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Inside the Market’s roundup of some of today’s key analyst actions

Having grown “significantly more confident about its prospects as a standalone entity” following a series of investor meetings in Toronto last week, Raymond James analyst Frederic Bastien upgraded his rating for Aecon Group Inc. (ARE-T) in the wake of its blocked takeover by a subsidiary of China Communications Construction Co. Ltd. (CCCC)

“CCCI’s proposed takeover was largely a non-issue for Aecon’s major clients, which continued to award the firm big jobs throughout the process,” said Mr. Bastien. “Our channel checks also showed no signs of employee turnover or poor staff morale, consistent with CCCI’s pledge to leverage Aecon’s workforce as its platform for growth in Canada. And while ARE would have benefited immensely from CCCI’s financial backing, the door remains open for collaboration domestically. For example, CCCI subsidiary John Holland boasts expertise that could be helpful to Aecon on the multi-billion dollar electrification of GO Transit’s rail network. Internationally, there is reason to believe CCCI could still seek Aecon’s unique P3 expertise to jointly bid on complex projects across its global network. That could potentially lead to more Quiport or Skyport clones down the road.”

“We are confident in the contractor’s ability to execute on its new contract awards, because they share a lot in common with some recently completed (and others underway). Crews from Waterloo Region LRT will be moved a stone’s throw to Finch West LRT; the Site C civil works in BC is a larger version of the John Hart project completed in that same province; the Bermuda Airport is a carbon copy of what Aecon undertook in Ecuador, and the REM LRT in Montreal is an awful lot like Eglinton Crosstown. We expect Aecon will take advantage of all lessons learned on previous projects to minimize risk and improve margins on the new ones. The massive baseload of work has less obvious benefits in that Aecon can now be more selective when looking at new jobs, and prioritize complex projects for which there is limited competition, be it domestic or foreign.”

While he thinks industrial catalysts are “plentiful” for Aecon moving forward, Mr. Bastien expects a slowdown in infrastructure activity following the Progressive Conservative’s victory in last week’s Ontario election as it assesses the state of the province’s finances and establishes a budget.

“That’s not necessarily a bad thing for Aecon, which is approaching capacity with the Eglinton Crosstown work program, the newly awarded Finch West LRT contract and scheduled rehabilitation work on the Gardiner Expressway,” he said. “We believe the firm’s expanding relationships in BC and Quebec will help fill any potential void, as should Western Canada’s slowly recovering industrial sector.”

Moving the stock to “strong buy” from “outperform,” Mr. Bastien maintained a target price for Aecon shares of $20.50. The average target on the Street is $18.75, according to Thomson Reuters Eikon data.

“Since we already held a constructive view of the firm’s record backlog and, more importantly, the high level of continuity in its recent awards, it is only natural we upgrade its stock,” he said.

“Other factors drawing us to Aecon include its broadly diversified operations, strong balance sheet and compelling valuation.”


CanWel Building Materials Group Ltd.‘s (CWX-T) acquisition of the lumber treatment division of Oregon-based Superior Forest Products Inc. appears “broadly attractive,” said Raymond James analyst Steve Hansen, who suggests the deal, announced Tuesday without financial terms, complements its existing U.S. operations through added “scale, volume and additional reach into attractive/adjacent west coast geographies.”

“At the same time, it also further advances the company’s multi-year strategy aimed at bolstering its high-margin, value-added mix — with additional chapters/moves still likely to come, in our view,” said Mr. Hansen.

“Further to CWX’s robust 1Q18 results, we expect sustained strength in lumber and building material (LBM) prices will continue to offer a robust tailwind to the firm’s 2018/2019 results. For context, lumber, OSB, and Plywood have surged 46 per cent, 21 per cent, and 32 per cent over the past 12 months, respectively, with continued strength through 2Q18. We have nudged up our 2018/2019 estimates accordingly.”

Keeping a “strong buy” rating for the stock, Mr. Hansen increased his target to $8 from $7.50. The average target is now $7.81.

Mr. Hansen said: “We believe CanWel remains well positioned to benefit from several macro/strategic tailwinds, including: 1) robust LBM prices (at multi-year highs); 2) strong/sustained U.S. organic growth, particularly in California, Arizona & Nevada (Canada still mixed); 3) improved Forestry operations benefitting from normalized weather/operations, robust log pricing, and the easing of rail congestion; and 4) the benefit of recent strategic acquisitions.”


