Inside the Market’s roundup of some of today’s key analyst actions
Though he believes it’s a “long-term positive” that Tesla Inc. (TSLA-Q) has become “more tactful” in its messaging to investors about its aspirations, RBC Dominion Securities analyst Joseph Spak thinks that honesty has placed “downward pressure” on its growth plans.
Accordingly, believing those goals are "too high to justify current levels, let alone to add to positions," Mr. Spak downgraded his rating for Tesla stock to "underperform" from "sector perform."
"For years, Tesla sold the dream of transportation disruption and fantastic growth," he said. "This served the stock well turning Tesla into a top 6 (at times top 3) valuable auto OEM despite delivering a fraction of units of others and nary a profit. A stock should of course discount future cash flows and the market took the promises of Tesla and their future growth potential to justify lofty valuations while Tesla took capital needed to support their endeavors. But the rubber appears to be hitting the road as the realities of Tesla becoming a volume player, the challenges to scale and deliver high volume at high ASPs/margins are coming to a head.
"Whether its cutting the price of their lineup by $2k/unit, admission the federal tax credit expiring will hurt, acknowledgment that Tesla can't sell at $35k Model 3 profitably and costs need to come down, or language around full-self driving - we'd classify recent commentary and actions by the company as more realistic. This is likely to cause a review of model assumptions leading to negative expectation revisions."
Mr. Spak expressed concern about both Tesla’s supply capacity and demand, estimating it currently has the ability to produce almost 5,000 Model 3s per week and almost 260,000 per year.
"In their 2Q18 shareholder letter, they talked about hoping to get the rate to 6k/week," he said. "That didn’t happen in 4Q18, but even if we give them credit for accomplishing it in 1Q19, that means an annualized run rate of 312k Model 3s in 2019. So, a reasonable max M3 production range for 2019 appears to be 260-312k. But this is a theoretical max range at Fremont because, a) assumes no downtime when maintenance will clearly need to occur; b) it assumes no production issues; c) There could be some switchover time as other M3 variants come out for international markets."
He added: "On supply, we believe a reasonable max Model 3 production range for Tesla 260-312k. On demand, the $2k price cut and talk about having to lower cost further as federal tax incentives subside confirms our view that the bulk of demand is at a lower price point that Tesla can't access yet profitably. Consensus is expecting 300k M3 deliveries, so near all out. RBC at 260k deliveries. A review of 2021 potential expanded capacity and expected deliveries also reveals a rosy scenario. At the end of the day, Tesla is trying to manage luxury profitability levels towards volume units. We believe this will prove difficult. Stronger unit growth assumptions require lower ASPs/margins assumptions (and likely more capital).
"Given 2019 deliveries are likely to be close to 4Q18 run-rate, but with a price/mix headwind, 3Q18 may have been peak profitability this decade."
After lowering his revenue expectations for fiscal 2019 and 2020, Mr. Spak dropped his adjusted, diluted earnings per share estimates to US$3.60 and US$6.75, respectively, from US$4.13 and US$9.02.
His target for Tesla shares dropped to US$245 from US$290. The average target on the Street is currently US$328.40, according to Bloomberg data.
“It’s not that we don’t believe Tesla can grow over time, our model shows solid long-term growth,” said Mr. Spak. “But the current valuation already considers overly lofty expectations. For instance, let’s assume 1mm units at $55,000 ASP, 12-per-cent EBIT margins, no interest/equity raise all by 2025. This is undoubtedly solid earnings, but at a more ‘mature’ 15 times price-to-earnings, the discounted back value is $195, meaning even in an optimistic case at least one-third of today’s price is an ‘Elon premium.’”
In separate notes released Wednesday, Mr. Spak made several other rating changes to stocks in his coverage universe. They are:
- Downgrading Adient PLC (ADNT-N) to “underperform” from “sector perform” with a US$16 target, down from US$17. The average is US$22.93.
Analyst: "ADNT’s stock is now up 24 per cent year-to-date (vs. S&P up 5 per cent). ADNT had been a popular short on operational troubles and balance sheet risk. We believe much of the rally has been fueled by short covering and momentum. From a fundamental perspective, we have difficulty justifying current levels and move to Underperform from Sector Perform."
