Inside the Market’s roundup of some of today’s key analyst actions
Seeing “multiple avenues of well-managed growth on a strong brand foundation” and a “solid” balance sheet and liquidity exiting the COVID-19 pandemic, D.A. Davidson analyst John Morris raised his rating for Canada Goose Holdings Inc. (GOOS-N, GOOS-T) on Wednesday.
"Until now, our rating was premised on concerns surrounding the weakening wholesale channel, coupled with high inventory levels, while at the same time the stock was highly valued," he said in a research note released before the bell.
"We now believe the wholesale weakness is discounted into the stock price and the inventory overhang could recede as the COVID crisis abates. Key reasons for our upgrade include 1) an inventory overhang turns from a negative into a positive, 2) we like the set-up of FY21 due to tailwind comparisons, and 3) the company has a solid balance sheet and liquidity position."
Moving the Toronto-based luxury apparel maker to "buy" from "neutral," the analyst said his previous concerns about Canada Goose's high inventory levels have begun to abate.
“With GOOS production facilities either closed due to COVID-19 or admirably re-dedicated to medical equipment production, GOOS has high quality, low fashion risk backstock that the company can sell in the coming seasons without incurring additional cost of manufacturing,” he said. “Recall GOOS is vertically integrated and the company exited 3Q with a glut of inventory, with inventory up 60 per cent vs sales growth of 13 per cent. With factories closed or used to produce personal protective equipment, GOOS can draw down some inventory and, once business normalizes post-crisis, begin to chase demand. Unlike some of its peers, we believe GOOS’s inventory is particularly low-risk because of the high percentage of core items and relatively low fashion risk. The factory closures or re-dedications serve two benefits: 1) GOOS has ample product to sell without having to continue running factories and build more stock amid softer demand, and 2) concerning-inventory levels are likely to recede, alleviating investor concern.”
Mr. Morris also sees "a year's worth of quarterly tailwinds that could help the company while retail business normalizes post-crisis."
" First, looking ahead into Fall, GOOS has the tailwind of being up against Hong Kong protests, which caused significant disruption to the store business during 3Q," the analyst said. “Additionally, wholesale revenue during 3Q decreased 8 per cent as function of timing, particularly with earlier Fall/Winter orders and the DTC [direct-to-consumer] business saw a significant deceleration from 50-per-cent growth to 28 per cent. Then, in the Winter or 4Q, GOOS is up against the warmest winter on record in the U.S. Finally, in the ensuing March and June quarters, the company would be approaching comparisons from the COVID-19 crisis, which started to feel an impact as early as January 2020 due to the extended Lunar New Year and ensuing lockdown in China. We expect the DTC business to feel the most impact from the pandemic crisis due to store closures and tighter consumer spending.”
His target for Canada Goose shares rose to US$30 from US$20. The average target on the Street is currently US$38, according to Thomson Reuters Eikon data.
“With the stock having declined about 50 per cent since our downgrade in November(compared to a 10.5-per-cent decline in the S&P), we like the valuation now and are raising ourprice target ... based on a PEG multiple of 1.1 times our fiscal 2022 earnings estimate,” said Mr. Morris.
Concerns with the “still fluid” direct and indirect impacts of COVID-19 on its business and seeking a “more timely” entry point, RBC Dominion Securities Drew McReynolds lowered his rating for Toronto-based Points International Inc. (PCOM-Q, PTS-T) to “sector perform” from “outperform” on Wednesday.
“In a normal environment, we believe Points provides small cap investors relatively low-risk exposure to a growing global loyalty industry reflecting a profitable and FCF-generative business model, a benign competitive environment and a multi-year track record of delivering steady growth driven by Loyalty Currency Retailing,” he said. “While we expect Points to benefit once global travel and hospitality industries revive post-COVID-19 social distancing, what remains unclear to us is the magnitude and timing of a recovery given potential changes in business travel and consumer behaviour."
