Inside the Market’s roundup of some of today’s key analyst actions
BTIG analyst Camilo Lyon thinks Canada Goose Holdings Inc.’s (GOOS-T) “revenue ramp” into the vital holiday season has yet to materialize, putting its third quarter at risk of missing the Street’s expectation.
In justifying his view, he pointed to recent commentary from U.S. retailers, like Dicks Sporting Goods Inc. (DKS-N) and Burlington Stores Inc. (BLS-N), that blamed warm weather for slow sales of winter apparel this far in November. That prompted Mr. Lyon to lower his rating for the Toronto-based company’s stock by two levels to “sell” from “buy” on Wednesday.
“While we continue to hold the brand and the company in high regard, we believe a lackluster sales recovery stemming from a warmer start to winter and ensuing weak digital demand will weigh on the stock until more tangible catalysts emerge that reflect an improving earnings recapture potential, likely not until next summer,” he said.
Mr. Lyon said his web traffic data analysis found a drop in digital traffic of 36 per cent thus far in the quarter, which he attributed to “warmer weather that has delayed the start of the parka selling season.”
“This compares to our prior FQ3 e-commerce growth estimate of 118 per cent (vs. an easy comparison of a decline of 35 per cent last year by our math),” he said. “For context, our digital data showed last quarter was up 11 per cent, consistent with the company’s ‘greater than 10 per cent’ e-commerce growth commentary.
“Adding to our more cautious stance is our belief that digital sales should be surging right now given stores are only partially opened and consumers are overwhelmingly choosing to shop onlinevs. in-store; however, digital traffic growth in November looks like it will be below both fiscal 2020 and fiscal 2019 levels. What’s more, lockdowns in Europe coupled with surging COVID cases in the U.S. reduce the need-based purchasing trigger in key cold weather markets (e.g., NYC, Boston, Chicago, London, Milan, and Paris) and thus further stifle any potential sales catalyst for the remainder of the quarter, we believe. We view these macro factors as important drivers of the business and ultimately the stock since they are happening during the peak earnings quarter and could have lasting impacts on how wholesale orders shape up next year. Moreover, we believe the company’s long standing position of maintaining price integrity by not promoting, while favorable long term, will only exacerbate these demand challenges now.”
Also pointing to warm weather in northern China, a key market for the company, and a decline in web search for the company, Mr. Lyon dropped his target for Canada Goose shares to $35 from $50. The average on the Street is $44.35, according to Refinitiv data.
“Taken together, with the stock having hit our previous $50 price target, it now trades at 40 times NTM P/E [next 12-month price-to-earnings], 6 times EV/Sales, and 23 times EV/EBITDA,” he said. “Given our new concerns about underwhelming demand, we believe the risk/reward has become disproportionately skewed to the downside. With macro pressures likely persisting through year-end, we see multiple compression ensuing on soft FQ3 earnings expectations, and thus believe a SELL and C$35 PT is warranted.”
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Citing current industry sales trends, Scotia Capital analyst Mark Neville thinks there’s “material potential upside” to 2021 and 2022 financial forecasts for Canadian auto parts suppliers.
“In the near term, the suppliers should also benefit from the rebuild of North American new vehicle inventory levels, which were largely depleted as a result of the Q2 shutdowns,” he said in a research note released Wednesday. “Furthermore, we also believe structural cost savings realized during the pandemic should support a higher level of sustained earnings through the cycle. We believe this should become more apparent as industry sales/production more fully recover.
“As such, and despite the upward move in equity values for the group, we continue to view the Canadian auto suppliers as being attractively valued on our 2021 estimates (i.e., between 7.5 times and 10.5 times P/E) and downright cheap on or 2022E (between 5.5 times and 8.5 times P/E) – especially in the context of what we consider to be appropriate mid-cycle multiples (i.e., 10 times to 12 times P/E), which, we would argue, is what underpins our 2021/2022 forecasts.”
Mr. Neville said he remains “constructive” on the group, seeing them having done “an exceptional job of managing costs and generating cash through the pandemic, which has protected B/S’s and enabled the companies to start the recovery in a position of strength.”
He raised his target prices for the following stocks:
Linamar Corp. (LNR-T, “sector outperform”) to $75 from $65. The average on the Street is $62.33.
Magna International Inc. (MGA-N/MG-T, “sector outperform”) to US$80 from US$70. Average: US$67.76.
