Inside the Market’s roundup of some of today’s key analyst actions
Though Metro Inc.'s (MRU-T) business remains “on track,” its share price currently reflects it, according to Desjardins Securities analyst Keith Howlett.
Despite reporting in-line first-quarter financial results on Tuesday, Mr. Howlett downgraded his rating for the grocery and drug store company to “hold” from “buy,” pointing to “the outlook for Bank of Canada interest rate increases being muted compared with the market’s perception in December 2018, and given share price appreciation since October.”
Metro reported adjusted diluted earnings per share for the quarter of 67 cents, meeting Mr. Howlett's projection and a penny below the consensus on the Street. The company posted same-store sales growth for its Metro chain of 3.2 per cent, the highest increase since the third quarter of fiscal 2016, which was assisted by internally measure inflation of 1.8 per cent.
Though he said synergies with Jean Coutu are "proceeding well" and the company raised its quarterly dividend to 20 cents (from 18 cents), Mr. Howlett feels the Street was also anticipating the positive results, leading him to downgrade his rating.
He did raise his target for Metro shares by a loonie to $51. The average target on the Street is currently $49.73, according to Thomson Reuters Eikon data.
Elsewhere, CIBC World Markets' Mark Petrie raised his target to $48 from $45 with a “neutral” rating.
Mr. Petrie: “Metro reported generally solid Q1 results, with earnings modestly below our forecast driven by higher SG&A in the food business. However, the top line was strong and grocery gross margin expansion reflects strong execution and a modestly more favourable backdrop. Furthermore, Jean Coutu’s integration is progressing and synergies are tracking in line with forecasts. Our valuation moves up given the market’s demand for stability, a quality Metro offers in spades.”
=====
Precision Drilling Corp.'s (PD-T) 2019 debt repayment guidance “shines [a] bright light on free cash flow potential,” said Raymond James analyst Andrew Bradford.
On Tuesday after market close, the Calgary-based oilfield services company announced its 2019 debt repayment target has been set at $100-million to $150-million, which it expects to be funded from free cash flow. At the same time, it announced a 2019 capital expenditure plan of $169-million, comprised of $53-million for maintenance and infrastructure and $116-million in upgrade and expansion capital.
Mr. Bradford called the budget "modest and scalable," leading him to raise his rating for the stock to "strong buy" from "outperform."
"It's telling that from today's vantage point, with rig counts dropping in both Canada and the US, Precision nonetheless articulates a 2019 capital allocation plan that implies a range of free cash flow (cash flow after maintenance capital spending) between $216-million and $266-million," he said. "Not bad for a $718-million market-cap company. The implied yield of that free cash for equity holders today would range between 30 per cent and 37 per cent. Our own estimate free cash flow is $218-million , implying a 30-per-cent yield. In light of this, we have elected to upgrade our rating."
He maintained a $5 target for Precision Drilling shares. The average is $4.67.
=====
“It’s déjà vu all over again” for Canadian energy services companies, according to Industrial Alliance Securities analyst Elias Foscolos, who expects stocks in the sector to enjoy a rebound in 2019 resembling one seen in 2016 following a similarly turbulent previous year.
In a research report released Wednesday that reviewed the sector’s performance and introduced his 2020 projections, Mr. Foscolos asked, “Is 2019 the new 2016?”
"Post-review, we maintain our positive outlook for the sector based on: (a) an overall increase in North American drilling activity (U.S. growth to offset Canadian decline) in 2019, (b) a weaker FX rate, and (c) E&P upstream spending in Canada that will not decline as much as current drilling activity, leading to a recovery in the back half of 2019," he said.
"In 2016, the sector posted a 34-per-cent return after losing 38 per cent in 2015. We believe that current conditions are similar today, and we predict that the stocks in our coverage universe will post a significant rally in 2019."
Mr. Foscolos called the last four months for energy services stocks “rough,” enduring a decline of 23 per cent even factoring in an 8-per-cent increase thus far in 2019, however he emphasized they are still below a 2016 trough.
"The sector remains 8 per cent below the levels seen in February 2016," he said. "At present, the stocks in the Index are generating an 3.5-per-cent yield despite the fact that one of nine companies (PSD-T) is not paying a dividend. We believe most dividend paying companies with the exception of CMG-T and ESI-T are solid."
"In 2018, 12 of our 15 stocks declined, with 9 declining over 20 per cent. However, 2019 has been a very different story so far, with 12 of our 15 stocks posting positive price returns and half of our stocks returning over 10 per cent in just one month. Despite the recent rally, most of our coverage universe still remains down from year-end 2017 levels."