- Lowering Delphi Technologies PLC (DLPH-N) to “sector perform” from “outperform” with a target price of US$17 (unchanged). The average is US$22.05.
Analyst: "2019 appears to be a transition year, as new technology revenue growth opportunity as well as cost/cash improvements from new CEO Rick Dauch seems unlikely until 2020–21. Our view of the LT opportunity isn't changed, but we prefer to sit on the sidelines until closer to inflection."
- Upgrading Garrett Motion Inc. (GTX-N) to “sector perform” from “underperform” with a target price of US$15, rising from US$11. The average is currently US$13.83.
Analyst: "We upgrade GTX to Sector Perform from Underperform, as current valuation appears more reasonable. GTX's FCF potential is intriguing, but 2019 seems to be a below-trend year and we still seek more clarity on the go-forward strategy."
- Dropping Meritor Inc. (MTOR-N) to “sector perform” from “outperform” with a US$19 target, up from US$18. The average is US$23.67.
Analyst: "We continue to view the company as well managed and like its long-term strategy. However, we view current valuation as mostly fair and see limited upside to expectations."
In the wake of Tuesday’s release of its 2019 capital budget, a pair of equity analysts raised their ratings for MEG Energy Corp. (MEG-T).
Calling the budget “conservative” and seeing room to grow, Desjardins Securities analyst Justin Bouchard upgraded the stock to “buy” from “hold,” citing its recent pullback in price.
"MEG’s 2019 budget is conservative, with sanctioned capex of $200-million, including $115-million in sustaining capital (below that of 2018 due to the advancement of planned 2019 turnarounds to November 2018)," he said. "On the growth front, MEG has allocated $20-million to the eMVAPEX pilot and $45-million to field infrastructure and to corporate and other initiatives. The company has also allocated $20-million to the Christina Lake Phase 2B brownfield expansion, which should increase nameplate capacity to 113 mbbl/d. MEG could sanction another $75-million by mid-2019 to advance this initiative ($275-million project budget, with $165-million spent to date)."
"Due to Alberta government–mandated curtailments, MEG expects to produce 8–10 mbbl/d below nameplate for 2019; guided production is thus 90–92 mbbl/d, which implies slightly higher per-barrel non-energy operating costs for 2019 of $4.75–5.25/bbl vs MEG’s estimated $4.40–4.90/bbl absent curtailments."
Mr. Bouchard lowered his target for MEG shares to $8 from $10.50 in the wake of Husky Energy Inc.'s (HSE-T) decision to abandon its takeover bid. The average on the Street is currently $8.28.
"The conservative 2019 capital budget should enable MEG to chart safer waters entering 2020, when it could benefit from the doubling of the Flanagan-Seaway commitment (to 100 mbbl/d by July 2020) and the potential start-up of Phase 2B," he said. "Given the strong implied returns, we are changing our rating."
Calling its capex budget “bare bones” with a focus on profitability, AltaCorp Capital analyst Nick Lupick moved the stock to “outperform” from “sector perform” with a $9 target, rising from $8.
“Given the selloff in the stock, now down 57 per cent since the collapse of the Husky Energy (HSE-T; ‘sector perform’ rating; target $20.50) hostile bid and management’s demonstrated focus of living within cash flow (expected to result in lowering of near term net debt), we believe that an investment in MEG at current price levels warrants renewed consideration for investors looking for strong exposure to commodity prices and who have a high risk tolerance," he said. “MEG’s ability to outperform its peer group is going to be predicated on the Company’s ability to get its production to global markets (and prices). With 30,000 mbbls/d of pipeline volumes expected to reach the USGC in the near term and expectations to see more than 20,000 bbl/d railed in Q1/19 (8,000 bbl/d to the USGC), we estimate that 40-45 per cent of H1/19 volumes will be sold into global markets where WCS is currently garnering a slight premium to WTI.”
