Inside the Market’s roundup of some of today’s key analyst actions
Following a “Christmas miss,” Raymond James analyst Kenric Tyghe lowered his target price for shares of Metro Inc. (MRU-T).
On Tuesday, the Montreal-based grocery retailer reported second-quarter earnings per share of 47 cents, missing the expectation on the Street by 2 cents. Mr. Tyghe attributed the miss to lower-than-expected sales in “what continues to be a highly promotional environment.” Adjusted EBITDA of $208.1-million met the consensus estimate of $208.0-million.
“Metro’s SSS [same-store sales growth] decreased 1.2 per cent (SSS increased 1.0 per cent after accounting for the holiday shift), sales were down 0.1 per cent for the quarter with traffic and tonnage remaining essentially flat,” the analyst said. “In the context of both the highly promotional market dynamics (and marginal negative timing shift), we believe that the 6 basis point gross margin expansion was better than the headline reads. Despite the inefficiencies of a multi-currency loyalty strategy, Metro appears to have been on point in the quarter and relatively effective in maximizing the yield on their promotional spend. The modest increase in adjusted (for the Jean Coutu related expenses) SG&A margins, in our opinion, highlights effective early-stage productivity initiatives (which we expect will be further bolstered by both increased technology use and improved market dynamics with a little more breathing room driven by inflation).”
With the results, Mr. Tyghe lowered his fiscal 2018, 2019 and 2020 EPS estimates to $2.62, $2.94 and $3.22, respectively, from $2.79, $2.99 and $3.26.
He kept an “outperform” rating and dropped his target by a loonie to $47. The average target on the Street is currently $45.33, according to Bloomberg data.
“We remain buyers of Metro following a noisy quarter and have adjusted our model for both the May-11, 2018 closing of the Jean Coutu acquisition and expected tougher market dynamics,” he said.
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A day after shares of Finning International Inc. (FTT-T) dropped in reaction to the release of Caterpillar Inc.’s (CAT-N) quarterly results, a pair of analysts on the Street took very different actions on its stock.
Raymond James’ Ben Cherniavsky upgraded the Vancouver-based company, which is world’s largest distributor of Caterpillar products, to “outperform” from “market perform,” citing the stock’s recent share price weakness and the view that the equipment cycle is rebounding.
“For most of last year we were bullish on Finning’s stock due to the improved supply and demand dynamics that were evident in the machinery sector,” he said. “Specifically, following several very difficult years, equipment dealersaround the world (Finning included) had finally pruned their inventories to historically low levels just as the resource and construction markets were gathering upward momentum. Thus we felt Finning—and the whole sector—was poised for a strong recovery in earnings and a rebound in its stock price. As this narrative ran its course, we were, however, forced to downgrade our rating earlier this year due to valuation risks and our concerns that the stock was getting ahead of itself.
“We have since been waiting to recommend the shares again either at a lower price or with improved visibility. Today, we feel we have both.”
His target rose to $37.50 from $36.25. The average on the Street is $37.56.
Conversely, Bank of America Merrill Lynch’s Ross Gilardi dropped Finning to “undeperform” from “neutral” based on valuation despite maintaining that its fundamentals remain Solid.
He has a $30 target, falling from $32.
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Melcor Real Estate Investment Trust (MR.UN-T) offers investors an “attractive” cash yield, according to Desjardins Securities analyst Kyle Stanley.
However, upon assuming coverage of the Edmonton-based REIT from colleague Michael Markidis, Mr. Stanley said he’s taking a neutral stance on its stock, including a “hold” rating, based on a trio of factors: the expectation of “minimal” cash flow growth over his forecast period; a “challenging” leasing environment in the Edmonton office market and its leveraged balance sheet.
“With 100 per cent of its portfolio located in western Canada and 90 per cent of NOI [net operating income] generated in Alberta, MR has undoubtedly been impacted by the oil price decline and resulting economic weakness since mid2014,” said Mr. Stanley. “However, MR’s portfolio has been highly resilient through the downturn; a healthy tenant retention ratio (70 per cent average) has enabled it to realize a modest 40 basis points improvement in occupancy since 3Q14 (to 91.8 per cent), with only a slight 3-per-cent erosion in average rental rates. We note that some of the occupancy gains over this period were likely attributable to the acquisition of stabilized properties. The same-property portfolio has delivered modestly negative results since 2014, as relative stability within the REIT’s retail portfolio has often been more than offset by weakness in the office and industrial segments. Occupancy and rent pressure in the REIT’s Edmonton office segment have weighed on same-property NOI growth in northern Alberta, while organic growth in southern Alberta, BC and Saskatchewan has been largely flat over the same period. In our view, the 5-year weighted average remaining lease term, combined with a tenant base comprised of provincial government agencies, retailers and banks, should continue to insulate the portfolio against further economic weakness in the REIT’s primary markets. However, we note that as leases signed in late 2013 and early 2014—at the height of the western Canadian market—roll, we would anticipate some modest rental rate erosion.”
