Inside the Market’s roundup of some of today’s key analyst actions
Morgan Stanley analyst Simon Flannery downgraded BCE Inc. to “underweight” from “equal-weight” and lowered his price target to C$58 from $65. The action sparked a 2 per cent decline in BCE shares today.
He cited three main factors for the downgrade:
1. BCE’s 15 per cent year-to-date outperformance against Canadian peers has resulted in an approximate 10 per cent valuation premium, based on the 2020 enterprise value/EBITDA ratio, “which we believe is unwarranted given its higher reliance on wireline revenues.”
2. Morgan Stanley expects Bell’s wireline growth to remain muted. And it expects fewer M&A opportunities in that segment going forward.
3. Bell’s wireless overage revenue remains relatively high at 6 per cent of service revenue vs. peers at 3-4 per cent, creating a potential headwind in 2020, as the overall Canadian wireless market migrates to unlimited data plans. “Across the Big 3 (Canadian telecoms), there also remains a regulatory overhang with the upcoming MVNO (Mobile Virtual Network Operator) review in February as well as the recent broadband rat cuts, which could create additional headwinds next year.”
Canaccord Genuity analyst Derek Dley believes that safe consumer staples stocks will outperform more economically sensitive consumer discretionary stocks in 2020.
“Consumer Staples stocks are likely to benefit from an increasingly defensive stance among investors, which historically has led to an increase in staples valuation multiples. Additionally, with food price inflation returning midway through 2019, and likely to remain prevalent throughout 2020, we believe staples companies will be able to pass along price increases over the next 12 months, leading to margin expansion,” Mr. Dley said in a note.
Discretionary stocks, though, are going to be struggling with a couple of big issues: Household debt is elevated and rising food prices will put constraints on consumer’ ability to purchase discretionary items.
“With the exception of a select few discretionary names which appear to be gaining market share or accelerating growth in new markets such as the U.S. or internationally, we believe 2020 could be a challenging year for Consumer Discretionary stocks,” he said.
That said, his three top picks for 2020 provide some range for consumer palettes.
He has a “buy” recommendation on Maple Leaf Foods Inc., along with a 12-month price target of $36. The food company is making a big bet on plant-based protein to tap into the growing popularity of meatless burgers and other vegetarian offerings. Mr. Dley noted that the company believes that the new division can tap into a $3-billion revenue opportunity over the next 10 years. And as the company builds scale, profit from the meatless division should more than offset the considerable expenses related to it right now.
Mr. Dley also likes Parkland Fuel Corp., the largest Canadian fuel retailer and second-largest convenience store operator. He has a “buy” recommendation on the stock and a 12-month price target of $60, underpinned by the company’s recent expansion following the acquisitions of CST Brands and Chevron’s downstream Canadian fuel assets.
“Given Parkland’s increased scale and vertical integration, we believe the ability to drive synergies from future tuck-in acquisitions has improved. We remain confident in Parkland’s ability to effectively integrate acquisitions, as the company recently enhanced its synergy guidance related to the acquisition of CST and Chevron by a substantial margin,” he said.
The third top pick, is more of a consumer discretionary stock – but one that has been showing impressive growth. He has a “buy” recommendation on Aritzia Inc. and a 12-month price target of $24. The clothing retailer, he noted, has delivered 21 consecutive quarters of same store sales growth (or growth at stores open for at least 12 months).
“With continued growth in e-commerce penetration, and growing brand awareness in the U.S., we expect the company to continue to drive robust same-store sales growth in the near term,” Mr. Dley said.
Aritzia has added 19 stores since its initial public offering three years ago, and is eyeing five new stores in fiscal 2020. What’s more, the company has been exceeding growth metrics. At its IPO, Aritzia expected that it could increase its revenue at a compounded annual growth rate of 15 to 17 per cent, with EBITDA (earnings before interest, taxes, depreciation and amortization) rising by 18 to 21 per cent. The results so far: Revenue has been rising at a 17 per cent clip over the past three years and EBITDA has been rising by 24 per cent.
“Looking ahead to 2020, we believe the company will provide its next 3- to 5-year growth targets, and believe this will be a positive catalyst for the share price,” Mr. Dley said.
Doug Young, an analyst at Desjardins Securities, has raised his target price on Power Corp. of Canada to $36, up from $34, following the company’s announcement last Friday that it will simplify its corporate structure and streamline the top executive tier. However, the analyst is maintaining a “hold” recommendation on the stock.
“Given the run in PowCo’s share price last Friday (+7.9 per cent) and the 9.5 per cent potential total one-year return to our target price, we think it makes sense to let the dust settle here,” he said in a note.
A big part of the attraction to the stock, he argues, is that the new structure will focus on financial services and eliminate Power Financial Corp. – a second holding company – thereby saving costs and improving liquidity.
“However, while we applaud the move, PowCo has some work to do to win back investor support, and management will need to execute on the various initiatives that it outlined as part of this proposal (cost savings, financing savings, etc),” Mr. Young said.
Raymond James analyst Michael Glen is initiating coverage of CCL Industries Inc., the Toronto-based label-maker, with an “outperform” recommendation and a 12-month price target of $65.
