Inside the Market’s roundup of some of today’s key analyst actions
Desjardins Securities analyst Keith Howlett admits it is currently impossible to quantify the risk facing Saputo Inc. (SAP-T) from the possible changes to supply management in the dairy industry stemming from ongoing NAFTA negotiations.
However, calling the Montreal-based company among the “most efficient” dairy processors in the world, he upgraded his rating for its stock to “buy” from “hold,” despite “elevated” risk.
“As demonstrated by provisions for brewers and other sectors under prior agreements, we expect reasonable transition arrangements for dairy,” he said.
“From the perspective of processors like Saputo (and, in turn, Canadian consumers), changes to supply management, should there be any, must be designed to ensure a continuous and orderly supply of high-quality input milk by a profitable farming sector with a long-term horizon. These are the same milk supply characteristics that Saputo has worked hard to achieve in Argentina and Australia, both of which have largely ‘free market’ dairy sectors with substantial export volumes.”
Mr. Howlett maintained a 12-month target price of $45 for Saputo shares. The average target on the Street is currently $43.20, according to Bloomberg data.
“Saputo is among the top global dairy processors, with a successful track record in the US, Canada, Argentina and Australia,” he said. “Its two primary competitors in Canada, Agropur (cooperative) and Parmalat (controlled by Lactalis of France), are also successful outside of Canada, with significant US operations. With adequate transitional measures to permit optimization of plant networks, processors can adjust to a future with a lower input cost of milk.”
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Goldman Sachs analyst Mark Delaney expects the supply and pricing issues that have hurt memory chip manufacturers to worsen into 2019.
Following nine consecutive quarters of growth, Mr. Delaney does think the downturn will be less severe than past dips and feature more modest pricing declines. However, he downgraded his rating for Micron Technology Inc. (MU-Q) to “neutral” from “buy” ahead of the release of the company’s fourth-quarter financial results on Sept. 20, projecting lower gross margins and weakness in the sale of both NAND and dynamic random-access memory (DRAM) chips.
“Memory downturns usually last for several quarters and can see an acceleration in price declines, as customers delay procurement to wait for lower prices when possible, causing a snowballing effect that can lead downturns to be worse than initially anticipated by investors," said the analyst.
Mr. Delaney’s target price for Micron stock fell to US$50 from US$68, which is well below the average on the Street of US$77.87.
After lowering the firm lowered its conviction for the semiconductor capital equipment space to “neutral” from “attractive,” Goldman’s Toshiya Hari downgraded Lam Research Corp. (LRCX-Q) to “neutral” from “buy” with a target of US$180, down from US$224. The average is US$236.76.
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In reaction to better-than-anticipated alumina prices, B Riley FBR analyst Lucas Pipes upgraded Alcoa Inc. (AA-N) to “buy” from “neutral,” citing its near-term outlook and earnings potential.
Touting an attractive current valuation due to a favourable pricing backdrop, Mr. Pipes raised his target to US$50 from US$48. The average is US$55.71.
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RBC Dominion Securities analyst Sabahat Khan raised his target price for shares of Hudson’s Bay Co. (HBC-T) in reaction to Tuesday’s announcement that it has agreed to combine its European retail operations with rival Signa Holding GmbH.
“Net proceeds of $616-million from the SIGNA transactions, combined with the expected proceeds from the Lord & Taylor 5th Ave. building sale should help improve HBC’s leverage and should also provide management with the financial flexibility to invest in its retail operations," said Mr. Khan. “The sale of a majority interest in its European operations should also result in increased management focus on the core North American operations, which we see as a positive given the elevated competitive intensity across the North American retail space. The addition of two new JVs (which will not be consolidated) does, however, add an element of complexity to valuing the company on a sum-of-the-parts basis.”
Maintaining a “sector perform” rating for HBC shares, his target rose to $11 from $10. The average is $10.67.
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Freehold Royalties Ltd. (FRU-T) is “well-positioned” for another 5-per-cent dividend increase in 2019, said Desjardins Securities analyst Chris MacCulloch.
