Inside the Market’s roundup of some of today’s key analyst actions
Believing a recent sell-off stemming from a strong greenback has created an attractive entry point for investors into the North American mining sector, Barclays analyst Matthew Murphy initiated coverage with a positive outlook and seeing the potential for a multi-year bull cycle.
Mr. Murphy thinks mining equities are generally in good shape, possessing improved balance sheets and healthy allocation practices.
His stock initiations included:
Goldcorp Inc. (GG-N, G-T) with an “overweight” rating and US$14 target. The average is US$15.98. Agnico Eagle Mines Ltd. (AEM-N, AEM-T) with an “overweight” rating and US$39 target. The average is US$48.56.
OceanaGold Corp. (OGC-T) with an “equal-weight” rating and $4 target. The average is $4.61.
In a research note previewing the quarterly report, scheduled for release on Nov. 1, Mr. Howlett said the storm caused the loss of 4-5 shipping days across its two major distribution facilities in the Carolinas, as well as eight days of production at its smallest yarn plant.
“We expect the company will disclose the negative impact of the unusual conditions,” said Mr. Howlett, who reduced his third-quarter earnings estimate.
The analyst also expressed renewed concern about the future of Gildan’s branded underwear business, which contributed US$127-million in revenue in 2017. He feels the segment is at risk due to the retailer’s move to private labels.
“While sales of Gildan-brand underwear have been growing, and the product provides retailers with an attractive margin, it is still a relatively small brand in the context of the U.S. market,” he said. “Private-label manufacturing contracts for products in which Gildan has expertise as well as a cost advantage (fleece, T-shirts, polo shirts, underwear) may provide a more than offsetting opportunity. We note that Target gave notice to Hanesbrands that it would discontinue C9 by Champion products at the end of the current contractual period. Sales of C9 by Champion to Target represent US$380-million to Hanesbrands annually. We expect further details on the 3Q call with respect to Gildan’s progress in obtaining private-label contracts. We note that maintaining profit margins over the long term on the supply of private-label products to major retailers can prove challenging.”
Moving his 2018 EPS projection to US$1.85 from US$1.88, he maintained a “hold” rating and $44 (Canadian) target for Gildan shares. The average on the Street is currently $44.37, according to Bloomberg data.
“Gildan is growing EPS during a transitional year in which it is combining its printwear and branded businesses,” he said. “We expect the future prospects of its branded men’s underwear business to be known within nine months. A better view of the magnitude of the private-label opportunity should also emerge.”
Impressed by the “strength” its organization, Desjardins Securities analyst Benoit Poirier thinks BRP Inc.’s (DOO-T) growth is unlikely to stop with its 2020 plan.
He raised his financial estimates for the Quebec-based recreational vehicle maker upon resuming coverage following its recent secondary offering.
“Overall, we remain positive on the name as management still has many levers in place to fuel growth beyond 2020 (Ryker, Marine Group, potential introduction in the two-wheel segment),” said Mr. Poirier. “As a result, we believe recent share price weakness provides a compelling entry point.”
His optimism stems largely from product introductions and meetings with management at the Club BRP 2019 on Sept. 9-10.
In particular, Mr. Poirier called the launch of BRP’s entry-level Ryker motorcycle, which has a price tag starting at US$8,459, as “the most exciting part of the event.”
“Ryker provides an opportunity to bring millennials into the three-wheel market — now the most important category,” he said. “Millennials are now the largest category of motorcycle buyers (36 per cent of unit sales). For this segment, customization is important but pricing is also a key factor as millennials spend US$8,500 on average for a motorcycle—a price point that BRP has met. In order to better meet customer needs, management will count on the digital experience through the Can-Am Ryker App, which will redefine the retail environment at dealers. Retail has evolved and 83 per cent of buyers start shopping on their phone.”
He added: “Management expects the Ryker’s profitability will be similar to that of other low-entry-level products such as the Sea-Doo Spark. The vehicle will be produced in Mexico (Juarez 2) and innovation should enable BRP to generate decent margins. The investment in the new product is expected to be paid back in 24 months, and the Ryker is also expected to drive additional synergies and stimulate demand for Spyder models, which carry higher prices. Assuming management successfully doubles the size of the 3WV business, profitability would be comparable to that of other products.”
Raising his revenue forecasts for fiscal 2020 and 2021 to reflect new product introductions, Mr. Poirier’s earnings per share expectation for 2020 increased by 6 cents to $3.61.
He kept a “buy” rating for the stock with a target of $78, up from $76. The average is $70.01.
“Over the next two years, assuming BRP achieves normalized EBITDA of C$823-million and EPS of C$4.05 in FY21, we believe the stock could be worth C$85–86, based on the same valuation multiples we apply currently,” he said.