Mr. Foscolos thinks most of the companies in his coverage universe will see year-over-year EBITDA growth in 2019, pointing to "favourable conditions including increased overall rig activity (Canada down, U.S. up), a strong U.S. economy, a stronger U.S. dollar, and the impact of acquisitions."
However, his earnings projections remain on average 4 per cent below the Street.
"Although Canadian drilling activity is expected to be down 35 per cent for the first half of the year, we are forecasting H2/19 tailwinds (down 8 per cent year-over-year with Q4/19 increasing 9 per cent year-over-year) including Enbridge Line 3, increased crude-by-rail, and production cut pullbacks. U.S. drilling is expected to steadily increase, and several of our companies that are executing U.S. growth strategies are likely to exhibit solid organic growth in 2019. However, it is important to note that there were several acquisitions made in 2018 and early 2019, so increased EBITDA will be partially offset by increased debt in our valuations. Overall, we are forecasting a 15-per-cent year-over-year increase to adjusted EBITDA for 2019 on estimates that are just 1 per cent higher than consensus."
In the report, Mr. Foscolos made several changes to target prices of stocks in his coverage universe, including:
Badger Daylighting Ltd. (BAD-T, “hold”) to $40 from $39. The average on the Street is $36.93.
"We believe the Company is operating in a Goldilocks environment where it has benefited from a strong U.S. economy, significant truck builds, and low truck retirements," he said. "We predict that this situation will change post 2022 unless a plan to manufacture additional trucks in the US is put in place."
Computer Modelling Group Ltd. (CMG-T, “buy”) to $8 from $8.25. Average: $8.41.
McCoy Global Inc. (MCB-T, “speculative buy”) to $1.60 from $1.80. Average: $1.53.
Mullen Group Ltd. (MTL-T, “strong buy”) to $16.50 from $16. Average: $16.01.
"Mullen remains one of our top picks and a Strong Buy going into 2019," he said. "We are anticipating revenue growth of 9 per cent in both Oilfield Services (OFS) and Trucking and Logistics (T&L), resulting in 2019 EBITDA of $212-million. We have slightly nudged our Q4/18 forecasts down to account for weak OFS revenue, but have increased our 2019 estimates. We have also increased our multiple to account for higher comparables trading value. Our outlook on this diversified company remains highly positive, and our projected 41-per-cent total return compels us to maintain our Strong Buy rating."
Pason Systems Inc. (PSI-T, “buy”) to $24 from $23. Average: $25.17.
"Pason remains among the most well-diversified and well-capitalized companies in our coverage universe, with five product segments, significant U.S. revenue, and net Debt/EBITDA2019 of negatvie 1.15 times," the analyst said.
Strad Energy Services Ltd. (SDY-T, “buy”) to $2.50 from $2.30. Average: $2.46.
Secure Energy Services Inc. (SES-T, “buy”) to $10.50 from $10. Average: $10.96.
STEP Energy Services Ltd. (STEP-T, “buy”) to $6 from $6.50. Average: $6.
Tervita Corp. (TEV-T, “buy”) to $11.25 from $12.50. Average: $12.06.
=====
A “tough” 2018 was exacerbated by a “difficult” fourth-quarter for Canadian asset managers, said Canaccord Genuity analyst Scott Chan in a research note previewing earnings season in the sector.
“Industry-wide mutual fund net inflows ended 2018 flattish with $7.9-billion in net outflows alone in Dec. 18,” he said. “Based on [The Investment Funds Institute of Canada], industry wide AUM [assets under management] declined 6.5-per-cent quarter-over-quarter with CI Financial Corp. at a 8.7-per-cent decline (implying continued large net outflows) and IGM Financial Inc. at down 6.6 per cent (particular flow weakness in Dec. 18). Equity markets significantly retracted contributing to much of the decrease.”
In reaction to this decline, Mr. Chan lowered his target for both companies in his coverage universe:
CI Financial Corp. (CIX-T, “buy”) to $22 from $24. The average is $20.88.
IGM Financial Inc. (IGM-T, “hold”) to $34 from $36. The average is $37.13.
“The major themes we are watching on the upcoming quarter include: (1) initial thoughts on RRSP season (expect to be weak but year-to-date equity market performance provides some optimism for February); (2) flow traction and relative Fund performance; (3) SG&A guidance (we think CI will be much more inclined on driving cost efficiencies than IGM to protect margins); and (4) capital deployment (e.g. CI to remain aggressive through its NCIB; expecting no dividend increases from either firm in 2019),” said Mr. Chan.
“We are introducing 2020 EPS for CIX and IGM of $2.33 and $3.34, implying a P/E (2020E) of 7.8 times and 10.1 times, respectively. Due to relative valuation, we contend that CIX has potentially more stock upside than IGM with a more constructive market environment.”