In justifying his move, Mr. McReynolds emphasized the company's Loyalty Currency Retailing (LCR) and Points Travel account for 85 per cent and 4 per cent of its gross margin, respectively, and both depend heavily on the global travel and hospitality industries.
“During the current period of social distancing: (i) approximately one third of LCR’s normal financial contribution has been eliminated while the remainder is far from operating at full capacity; and (ii) there is no contribution from Points Travel,” the analyst said. “On a positive note: (i) Platform Partners (11 per cent of gross margin) is less impacted; and (ii) notwithstanding what is likely to be a different type of recovery this cycle, we believe loyalty programs will be an important lever to help kick start consumer demand.”
Projecting a 65-per-cent year-over-year decline in second-quarter LCR revenue before gradual improvement through the year, Mr. McReynolds dropped his 2020 earnings per share projection to nil from 72 US cents previously. His 2021 and 2022 estimates slid to 26 US cents and 49 US cents, respectively, from 82 US cents and 93 US cents.
That led him to lower his target for Points International shares to US$13 target from US$22. The average target on the Street is US$16.50.
Though he calls Costco Wholesale Corp. (COST-Q) “best in class and one of the most impressive retailers in our universe,” Citi analyst Paul Lejuez views it as “too pricey” compared to its peers after having performing “remarkably well.”
Accordingly, he assumed coverage of the stock with a "neutral" rating in a research note released late Tuesday.
"We like long-term positives of the COST story including its membership format, its merchandising strategy, its low prices, the draw of its ancillary businesses, its e-commerce initiatives, its geographic diversification, the steady nature of margins, and cash returns to shareholders," said Mr. Lejeuz. "We expect these factors to drive ongoing strength in SSS [same-store sales] growth and membership sign-ups as COST continues to generate strong EPS growth via the top line. But with COST trading at the upper end of its historical ranges, we see these positives priced into the stock at current levels."
He raised the firm's target for Costco shares to US$310 from US$305. The current average on the Street is US$323.67.
"Given COST’s positioning (with a high percentage of consumables) in the current COVID-19 affected environment, we believe a premium to its historical multiple is warranted," he said. "Our $310 TP implies a fiscal 2021 P/E [price-to-earnings] multiple of 31 times and F21 EV/EBITDA [enterprise value to earnings before interest, taxes, depreciation and amortization] multiple of 18 times. Relative to other companies that are considered more defensive, COST trades at a significant premium."
Separately, Mr. Lejuez assumed coverage of the following companies and promptly downgraded the firm’s ratings to “neutral” from “buy” previously:
Kroger Co. (KR-N) with a US$32 target (unchanged). Average: US$34.15.
"We see KR as one of the few retailers that should perform well during the current crisis, as grocery chains are being helped by stock up sales and more eating at home," he said. "And prior to the crisis, KR was achieving gradually improving comps over the past several quarters, but the stock has performed well and is now priced at what we believe is near fair value."
BJ’s Wholesale Club Holdings Inc. (BJ-N) with a US$26 target, down from US$30. Average: US$30.19.
“While there is a lot to like about the warehouse club model, there are also a few things we don’t like at BJ that balance out the things we like, creating a balanced risk/reward,” he said. “In the near term they should perform well, but they face very formidable competitors that are executing better and more consistently.”
Seeing an “attractive” valuation and “strong” macro tailwinds pointing to a large addressable market, Canaccord Genuity analyst Raveel Afzaal initiated coverage of Greenlane Renewables Inc. (GRN-X) with a “speculative buy” rating.
"Methane emissions from dairy farms, landfills and wastewater facilities are the leading contributors to GHG emissions," said Mr. Afzaal. "GRN's equipment helps to reuse these waste emissions by upgrading them to RNG, which can be injected directly into the natural gas network. Further, we have seen a significant increase in renewable content on the electricity grid and expect a similar shift for the natural gas network through RNG. Such a shift is intended to prevent an increasing portion of natural gas infrastructure from becoming stranded over time due to declining demand for fossil fuels driven by climate change initiatives."
The analyst thinks the Burnaby, B.C.-based company has the largest installed capacity among its peers and notes two of the largest RNG facilities in the world use its proprietary water wash technology.