Calling it “the best pre-production gold company among Canadian listed stocks,” Beacon Securities analyst Jacob Willoughby initiated coverage of Orezone Gold Corp. (ORE-X) with a “buy” rating, citing the “robust” feasibility study for its Bomboré deposit in Burkina Faso.
“The company’s 90-per-cent owned Bomboré deposit is one of the largest undeveloped open pit projects in Africa,” he said. “Bomboré is already permitted and the company just completed an updated feasibility study on the project in late August. That feasibility study outlined a very simple and low cost oxide gold mine that produces an after tax IRR of 42.6 per cent using a steady US$1,275 gold price. The Bomboré mine should produce over one million ounces of gold during its 13 year projected mine life. Moreover, its cash costs for the first three years and Life of Mine (LOM) are estimated at US$485/oz and US$677/oz respectively in the feasibility study. The capex is forecast at a modest US$144-million.”
Mr. Willoughby set a target of $1.20, which is 4 cents lower than the consensus.
In a third-quarter preview for North American chemicals and agriculture companies, Citi analyst P.J. Juvekar raised his rating for Mosaic Co. (MOS-N) to “buy” from “neutral.”
It’s the first time Mr. Juvekar has recommended shares of Minnesota-based Mosaic, the world’s leading producer of concentrated phosphate and potash crop nutrients, since 2013.
“In our view, MOS shares should outperform as phosphate fundamentals are poised for medium-term improvement,” the analyst said. “Catalyzed by the shutting of MOS’s Plant City site, phosphate supply/demand is shaping up to be favorable again in 2019, with the potential for further upside should long-awaited environmental policies in China negatively affect Chinese DAP/MAP exports. While the pace of improvement in global phosphate supply/demand may be at times uneven, lower supply growth and strong producer discipline should tighten the market over time.”
Mr. Juvekar thinks the Street’s estimates for the second half of Mosaic’s 2018 fiscal year and 2019 remain too low, citing favourable fertilizer price trends. He raised his 2018 and 2019 earnings per share projections to US$1.87 and US$2.50, respectively, from US$1.70 and US$2.02.
He also hiked his target for Mosaic shares to US$40 from US$36. The average is US$36.
“With MOS today trading at 7 times our 2019 EBITDA forecast, we think the shares look attractive relative to peers CF Industries Holdings Inc. and Nutrien Inc. which are both trading close to 9.5 times,” he said. “Among fertilizers, we like MOS and then NTR and remain Neutral CF.”
Separately, Mr. Juvekar downgraded Sherwin-Williams Co. (SHW-N) to “neutral” from “buy,” believing raw material inflation continues to be a problem for speciality chemical producers.
“We think raw material inflation and margins are likely to remain the key debate for the industry into 2019, pushing out the normalizing process of matching price/cost beyond where we think some investors were thinking just a few weeks ago,” he said. “PPG’s negative pre-announcement signaled that pressure remains intense. Paint producers are now well into the second year of significant cost pressure from higher prices raw materials. They are lifting prices, but the pace of realization has been uneven. We acknowledge that SHW controls more of its own destiny with pricing control in its own stores but we think it will be difficult for SHW to outperform so long as raw material costs continue to rise.”
His target for Sherwin-Williams shares fell to US$435 from US$492, which is below the average of US$468.52.
“SHW has long traded at a premium to the group due to its own stores,” the analyst said. “Over the past three years SHW has traded between 11-15 times forward EBITDA with an average premium over the peer group of 25 per cent. Previously, we had given SHW and bigger premium over the peer group to reflect the benefits from the [Valpsar] acquisition. But given the ongoing margin pressure uncertainty and potentially slowing growth in some end markets, we think this premium should fade.”
On Wednesday, the Toronto-based electronics manufacturing services company announced the US$329-million acquisition of Impakt Holdings LLC. It also announced an increase to its operating margin target for the next 12-19 months and new terms associated with the its Toronto property sale.
“With the stock trading at 8.7 times current year price-to-earnings versus the group at 12.7 times, combined with CLS’ improving margin profile and stronger book of business, we view the shares as representing a compelling buying opportunity (even factoring potential reviewing uncertainty stemming from the CCS portfolio review),” said Mr. Leung.
He maintained a US$13 target price. The average is currently US$12.73.
In other analyst actions:
Scotia Capital analyst Jeffrey Fan upgraded BCE Inc. (BCE-T) to “sector outperform” from “sector perform” with a $58 target. The average is $59.04.
Mr. Fan downgraded Telus Corp. (T-T) to “sector perform” from “sector outperform” with a $49 target, which sits below the average of $50.72.
National Bank Financial analyst John Hunt downgraded MEG Energy Corp. (MEG-T) to “sector perform” from “outperform” with a $12 target, which matches the current consensus.
With files from Bloomberg News