======
“The returns are good, and the growth is there” for Canadian National Railway Co. (CNI-N, CNR-T), said Credit Suisse analyst Allison Landry following Tuesday’s release of better-than-expected quarterly results.
“CN did what it said it would do,” the analyst said. “As capacity came online in Q4 following a step up in capex, network fluidity improved, margins inflected positively, and volume growth re-accelerated. Given the momentum in RTM [revenue ton mile] growth (supported by a pipeline of $2-billion of incremental revenue by 2020), continued improvement in the operating metrics, and the cycling of prior year network inefficiencies, we continue to view 200 basis points of O.R. [operating ratio] improvement in 2019 as achievable ... As such, we think the company’s guidance for low-double digit EPS growth is conservative. More importantly, with ROIC well in excess of its cost of capital, and an unparalleled ability to execute on the top line, we think the market will continue to reward the stock.”
She added: “While CN had in fact cautioned the market to continue to expect elevated spending levels in 2019, we don’t think anyone was quite expecting an 11-per-cent year-over-year increase, or 25 per cent of sales (our initial forecasts called for $3.5-billion, or 23 per cent of revenues). However, if we view capex on a GTM basis (assuming year-over-year growth at a slightly more moderate pace to RTMs), the implied increase is significantly more palatable at around 5 per cent. Given its track record for consistently generating above industry average growth, we are confident that investors should be viewing the capex increase within this context.”
However, Ms. Landry lowered her 2019 and 2020 earnings per share forecast to US$6.28 and US$6.99 from US$6.31 and US$7.00, respectively, citing a higher tax rate, partially offset by lower interest expense. She also introduced a 2020 projection of US$7.75.
Maintaining an "outperform" rating, she raised her target to US$96 from US$95. The average on the Street is US$91.60.
Elsewhere, Desjardins Securities analyst Benoit Poirier maintained a "buy" rating and $127 (Canadian) target.
Mr. Poirier said: " we believe there might be further upside given CN’s robust pipeline of growth opportunities. In addition, we are pleased with the 18-per-cent dividend increase and the newly authorized NCIB program."
=====
Though he hoped Allergan PLC’s (AGN-N) fourth-quarter results “would surprise us positively with a management pivot” given messaging ahead of the release, RBC Dominion Securities analyst Randall Stanicky said he came away “unable to further support the stock.”
Accordingly, in the wake of the disappointing results and guidance as well as a subsequent 8.55-per-cent drop in share price on Tuesday, Mr. Stanicky downgraded his rating for the pharmaceutical giant to "sector perform."
"Despite debate over [Tuesday's] 9-per-cent sell-off, the 'fundamental' bull case is tougher to defend with shares likely range-bound absent surprise/forced strategic change," he said. "After three years of stock downside, it's clear to us that change is (a) needed and based on messaging [Tuesday] (b) unlikely to be pursued by management/Board. The 'value' case remains but is 'locked'; we would be willing to revisit should that change."
Mr. Stanicky lowered his expectations for 2019, believing the company's guidance "feels stretched and leaves downside risk." He also emphasized that "Growth Pharma" has not worked in three years and expressed a need for "aggressive" change.
"We can debate the walk-back of divesting Women's Health (and would) but more aggressive change is likely needed anyway," he said. "AGN's current strategy has struggled to deliver growth or value; maintaining status quo will not change that. Bull case is increasingly reliant on more aggressive change and without 'fundamental' P&L support we are challenged to maintain an OP-rating. Expect focus on upcoming May. 1 shareholder meeting (and voting) to pick-up."
His target for Allergan shares dropped to US$165 from US$220, falling below the average of US$194.
=====
RBC Dominion Securities analyst Mike Dahl downgraded Whirlpool Corp. (WHR-N) to “underperform” from “sector perform” in the wake of 9.6-per-cent rally on Tuesday following the release of what he deemed to be “disappointing” fourth-quarter results and “soft” fiscal 2019 guidance.
"Our sense is that the positive reaction was driven by a view that guidance is conservative, based on the lack of share buybacks assumed and a healthy level of cost inflation assumptions including tariffs," he said. "We also see these areas as supportive, but believe risks remain to the updated segment guides, primarily in North America (Guide: EBIT %: 12%+ vs. RBCe 11.8%), given uncertainty regarding industry market share/pricing dynamics as the washing machine tariff quota resets in early Feb. and competitors continue to expand capacity, and in EMEA (Guide: EBIT% 0%-1% vs. RBCe -1.1%) given ongoing challenges and a weakening macro backdrop."
Mr. Dahl maintained a US$111 target. The average is currently US$148.71.
=====
In other analyst actions:
Mizuho initiated coverage of Encana Corp. (ECA-T) with a “neutral” rating and $8 target. The average is currently $12.41.
David Leeder