Despite maintaining a belief that the semiconductor equipment industry is less cyclical in nature and expecting to see long-term growth, RBC Dominion Securities analyst Mitch Steves projects calendar 2019 to be a “muted” year for the industry.

“While CY18 estimated WFE [wafer fab equipment] is likely up year over year to $52-billion, we think it is likely that 2019 numbers will be down on a year-over-year basis,” said Mr. Steves. “In particular, when we look at total CAPEX spending for the top 20 players (90 per cent of the market), we see estimates that suggest spending will be down 4 per cent on a year-over-year basis. While DRAM [dynamic random-access memory] and NAND have been growing rapidly the past four years, we think year-over-year growth trends will be more subdued compared to the 50 per cent-plus growth we saw in 2017. Notably, we recognize that if the transition from 64 layer to 96 layer is difficult numbers could go higher from a memory perspective. That aside, given where numbers currently stand, if the transition is relatively smooth we think risk reward skews to the downside for 2019.”

In a research note released Wednesday, Mr. Steves downgraded his rating for both Applied Materials Inc. (AMAT-Q) and Lam Research Corp. (LRCX-Q) to “sector perform” from “outperform” under the expectation of “flattish” stock movement.

“We have Sector Perform ratings on AMAT and LRCX, as we think investors should wait for attractive entry points vs. what we see currently (decline in WFE spending in 2019, could cause CY19E downward revisions),” he said. “Fundamentally, while memory continues to act as a revenue tailwind, with WFE numbers likely north of $50B for 2018 we think it is unlikely that 2019 WFE spend is up again. For investors that need exposure to the group, we would recommend buying ASML [ASML Holding N.V.]. With potential monopoly pricing due to EUV we think the near-term headwinds in Semi-cap will be offset by this opportunity.”

With his downgrade of Applied Materials, Mr. Steves lowered his target to US$55 from US$64. It’s now below the consensus on the Street of US$67.32.

“We downgrade Applied Materials shares to Sector Perform, as we view the bull case model as largely baked in,” he said. “With potential for $5–6 EPS in 2020 (we think closer to $5 than $6), this would imply a current valuation of 10–11 times 2020 expectations. We view this as fair given that yield issues are likely solved and Taiwan Semi has recently announced a cut to foundry expectations. In addition to this high-level view, we think OLED could come in a bit weaker than expected given the recent commentary reducing expectations during the last conference call.”

He also lowered his target for Lam Research Corp. to US$210 from US$245. Consensus is currently US$266.

“Similar to AMAT, we are making the case than cY19 revenue and EPS will likely be lower than current Street expectations,” he said. “Notably, we would become more positive if Street estimates were revised down to reflect muted WFE trends in 2019. While 2018 will likely see an overall increase, flat to down for 2019 appears more reasonable in our view and would cause downward estimate revisions as WFE spending becomes more muted from a y/y growth perspective.”

At the same time, Mr. Steves raised his rating for ASML Holding N.V. (ASML-Q) to “outperform” from “sector perform” with a target of US$235, rising from US$218 and above the consensus of US$220.80.

“We’re taking a positive stance on ASML primarily due to EUV and Intel’s commentary that 10nm will be the last node without EUV,” the analyst said. “Shipments have continued to ramp for this segment of the business and this should lead to higher gross margins acting as a long-term tailwind for the company. Despite cycle fears that are prevalent in the space, we think the company has line of sight to 40+ EUV units in 2020, which could drive EPS to €9.50 (Street at €9 and we think an upside case is closer to €10). In this scenario, we think a 20 times price-to-earnings multiple is fair, resulting in a price closer to $235. If successful, we think pricing for EUV should work in ASML’s favor going forward; this could create downside support for the stock, as investors would purchase shares if results are a tad light and EUV remains on track.”


Lululemon Athletica Inc. (LULU-Q) appears well on its path to achieving its revenue goal of US$4-billion by 2020, said RBC Dominion Securities analyst Brian Tunick.