Martinrea International Inc. (MRE-T, “sector perform”) to $19 from $17. Average: $18.
Elsewhere, CIBC World Markets’ Kevin Chiang upgraded Linamar to “outperformer” from “neutral” with a target of $71, up from $56.
“We believe Linamar has traded at a discount, reflecting concerns around the impact of electric vehicle adoption on its earnings,” he said. “Based on our analysis using Bloomberg New Energy Finance’s (BNEF’s) 20- year EV forecast, we see Linamar’s earnings CAGR [compound annual growth rate] over the next 10-20 years to be in line with its historical trend rate. As such, we raise our target multiples to 6 times EV/EBITDA and 11 times P/E (up from 5 times and 9 times, respectively) … we argue if a proven management team is given proper time and resources, it significantly increases the probability that team can pivot its company’s business and adjust to changes in industry trends. That is what we have seen Linamar do over the past several years as it prepares for the global adoption of electric vehicles”
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As a pre-revenue company, Fisker Inc. (FSR-N) is a “higher-risk investment proposition,” according to Citi analyst Itay Michaeli.
However, he initiated coverage of the California-based electric vehicle maker, which began trading in late October through a blank-check merger with Spartan Energy Acquisition Corp., with a “buy/high risk” recommendation in a research note released Wednesday.
“We like the long-term fundamental story for four reasons: (1) We believe the company is targeting the right segment (SUV) and price-points ($38-$69k) for its first EV; (2) We see significant upside potential in the company’s future entry into EMaaS/flex-leases—a similar model as the subscription model we’ve long written about, and one that could substantially expand the TAM [total addressable market] from today’s largely 1-time transactional business to lifetime vehicle revenue; (3) Fisker is production asset-light having secured a strong partner in Magna, which de-risks many typical “OEM” hurdles but allows Fisker to retain control of key areas within software/UI/design; (4) Early signs (web traffic data) suggest the company has the potential to build a strong brand,” he said.
Mr. Michaeli set a US$26 target for Fisker shares.
“Over the next 12-months, we think the stock will trade on: (1) Ocean product milestones/announcements (H1 sees key events); (2) Reservations/brand momentum, which we track using app download and website traffic data reviewed in this report; (3) Read-through metrics from EV newcomers,” he said.
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A group of analysts raised their target prices for Vancouver-based Ero Copper Corp. (ERO-T) following Tuesday’s release of an updated mineral reserve and resource estimate along with updated life-of-mine plan for its 97.6-per-cent owned NX Gold Mine in Brazil.
Scotia Capital’s Orest Wowkodaw raised his target to $22.50 from $22 with a “sector perform” rating. The average target on the Street is $23.17.
“Given our markedly improved valuation for NX Gold resulting in a modestly improved corporate valuation, we view the update as positive for the shares,” he said.
Others making changes included:
- National Bank’s Shane Nagle to $25 from $20.50 with a “sector perform” rating
- Raymond James’ Farooq Hamed to $23 from $21.50 with an “outperform” recommendation
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Credit Suisse analyst Allison Landry said fourth-quarter volumes for North American railway companies have “inflected positive,” expecting them to exceed the Street’s initial forecasts.
“We are updating our rail estimates to reflect largely better than expected Q4 volume trends – which have inflected positive for the first time in 7 quarters (marking the longest rail recession since the financial crisis),” she said. “Our preliminary revised Q4 estimates suggest the most EPS upside at CN (3 per cent vs cons), followed by CSX , and NSC; we lowered our forecasts for KSU (now 2 per cent below Street, driven by the ongoing blockade outside of Lazaro), and for UNP (1 per cent below cons; as the 1 per cent better vol trends were more than offset by the recently announced C&B headwind related to union employee bonuses). We raised target prices across the group.”
Ms. Landry thinks stocks in the sector should continue to outperform, seeing a “cyclical volume recovery underway.
“So long as the industrial recovery persists (even at a sluggish pace) – while the truck market remains tight – 2021 is setting up to be a pretty strong year for rail volume growth … and operating leverage,” she said. “On average, we are looking for the rails to generate meaningful margin expansion as well as 20 per cent-plus EPS growth in 2021 – amongst the highest in our universe.”
She raised her target for Canadian Pacific Railway Ltd. (CP-N/CP-T) to US$367 from US$353 with an “outperform” rating. The average is US$344.24.
Ms. Landry also raised his target for Canadian National Railway Co. (CNR-T/CNI-N) to $120 from $117 with a “market perform” rating. The average is $129.56.
