'s bid to take Canfor Corp. (CFP-T) private is “not exactly dynamite,” according to Raymond James analyst Daryl Swetlishoff.
“While at face value the $16 per share Great Pacific Capital Corp. (Great Pacific) non-binding ‘go private’ bid for Canfor represented an impressive 82-per-cent premium to the previous closing price, we consider the offer as opportunistic and far below fair intrinsic value,” he said on Tuesday. “Canfor shares were disproportionately savaged over the past year as a result of falling commodity prices, escalating BC log costs and a lack of investor appreciation of the merits of the VIDA Group (Sweden) acquisition. We consider he bid timing as shrewd, as over the summer, permanent BC lumber capacity shuts are poised to lead to higher lumber pricing this fall and lower B.C. log costs over the next 2 years – removing two key headwinds for the stock price.”
Mr. Swetlishoff said he sees Canfor’s intrinsic value at $23.32 per share, or $25 if 80 per cent of U.S. lumber export duties are eventually returned.
“While we don’t expect a ‘white knight’ counter offer to force the Great Pacific bid to our fair value estimate, we look forward with interest to the formal independent valuation report to be prepared by New York based firm Greenhill & Co. and the recommendation of the special committee of Canfor’s Board of Directors as to whether shareholders should support the proposal,” he said. “In our view, long term minority shareholders should require valuations materially higher than the current $16 per share for the offer to be successful.”
He maintained an “outperform” rating and $18 target for Canfor shares. The average is $16.50.
Canaccord Genuity analyst Derek Dley said Maple Leaf Foods Inc. (MFI-T) intends to “be aggressive” in acquiring market share within the plant-based protein (PBP) “at the expense of margins for the foreseeable future.”
"While still in early days, Maple Leaf has leveraged its meat protein distribution relationships to gain nearly 100-per-cent retail penetration of its PBP products in Canada, with the recently launched Lightlife burger experiencing strong sell through," he said. "While the company may have been late to the game in terms of partnering with large QSR chains, which has been the strategy of its major competitors, management believes owning the grocery aisle will allow for long-term sustainability and success."
In a research note reviewing institutional meetings with the company's management last week, Mr. Dley said Maple Leaf confirmed its 2020 target of $280-million in PBP revenue and a 10-year goal of $3-billion in PBP sales. He said the company has seen a 38-per-cent compound annual growth rate since acquiring Lightlife and Field Roast, and projects a 10-year CAGR of 30 per cent going forward.
He kept a "buy" rating and $50 target for Maple Leaf shares. The average on the Street is $40.86.
“While the focus on most of our meetings centered on the PBP business, Maple Leaf reiterated its confidence in achieving 14-16-per-cent EBITDA margins within the meat protein business by 2022,” the analyst said. “While the reduction in the hog herd in Asia due to the ASF has led to some near-term volatility in commodity markets, over time a reduction in hog supply will be a net positive to Maple Leaf’s EBITDA margins as the liquidation of the current hog supply is concluded. This coupled with the completion of the largest brand renovation in company history, and the reduction in poultry processing costs has the company well positioned for margin growth, in our view.”
Amazon.com Inc.'s (AMZN-Q) new Prime One-Day Shipping initiative is likely to lead to a significant jump in revenue through both a rise in the adoption of the premium service and increased user spending, according to RBC Dominion Securities analyst Mark Mahaney, who expects the recently unveiled service to be rolled out across the U.S. within one year and globally within 2-3 years.
"Our 7-year survey on Online Retail indicates that a very high & rising 64 per cent of U.S. Internet users are 'Extremely' or 'Very Interested' in next-day shipping," said Mr. Mahaney in a research note released Tuesday. "So AMZN is tapping into real demand here. Makes One-Day a True GCI [Growth Curve Initiative]."
"Based on extensive discussions with industry experts and with senior management, we tested a series of incremental revenue impacts from One-Day, based on increased Prime adoption and increased spend per Prime Household (esp. frequency boosts). We estimate that a 150-300 basis point boost in global Prime Adoption – from 24 per cent in 2018 – and a 5-11-per-cent boost in annual spend per Prime household – from $1,800 in 2018 – would generate a 7-15 per cent increase in total AMZN revenue – or $11-$24-billion. THAT’s material. Win."
