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

Though Lululemon Athletica Inc.'s (LULU-Q) second-quarter sales and earnings results were “good,” Citi analyst Paul Lejuez expects they “likely disappointed high market expectations.”

In a research note released before the bell, he said the quarter was “good, not great (and it needed to be great)” and thinks the Vancouver-based apparel maker will also be weighed down by its third-quarter revenue to date, which also falls short of the Street’s projections.

“While the business is doing well relative to other mall-based peers, capacity constraints in stores and additional investments in the business may hold back the recovery in sales/EPS through the remainder of 2020,” he said.

“LULU is the most highly valued specialty retail brand ever and is priced to perfection (leaving very little room for error). While LULU is a great brand with a long runway for growth, we believe the risk/reward is fairly balance at current levels.”

On Tuesday after the bell, Lululemon reported adjusted earnings per share for the quarter of 74 US cents, falling short of Mr. Lejuez’s 93-US-cent estimate but exceeding the 56-US-cent consensus forecast. Total sales rose 2 per cent, missing the analyst’s 8-per-cent projection.

For the third quarter, the company expects total sales to rise mid-to-high single-digits with earnings per share down 15-20 per cent, which Mr. Lejuez said implies 77-82 US cents. The Street was expecting 94 US cents.

With the results and a lower outlook for the second half of the year, the analyst trimmed his full-year 2020 and 2021 EPS estimates to US$4.16 and US$6.28, respectively, from US$5.22 and US$7.70.

Keeping a “neutral” rating following a Sept. 3 downgrade, Mr. Lejuez lowered his target for Lululemon shares to US$340 from US$400. The average target on the Street is US$370.94, according to Refinitiv.

“Comp momentum has been among the best in retail and margins have expanded almost 400 basis points since 2015,” he said. “Product innovation continues to drive strong results in seemingly developed categories such as women’s pants, the men’s business is a big opportunity, and the customer has given LULU license to broaden into new categories. While Covid-19 disruptions will be a near-term headwind, there is no change to LULU’s long-term earnings power.”

Elsewhere, BMO Nesbitt Burns' Simeon Siegel raised his target to US$228 from US$192 with a “market perform” rating (unchanged).

“One of the few growing sales, and yet among the least bad GM declines, LULU’s 2Q was among the better reports of our group,” he said. “However, with a $46-billion market cap on $4.0-billion FY19 revenues, we’d expect no less.”

“We continue to believe the brand is among the strongest brands in retail, however as revenues approach our ‘Brand Peak’ saturation point, we worry sales or margin will begin to butt heads and worry that a work out from home trend may weigh on unit demand post pandemic.”

Raymond James analyst Matthew McClintock raised his target for Lululemon to US$400 from US$335 with a “strong buy” rating.


Desjardins Securities analyst Andrew Breichmanas thinks mid-tier gold producers are “poised to capitalize” on higher prices for the precious metals.

In a research report released Wednesday, he initiated coverage of eight companies, which he thinks will benefit from near-term price strength and deliver longer-term value.

“With the gold price remaining near all-time highs, expectations for sustained accommodative monetary policy fuelling inflation fears and suppressed input prices enabling operations to deliver record margins, gold producers are enjoying a period of strong free cash flow,” said Mr. Breichmanas. “Historically, such an environment has led management teams to stretch balance sheets to pursue growth through large-scale acquisitions or development, but thus far management teams of senior producers have been conveying a desire to maintain discipline and potentially return cash to shareholders through increased dividends. For larger companies, this may be a sensible short-term strategy, enabling current high-quality assets to be optimized while ensuring that future capital allocation decisions remain prudent. However, many smaller peers are seizing the chance to reinvest excess cash flow into potentially transformative opportunities. In our view, the additional execution risk of this strategy is offset by the relatively attractive valuations and greater upside potential.”

“Our preference is for companies that possess capable management teams, balance sheets that can withstand lower prices, and strong organic growth through development of advanced projects or exploration programs at existing assets.”

Mr. Breichmanas initiated coverage of the following companies:

* Alamos Gold Inc. (AGI-T) with a “buy” rating and $18.50 target. The average on the Street is $17.41.

He said: “The stock warrants a premium valuation for operating quality long-life mines in attractive jurisdictions and for its leadership on sustainability issues. As Young-Davidson demonstrates its ability to achieve anticipated production rates, costs and cash flow, we expect the focus to shift past current capital programs at La Yaqui Grande and Island Gold to realizing value for the company’s assets in Turkey and advancing Lynn Lake.”

