Inside the Market’s roundup of some of today’s key analyst actions
Though TC Energy Corp. (TRP-T) remains his preferred Canadian play, Citi analyst Timm Schneider is concerned its Keystone XL pipeline “could become an albatraoss,” depending on the outcome of the U.S. presidential election.
"Optically, Midstream investors don’t love large capital projects and we continue to field questions around 1) the regulatory obstacles; and 2) the need for an additional crude oil pipeline from Canada," he said. "Our base case – at this time - is KXL gets built, but doesn’t come online until 2024."
Mr. Schneider adjusted his 2020 and 2021 financial expectations for the TC Energy to reflect the sale of assets, project updates and recent updates. He's now projecting earnings per share for the current fiscal year of $4.11, down from $4.31 and below the $4.20 consensus on the Street.
"Reflecting the announcement from the Government of Alberta regarding its support for an investment in Keystone XL (KXL), as well as updated company guidance, we have increased our estimates for FY20 capex to $9.0-billion (up from our previous estimate of $5.5-billion)," he said. "Despite the optimism from company management for a ‘23 ISD for KXL, due to recent regulatory constraints, as well as the current challenged environment, we are modeling KXL coming online in 2024."
"Following the recently-completed sale of three natural gas-fired power plants in Ontario ($2.8-billion proceeds) and FID of KXL (incl. $5.3-billion equity and debt guarantees from the Gov’t of Alberta) TRP increased its capital program to include $43-billion of secured growth projects expected to enter service by 2023. To date, $12-billion has been invested with a further $6-billion expected spend by eoy. We have updated our [price target] to reflect TRP’s recent results and updated forward spending plan, as well as for the more challenged environment."
Keeping a “buy” rating for TC Energy shares, Mr. Schneider reduced his target to $69 from $75. The average on the Street is $71.55.
“We believe TRP’s acquisition of Columbia Pipeline along with execution of its current $43-billion backlog of projects will drive earnings grow through 2023,” he said. “We expect dividends growth to be in the middle of management guidance of 8-10 per cent over the short-term and then 5-7 per cent beyond that. We also believe there is material upside from critical projects such as Keystone XL, Bruce Power, and opportunities within Mexico over the longer term despite political headwinds.”
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Desjardins Securities analyst Michael Markidis predicts WPT Industrial Real Estate Investment Trust’s (WIR.U-T, WIR.UN-T) investor base will broaden with its inclusion in the TSE EPRA Nareit Global Developed and S&P/TSX Composite indexes.
Expecting the moves to take place Friday, the analyst also anticipates a positive impact on the flow of funds.
"Rent collection during COVID-19 has been outstanding thus far and an early renewal with its 10th largest tenant has been secured on favourable terms — we believe these events are indicative of the quality of WIR’s asset base and tenant roster," said Mr. Markidis.
The analyst raised his 2021 financial projections and target price for shares of the Toronto-based REIT in response to a "positive" operating update released Tuesday after the bell.
"WIR’s recent collection experience has been outstanding," he said. "More than 99 per cent of the contractual rent billed for April and May has been received; the collection rate for June is already in excess of 98 per cent. It is also worth noting that (1) aggregate requests for some form of short-term rent relief from tenants has declined to 12 per cent (from 15 per cent) over the past month, and (2) no deferrals have been granted to date."
Maintaining a “buy” rating for WPT, he increased his target to US$14.50 from US$13. The average is US$13.25.
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RBC Dominion Securities analyst Robert Muller thinks the market is not giving proper credit to Apple Inc. (AAPL-Q) for its “significant” capital return program, seeing the tech giant remaining “in a league of its own when it comes to share purchases.”
“When looking at S&P 500 constituents with 3.5/4.5-per-cent growth rates, we find an average calendar 2021 price-to-earnings of 18/19 times, compared to AAPL’s current 23-times multiple,” he said in a research report examining its repurchases. “However, we estimate that within our base case, AAPL can grow its EPS at a 3.5-per-cent CAGR over the next 5-years if we assume zero growth beyond FY20 while continuing its repurchase pace of $70-billiom annually. What this implies, to us, is that the potential uplift from the upcoming 5G upgrade cycle is being discounted by the market (in addition to recent robust Wearables and Services growth as well as any potential future product innovations).”