“European utilities, representing 75 per cent of natural gas consumption, are calling for biogas production to increase to 50 billion cubic metres (from 2 bcm currently) by 2050; California aims to replace 20 per cent of its natural gas supply with RNG by 2030, and Canada has a 5-per-cent RNG target by 2025," he said. "Denmark has already replaced 10 per cent of natural gas with RNG, which demonstrates the industry’s commercial viability. A 5-per-cent substitution of natural gas with RNG implies estimated biogas upgrading equipment sales of $18-billion in U.S. alone. GRN sells into North America and Europe and is operating at a $25-million sales run-rate. Hence, a modest increase in RNG generation should have a material impact on GRN’s financial results..”
Mr. Afzaal set a target price of 80 cents per share. The average is $1.10.
“We derive our target price using a 3.0 times EV/S [enterprise value-to-sales] multiple on our 2021 estimates,” he said. “This is in line with the current peer group average. However, pre-COVID-19, we saw the peer group valuation multiple expand to 4.5 times. Similarly, Xebec, which is a direct comparable to Greenlane, also saw its valuation multiple expand closer to 4.5 times prior to the spread of COVID-19 in North America.”
Though 2020 is likely to be a “lost year” for U.S. homebuilders, Citi analyst Anthony Pettinari sees a “historically attractive” entry point for investors.
“The Coronavirus pandemic has led to the tragic deaths of thousands of Americans, a virtual halt to economic & social activity, and unprecedented uncertainty,” he said. “For homebuilders, the pandemic is likely to essentially void the spring selling season, which was expected to be strong given pent-up demand, historically lean inventories, robust employment & consumer confidence, and relatively easy 1H comps. With several public health authorities forecasting a peak in daily U.S. Coronavirus cases in mid-April, and stay-at-home measures potentially remaining until May-June, we expect volatility and uncertainty to continue in the near-term. While expect consensus estimates for the group to go lower (Citi ’20 EPS estimate 8 per cent below consensus), the earnings revision cycle should largely reflect Coronavirus disruptions by the close of 1Q earnings season.”
In a research note released Wednesday, Mr. Anthony Pettinari sees a “sharp” slowdown in housing starts this year before a recovery begins in 2021.
“Current valuations appear to be pricing in some level of builder impairments, which we don’t expect unless the crisis continues through the 2021 spring season,” he said. “There are important differences between 2020 and 2008: 1) housing inventories are leaner, 2) builder land portfolios are better managed, 3) consumer creditworthiness has improved, 4) builder balance sheets are stronger. Put simply, the 2008-09 crisis was centered on housing, while the 2020 crisis is not. While our base case ETR is 25 per cent on average, in a bull case where Coronavirus recedes quickly we see a 50-per-cent average upside, while in a bear case where Coronavirus disruptions continue through the 2021 season we see 30-per-cent average downside.”
"The group is trading at 1.08 times LTM P/TBV [last 12-month price to tangible book value], well below the 5-year avg. (1.65 times); our target multiples are further at steep (0.40 times avgerage) discounts to historical averages. Over the last 20 years, the sector has finished the week with a price/tangible book value less-than 1.1 times 120 times; in 86 (72 per cent) of those instances the stocks outperformed the S&P over NTM [next 12 months], in all instances the median return net S&P 500 is 800 basis points over NTM."
He initiated coverage of three stocks with "buy" ratings on Wednesday:
D.R. Horton Inc. (DHI-N) with a US$51 target. The average on the Street is US$51.33.
"Outsized exposure to entry-level homes has allowed DHI to outpace peers on topline growth with delivery growth of 12 per cent over the last 3 years vs. the peer avg. of 9 per cent," he said. "DHI is the heaviest spec. builder under coverage with 80 per cent of homes starting construction without a buyer. This strategy allows DHI to provide a clear and attractive work schedule to potential laborers, insuring adequate work supply in a tight labor market. DHI’s spec. houses carry a lower gross margin than traditional builds but DHI is able to turnover inventory more quickly, allowing them to generate the same returns on lower gross margins."