“We had Freehold in for a desk presentation [Tuesday] and came away with increased conviction on the stock as an attractive way to add low-risk exposure to the Canadian oil & gas space, particularly following the TMX court decision which has pushed the stock’s multiple toward a five-year low,” he said. “Meanwhile, we have updated our dividend sensitivity and see support for another 5-per-cent increase in the payout early next year, which would enhance the current 5.6-per-cent yield.”
“Although we maintain our preference for accretive acquisition opportunities as the optimal use of free cash flow, noting that the deal pipeline appears flush based on our discussion with management, we also anticipate another dividend bump early next year given the strong support from higher oil prices. Based on our updated dividend sensitivity analysis, we believe the company could increase its payout by another 5 per cent assuming our current US$60/bbl WTI and C$2/mcf AECO commodity price forecast while holding foreign exchange and oil price differentials assumptions at strip and keeping the payout ratio in the 60–80-per-cent target range. However, we note that the sensitivity remains highly skewed toward oil prices, which could provide additional support to the payout beyond the 5-per-cent level. That said, we ultimately believe the company will maintain a relatively cautious approach to potential dividend hikes, which should help preserve dry powder to pursue acquisition opportunities and/or share buyback.”
Mr. MacCulloch maintained a “buy” rating for Freehold with a target price of $17. The average is $17.18.
“While the company is not immune to the challenges facing the sector—particularly with respect to widening oil price differentials—the reality is that by definition, the royalty structure provides greater free cash flow stability given the limited capital and operating cost of production,” he said.
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Citing a “sharp” recent downturn in lumber and building materials prices, Raymond James analyst Steve Hansen lowered his financial estimates and target price for CanWel Building Materials Group Ltd. (CWX-T).
“Lumber prices have endured a sharp decline in recent months, falling 27 per cent from their June highs largely in response to concerns over rising rates and weaker housing starts/activity on both sides of the border,” he said. “While recent B.C. forest fires have helped reverse/arrest this pattern, we expect CWX’s 2H18 results to reflect this recent price downdraft, largely through lower available margin opportunity.”
Mr. Hansen lowered his third-quarter earnings per share projection to 13 cents from 18 cents, a drop of 6 cents from the previous quarter. His fourth-quarter estimate is now 2 cents, falling from 8 cents, while his full-year projection is down a dime to 43 cents.
"While we continue to admire CWX’s value-added growth strategy in key west coast markets, we are equally mindful of slowing activity trends in CWX’s key end-markets (i.e., Ontario and California). For context, seasonally adjusted annual housing starts in Canada are averaging 203,000 through 3Q18, down modestly versus the near-record 218,000 average in 2Q18,” he said. “At the same time, U.S. housing starts have also proven highly volatile, declining 12 per cent month-over-month in June (the largest monthly percentage drop in about a year and a half) before bouncing modestly in July. Finally, we note that single family housing starts in the western U.S. are down 13.5 per cent year-to-date through July as rising mortgage rates, labor market tightness, and record home values all weigh on affordability and market activity. We will continue to monitor accordingly.”
Keeping an “outperform” rating, his target is now $7, falling from $8. The average is $7.78.
“We continue to recommend CWX shares based upon our constructive view of the firm’s value-added growth strategy,” the analyst said.
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Shares of DHX Media Inc. (DHX-T) are currently “uninvestible” despite a valuation that continues to get cheaper, according to CIBC World Markets analyst Robert Bek, pointing to “poor operating momentum, a high debt load, and limited visibility on all aspects of the story.”
“While it’s possible that the company may be able to come up with some value enhancing options from its ongoing strategic review, this remains a low probability outcome in our opinion,” he said.
With a “neutral” rating, Mr. Bek lowered his target to $3 from $4, which is the current consensus.
“We continue to wait this name out on the sidelines,” he said.
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In other analyst actions:
TD Securities analyst Daniel Chan initiated coverage of Exfo Inc. (EXF-T) with a “hold” rating and target of $6.53. The average is $6.16.
Cormark Securities initiated coverage of Contact Gold Corp. (C-X) with a “buy” rating and target of $1.10.
With files from Bloomberg News
David Leeder