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Inside the Market’s roundup of some of today’s key analyst actions

Gold sits poised for a bull run, according to Industrial Alliance Securities analyst George Topping, who believes it may be poised to reclaim its “safe haven asset class of choice title” in 2019.

“The main headwind for gold in 2018 was the stronger US$,” said Mr. Topping in a research note previewing the metals and mining sector in 2019. “Strong U.S. economic data, a divergence in policies between the Fed and other central banks, and a perceived upper hand for the US in the trade war, all pushed the US$ in 2018. Throw in an aggressive Fed, which increased rates four times in 2018, and one can see the reason why the short gold, long US$ trade persisted in the market for much of the year. At one point, fund managers were a record 222K contracts short gold.

“The macro-environment looks much different in 2019. Recessionary fears on the market’s thinking that the Fed may have overtightened have reversed the short gold/long US$ trade of 2018 and should spur the precious metal in 2019. Mr. Powell went from hawkish to dovish by the end of 2018, adopting a wait-and-see approach with the projected weaker US economy. This bodes well for gold which doesn’t bear interest. Currently, just two rate hikes are projected in 2019 with some economists projecting that Powell will backtrack further and may cut rates. Emerging markets, already under siege by their own missteps to begin with, did not fare well with the strong US$ in 2018, which caused central banks to start buying gold. Russia, India, China, and Turkey have all added gold in the past 12 months. The next breakout level for gold will be when the 50-day moving-average crosses the 200-day MA, a phenomenon known as the golden cross, signalling a bull run is indeed in store for gold.”

Meanwhile, Mr. Topping sees the fortunes of base metals tied to China in 2019, noting: “Base metals started their descent from their last significant peaks in mid-June when the US-China trade war narrative took over the market. China is the world’s largest consumer of base metals and base metals were sold off, inching lower every time the U.S. hit China with more tariffs on the fears of slower growth in the key emerging market. Recent weaker Chinese economic data indicate the market was slightly correct, yet we believe base metals equities are vastly oversold at this point. 2019 could bring a resolution to the trade war and China has indicated more stimulus measures are planned to aid in the recovery. While a rebound is projected across the base metals sector, copper should benefit the most as near-term supply dwindles and the market deficit grows with burgeoning demand from the electric vehicle and renewable energy markets.”

Mr. Topping named a trio of top picks in the sector for 2019. They are:

Hudbay Minerals Ltd. (HBM-T) with a “buy” rating and $12.50 target. The average target on the Street is $9.67, according to Bloomberg data.

“We believe Hudbay is undervalued given its assets, copper market fundamentals, impending permits on Rosemont, and activist pursuit,” he said.

Franco-Nevada Corp. (FNV-T) with a “buy” rating and $115 target. The average is $105.97.

“In a rising gold market, funds flow starts with the large and liquid, and with Franco’s low risk best-in-class business model, and historic outperformance of physical bullion and other gold equities, it will be the clear benefactor,” the analyst said.

Wesdome Gold Mines Ltd. (WDO-T) with a “strong buy” rating and $6.20 target. The average is $5.17.

“Wesdome is our only Strong Buy rated stock,” said Mr. Topping. “The main attractions are the +70Koz p.a. free cash flowing Eagle mine which continuesto grow and more than covers the exploration costs necessary for the Kiena mine restart.”


Citi analyst Prashant Rao feels WCS differentials are likely to widen, calling current levels “unsustainable.”

“Provincially-mandated production cuts in December have driven prices for Canadian Heavy and Light grades up by $30 per barrel and $26 per barrel, respectively, with differentials for WCS now US$10 per barrel vs Maya, hovering near $7.50 per barrel pipeline costs,” said Mr. Rao in a research note on Canadian integrated oil companies.

“On our relatively conservative math, excess inventory clears by early 2Q due to the cuts. That said, the market remains structurally reliant on rail transport for the incremental barrel of production growth (even with Line 3 expansion), supporting our view for US$20 per barrel WCS-Maya in 2H19 (US$18.50 discount to WTI). We are more constructive on SCO and expect it to vacillate around WTI price.”

In the note, Mr. Rao cut his target price for the four companies in his coverage universe.

They are:

Husky Energy Inc. (HSE-T, “neutral”) to $16 from $22.The average is $19.79.

Analyst: “Outcome of the tender offer is likely to overshadow 4Q18 results, with the focus on HSE’s integration plan should the transaction successfully close. HSE is also considering sale of its non-core downstream assets including its Prince George refinery (12mbpd). We expect that HSE’s 2019 production guide of 300,000 barrels of oil equivalent per day (boe/d) will 3 per cent higher than 2018.”