“While rail multiples are elevated, we note that relative to the S&P and the broader industrials complex, valuations are reasonable. We also point out that the stocks are attractive on a FCF basis,” she said.
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RBC Dominion Securities analyst Deane Dray sees Danaher Corp. (DHR-N) as “less compelling” in a cyclical rebound, prompting him to make a “soft downgrade” for the medical-equipment maker to a “sector perform” recommendation from “outperform.”
The move came in response to his multi-industry sector call to increase cyclical weighting in his investment framework recommendation to 75 per cent from 60 per cent previously and decrease defensive exposures (from 40 per cent to 25 per cent).
“We upgraded Danaher to Outperform in March 2020 at the onset of the global pandemic given our expectations that Danaher would be well positioned for a flight-to-quality trade and that its life sciences portfolio would be in the spotlight,” said Mr. Dray. “We now believe the market has mostly priced-in Danaher’s COVID testing success story and role it can play as a consumables supplier in global vaccine production
“We expect that the biggest pushback to our downgrade is that a second wave of COVID-19 in the U.S. this winter would likely shift the market sentiment to a risk-off bias. While we could downplay the prospects for a ‘double-dip recession,’ in such a scenario, we believe Danaher’s shares would benefit from its high-quality mix and COVID solutions appeal. Additionally, the market opportunity for COVID tests and tailwind for vaccine discovery/production is still difficult to gauge, especially as we look out into 2021. We see the COVID backdrop as the largest influence on shares. In addition, relative P/E valuation in the past two weeks has been less demanding vs. its three-year average.”
Seeing its relative valuation as “less demanding in the ongoing risk-on market sentiment,” Mr. Dray lowered his target for Danaher shares to US$234 from US$273. The average is US$261.31.
“We believe that its high-quality, defensive portfolio (70-per-cent recurring revenues) is less compelling to own in the near-term as the cyclical recovery gains traction into 2021,” he said. “Danaher continues to be a COVID testing success story and should be well positioned as a consumables supplier in global vaccine production. However, we believe the flight-to-quality stage of the cycle is well behind us now.”
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After a “strong” third-quarter despite “depressed” tourist traffic in Las Vegas due to COVID-19 restrictions, Canaccord Genuity analyst Bobby Burleson expects Planet 13 Holdings Inc. (PLTH-CN) momentum to continue.
“PLTH delivered a record quarter in Q3, continuing to drive a strong recovery from the COVID-19 trough, harnessing a successful pivot to home delivery and curbside pickup, and effectively pivoting to local customers,” he said. “Meanwhile, an expanding cultivation footprint allows for additional progress toward 50 per cent of sales from in-house brands, doubling current shelf penetration.
“Further, with the reopening of Medizin, there is a clear path to more share gain in the NV market, which stood at a little over 9 per centfor PLTH in Q3. We are taking up our estimates for 2021 EBITDA, as we expect some incremental margin improvement vs. prior assumptions, driven in part by a more constructive view of Medizin’s cost structure. We are also now more positive on the ability of Medizin to get back to its previous revenue run rate before closing late 2018.”
Mr. Burleson raised his revenue and earnings expectations for the fourth quarter through 2021, leading him to increase his target for Planet 13 shares to $6.50 from $6 with a “speculative buy” rating. The average is $5.67.
“While PLTH commands a lofty multiple, its ability to fund growth beyond NV and CA appears increasingly certain following recent upsized capital raises that further strengthened the company’s balance sheet to roughly $57-million (up from $13-million last year),” he said.
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In other analyst actions:
CIBC World Markets analyst Mark Petrie increased his target for Dollarama Inc. (DOL-T) to $55 from $54 with a “neutral” rating. The average is $55.31.
CIBC’s Chris Couprie bumped his target for Granite REIT (GRT.UN-T) to $83 from $82 with an “outperformer” rating. The average is $84.36.
National Bank Financial analyst Richard Tse increased his target for Lightspeed POS Inc. (LSPD-T) to $60 from $50 with an “outperform” rating. The average is $61.77.
National Bank’s Rupert Merer increased his target for Boralex Inc. (BLX-T) shares to $43 from $42 with an “outperform” rating. The average is $44.64.
National Bank’s Adam Shine raised his target for Transcontinental Inc. (TCL.A-T) to $20 from $18.50, keeping an “outperform” rating. The average is $20.19.
David Leeder