Inside the Market’s roundup of some of today’s key analyst actions
Apple Inc.’s (AAPL-Q) reliance on rising average selling prices (ASPs) is “no longer enough” to boost growth during a period of slowing iPhone unit sales, according to Guggenheim analyst Robert Cihra, leading him to downgrade the U.S. tech giant to “neutral” from “buy.”
Mr. Cihra said the ASP for iPhones has jumped by almost US$220, or 40 per cent, over the last 10 years, reflecting “its growing value to both consumer and business markets.” However, he said “nearly HALF of all that just came in FY18 alone, making a period of digestion now likely.”
The analyst expects unit sales to decline by 5 per cent in 2019, and, unlike in 2018, he does not expect ASP increases to offset that drop.
He lowered his fiscal 2019 earnings per share projection to US$12.97 from US$13.41 with his revenue estimate falling to US$273-billion from US$281-billion.
“We see growing risk of even softer iPhone unit demand, with downside in China, India and other emerging markets, where Apple may need to start considering lower price points,” he said.
Mr. Cihra removed his US$245 target price for Apple shares. The average target on the Street is currently US$232.86.
Meanwhile, UBS analyst Tim Arcuri lowered his target to US$225 from US$240, citing supply chain cuts and after reducing his unit sales estimates for the current quarter to 73.5 million from 75 million.
He maintained a “buy” rating.
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Pointing to its unwarranted discounted valuation to its dividend-paying peers, Raymond James analyst Kurt Molnar upgraded his rating for Vermilion Energy Inc. (VET-T) to “strong buy” from “outperform.”
“Like Enerplus, we expect that Vermilion will post strong returns on its invested capital and it will likely pay down debt at the same time,” said Mr. Molnar. “Like Enerplus, Vermilion is well diversified away from total exposure to the Canadian basin and its differential headwinds. Unlike Enerplus, Vermillion enjoys even greater diversity of markets and arguably greater diversity of commodities to target. If we look at total hard profits to be made on production in 2019, dividends to be received and debt to be reduced, versus the current EV of the stock, Vermillion offers a theoretical 2019 shareholders yield of approximately 15 per cent, which is materially stronger that its comparably sized peers.
“Considered differently, Vermilion’s financial position and expected cash flow in 2019 is arguably subject to far less potential volatility than many of its dividend paying peers that currently trade at dividend yields of 5.5-6.5 per cent. We can think of no reason for Vermilion to trade at a discount to these peers and could in fact argue for a premium, but simply returning to a 5.5-6.5-per-cent yield would have the stock return to somewhere in the $40’s/share. From current trading levels that is roughly a 33-per-cent IRR [internal rate of return] on share price appreciation if the valuation were to ‘correct’ within 12 months to only a modest 6.5-per-cent dividend yield. It should not be lost on investors that Vermillion has the financial means to relatively aggressively buy back its own stock (with cash in excess of its dividend and capex) and be very accretive to the likely IRR embedded in their capex program.”
Mr. Molnar suggested Vermilion could allocate capital from its North American capex budget in order to pursue buybacks, adding it could be “be accretive to returns on invested capital while preserving future North American drilling locations for a date where they would generate higher returns on capital (so the investor would win twice).”
Mr. Molnar maintained a target price for Vermilion shares of $51. The average target on the Street is now $52.73.
“We rarely suggest valuation is a catalyst but this a real exception,” he said. “By our way of math (hard dollars in and out) Vermillion will post a return to shareholders in 2019 that will only be surpassed by Enerplus.”
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In reaction to a 10.4-per-cent jump in share price on Tuesday following the release of its third-quarter financial results, Industrial Alliance Securities analyst Elias Foscolos downgraded his rating for Badger Daylighting Ltd. (BAD-T) to “buy” from “strong buy.”
On Monday after market close, Badger, a Calgary-based environmental services company, reported revenue of $169-million, exceeding the projections of both Mr. Foscolos ($162-million) and the Street ($164-million). A year-over-year jump of 19 per cent, the result was due largely to a strong performance in the U.S., which the analyst expects will continue in 2019.
Adjusted EBITDA of $51-million also topped Mr. Foscolos’s Street-high forecast of $54-million (and the $39-million consensus).
“Badger’s Q3/18 results beat projections that had already been revised upward in October,” he said. “Badger’s continued focus on growing its U.S. hydrovac business continues to pay off, and the company continues to look for ways to streamline its internal processes. Overall, the theme is confidence heading into 2019, for which EBITDA is guided at $170-190-million, which was and still is in line with our estimates.”