Suncor Energy Inc. (SU-T, “buy”) to $60 from $63. The average is $53.65.

Analyst: “Suncor’s production and capex guides should allow the company to boost its share repurchase program while raising dividends this year. Since upstream production ramped in 2H18 and given 80-per-cent downstream integration, SU is more negatively impacted than its peers on January’s mandatory production cuts (down 11 per cent quarter-over-quarter), but the resulting earnings headwind to upstream should be partially offset by narrower SCO-WTI diffs. At a 9-per-cent 2020 estimated FCF yield on our estimates, Suncor remains the most compelling Buy in the group.”

Cenovus Energy Inc. (CVE-T, “neutral”) to $12 from $13. The average is $14.10.

Analyst: “Being partially-integrated, CVE stands to benefit significantly from Alberta’s mandated production cuts. Higher earnings power, coupled with potential of more than $500-million asset sales should accelerate CVE’s progress in achieving its long-term Net Debt/EBITDA target of 2 times. Utilized rail transport volumes should remain flat in 1Q19, at end-2018′s runrate of 25mbpd due to narrow WCS-WTI diffs, with the ramp resuming later this year for the remaining 75mbpd of contracted capacity.”

Imperial Oil Ltd. (IMO-T, “neutral”) to $38 from $45.. The average is $42.55.

Analyst: “IMO’s integrated model, rising production, and SCO-WTI sensitivity (more than $100-million per year pre-tax benefit for +1 wider diffs) exposes the company relatively more to headwinds from the mandatory cut.”


Though he called it a “well-oiled cash machine” and believes it’s poised to deliver strong fourth-quarter results and outlook, Desjardins Securities analyst David Newman lowered his target price for shares of Parkland Fuel Corp. (PKI-T) ahead of the release of its earnings on Feb. 28.

Mr. Newman is projecting earnings before interest, taxes, depreciation and amortization (EBITDA) of $221-million for the quarter, rising from $211-million and exceeding the consensus on the Street of $217-million. He pointed to “elevated” crack spreads, high single-digit convenience store same-store sales growth in its retail fuels segment, a “solid” performance at Parkland USA and the realization of synergies.

However, the analyst lowered his 2019 and 2020 EBITDA projections to $1.015-billion and $1.088-billion, respectively, from $1.091-billion and $1.153-billion, citing “modest adjustments in our crack spread assumptions and potential softness in the Commercial Fuels segment considering recent market volatility in the oil and gas sector.”

“We continue to see PKI as a well-oiled cash flow machine focused on building a diversified asset base with a full range of petroleum products across the barrel, growing supply capabilities and expanding geographic reach, coupled with subsequent benefits of scale,” he said. “We further believe PKI will continue to expand its presence in North America and the Caribbean region (following the completion of the SOL acquisition, as well as the Rhinehart and MVP deals), leveraging its strong FCF and favourable access to capital. Over time, we believe its M&A program and continued investment should reduce the more volatile components of the business (Burnaby Refinery), increase its scale and drive synergies, which could lead to a re-rating in the stock.”

He maintained a “buy” rating and dropped his target to $45 from $50. The average is now $48.43.

“PKI offers a total potential return of 24.7 per cent with its mix of strong growth and a stable yield, as well as catalysts stemming from the integration of CST, CCL and the recently acquired SOL (including synergies),” the analyst said.


In the wake of “mixed” pre-release results and the “surprise” resignation of chief financial officer Tim Stone, RBC Dominion Securities analyst Mark Mahaney downgraded Snap Inc. (SNAP-N) to “sector perform” from “outperform.”

“Our take is that this is not the first c-level departure since Snap’s IPO nearly two years ago … or the second … or the third,” he said. “Among key recent departures, we would highlight Chief Strategy Officer Imran Kahn, VP Of Content Nick Bell, Head of Communications Mary Ritti, and prior CFO Andrew Vollero. We view it as a material negative that Tim Stone announced his intention to resign less than a year into the role. We had viewed Stone as a key positive management addition, given his successful background at Amazon.”

He added: “Fundamentals have been very uneven since the company’s IPO. Our belief is that this has in part been due to severe competitive pressures (from FB), but also due to very uneven execution. Our hope had been that the May 2018 hiring of Tim Stone as CFO would help improve the company’s execution. With his relatively sudden departure, our confidence in a fundamental turnaround has been lessened.”

Mr. Mahaney maintained a target of US$8 for Snap shares, which exceeds the consensus of $7.51.