* Galiano Gold Inc. (GAU-T) with a “buy” rating and $3.25 target. Average: $2.43.

“The stock offers attractive value based on delivery of the current mine plan, which places a priority on cash flow given the joint venture oversight. However, exploration success on the prospective land package has potential to significantly improve economics and alter the longer-term expectations for the complex.”

* Golden Star Resources Ltd. (GSC-T) with a “hold” rating and $6.25 target. Average: $6.57.

“Wassa drill results warrant attention as there is potential to delineate a significant underground resource. However, ongoing debt repayments, maturity of convertible debentures in August 2021 and potentially significant capital requirements will likely keep the focus on the balance sheet for now.”

* IAMGOLD Corp. (IMG-T) with a “buy” rating and $8.25 target. Average: $7.70.

“The company possesses a strong balance sheet, operations capable of generating meaningful cash flow during periods of high prices and a solid pipeline of development projects. The stock trades at a significant discount, which we expect to narrow as continued delivery minimizes outstanding risks. In particular, the Côté project is being advanced in a measured way by a management team with significant experience operating large-scale open pit operations and should be perceived as an emerging cornerstone asset capable of delivering long-term value.”

* OceanaGold Corp. (OGC-T) with a “hold” rating and $4 target. Average: $4.34.

“We expect an attractive entry point on positive news for Didipio or in anticipation of stronger 2021 performance, but recommend waiting for greater clarity on both fronts.”

* Teranga Gold Corp. (TGZ-T) with a “buy” rating and $19.25 target. Average: $20.06.

“Management has demonstrated its capacity for project development with successful delivery of Wahgnion. While Massawa presents more complex metallurgy, the ability to leverage Sabodala infrastructure, especially the power plant, mitigates these concerns somewhat. After plant modifications are complete, Sabodala-Massawa should offer appeal as a unique large-scale complex with further exploration potential. The scarcity of such high-quality long-life assets in smaller producers should eventually warrant a premium valuation.”

* Torex Gold Resources Inc. (TXG-T) with a “buy” rating and $32.50 target. Average: $32.40.

“Torex provides a unique combination of exposure to a world-class deposit in a singleasset producer, a proven management team with a track record for innovation and value preservation, organic growth opportunities capable of being funded from existing cash and attractive relative valuation. The El Limón-Guajes mine is already a globally significant gold operation and Media Luna has potential to further transform it into a top-tier long-life complex with infrastructure developed to support further exploration success.”

* Wesdome Gold Mines Ltd. (WDO-T) with a “hold” rating and $16 target. Average: $15.68.

“At current gold prices, the combination of the ability of Eagle River to generate cash with the appeal of potential at Kiena are undeniable, and the consistent performance has earned management the ability to advance further growth plans in a measured way. In particular, the Falcon Zone appears to offer upside at Eagle River to compensate for the completion of mining at the Mishi pit. The portfolio offers an impressive platform for further growth, but the stock appears reasonably valued based on current forecasts.”

Mr. Breichmanas added: “Our preferred intermediate producers are: Alamos Gold, which has the opportunity to establish a foundation of three assets in Canada, with further optionality in Mexico and Turkey; Torex Gold, which can apply existing cash flow and infrastructure toward advancement of the Media Luna project; Teranga Gold, where integration of the Massawa project should yield near-term growth and establish a long-life complex; Galiano Gold, which has stabilized operational performance and can reinvest in exploration; and IAMGOLD , which offers leverage from current operations and development of Côte Gold."


Suncor Energy Inc.'s (SU-T, SU-N) 2020 guidance update is a “sizeable reset,” according to RBC Dominion Securities analyst Greg Pardy.

On Monday, the Calgary-based company lowered its 2020 production guidance to 680,000-710,000 barrels of oil per day from 740,000-780,000 bbl/d due to the impact of an August fire at its Base Plant operations.

“Suncor’s updated 2020 guidance pointed towards 9-per-cent lower mid-point production amid unchanged capital spending of $3.6-$4.0-billion,” said Mr. Pardy. “With maintenance and repairs at Base oil sands expected to be complete in the fourth-quarter, Suncor will look to regain its operating momentum as it closes the books on 2020.”