Mr. Stanley did emphasize that the REIT’s link to Melcor Developments Ltd. (MRD-T), which owns a 53-per-cent interest, offers a “captive” pipeline of newly developed acquisition opportunities. He projects those could represent 6.7 million square feet of gross leasable area (GLA) over the next decade.
He also feels the REIT could be attractive to investors seeking income, noting its 8.2-per-cent cash yield is 90 basis points higher than the diversified average. He said the yield implies a “highly sustainable” 66-67 per cent funds from operations (FFO) payout over his forecast period.
“Given the REIT’s conservative payout and low capital intensity, we expect it to generate a funding surplus of $3–4-million through 2019,” said Mr. Stanley. “Despite the low capital intensity and funding surplus, we believe the likelihood of a near-term distribution increase is minimal as MR’s funding for external growth initiatives hinges on internally generated cash flow and capital recycling.”
Mr. Stanley has an $8.75 target for Melcor units. The average on the Street is currently $8.88.
“We would argue that given the REIT’s (1) relative size, (2) illiquidity, (3) significant NAV discount limiting access to capital, and (4) exposure to western Canada, in particular the Edmonton office market, it should continue to trade at a modest valuation discount vs its peer group, its compelling yield and payout notwithstanding,” he said.
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Stifel analyst Scott Devitt raised his rating for Alphabet Inc. (GOOGL-Q) to “buy” from “hold,” seeing an enticing buying opportunity for investors given its current valuation.
“Alphabet continues to drive growth at scale through strength in mobile search, YouTube, and programmatic advertising, while investing in other key initiatives (cloud, hardware, AI) that should serve as multi-year growth levers,” said Mr. Devitt. “Alphabet’s products seem to have more proven durability and utility in the lives of consumers than Facebook’s products, as displayed in recent weakness of users and usage in Facebook’s most mature and highly monetized market of North America.”
Mr. Devitt said the company’s margin reset following the release of its first-quarter results on Monday has created a reasonable buying level.
““We are increasingly comfortable with Alphabet’s positioning in the digital media space given Alphabet’s private relationship with consumers and the high utility and durability of Google’s core business. Current valuation levels offer a reasonable entry point for GOOGL share ownership,” said Mr. Devitt.
The analyst maintained his target for Alphabet shares of US$1,234, which sits slightly below the consensus of US$1,253.
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With WTI oil prices approaching US$70 a barrel and the Canadian dollar below 80 U.S. cents, Canaccord Genuity analyst Anthony Petrucci and Dennis Fong feel “potential resource value” could become an increasingly more important variable in investment decisions on junior and intermediate exploration and production (E&P) companies.
“Through the downturn, little credit was given for promising well results, as the overriding malaise in the market muted share price reactions,” the analysts said in a research note previewing first-quarter earnings season in the sector.
“We are looking for near-term significant well results from the Duvernay (RRX, IPO), the Montney (CR, ATH, LXE, IBR, CKE, BIR, NVA), the Cardium (YGR, PEY) and additional plays (SGY Valhalla Doig, CPG Uinta Basin, TOG Unconventional Midale).”
Citing the recent rise in oil prices, the analysts think several companies in the sector with oil exposure will generate “significant” free cash flow which will be allocated toward improving shareholder returns.
“This includes potential dividend increases (TOG, WCP), meaningful share buybacks (WCP), reduced debt levels (BNE, BIR), and potential boosts to capital programs (IPO, YGR, ATH, RRX),” they said.
“The announced sale of SPE to VET has prompted more discussion on potential M&A activity. In addition to RRX’s Strategic Repositioning, we highlight potential asset sales for OBE, CPG and CR.”
Ahead of the yet-to-be-scheduled release of its financial results, Mr. Petrucci did downgrade his rating for Chinook Energy Inc. (CKE-T) to “speculative buy” from “buy” based on the “continued pressure” on natural gas prices.
