Inside the Market’s roundup of some of today’s key analyst actions
BMO Nesbitt Burns' Jackie Przybylowski expects to see an improved outlook for TSX-listed base metals miners in 2019, pointing to “company action, combined with an improving outlook for base metals commodities through the year.”
In a research report released Wednesday, she initiated coverage of six stocks.
Ms. Przybylowski gave “outperform” ratings to five of the six. They are:
Ero Copper Corp. (ERO-T) with a $16 target. The average target on the Street is $14.56, according to Bloomberg data.
“Ero has been one of the best-performing base metals names since its IPO in 2017, and at this point, it’s fair to argue that the equity is fully-valued based on its current mine plan,” she said. “However, Ero offers investors exposure to copper with significant opportunities for production growth and resource expansion.”
“We expect consensus estimates will rise to reflect new reserves or resources as these are defined and reported in future mine plans.”
First Quantum Minerals Ltd. (FM-T) with a $20 target. Average: $19.13.
“First Quantum is an investment for investors who are positive on copper and we believe will outperform once bullish sentiment returns to the copper space,” she said. “We expect FM to be a leader in cash flow generation growth in the coming years as spending on its Cobre Panama project slows and cash flow from the new mine accelerates.”
“Hudbay is sometimes thought to be a ‘value trap’ but we disagree with this assessment,” she said. “Hudbay has already made significant strides towards building confidence and improving valuation. However, confidence in corporate strategy is critical—Hudbay has started to improve with the announced conclusion of trade-off studies at Lalor.”
“We also believe Hudbay is well-positioned to fund the Rosemont construction when it begins given its well-timed 2017 equity raise and low debt.”
“Teck’s low-risk profile should appeal to both generalist and specialist investors,” she said. “We expect to see funds flow into Teck as sentiment toward copper and commodity markets improve in 2019.”
“The company has a diversified asset mix with exposure to metallurgical coal, low geopolitical risk, significant long-term copper growth, and a stable balance sheet on the path to recapturing an Investment Grade credit rating.”
Trevali Mining Corp. (TV-T) with a 80-cent target. Average: $1.10.
“Trevali has suffered from issues around operational execution and missed expectations,” she said. “This, coupled with lack of confidence in the zinc market in general, has eroded investors’ confidence in management and resulted in a material underperformance in Trevali’s share price in 2018.”
“In our view, the sell-off is now overdone; Trevali now represents one of the best value stocks in our coverage universe.”
“While Nexa is a newly-listed company and investor familiarity is still low, the company’s shares trade at attractive 2019 estimated price-to-cash flow (3.6 times), enteprise value-to-EBITDA (3.8 times) and price-to-NAV (0.50 times) multiples and we believe have room for upside as the company, guided by its experienced management team, executes on its plans and gains the confidence of the investing market,” she said.
Expecting to see flat growth and “no major excitement” in 2019, Mackie Research analysts Andre Uddin and Yue Ma downgraded their rating for Knight Therapeutics Inc. (GUD-T) on Wednesday.
“Probuphine was launched in Oct. 2018. Iluvien, Netildex, Mytesi, TX-004/001 and tenapanor are slated to be launched between 2019 and 2020 – among which we believe TX-004/001 should be the most important one,” they said. “Our product sales estimates suggest GUD would have flat growth in 2019 relative to 2018 – the momentum should come back in 2020 following the launch of TX-004/001.”
In moving the Montreal-based company to "hold" from "buy," the analysts do not expect Knight to engage in any major transactions in 2019.
“By Q3/2018 end, GUD had $651-million in free cash ($4.56 free cash/share) which can be deployed to acquire/in-license products,” they said. “However, GUD’s management is price sensitive and is still awaiting product acquisition prices to cool down.”
Their target for Knight shares dipped to $8 from $10.65. The average on the Street is $9.99.