"AAPL has communicated its desire to reach cash neutral (cash = debt) over time. However, if AAPL maintains its recent pace of $70-billion of share repurchases and is able to grow its top-line by 3-4 per cent, we believe AAPL can continue through the next decade before reaching its target. If we consider a no organic growth scenario, we believe that AAPL has the runway to keep its current buyback activity through mid-2023, at which point AAPL could then repurchase $45-billion of shares indefinitely without affecting its net cash position. We note that this is on top of nearly $15-billion of annual dividend payments."
Also seeing its debt maturities as “manageable” and not having an impact on its repurchase program, Mr. Muller raised his target for Apple shares to US$390 from US$345, keeping an “outperform” rating. The average on the Street is US$327.63.
“With the macro backdrop slowly improving following the initial COVID-19 pullback, and as the economy has begun to reopen, we believe we are justified in utilizing a multiple more in line with its high-tech peers,” the analyst said. “We apply a 24-times multiple (was 21 times) to our relatively-unchanged calendar 2021 EPS estimate to arrive at our $390 PT. We believe this is in line with large cap peers with similar growth profiles, however we note it is below AAPL’s FAANGM peer group median multiple of 29 times.”
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Despite expecting Empire Company Ltd. (EMP.A-T) to report significant fourth-quarter same-store sales growth when it releases its earnings on Thursday before the bell, Desjardins Securities analyst Chris Li trimmed his financial expectations for the grocer based on a “more conservative” gross margin assumption.
"Following the company’s business update in mid-April and comments by peers, we expect EMP to post strong sales results, partly offset by COVID-related costs," he said. "The focus will be on recent sales trends and an update on various growth and productivity improvement initiatives (Ocado, FreshCo expansion, Sunrise 2.0, etc) meant to further narrow its margin gap vs peers."
For the quarter, Mr. Li is projecting same-store sales growth, excluding fuel, of 17.4 per cent, while he anticipates seeing gross margin growth of 44 basis points.
“We expect EMP to benefit from the large, full-service format near-term as consumers prefer one-stop shopping,” he said. “This is balanced against trading down to discount in a recession. We believe consumers have higher discretionary spending near-term as they refrain from eating out/benefit from government unemployment programs.”
Mr. Li lowered his earnings per share estimates for 2020 and 2021 to $2.13 and $2.28, respectively, from $2.29 for both years.
However, he kept a “buy” rating and $34 target for Empire shares. The average target is $34.94.
“Despite uncertain industry conditions, our favourable view is predicated on margin growth drivers supported by various sales productivity and efficiency-improvement initiatives, as well as EMP’s discounted valuation,” he said.
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RBC Dominion Securities analyst Kate Fitzsimons said she remains a buyer of Canada Goose Holdings Inc. (GOOS-T, GOOS-N), seeing a pair of executive appointments on Tuesday as “positive developments.”
The luxury apparel maker announced Carrie Baker as President, North America and Kara MacKillop as Chief of Staff and EVP People & Culture.
“We’re most intrigued by the appointment of Baker, as she joins the regional head ranks such as Scott Cameron, President, Greater China, and Pat Sherlock, President, International,” said Ms. Fitzsimons. "We sense the move was viewed as the next step in Canada Goose’s evolution towards a matrix model, with now ownership of a North American P&L falling to Baker. She was deeply involved the brand’s 2017 IPO and recent Sustainability and Corporate Citizenship initiatives, so she certainly has the track record and history with the company. Baker will now oversee marketing and commercial operations in North America, including responsibility of the brand’s growth in the home market (60 per cent of sales in FY20) and driving demand and customer engagement. On that last point, with growth in local customers realistically an even greater priority for GOOS in a COVID world given predominance of tourist sales in its 12 North American stores, having someone with a proven track record directly responsible for engaging local consumers and managing regional distribution seems like a smart move.
"We'd also note that MacKillop seems well-equipped, having been at GOOS since 2014 as EVP, People and Culture - gaining intimate knowledge of the dynamics of a rapidly growing business on the people side."
