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

In reaction to the sharp sell-off following the announcement of its proposed $2.8-billion merger with Raging River Exploration Inc. (RRX-T), Desjardins Securities analyst Kristopher Zack upgraded his rating for Baytex Energy Inc. (BTE-T, BTE-N) to “buy” from “hold.”

The Calgary-based company’s stock plummeted 12.4 per cent on Monday, its biggest drop since March of 2016, and fell a further 1.1 per cent a day later.

“We believe BTE looks attractive at current levels following the sharp 12-per-cent sell-off on the back of the announced combination with RRX [Monday],” said Mr. Zack. “While we see the deal as dilutive to CFPS, we believe it strategically checks a number of boxes for BTE, including significantly reducing debt levels and adding light oil growth in Canada while maintaining exposure to strong Eagle Ford netbacks.”

“While we believe investor churn could remain a near-term overhang on the stock, we estimate that the post-merger BTE is now trading at just 4.5 times 2019 DACF [debt-adjusted cash flow] at the current strip, down from 5.2 times prior to the transaction.”

Mr. Zack sees a “significant” improvement in Baytex’s balance sheet with the deal, which he believes provides increased financial flexibility moving forward.

“We estimate a D/CF [debt-to-cash flow] of 2.3 times at year-end 2019 at strip, down sharply from 4.0 times prior to the deal, and note that the company is targeting closer to 1.5 times going forward,” he said. “We estimate an FCF [free cash flow] yield of 8.5 per cent on a debt-adjusted basis, which is above average for our producer coverage list, as RRX’s strong netback helps compensate for the higher corporate declines.”

Mr. Zack maintained a target price of $5.75 for Baytex shares. The average target on the Street is currently $5.93, according to Bloomberg data.

“While we expect that mixed shareholder reviews and arbitrage noise could continue to weigh on the stock in the very near term, we believe that the company is now fundamentally better positioned to compete for investor mind share in the current market with significantly reduced debt and increased light oil exposure,” he said. “We are moving to a Buy rating (from Hold) following the sharp sell-off [Monday], which from our perspective has created an attractive entry point for long-term-focused investors.”

Elsewhere, Veritas Investment Research analyst Jeffrey Craig upgraded his rating for Baytex to “buy” from “sell” with a target of $5, up from $4.50.


Starbucks Corp. (SBUX-Q) faces a decelerating top line in both the United States and China, according to Morgan Stanley analyst John Glass, who downgraded its stock with the belief that slowing sales won’t reverse course in the near term and expressed doubts over its fiscal 2019 earnings per share outlook.

“Facing now what is clearly decelerating top-line in its two key markets, SBUX is now saddled with increased EPS risk and a poor recent track record of driving sales,” said Mr. Glass. “We see this stock as range bound, at best, near-term as the catalyst for a US comp recovery remains elusive, offset by a valuation that has been compressing over the past 2+ years.”

On Tuesday after market close, Starbucks, the world’s largest coffee chain, released a forecast for global comparable store sales for the current quarter which fell below Wall Street’s estimates and said it anticipates lower net new store growth in the U.S. for fiscal 2019. It expects global comparable store sales to rise 1 per cent in the third quarter, missing the 3-per-cent increase estimated by analysts.

Though he acknowledged the company is taking action to react to the slowdown through both product and digital innovation, Mr. Glass said it’s unclear how much that will impact sales, suggested a further reduction in expenses may also prove constructive.

“The [decline in sales in China] was a negative surprise, and believing in the long-term opportunity in China is important to the long-term thesis,” he said. “There are some plausible partial explanations for this (a switch away from unsanctioned third party delivery; new arrangements to come by year’s end) but now this is show-me as well.”

After lowering his EPS projections for the next two years, Mr. Glass dropped his rating to “equalweight” from “overweight” and lowered his target for its stock to US$59 from US$72, which had been the highest on the Street. The average target is currently $61.76.

Elsewhere, Telsey Advisory Group analyst Robert Derrington downgraded his rating for Starbucks to “market perform” from “outperform” with a target of US$60, falling from US$70.

BTIG LLC analyst Peter Saleh downgraded it to “neutral” from “buy” without a specified target.


CIBC World Markets analyst Kevin Chiang thinks the North American railway and trucking sector is “bouncing back” after a challenging winter.