"We believe GUD could serve as a defensive play for investors during a market downturn as GUD has arguably the strongest balance sheet in the Canadian specialty pharma sector," they said.
Separately, Mr. Uddin and Mr. Ma downgraded Theratechnologies Inc. (TH-T) to “hold” from “buy” after lowering their sales estimates for their Egrifta and Trogarzo drugs.
"TH incurred net losses in FY2017 – and likely in FY2018 as well – as the company ramped up its preparation efforts for the Trogarzo launch," they said. "We believe the launches of Trogarzo in the U.S. and Europe should start bringing profits back to TH in 2019. Our adjusted EBITDA and fully diluted EPS forecasts for TH in Q4/FY2018 and the following years have been significantly lowered due to our reduced Egrifta and Trogarzo sales estimates."
Their target for Theratechnologies fell to $10.20 from $19.50. The average is $16.15.
They said: "We are downgrading our CORV rating ... for three main reasons: (i) we are lowering our sales outlook for the company, (ii) we do not expect CORV to turn profitable in the near future, and (iii) we expect CORV to conduct up to a $30-million equity financing in 2019 that would cause equity dilution."
Citi analyst Alexander Hacking sees a "constructive" short-term outlook for the U.S. steel sector in 2019, leading him to raise his hot-rolled coil price forecast for the first three quarters of the year.
“U.S. steel mills are expected to generate another strong year of profits in 2019 supported by Section 232 tariffs,” he said in a research note released Wednesday. “Flat steel prices are expected to rebound in the near term having fallen below import parity. Yet, the medium-term outlook has turned more negative due to more announcements of new flat rolled capacity.”
"U.S steel prices are now trading below import parity and potentially at a floor based on industry feedback. We expect a $50-100 per ton bounce in flat steel that will likely peak in 3Q. Our average forecast for the year is $750 per ton – lower than 2018 but elevated by historical standards. We forecast rebar steady at $700 per ton. These assumptions are based on the view that U.S. steel demand will be flat in 2019 (0-per-cent growth), global prices will trade marginally lower and Section 232 will remain largely in place (perhaps with deals for Canada / Mexico). The main risk to the outlook is Chinese growth and especially the property market."
Despite this positive outlook, Mr. Hacking downgraded his rating for shares of U.S. Steel Corp. (X-N) to “neutral” from “buy.”
"We still see strong near-term cash flows from Section 232 windfall profits and longer-term upside from asset revitalization expenditures," he said. "However, we do not see the stock outperforming given a challenging longer-term backdrop with significant new capacity being added in the domestic steel market. Key themes for 2019 will be 1) steel prices and sustainability of trade actions, 2) impact of new steel capacity, 3) progress on asset revitalization initiatives and 4) capital allocation."
His target for its stock fell to US$23 from US$40. The average is US$33.72.
On the sector, Mr. Hacking said: "Against this backdrop we see value in mini-mills Steel Dynamics Inc. (STLD) and Nucor Corp. (NUE) which are growing (via more market share), returning capital and generating ROIC > WACC. We are more cautious on integrateds U.S. Steel Corp. (X) and AK Steel Holding Corp. (AKS) which seem likely to lose market share and become increasingly reliant on a single customer base (the U.S. auto supply chain)."
His target price for Citizens fell to US$37 from US$41, which falls below the average on the Street of US$41.17.
"We see potential room to increase the medium-term ROTCE [return on average tangible common shareholders' equity] range higher," he said. "CFG sits with the most excess capital of our regional banks which will be a lever over time."
Mr. Horowitz also lowered his target for Morgan Stanley to US$48 from US$50. The average is US$53.27.
"We think MS has the potential to raise its ROTE targets on improved efficiency and lowering capital levels," he said.
Conversely, the analyst downgraded Bank of New York Mellon Corp. (BK-N) to “neutral” from “buy” with a target of US$52, down from US$55. The average is US$53.08.