With the release, Mr. Pardy trimmed his production outlook for 2020 by 6 per cent to 697,600 barrels per day. His 2021 estimate shrunk by 3 per cent to 795,800 bbl/d.

His earnings per share estimates also fell, moving to a loss of $1.12 in 2020 from a 98-cent deficit and $1.04 in 2021 from $1.20.

Keeping an "outperform rating, he also lowered his target for Suncor shares to $25 from $28. The average is $31.33.

“Suncor is trading at a debt-adjusted cash flow multiple of 8.6 times in 2020 (vs. our Canadian integrated peer group at 12.0 times) and 4.9 times in 2021 (peers at 4.4 times),” he said. “We believe that Suncor should trade at a modest premium vis-à-vis our integrated peers given integration and balance sheet strength/liquidity.”


Raymond James analyst Rahul Sarugaser said Village Farms International Inc.'s (VFF-Q, VFF-T) move to secure full ownership of its Pure Sunfarms joint venture “redoubles” his view of its “best-in-class” status in the Canadian cannabis sector.

On Tuesday, Village Farms announced a deal to acquire the remaining shares in PSF from former partner Emerald Health Therapeutics Inc. for $79.9-million. It had previously owned a 58.7-per-cent stake.

“Given PSF’s long track record of profitability and EBITDA positivity, this transaction will be immediately accretive to VFF’s net income, and will allow VFF and its shareholders to fully participate in PSF’s enviable margins and growing share of the Canadian cannabis market,” said Mr. Sarugaser.

“PSF has been steadily growing its share of the Canadian cannabis market with its high-volume sales of low-cost, high-quality cannabis flower,and the recent introduction of 510 vape cartridges and bottled oils. According to our channel checks, PSF, for the first time, broke the top 5 in adult-use cannabis sales during August 2020, displacing industry mainstays with much larger valuations.”

Keeping an “outperform” rating for Village Farms shares, he raised his target to US$20 from US$14. The average on the Street is US$13.


Though new CEO Miguel Martin is likely to bring Aurora Cannabis Inc. (ACB-T, ACB-N) “new vision as it moves out of the first phase of its transformational period and into the second phase of producing higher-margin products to improve its financial position,” Desjardins Securities analyst John Chu lowered his forecast, expressing caution on the impact of the transition period on near-term results.

On Tuesday, Aurora announced Mr. Martin will replace interim CEO Michael Singer, who took the helm following the exit of founder Terry Booth in February.

At the same time, the Edmonton-based company announced fourth-quarter net revenue is expected to be between $70-million and $72-million, including $66-million to $68-million in cannabis net revenue.

With that change, Mr. Chu raised his projection to $72-million from $66.4-million.

“However, we have decreased our estimate for 1Q FY21 revenue to $78.3-million (previously $84.5-million) due to management’s labelling the quarter a ‘transformational period’ (eg does ACB rationalize some SKUs similar to WEED?),” he said. “Our gross margin estimate for 4Q is unchanged at 50 per cent (in line with guidance). We have used the top of the SG&A range of guidance, which includes R&D costs of $65.4-million (previously $58.3-million). We have reduced our estimated FY21 adjusted EBITDA downwards to $16.5-million to reflect ACB’s credit facility amendment for positive EBITDA of $20-million as we expect to remain conservative until we see some decent progress being made.”

Mr. Chu also trimmed his target for Aurora shares to $20 from $22 to “reflect both a transition period for the new CEO and the lower FY21 EBITDA covenant requirements.” The average on the Street is $14.36.

“W e maintain our Buy rating but urge near-term caution until we gain more clarity on the new CEO’s vision, how long the transition period may take and the impact it may have on near-term sales and margins,” he said.


Slack Technologies Inc.'s (WORK-N) trends are “faring worse” than its peers following a “tough” second quarter, according to Citi analyst Walter Pritchard.

On Tuesday, the San Francisco-based company reported revenue for the quarter of US$215.9-million, exceeding the Street’s US$209.2-million expectation. However, billings of US$218.2-million fell short of the forecasts of both Mr. Pritchard (US$240-million) and the consensus (US$225-million).

“While we don’t think expectations were especially higher into the quarter, we do see the results as problematic for the bull case,” the analyst said. "Namely, Slack has fared worse than its peers, both generally in productivity/collaboration, as well as in software, during COVID so far. We expect some will attribute this to more immature sales execution, but also, we expect this will stick to the bear case around lack of differentiation versus MSFT Teams.