Following an investor event in Chicago on Tuesday, Mr. Tunick expressed increased confidence that 2018/2019 is “setting up” for “ongoing” sales and earnings beats for the Vancouver-based apparel maker.

“Investors are clearly focused on looking beyond that target to gauge what could be additional areas to help sustain 15-20-per-cent bottom-line growth,” he said. “The good news is that it sounds like the path to $6-billion in revenues should look relatively similar to what the company is delivering on today. A framework of 10-per-cent square footage growth, a men’s business north of $1-billion, a digital ecomm penetration of 30-per-cent-plus, and a bigger International business with Asia alone adding over $1-billion would be the ongoing building blocks. While footwear will continue to be explored, it sounds like all categories that help guests ‘live their best lives’ could be on the table over the next few years.”

“Looking ahead there are a number of projects on deck in order to sustain the momentum, including: 1) ongoing work in landing pages, enhanced content, and navigation; 2) streamlining the checkout process; 2) developing more sophisticated tools to enhance mobile search, browse, and email post-purchase communications; 3) leveraging stronger customer and data analytics; 4) expanding ship from store capability to 300 locations; and 5) rolling out BOPUS capability into 2H18.”

Mr. Tunick raised his 2018 earnings per share projection to US$3.22 from US$3.08 to reflect the company’s first-quarter guidance update and the impact of share repurchasing. His 2019 estimate moved to US$3.74 from US$3.47.

He kept an “outperform” rating for the stock and hiked his target to US$130 from US$92. The average on the Street is US$115.32.

“We continue to believe that the $4 EPS carrot could arrive in 2019 given current sales and margin momentum with a $4.50-$4.60 an EPS upside scenario in 2020,” the analyst said.


Mackie Research analyst Greg McLeish initiated coverage of Aleafia Health Inc. (ALEF-X), which operates Canada’s largest physician-led referral-only clinics for medical marijuana, with a “buy” rating.

“Aleafia Health’s business strategy is centered around quality patient care,” he said. “Physicians registered with the company’s affiliate clinics have access to a vast medical cannabis database, derived from over 40,000 patients. This experiential knowledge helps ensure physicians make treatment recommendations that have been proven effective through historical data, creating a faster route to patient relief and satisfaction. To complement this extensive database, Aleafia has a unique skillset amongst its key management: law enforcement. Experience in the law enforcement sector brings expertise on specific illnesses (such as post-traumatic stress disorder), unions, human rights, and cannabis in the workplace.

“As an additional assurance in the delivery of quality treatments, Aleafia Health owns two state-of-the-art cultivation facilities. The company will grow a refined set of medical cannabis strains, tailored to meet the specific needs of its patients. By cultivating its own product, Aleafia Health will ensure standardization and quality of its treatments, as well as a shortened seed-to-patient time.”

Mr. McLeish set a target price for Woodbridge, Ont.-based Aleafia, which started trading on the Venture Exchange in late March after a merger with Canabo Medical Inc., of $1.75 per share.

“Investing in the cannabis sector is not for the faint of heart, as companies operating in the sector will most likely experience both regulatory and operational challenges,” the analyst said. “Aleafia has an experienced management team comprised of experts that have served in senior positions in government, law enforcement and emergency services. This unique experience gives the company and advantage particularly when it comes to treating first responders.”


Avante Logixx Inc. (XX-X) is “bringing premium security to a wider audience,” according to Canaccord Genuity analyst Doug Taylor, who initiated coverage of the stock with a “buy” rating.

“Recent management changes are expected to reignite organic growth and we expect the company will become more acquisitive, bringing the opportunity for meaningful accretion and synergy-driven value creation,” said Mr. Taylor. “While we think the current share price values the existing business fairly, as new management builds a track record of execution on expanding organic growth and effective capital deployment, we see upside.”

He set a target price of 60 cents per share, exceeding the consensus of 53 cents.

“Avante trades presently at 13 times our NTM [next 12-month] EBITDA estimate and 11 times 2020 estimates,” he said. “Larger security consolidators trade at 10x but do not feature the same organic growth opportunity. If the company proves out a track record of double-digit organic growth and accretive deployment of capital, we see upside to the current valuation.”


In other analyst actions:

Cormark Securities initiated coverage of Trisura Group Ltd. (TSU-T) with a “buy” rating and $32 target.

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