“The North American rails and truckers are benefiting from cyclical tailwinds driving strong volume and pricing growth which has a resulted in CN, CP, and TFII reaching (or getting close to) their all-time highs,” said Mr. Chiang in a research note previewing second-quarter earnings. “Rail and trucking volumes were up 4-plus per cent year over year in Q2/18, while pricing continued to remain strong with no sign of easing in sight. The North American transportation equities (S&P Transportation Index and S&P/TSX Transportation Index) outperformed the broader market (S&P 500 and S&P/TSX) by ~350 bps thus far in the second quarter. While we suspect there is some investor concern that the surface freight cycle is peaking given how strong H1/18 has been, we believe given the labor shortage in the market and favorable long-term volume trends, the outlook for the sector through the balance of 2018 and into 2019 remains favorable.”

Mr. Chiang raised his target price for a trio of stocks. His moves were:

- Canadian Pacific Railway Ltd. (CP-T. CP-N) to $280 from $270 with an “outperformer” rating. Consensus is $256.57.

“CP’s guidance of low double-digit % EPS growth in 2018 continues to look conservative, and if it were not for the labour disruption in Q2, we believe management would have raised its guidance,” he said. “We are forecasting 2018 EPS growth of 16 per cent year over year. We expect upward revisions to CP estimates.”

- Canadian National Railway Co. (CNR-T, CNI-N) to $115 from $105 with a “neutral” rating. Consensus is $106.70.

“CN has bounced back better than expected after a challenging winter season. With Q1 results, the company lowered its 2018 EPS guidance from $5.25-$5.40 to $5.10-$5.25,” he said. “With RTMs [revenue ton miles] up 8 per cent year over year in Q2 and service metrics showing good sequential improvement, we now believe CN can beat the top end of its revised earnings guidance. We are assuming that as construction season gets underway, we will continue to see strong sequential improvement in CN’s operating metrics and the return to more normalized velocity/dwell exiting 2018. We are forecasting 2018 EPS of $5.27.”

- TFI International Inc. (TFII-T) to $45 from $39 with an “outperformer” rating. Consensus is $42.07.

“We expect TFII to raise its 2018 EBITDA outlook of $600-million in EBITDA when it reports Q2/18 results given the underlying strength in the North American truck market, as well as benefiting from its own restructuring efforts,” he said.


Citing its development of a potential “best-in class” omega-3 drug, Mackie Research Capital Corp. analyst André Uddin initiated coverage of Acasti Pharma Inc. ( ACST-X ) with a “speculative buy” rating.

“Acasti is currently conducting two Phase 3 trials in North America for CaPre, its omega-3 (OMG3) drug candidate for the treatment of severe hypertriglyceridemia (SHTG),” the analyst said. “U.S. gross sales of prescription OMG3 therapies in 2017 were over US$1.2-billion (with generic Lovaza leading the class – AMRN 10-K). OMG3 drugs have unwanted side effects: GSK’s (GSK-N) Lovaza and Amarin’s (AMRN-Q) Vascepa have a significant food effect requiring a high fat diet for better absorption due to their formulations and chemical structures; AstraZeneca’s (AZN) Epanova and GSK’s Lovaza both elevate low-density lipoprotein-cholesterol (LDL-C) – which in turn may increase the risk of heart disease. CaPre’s competitive advantages should be differentiated from currently approved OMG3 drugs: should be significant TG lowering, no LDL-C elevation (but lowering), potential positive impact on HDL, no food effects (no high fat diet needed), an excellent safety profile and no fishy taste. We believe CaPre should be able to capture decent market share.”

Mr. Uddin set a $2 target for shares of the Quebec City-based company, which falls below the consensus of $6.48.


Neptune Technologies & Bioressources Inc.’s (NEPT-T, NEPT-Q) “seminal” alliance with Canopy Growth Corp. (WEED-T) establishes it as a “major player” in cannabis oil production, said Echelon Wealth Partners analyst Douglas Loe.

On Tuesday, Neptune announced it has entered into a multi-year agreement with Canopy Growth to supplement its extraction, refinement, and extract product formulation capacity.

“For anyone who disagreed with us on Neptune’s prospects in the medical cannabis oil space, that perception just shifted from being unfounded to being objectively inaccurate with the firm’s announcement earlier [Tuesday] that it has identified leading cannabis producer Canopy Growth as a multi-year strategic partner for extracting cannabis oil, purifying active cannibinoids, co-formulating them with other nutritional supplements and then presumably feed into Canopy’s existing distribution channels previously established through its own independent efforts,” said Mr. Loe.