“We expect near-term reaction in stock may be an over-reaction as management reiterates that 2H trends will improve. At the same time, we expect Slack to become a 'show me” story, which makes it challenging to regain a premium multiple."

Keeping a “neutral” rating for Slack shares, Mr. Pritchard lowered his target to US$30 from US$33. The average on the Street is US$31.33.

“We rate Slack Technologies shares as Neutral with a High Risk profile because while we view the company’s product value proposition as very compelling, we think that the market valuation for Slack’s shares embeds relatively ambitious long-term growth expectations,” he said. “Furthermore, the market for collaboration software tools is rapidly evolving and while Slack currently holds a lead over its competitors in the realm of messaging collaboration platform, its competitive position may be undermined over a longer period.”

Elsewhere, RBC Dominion Securities' Alex Zukin lowered his target to US$30 from US$38, keeping an “outperform” rating.

Mr. Zukin said: “Slack reported a mixed F2Q that saw a likely peak in contract contraction and churn coupled with a trough in large deal activity, counterbalanced by strong new paid customer growth. While shares are likely to be range-bound until evidence of improved execution, we see attractive risk/reward if COVID headwinds prove to have troughed, with several potential tailwinds into 2H.”


Exro Technologies Inc. (XRO-CN) is “driving efficiency in electric motors,” said Fundamental Research analyst Sid Rajeev, who initiated coverage with a “buy” rating.

The Vancouver-based early stage company is focused on creating more efficiency electric motors and powertrains.

“Exro has a small manufacturing operation, mainly for making engineering samples for customers,” the analyst said. “For high volume manufacturing, it plans to license the technology to its customer and partners rather than producing them in-house. This asset-light approach should allow Exro to scale rapidly if its technology becomes widely adopted.”

Currently the lone analyst on the Street covering the stock, Mr. Rajeev set a fair value for Exro shares of $1.69.

“We will be closely monitoring the company’s key developments in the next 12 months as partner adoption of Exro’s technology will have a very high impact on the company’s long-term risk and reward profile,” he said.


Several analysts on the Street raised their target prices for shares of Great-West Lifeco Inc. (GWO-T) in response to its US$2.35-billion deal to buy the retirement business of Massachusetts Mutual Life Insurance Co.

Keeping a “hold” rating, Desjardins Securities' Doug Young increased his target to $28, which is the current average on the Street, from $26.

“The transaction is (1) on strategy, (2) EPS-accretive, and (3) should help further extract value from the previously announced Personal Capital acquisition,” he said.

Credit Suisse’s Mike Rizvanovic increased his target to $29 from $27, maintaining a “neutral” rating.

“We view the acquisition as a clear positive for GWO as it would further solidify Empower’s position as the second largest player in the U.S. retirement services market ranked by both the number of participants and assets managed,” said Mr. Rizvanovic. “The synergies from the added scale are compelling, with further potential upside from gradually bringing some of the existing assets currently managed by third-party providers in-house by leveraging Putnam’s capabilities. The one modest negative is that GWO’s leverage will be slightly elevated following the deal, although management expects to reduce the leverage ratio back down below the 30-per-cent level within a 12-18 month period.”

National Bank Financial’s Gabriel Dechaine also raised his target for to $28 from $26. He kept a “sector perform” rating.


In other analyst actions:

* In the wake of the release of an updated technical report for its Kamoa-Kakula copper project, Canaccord Genuity analyst Dalton Baretto raised his target for Ivanhoe Mines Ltd. (IVN-T) shares to $7 from $5.50 with a “speculative buy” rating (unchanged). The average on the Street is $6.17.

“The overall expansion plan is largely in line with our expectations, as we were recently on site in February; based on the September 1 progress update, however, we now believe that the project is on track for first production in less than 12 months, six months ahead of our forecast,” said Mr. Baretto. “IVN remains fully funded to advance Kamoa-Kakula to first production, although this assumption remains subject to capital allocation to the other projects, plus any capex overruns ... We note that no mention of the transportation strategy for concentrate and cathode was made in this release. We assume the previous strategy - trucking to Zambia, followed by rail to Durban, South Africa, remains the preferred option for now.”

* Eight Capital initiated coverage of Great Bear Resources Ltd. (GBR-X) with a “buy” rating and $30 target. The average is $19.19.

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