"We view BK as fairly valued given recent outperformance only declining 9 per cent, outperforming peers by 11 per cent and the BKX by 7 per cent," he said.
"We do believe the long-term growth opportunities are significant — both from transitioning illicit trade to legal sales, medical sales, and from transitioning sales in health & wellness categories to CBD-infused products,” said Mr. Lavery. “While timing of further changes is difficult to predict, the pace of further legalization appears to be accelerating.”
The analyst set a US$40 target for shares of Canopy. The average is currently US$47.05.
"While it is difficult to predict how Canopy may be positioned long-term, we believe its large size currently (relative to competitors) is likely to help drive near-term momentum that can provide resources to help fuel long-term growth,” he said.
He set a US$90 target for Tilray, which falls short of the US$127.50 consensus.
“Tilray has the ingredients for long-term growth,” said Mr. Lavery. “We believe its medical partner, Novartis, its EU capacity, and clinical trials position it well for global medical growth. We consider its relationship with Privateer (U.S. operator and 77-per-cent owner) to be valuable, both for brands like Marley Natural (with inherent consumer equity) and for its US operations, especially if US legalization comes.”
Global apparel giant PVH Corp. (PVH-N) possesses “strong” brands with significant market share gain potential, according to RBC Dominion Securities analyst Brian Tunick.
He initiated coverage of the New York-based company, which owns several brands such as Van Heusen, Tommy Hilfiger and Calvin Klein, with an "outperform" rating.
"As the list of U.S.-based branded apparel companies shrinks, PVH has been one of the few to grow both organically and via strategic acquisitions," said Mr. Tunick. "At $9.6-billion fiscal 2018 estimated revenues, PVH is one of the top three largest apparel manufacturers in the world. Key long-term drivers of global growth include: 1) Tommy Hilfiger international growth (incremental $696M) led primarily by Asia, particularly China; 2) Calvin Klein international growth (incremental $566M), led by Europe; and 3) modest growth at NA America revenues for both Calvin Klein and Tommy Hilfiger through third-party e-commerce growth."
"Beyond category/ region-specific market share opportunities, we expect PVH’s best-in-class initiatives to adapt to "new retail" (with Amazon partnerships, leading social media presence, and celebrity collaborations) to help it gain sales donated by a few of its peers and increase relevance with younger consumers. We also believe the company's embracing of the off-price channel is unique among vendors."
Mr. Tunick set a target of US$122 per share, which falls below the current average of US$139.14.
“We are compelled by PVH’s low- to mid-teens EPS growth algorithm driven by regional growth opportunities for Calvin Klein and Tommy Hilfiger and potential for margin recovery at the Calvin Klein brand,” he said. “As valuation has come in 4–6 times over the last few months, we believe sentiment is fairly washed out and risk/reward is favorable at current levels for investors willing to take on more global exposure.”
Citing competition in its core core database and cloud markets, Barclays analyst Raimo Lenschow lowered Oracle Corp. (ORCL-N) to “equal weight” from “overweight.”
Mr. Lenschow does not expect the Silicon Valley tech giant to grow at a rate higher than 2-4 per cent annually over the coming years, pointing to declining licenses among other factors.
"We have seen several false starts as investors thought ORCL could be the next MSFT [Microsoft Corp]," he said. "A closer look shows that we are not there yet, and hence we feel Oracle will likely continue to be range-bound."
His target fell to US$55 from US$60, exceeding the average of US$52.90.
In other analyst actions:
JP Morgan upgraded New Gold Inc. (NGD-T) to “neutral” from “underweight.”
Buckingham Research Group analyst Eric Tracy upgraded Lululemon Athletica Inc. (LULU-Q) to “buy” from “neutral” and raised his target to US$157 from US$151. The average on the Street is US$158.47.
Cormark Securities Inc. initiated coverage of Spark Power Group Inc. (SPG-T) with a “buy” and $4 target, which is 13 cents below the consensus.