Though he lowered his rating due to price appreciation, Mr. Foscolos raised his target price for Badger shares by a loonie to $39, which exceeds the current average of $36.25.
Elsewhere, Canaccord Genuity’s Yuri Lynk raised his target to $41 from $39, keeping a “buy” rating.
Mr. Lynk said: “Badger’s shares are attractively valued at 13.3 times 2019 estimated EPS. We find this extremely reasonable for a company we expect to post a 2018-2020 EPS CAGR [compound annual growth rate] of 17 per cent, with low leverage, and pre-tax-ROIC [return on invested capital] of more than 25 per cent.”
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DHX Media Inc. (DHX-T) enjoyed a “modest but encouraging” start to the 2019 fiscal year, said BMO Nesbitt Burns analyst Tim Casey.
On Tuesday before market open, the Halifax-based media company reported revenue for the first quarter of $104-million, up 5 per cent year over year and topping the $99-million expectation on the Street. Adjusted EBITDA of $17-million met expectations but represented a drop of 24 per cent from fiscal 2018.
“We remain supportive of the refocused strategy; however, leverage remains elevated,” said Mr. Casey. “We view DHX as a ‘show me’ story until there is sustained demonstrative progress on deleveraging and an improving cash flow profile. We think investors will need to see tangible progress in delivering the balance sheet AND monetizing Peanuts to justify valuation, which seems stretched to us at the current share price.”
Maintaining a “market perform” rating for DHX shares, Mr. Casey raised his target price by a loonie to $2.50. The average on the Street is $2.31.
He was one of several analysts to raise the company’s stock following the release of its results. Other changes included:
- Canaccord Genuity’s Aravinda Galappatthige to $1.75 from $1.50 with a “hold” rating.
- Echelon Wealth’s Rob Goff to $3.40 from $2.85 with a “speculative buy” rating.
- National Bank Financial’s Adam Shine to $2.75 from $1.50 with a “sector perform” rating.
- RBC’s Drew McReynolds to $3 from $2 with a “sector perform” rating.
- TD’s Bentley Cross to $2.75 from $1.50 with a “hold” rating.
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Cargojet Inc.’s (CJT-T) “strong” third-quarter financial results set it up for “another record peak season,” said Acumen Capital analyst Nick Corcoran.
On Tuesday, the Mississauga-based company reported revenue for the quarter of $114-million, up almost 28 per cent year over year and ahead of the consensus estimate of $105.4-million. Adjusted EBITDA of $31.5-million was an increase of 24 per cent and also topped expectations ($29.4-million).
“We view the Q3/18 results as positive,” said Mr. Corcoran. “Volume growth on the core network continues to be driven by the growth of e-commerce and additional ACMI [aircraft, crew, maintenance, and insurance] contract wins. Catalysts for the story include another record peak season and new ACMI routes.”
Keeping a “buy” rating for its stock, the analyst hiked his target to $95 from $78 based on increased estimates and valuation. The average is $94.80.
“Based on enterprise value-to-/EBITDA, CJT continues to trade at a premium to the peer group for both 2018 and 2019 estimates,” said Mr. Corcoran. “We believe that this is reasonable given its dominant market position, ability to pass on fuel costs, strong growth of the core business, the growth potential of the non-core business, and the strong free cash flow yield (estimated at 6.8 per cent in 2018 estimates based on the last trading price of $85.43/share).”
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In other analyst actions:
Citing the bank
TD Securities analyst Aaron MacNeil upgraded CES Energy Solutions Corp. (CEU-T) to “action list buy” from “buy” with a $7 target. The average is $6.27.
TD Securities’ Derek Lessard downgraded Premium Brands Holdings Corp. (PBH-T) to “buy” from “action list buy” and dropped his target to $95 from $145. The average is $102.80.
Macquarie analyst Konark Gupta upgraded CAE Inc. (CAE-T) to “outperform” from “neutral” and raised his target for its stock to $29 from $26. The average is $29.05.
RBC Dominion Securities analyst Kurt Hallead reinstated coverage of Trinidad Drilling Ltd. (TDG-T) with an “outperform” rating and $3 target, exceeding the consensus of $2.33.
Laurentian Bank Securities analyst Nick Agostino upgraded Mediagrif Interactive Technologies Inc. (MDF-T) to “buy” from “hold” with a $12 target, rising from $11.50. The average is $13.60.
David Leeder