“Our Q1/18 production estimate is 3,060 barrels of oil equivalent per day, above consensus estimates of 2,940 boe/d (range 2,500 boe/d to 3,600 boe/d),” he said. “Our Q1/18 CFPS estimate is 1 cent, which is a penny above consensus estimates of $0.00 (range $0.00 – $0.01). CKE has completed drilling of its two vertical delineation wells in the Umbach/Birley area. We will be watching for the result of these delineation wells that should further re-risk CKE’s land base. Most of CKE’s 2018 program will be funded by flow-through share issuance for a total consideration of $2.0-million.”
His target for Chinook shares fell to 35 cents from 40 cents. The average on the Street is 26 cents.
“CKE currently trades at 5.4 times 2018 estimated EV/DACF [enterprise value to debt-adjusted cash flow], above its small cap peers at 5.0 times,” he said.
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Shares of Viemed Healthcare Inc. (VMD-X) are currently “significantly” undervalued, according to Beacon Securities analyst Doug Cooper.
He initiated coverage of Viemed, a Louisiana-based provider of equipment and home therapy to service patients with various respiratory diseases, with a “buy” rating.
“We believe Viemed will have the ‘wind at its back’ for the foreseeable future,” said Mr. Cooper. “Assuming the company maintains its current EBITDA margin profile, it could generate a FY18 exit rate EBITDA run-rate of $18-million. Based on a current Enterprise Value of $120-million, the stock trades at under 5 times enterprise value-to-EBITDA – a material discount even to the low-end of its peer group. “
Mr. Cooper feels Viemed is poised to grow as in-home treatment of chronic illnesses continues to increase as U.S. Baby Boomers reach retirement age.
“Viemed is focused on the respiratory market in general and the Stage 4 COPD market in particular. Its noninvasive vent (NIV) therapy has proven efficacy and dramatically reduces hospital re-admissions, thus benefitting the patient and the payers. Despite this, the installed base of NIV therapy is less than 5 per cent of its potential,” he said.
“This conducive market condition led to a 38-per-cent year-over-year increase in patients in 2017 versus 2016. We believe such growth is sustainable. We are modeling FY18 revenue/EBITDA of $60.9-million/$16.1-million with a FY18 exit rate of $67.7-million/$18.3-million. Such forecasts put its valuation at 5.6 times EV/EBITDA and 4.9x its FY18 exit rate.”
Mr. Cooper set a price target of $7 for Viemed shares.
“From a valuation perspective, we believe the shares of Viemed are incredibly undervalued and the current price neither reflects the positive macro dynamics of the industry nor the company’s historical or future prospects,” he said. “We can envision several scenarios under which investors could experience a significant increase in the share price of VMD.”
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WPX Energy Inc. (WPX-N) has undergone an “impressive” transformation over the past several years, said RBC Dominion Securities analyst Brad Heffern.
He initiated coverage of the Tulsa-based company, which he said has emerged as an “oil-growth-focused company with top tier assets in the Delaware and Williston Basin,” with an “outperform” rating.
“Unlike many Permian peers, WPX has invested significantly on the infrastructure front, with equity ownership across the spectrum of oil, NGL and gas assets,” said Mr. Hefffern. “This is of particular note currently, as Midland-WTI spreads have widened dramatically over the past month. WPX has only 5 per cent/10 per cent of its 2018/2019 Permian volumes exposed to Midland basis, and we believe the company has flow assurance. Getting full value for the midstream assets (potentially $3-plus per share) will be a longer-term battle that could involve outright monetization, drops or an MLP.”
He set a target for WPX shares of US$21, which exceeds the average of US$20.37.
“WPX currently discounts $57 WTI, which is in line with peers,” he said. “We estimate that WPX trades at a 30-per-cent discount to our $24 NAV [net asset value], as it has strong assets slightly offset by its higher leverage. WPX currently trades at a 5-10-per-cent EBITDAX multiple discount to Permian peers (8.7 times 2018 estimates for WPX vs. 9.2 times group), which we attribute to its higher leverage profile and a multi-basin discount.”
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In other analyst actions:
Scotia Capital analyst George Doumet reinstated coverage of Jamieson Wellness Inc. (JWEL-T) with a “sector outperform” and $26 target. The average is $24.96.
Roth Capital Partners analyst Jake Sekelsky initiated coverage of First Mining Gold Corp. (FF-T) with a “buy” rating and $.120 target, which is 10 cents less than the consensus.
David Leeder