“We assume that Neptune’s core revenue model will be to provide Canopy (and indirectly its distributors) either with cannabis oil itself or purified cannabinoids or co-formulated cannabinoid-containing nutritional supplements, and we thus will continue to assume as before that Neptune will recognize revenue on transfer of material to Canopy. Accordingly, we expect that any cannabis oil-based/oil-derived products generated in Sherbrooke to minimally impact Neptune’s own inventory. The press release does not specifically mention if the agreement is exclusive for either party, and we assume that this element would have been explicitly mentioned if relevant. But in our view, the alliance with a major industry participant like Canopy firmly establishes Neptune as a highly-relevant contract manufacturer in the emerging medical cannabis universe and we are revising our model accordingly. …. Neptune/Canopy did not provide many operational specifics either, and interestingly, it was Canopy’s cannabis production infrastructure that was quantified (at least on square footage of the relevant facilities) and not Neptune’s, but we did observe with interest that the partners could focus at least initially on local markets in Quebec. Both firms have physical operations in the province already and thus are well-positioned to locally provide cannabis-based medical products through new government channels.”

Maintaining a “buy” rating for shares of Laval, Que.-based Neptune, Mr. Loe increased his target to $8 from $5.25. He’s the lone analyst currently covering the stock, according to Bloomberg.

“We see no reason not to assume that Neptune merits comparison to cannabis peers preferentially over legacy nutritional supplement manufacturing peers, though we do expect Neptune to participate competitively in the overlap between the Venn diagrams defined by these two industries,” he said. “At present, we see limited bandwidth from other publicly-traded firms in this realm, and we thus expect other cannabis-based firms (and perhaps other nutritional supplement-focused firms) to actively seek out commercial alliances with Neptune as its expertise in purification/formulation becomes apparent to both industries.”


Vertex Resource Group Ltd. (VTX-X) is attractive at its current price, said Acumen Capital analyst Trevor Reynolds, emphasizing its “strong” leadership team, “compelling” valuation and “stable” base business.

Mr. Reynolds initiated coverage of Sherwood Park, Alta.-based environmental and industrial services company with a “buy” rating.

“VTX has established a strong base level of revenue and EBITDA, while management is targeting material growth through acquisitions and organic investments in their internal 5-year outlook,” the analyst said. “The company recently termed out their debt until 2021, which combined with projected free CF allows VTX to continue executing on their acquisition initiatives over the near term. In our view the company’s discounted valuation (4.8 times 2018 EV/EBITDA) will improve with continued execution, and as the story gains exposure and liquidity increases.”

Currently the only analyst on the Street covering the stock, he set a target price of $1.20 per share.

"While risks do remain in the service sector, we believe VTX’s high quality executive team coupled with industry diversification, and environmental focus have positioned the company for strong shareholder returns,” said Mr. Reynolds. ”Based on the material insider ownership liquidity is an issue at this point which is factored into our valuation but should improve over time.”


Raymond James analyst David Quezada thinks Atlantica Yield plc’s (AY-Q) discounted valuation is a “temporary phenomenon with stable footprint, new sponsors on deck.”

He initiated coverage of U.K.-based Atlantica, a total return company that owns a portfolio of contracted renewable energy, power generation, electric transmission and water assets in North and South America, and certain markets in EMEA, with a “buy” rating.

”As has been clearly illustrated in recent years, a YieldCo’s health and valuation are heavily influenced by the development pipeline and financial health of its sponsor,” said Mr. Quezada. “As such, we believe financial challenges faced by Abengoa, Atlantica’s previous sponsor, had a significant impact on the company’s growth and share price, contributing to a precipitous decline from over $38 as recently as mid-2015 to $20.23 currently. However, we now believe Atlantica enjoys much improved visibility in its growth profile which, coupled with a high quality long life asset base warrants a multiple re-rating, in our view. Trading at 9.1 times 2019 estimated EV/EBITDA (vs. YieldCo peers at 10.5 times) and a 9.0-per-cent CAFD yield vs. comparable precedent transactions at 7.0-7.5 per cent, we believe shares of Atlantica are materially undervalued.”

Mr. Quezada set a target of US$26, exceeding the consensus of US$24.17.


In other analyst actions:

TD Securities analyst Sean Steuart downgraded Canfor Pulp Products Inc. (CFX-T) to “hold” from “buy” with a target of $26, rising from $22. The average is $22.55.

Mr. Steuart upgraded Mercer International Inc. (MERC-Q, MERC-U-T) to “buy” from “hold” with a target of US$20, up from US$15. The average is US$19.83.

TD Securities’ Steven Green downgraded New Gold Inc. (NGD-T) to “hold” from “buy.”

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