Much of his bullishness springs from the company’s successful expansion: It has spent $1.4-billion on internal growth initiatives and $2.5-billion on acquisitions – driving big increases in sales and EBITDA (earnings before interest, taxes, depreciation and amortization). Rather than raising money by issuing additional shares, and diluting existing shareholders, the company has used recurring free cash and moderate amounts of debt.
“While internal growth initiatives represent an important component of CCL’s overall growth, the company has also earned itself the distinction of a strong acquirer and integrator of businesses. In particular, CCL has an extensive history of M&A transactions and management has frequently demonstrated their ability to integrate and extract benefits from deals. Additionally, despite the overall size of the organization, CCL remains quite active with smaller tuck-in transactions, which typically offer some unique characteristic, such as a new geography, technology, or capability that CCL does not currently have in the portfolio,” Mr. Glen said.
In terms of valuation, Mr. Glen uses an 11-times estimated EBITDA multiple, which is in line with peers in the diversified packaging sector and a slight discount to Avery Dennison.
“We also believe there is an opportunity for multiple expansion towards 12-times EBITDA, and continue to have a high degree of conviction surrounding management’s ability to invest and grow the business,” Mr. Glen said.
CIBC analyst Bryce Adams downgraded Equinox Gold Corp. to “neutral” from “outperformer” and trimmed his 12-month price target to $10 from $12.50 after the gold mining company announced an all-share merger with Leagold Mining Corp.
Mr. Adams believes that the deal will dilute net asset value per share by 6 per cent and weigh on estimated cash flow per share in 2020.
“We view Leagold’s asset base as lower quality versus Equinox’s assets, and see potential headwinds stemming from this transaction, including block trade potential and 100koz per year gold hedges that are out of the money. Further, we expect portfolio rationalization to be an overhang on the pro forma shares until mid-2020,” Mr. Adams said in a note.
The $769.3-million deal between Equinox and Leagold, expected to close in the first quarter of 2020, comes amid a merger frenzy among gold producers, with transactions valued at $40-billion this year, according to Reuters.
Mr. Adams said that his rating downgrade will remain until he gets a clearer picture of the operational performance of the merged companies. He does acknowledge that there is growth here though. For 2020, he is now expecting production of 587,000 ounces at a cost of US$1,022 per ounce (all-in sustaining costs), up from a previous estimate of 285,000 ounces at a cost of US$996 per ounce. For 2021, he estimates production of 769,000 ounces at a cost of US$1,071 per ounce – implying rising costs.
“Management highlighted that increased scale, diversification, synergies, and liquidity should attract new investors. We agree with this broad statement, but also believe that the key to the re-rate will be successful integration of these assets, managing the January-June wet season at Aurizona, delivery of Castle Mountain Phase 1, and positive expansion updates at Los Filos,” Mr. Adams said in a note, referring to gold mining projects in Brazil, California and Mexico.
A scathing short-seller report on Canadian Tire Corp. Ltd. earlier this month from Spruce Point Capital Management has raised questions about the retailer’s ability to defend its margins and competitive positioning, while generating sufficient cash to pay down debt. Peter Sklar, an analyst at BMO Nesbitt Burns, has some answers.
"Our conclusion is that the company will be able to generate sufficient free cash flow to provide for necessary debt pay-down and maintain the common dividend; however, the current pace of share buyback may have to be scaled back,” Mr. Sklar said.
He is maintaining a “sector perform” recommendation on the stock, along with a 12-month price target of $159. The stock traded at $143 in Toronto on Tuesday in midday action.
He pointed out that Canadian Tire’s elevated debt level is the result of the recent Helly Hansen acquisition and share buyback activity, which has left the retailer with a net debt to EBITDA (earnings before interest, taxes, depreciation and amortization) ratio of 3.3 to 3.6 (depending on the method for calculating the ratio).
Credit rating agencies generally require Canadian consumer companies with an investment grade rating to maintain a debt-to-EBITDA ratio of 3 or less. Anything higher means that the company must show a path to bringing the ratio back in line within 18 months. In the case of Canadian Tire, that means the company needs to bring the debt down by $500-million to $800-million, with one-and-a-half to two years of free cash flow.
Mr. Sklar is confident that Canadian Tire can achieve this debt repayment and pay its dividend. What’s less clear is the retailer’s ability to buy back additional shares.
“Canadian Tire repurchased 4.3 million shares ($659.3-million), 3.7 million shares ($588.9-million), and 1.4 million shares ($200.7-million) in 2017, 2018, and year-to-date as of the end of Q3/19, respectively. Our calculation suggests that there may be insufficient cash flow to continue with share buyback at these levels,” the analyst said.
While Canadian Tire has previously indicated that it intends to buy back $350-million worth of shares by the end of 2020, Mr. Sklar expects the company will hit just three-quarters of this target. As a result, Mr. Sklar has trimmed his earnings-per-share estimates.
For the fourth quarter of 2019, he now expects Canadian Tire will generate a profit of $5.41 per share, down from a previous estimate of $5.44. For 2020, his EPS estimate is $13.72, down from an earlier estimate of $13.94.
In other analyst actions:
BMO upgraded Freeport-McMoRan to “outperform" and raised its price target to US$17 from $12.
BMO downgraded Alcoa to “market perform” from “outperform” and lowered its price target to US$23 from $25.