At the same time, Ms. Fitzzimons trimmed her fiscal 2021 financial expectations to "allow for greater conservatism," particularly in the first half of the year. Her earnings per share projection slid to 86 cents from $1.16.
She maintained an "outperform" rating and $47 target. The average on the Street is $38.05.
“Our price target, fiscal 2022 estimate, and target multiple are all unchanged at $47 (or US$35 at CADUSD 0.74), implying 30 times our FY22 EPS estimate of $1.55, warranted given scarcity of growth in global consumer discretionary, GOOS’s attractive top-line/margin profile, and margin recovery on the assumption that the curve continues to flatten in 1HF21,” she said.
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Canaccord Genuity analyst Maria Ripps initiated coverage of online personal styling company Stitch Fix (SFIX-Q) with a “buy” rating, seeing “significant” opportunity as ecommerce trends remain strong.
“In a retail world still largely dominated by brick-and-mortar distribution, apparel was one of the early verticals to migrate online,” said Ms. Ripps. “We estimate apparel eCommerce penetration in the U.S. and UK (Stitch Fix’s two markets) stands at 25 per cent and is likely to reach 40 per cent over the next five years, to some extent aided by behavioral changes in the wake of the COVID-19 pandemic. Additionally, Stitch Fix has an opportunity to take share within the large and growing online apparel category as consumers continue to seek an experience that is both convenient and highly personalized. The company’s recent emphasis on its direct buy offering should expand the addressable market and allow it to gain additional wallet share, driving potential upside to current estimates.”
Touting its personalization and data advantages and seeing its growth as “measured” with a focus on profitability, she set a target of US$30 for shares of San Francisco-based company. The average on the Street is now US$25.77.
“Stitch Fix solves for many of these issues through personal curation from an individual stylist who is familiar with each consumer’s unique tastes and can incorporate knowledge of various clothing styles to present a consistent, emotionally appealing offering wrapped within a subscription-like experience that helps the consumer discover new brands,” she said. “With nearly 3.5 million customers and growing, the model appears to be working for consumers who are turning away from the less personal experience offered in brick-and-mortar retail outlets. While this is a competitively intense area, we recognize Stitch Fix’s ability to build a loyal, recurring customer base, providing a foundation for innovation and new product features that can help the brand gain an increasing share of consumer wallets over time.”
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Viewing the impact of the COVID-19 pandemic abating, H.C. Wainwright analyst Raghuram Selvaraju raised his rating for Bausch Health Companies Inc. (BHC-N, BHC-T) to a Street-high $64 from $50 with a “buy” rating (unchanged). The average on the Street is US$27.65.
“As states gradually reopen their economies in the wake of the advent of the COVID-19 pandemic, we expect a slow recovery in several of Bausch Health’s hardest-hit businesses — notably, ophthalmology, dermatology and dental health," said Mr. Selvaraju. "While we currently anticipate roughly $8.1-billion in revenue for 2020 vs. our previous projection of $8.75-billion, which is within the company’s previously-announced guidance range of $7.8-8.2-billion, the universe of comparable companies we employ to derive our earnings multiple has appreciated in price since the nadir reached in March 2020. Accordingly, our earnings multiple has increased to 12.3 times vs. the prior 9.8 times. In addition, we expect a continued rebound over the course of this year and heading into 2021, since from our vantage point the most severe impact would likely be felt in the current quarter.”
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In other analyst actions:
* RBC Dominion Securities raised AltaGas Ltd. (ALA-T) to “outperform” from “sector perform” with a $21 target, up from $19. The average on the Street is $19.03.
* Credit Suisse analyst Robert Moskow raised his target for Beyond Meat Inc. (BYND-Q) to US$142 from US$90 with a “neutral” rating (unchanged) The average on the Street is US$95.95.
Mr. Moskow said: “Contrary to our initial view, Beyond may emerge as a net beneficiary of the pandemic in the near-term due to strong demand in retail channel (48 per cent of sales) and in the long-term due to rising consumer interest in healthier foods. Consumer survey data from Hunter indicates that the number of people who say they are eating healthier foods has increased 20 per cent since the start of the pandemic, presumably because they are interested in boosting their resilience to illness. We think the spike in at-home consumption will lead to stronger sales at restaurant chains as social restrictions ease off.”
David Leeder