There are “visible growth opportunities ahead” for Hydrogenics Corp. (HYGS-Q, HYG-T), said Canaccord Genuity analyst Raveel Afzaal.

He initiated coverage of the Mississauga-based developer and manufacturer of hydrogen generation and fuel cell products with a “speculative buy” rating, touting the growing public and private support for the industry.

“The company’s leading hydrogen generation and fuel cell technologies have attracted strategic ownership from Hejili Equity Investment Limited (14 per cent) in 2017 and Air Liquide (19 per cent) in late 2018,” said Mr. Afzaal. “We view Air Liquide’s (AI-FR, Not Rated, market cap $50.5B) recent investment at $5.80 per share as particularly interesting given it is already a leading supplier of hydrogen. We believe this not only helps validate Hydrogenics Proton Exchange Membrane (PEM) technology but also competitively positions the company to win large fueling station and power-to-X contracts.

“Looking at the overall fuel cell market, we have seen several strategic investments in other fuel cell companies as well. We believe growing interest by larger entities serves as a bullish signal for industry prospects.”

Mr. Afzaal set a target price of US$8.75 for its shares. The average on the Street is now US$7.81.

“We recommend this name to investors with a longer-term horizon, given that the fuel cell industry is still in its early days which makes predicting near-term industry adoption rates very difficult and could result in lumpy near-term financial performance,” he said. “That said, we believe the company is well capitalized to sustain such lumpiness and competitively positioned to benefit from exposure to an industry with promising prospects over the medium term.

“Further, we believe positive news flow should continue to provide support to the share price. We believe near-term valuation catalysts include potential announcements pertaining to (1) new strategic partnerships; (2) improvement in order flow from the China fuel cell bus market; (3) follow-on rail orders from Alstom; and (4) new project wins through the partnership with Air Liquide.”


After announcing Tuesday evening that sales at its full-priced stores fell “below expectations” during the key holiday season, Nordstrom Inc. (JWN-N) was downgraded by several equity analysts.

The retail chain announced it’s now projecting diluted earnings per share for fiscal 2018 to fall on the low end of its prior guidance range of US$3.27 to US$3.37.

That led Goldman Sachs analyst Alexandra Walvis to lower her rating to “neutral” from “buy” and removed the stock from the firm’s “Americas Conviction List.”

“Since our initiation at Buy on Sept. 3, 2018, shares are down 25 per cent versus the S&P 500 down 10 per cent and our Apparel & Accessories coverage average of a 17.9-per-cent decline,” she said. "Our initial thesis was predicated upon: (1) forecast outperformance in the full-price business as Nordstrom benefits from well located stores, a curated product selection, and a robust omnichannel offer; (2) stronger forward operating margin leverage; and (3) an underappreciated off-price business. Following two releases in which full price comps have disappointed versus our expectations, we have fading confidence in the outlook for the core department store business, and see choppy gross margins as likely offsetting good news on costs as the company cycles grnerational investments.

“In short, we got this call wrong.”

After lowering her 2018, 2019 and 2020 earnings per share estimates by 3 per cent, 5 per cent and 7 per cent, respectively, Ms. Walvis lowered her target for Nordstrom shares to US$50 from US$73. The average on the Street is now US$55.17.

Elsewhere, Telsey Advisory Group analyst Dana Telsey downgraded Nordstrom to “market perform” from “outperform” with a US$56 target, down from US$72.

Atlantic Equities LLP analyst Daniela Nedialkova downgraded it to “neutral” from “overweight” with a target of US$45, down from US$68. PT is $53.89.

J.P. Morgan analyst Matthew Boss lowered the retailer to “underweight” from “neutral” and dropped his target to US$41 from US$51.


Citi analyst David Driscoll added General Mills Inc. (GIS-N) to the firm’s “U.S. Focus” list.

“We see a confluence of positive catalysts on the horizon – improved organic revenue growth, new pricing, benefits of cost savings and synergy capture from the Blue Buffalo acquisition, and rising gross margins,” he said. “All of these factors add to our expectation of high single digit EPS growth in the company’s fiscal 2020 which begins in June 2019."

Mr. Driscoll has a “buy” rating and US$54 target for its shares. The average on the Street is US$44.18.


In other analyst actions:

Clarksons Platou Securities analyst Jeremy Sussman downgraded Teck Resources Ltd. (TECK-B-T, TECK-N) to “neutral” from “buy” with a target of $31, down from $35. The average on the Street is $40.56.

Peters & Co analyst Jeff Fetterly downgraded Enerflex Ltd. (EFX-T) to “sector perform” from “sector outperform” with a target of $22, which is 34 cents less than the consensus.

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