Mr. Mahaney raised his 2020 and 2021 revenue estimates by 0.8 per cent and 1.2 per cent, respectively.
He added: "Based on higher assumed Shipping & Fulfilment expenses – and an overall reconsideration of prior margin assumptions that were likely overly aggressive – we are also lowering our Operating Income estimates for 2020 and 2021 by 15 per cent and 16 per cent, respectively.
“The key point here, in terms of AMZN shares, is that we see the potential for sustained Revenue Growth acceleration and have thus boosted our ’20 estimated Revenue to $337-billion (implying 21 per cent year-over-year growth – vs. 20 per cent in 2019E – and 2-per-cent upside to Street estimates) and our ’21E Revenue to $411-billion (implying 22-per-cent Y/Y growth and 6-per-cent upside to Street estimates). And on the bottom line, we have reduced our ’20E Operating Income to $20.8-billion (4-per-cent downside to Street), though our new ’21E Operating Income is $31.5-billion (2-per-cent upside to Street), with even more upside vs. the Street in ’22E (6 per cent to be exact – $46-billion vs. $43-billion).”
Maintaining an “outperform” rating for Amazon shares, he increased his target to US$2,600 from US$2,250. The average on the Street is US$2,269.04.
Hardwoods Distribution Inc.'s (HDI-T) valuation is “attractive” as its M&A pipeline “firms” with soft U.S. housing macro data, according to Canaccord Genuity analyst Yuri Lynk.
“U.S. housing starts fell in July for the third consecutive month,” he said. "Our work shows U.S. housing starts are just below the 50-year average (despite a growing population), which limits downside potential when compared to the last cycle when starts were 67 per cent above average heading into the 2008 financial crises. Looking ahead, the National Association of Home Builders forecasts very modest growth with U.S. housing starts expected to increase 4 per cent in 2020 and 2 per cent in 2021. If this forecast turns out to be optimistic and a housing recession hits, we note HDI proved to be FCF positive in the last downturn and its residential housing exposure has been reduced to 50 per cent of sales from 85 per cent.
"With U.S. housing macro data soft, HDI's acquisition pipeline has firmed. Management has noted more of an appetite on behalf of potential sellers to engage with HDI as sentiment surrounding the industry has weakened. Again, HDI is well positioned to move on acquisitions with modest leverage of 1.9 times debt-to-EBITDA (pre-IFRS 16, TTM) and $90-million available on its credit facility. We estimate the company has the financial capacity to acquire $200-million of revenue without requiring equity. Such an acquisition could add 12 per cent to the stock price."
Seeing its stock as “extremely inexpensive on most valuation measures,” Mr. Lynk maintained a “buy” rating and $15 target for Hardwood shares. The average is $17.45.
RBC Dominion Securities Alex Zukin assumed coverage of ServiceNow Inc. (NOW-N) with a “top pick” rating, believing its “large platform opportunity and unparalleled growth-at-scale make the company a long-term winner both in its markets and for investors.”
He raised the firm’s target for the Santa Clara, Calif.-based cloud computing company to US$320 from US$300. The average on the Street is US$317.72.
“In the most recent quarter, NOW posted 33 per cent year-over-year subscription revenue growth (36 per cent cc) and 37-per-cent CC current RPO growth,” he said. “This represents unparalleled organic growth at scale and is a testament to the moats that NOW has built around its core business in ITSM [IT Service Management] that have allowed the company to count more than 45 per cent of Global 2,000 organizations as customers. We see the company remaining a strategic vendor to 75 per cent of the F500 and believe they are only 20 per cent penetrated in the base still in the early innings of large enterprise digital transformations. The company’s efficiency score (total revenue growth + FCF margin) of 64 per cent is the third highest across our coverage landscape and modestly trails only that of ADBE and TEAM. Looking ahead, we continue to see significant runway for growth as federal penetration grows, portfolio breadth increases both inside and outside IT, new partnerships scale (MSFT & ADBE), platform functionality expands and monetization improves.”