Though he thinks the “gloomy view” of the Canadian financial services sector is “in our rear-view mirror,” Industrial Alliance Securities analyst Dylan Steuart sees “a mixed bag of headwinds and tailwinds” for companies in his coverage universe in 2019.
"Although geopolitical uncertainties like the Canada-China trade relationship, downward pressure in the energy sector, and a general slowdown of the global economy will weigh on all sectors," said Mr. Steuart in a research note released Wednesday. "We believe that the challenged growth in Personal Lending due to higher debt ratios will be a headwind to the financial sector specifically. On the other hand, we continue to expect Commercial Lending to remain strong in 2019 relative to household based lending.
"However, while the strained state of the Canadian household balance sheet is expected to limit growth of consumer based lenders, we do not forecast a credit event for mortgage based lenders this year. Data going back nearly 30 years shows that the domestic borrowers have been resilient in thick and thin conditions."
Mr. Steuart said the sector is still rebounding from a "highly volatile" 2019, which featured rising rates, increased regulation and reduced sector sentiment.
"Seven out of the eleven companies we cover showed negative returns over the year," he said. "Within our coverage universe, Founder’s Advantage, Mosaic and Street Capital faced the largest declines in the year. On the other hand, VB, EFH, and CXI were the best performers within our coverage universe. VersaBank’s increased margins, Echelon’s recent transaction to sell its core operating segment, and Currency Exchange’s organic growth all contributed to positive market sentiment."
"Overall, we are forecasting a rebound for most of our coverage universe from the mixed 2018 results. We forecast a median increase of 6.7 per cent in revenue and 11.6 per cent in EPS for our group of specialty lenders in 2019, a slight moderation in growth from 2018."
Mr. Steuart expects “solid” growth for Chesswood Group Ltd. (CHW-T), which he has pegged as his “Top Pick” for the sector. He currently has a “strong buy” rating and $16 target for its stock, which exceeds the consensus by a loonie.
"We believe Chesswood has positioned itself as a pure-play North American equipment financer," he said. "Over the course of 2018, CHW exhibited strong growth (year-to-date receivables of $680-million were up 34 per cent year-over-year), steadying margins, and superior credit performance (delinquency percentage in the core U.S. business was 1.83 per cent, the best ratio since 2012). Solid fundamental performance combined with outsized U.S. exposure (year-to-date revenues were 85-per-cent U.S. based) sets CHW apart from its peers in the domestic financials space. The growing underlying business in addition to gains from the favourable tax legislation in the U.S., has led to the dividend payout ratio declining to under 50 per cent on a free cash flow basis. This leads to a very attractive entry point, as the stock yields 8.1 per cent based on the current annualized dividend."
Believing expectations on the Street are ignoring the possibility of a “big boost” to both new income and earnings per share likely to come as early as the second half of 2019, Citi analyst Jim Suva initiated coverage of Dell Technologies Inc. (DELL-N) with a “buy” rating, pointing to its “attractive” valuation.
"We believe consensus is not fully giving Dell credit for its debt pay down in the coming years," he said. "Our revenue and operating income estimates are not materially different from consensus but the interest expense and EPS forecasts diverge in 2H 2019 and we see upside to consensus EPS in 2H 2019 and into 2020 and 2021. We believe Dell will be able to pay down the $4.3-billion debt due in 2Q 2019 via its cash flow and current cash & short term investments, and following this action consensus will recalibrate its interest costs lower closer to our estimate which will all materially boost consensus EPS higher in 2H 2019 and beyond and therefore we encourage investors to build a position in Dell shares prior to mid 2019."
Mr. Suva set a target price of US$55 for Dell shares, which falls below the average on the Street of US$56.25.
"Dell stock currently trades at a 40-50-per-cent discount to its peers despite Dell having a much more favorable product offering," the analyst said. "Dell has a more complete product package than Hewlett Packard Enterprise Co. (HPE), HPQ, Lenovo, IBM, and NetApp as Dell has EMC, VMW, Pivotal, Secureworks and also PCs. This complete product package allows Chief Technology Officers to get the majority of their computing needs from one source. While the debt burden, lack of a dividend and Michael Dell’s ownership indeed warrant a discount we believe a 25-per-cent discount is more appropriate rather than the current 40-50 per cent at which the stock trades."