Lennar Corp. (LEN-N) with a US$53 target. Average: US$51.
"LEN, along with the homebuilders as a group, has targeted the entry-level homebuyer over the past several years (with first-time buyers entering the market later in the cycle), with entry-level representing roughly 40 per cent of the company’s business," he said. "Despite the focus on entry-level, LEN’s ASPs are near the midpoint of peers, at $400k in 2019 for closed homes."
PulteGroup Inc. (PHM-N) with a US$32 target. Average: US$38.20.
"Since 2016, PHM has generated ROE [return on equity] above the peer average in all but one quarter," he said. "The returns focus is rooted in mgmt. compensation with 33 per cent of long-term incentives derived from ROIC [return on invested capital], above the peer avg. of 21 per cent returns-based incentives. Since 2016, PHM has traded alongside DHI at-or-near the top of the group on price/tangible book, as investors have rewarded the returns focus."
He set a “neutral” rating for Toll Brothers Inc. (TOL-N) with a US$35 target, which exceeds the consensus of US$31.40.
“In our view, the company’s relatively land-long balance sheet, greater leverage, and slower sales pace make TOL less attractive, and current valuations appear fair,” said Mr. Pettinari.
In other analyst actions:
* Believing its valuation “does not reflect its high-growth utility assets,” Scotia Capital analyst Robert Hope upgraded AltaGas Ltd. (ALA-T) to “sector outperform” from “sector perform” with a target of $20, falling from $22. The average on the Street is $19.
* Barclays analyst David Strauss downgraded Bombardier Inc. (BBD.B-T) to “equal weight” from “overweight” with a 50-cent target, down from $1.75. The average is $1.24.
* CIBC World Markets analyst John Zamparo lowered Organigram Holdings Inc. (OGI-T) to “neutral” from “outperformer” with a $2.75 target, down from $5 and below the $5.24 consensus.
“We continue to believe in OGI’s strong management team and have seen mostly encouraging execution. But COVID-19 and new low-cost competitors may hurt revenue, and 2.0 start-up costs could suppress margins. Furthermore, OGI’s balance sheet lacks the robustness of large-cap peers, and on our reduced estimates, we believe valuation upside is limited,” said Mr. Zamparo.
* BMO Nesbitt Burns analyst Alexander Pearce resumed coverage of Denison Mines Corp. (DML-T) with a “market perform” rating and 30-cent target, down from 60 cents. The average is $1.14.
“·Denison has secured funding that should see it through the remainder of the year and allow it to continue its exploration work at Wheeler River, including ISR testwork at Phoenix,” he said.
·"Whilst we recognize that the use of ISR mining in the Athabasca basin has the potential for an extremely low cost operation, many geotechnical questions remain to be answered.
* Goldman Sachs analyst Mark Delaney initiated coverage of Tesla Inc. (TSLA-Q) with a “buy” rating and US$864 target. The average on the Street is US$466.05.
"We are positive on Tesla because we believe that the company has a signiﬁcant product lead in EVs, which is a market where we expect long-term secular growth," he said.
* BMO Nesbitt Burns analyst Kelly Bania raised Target Corp. (TGT-N) to “outperform” from “market perform” with a US$125 target, up from US$115. The average is US$124.39.
“We believe Target is poised to emerge from the coronavirus (COVID-19) pandemic in an even stronger position relative to discretionary peers where we expect closures may accelerate, supporting an outlook for acceleration in higher-margin discretionary sales for Target,” said Ms. Bania.
* In response to its dividend suspension and withdrawal of its guidance, Laurentian Bank Securities analyst Todd Kepler downgraded Surge Energy Inc. (SGY-T) to “hold” from “buy” with a 30-cent target, down from 40 cents. The average is 64 cents.
“Although, we believe that capital preservation and balance sheet protection remains the utmost importance as the oil industry wades through these unprecedented times we have reduced our target price to reflect our updated NAV,” he said.