Believing its share price is “well-supported by good underlying value,” Laurentian Bank Securities analyst Barry Allan has a “buy” rating for Marathon Gold Corp. (MOZ-T).
“The Valentine Lake project is an important new gold resource of the size and quality to justify mine development,” he said when initiating coverage of the stock. “Compared to a peer group of other development-stage companies, Marathon Gold offers a good operating jurisdiction and usually good access to infrastructure, for a project at this stage of development. The management are a group of successful geologists who have the skill-sets to advance the project through to a feasibility study. Considerable up-side to the resource remains to be tested.”
Mr. Allan has a $2.50 target, which exceeds the average of $1.94.
Though he’s lowering his 2019 earnings expectation below the consensus on the Street due to a “murkier” view of the year, Canaccord Genuity analyst Yuri Lunk still “sees value” in SNC-Lavalin Group Inc. (SNC-T).
“After a deep dive into SNC’s near-term prospects, we come away with a more muted outlook,” said Mr. Lynk. “However, despite our lower earnings forecast, the stock remains exceptionally inexpensive on P/E, and we believe the valuation gap with its North American peers can narrow as FCF [free cash flow] generation continues to improve. Furthermore, we view the pending sale of a portion of SNC’s 16.8-per-cent interest in Highway 407 as a potential near-term share price catalyst and would position ourselves accordingly.”
Ahead of the release of its 2019 initial guidance in late February, Mr. Lynk dropped his 2019 and 2020 earnings per share projections for its engineering and construction segment.
“Weighing on our outlook are more muted margin expectations in Infrastructure reflecting the roll-off of two large projects (the Champlain Bridge in H1/2019 and the Confederation Line LRT in 2018) while the remaining backlog is young,” he said. “We have also taken our EDPM [engineering design and project management] estimates lower to reflect more modest expectations against a tough comparator. We note, our EBITDA estimate changes do not match the magnitude of the respective EPS estimate changes as we are converting to IFRS 16, which will be adopted in this year.
“Notwithstanding our lower forecasts, we believe SNC has attractive long-term fundamentals. We are tracking several infrastructure mega-projects in Canada, two of which SNC is shortlisted on, that should drive years of growth in the Infrastructure segment. The Nuclear segment should benefit from decommissioning work in Canada and, especially, in the US where the market is expected to grow at an 8.5-per-cent CAGR between 2018 and 2025. The EDPM segment's results should be underpinned by the 4-per-cent-per-year growth forecast for the global environmental consulting industry in 2019 through 2022. On the resource side, while our expectations are rather muted for 2019, the capex budgets of several of SNC's O&G and mining clients are on the upswing.”
Maintaining a “buy” rating for SNC-Lavalin shares, his target dipped to $58 from $61. The average is now $61.25.
Pointing to “an unprecedented commitment to cost control,” Morgan Stanley upgraded Walmart Inc. (WMT-N) for the first time in four years.
“WMT is harnessing its scale,” said analyst Simeon Gutman, moving the stock to “overweight” from “equal-weight." He added: “Cost control has higher priority than at any point since we have covered the stock.”
Mr. Gutman hiked his target to US$110 from US$107, exceeding the consensus of US$106.13.
“At face value, Walmart doesn’t fit neatly into the framework we are recommending in 2019 as we model EPS declining in the low single digit range and its about 20 times price-to-earnings multiple is above historical levels,” said Mr. Gutman. “However this is misleading, as both the EPS decline and inflated multiple are attributable to Walmart’s acquisition of Flipkart in 2018.”
He added: “We believe Walmart U.S. (the main driver of the stock) will be one of few retailers to grow earnings in 2019.”
In other analyst actions:
National Bank Financial analyst Don DeMarco upgraded Alacer Gold Corp. (ASR-T) to “outperform” from “sector perform” with a target of $4.75, rising from $4.25. The average is $3.52.