Inside the Market’s roundup of some of today’s key analyst actions
Despite expecting Metro Inc. (MRU-T) to report largely in-line second-quarter financial results on April 17, Raymond James analyst Kenric Tyghe downgraded its stock to “market perform” from “outperform.”
“We believe on current estimates, that not only is there a modest probability of any material positive earnings surprises through our forecast window, but also that there is a limited chance of further (material) multiple expansion from current levels,” he said. “Our view on the multiple is that not only does making the Jean Coutu acquisition work get harder from here, but that (necessarily) the focus (of both talent and resources) could create ripple effects further delaying what we believe are key (and in our opinion already late to market) initiatives, the likes of an online grocery push in the Ontario market (and more rapid acceleration of online in Quebec).”
Mr. Tyghe is projecting a 2.4-per-cent rise in same-store sales, versus a 1.2-per-cent decline during the same period a year ago. He's forecasting a 29.7-per-cent increase in sales to $3.759-billion, exceeding the consensus on the Street of $3.735-billion.
"We believe that the accelerating Food CPI backdrop, largely on a marked increase in Fresh CPI (through the first 2-months of the quarter), are supportive of our SSS estimate," he said. "We expect positive sales mix, combined with further procurement synergies, to drive a 26 basis points gross margin expansion to 20.4 per cent. We expect our gross margin expansion expectation to dovetail with a 52 bp improvement in SG&A margins, driven by both cost cutting initiatives and lower operating expenses at Jean Coutu, for an adjusted EBITDA margin of 8.0 per cent."
Mr. Tyghe's EBITDA estimate of $299.1-million falls below the consensus ($305.8-million), while his adjusted earnings per share expectation of 63 cents falls in line with the Street's view.
He maintained a target price of $51 per share. The average on the Street is $49.50, according to Bloomberg data.
With its shares up 49 per cent thus far in 2019, Industrial Alliance Securities analyst Neil Linsdell lowered his rating for DIRTT Environmental Solutions Ltd. (DRT-T) to “hold” from “buy.”
“Following the Q4/18 results released in March, we increased our target price from $8.00 to $9.00,” he said. “This morning we are increasing our target further to $9.50 following meetings with management last week where we gained comfort on expense reductions and opportunities to grow revenues at the higher end of the company’s guidance range of 5-10 per cent for 2019. Despite these upward revisions, the share price has appreciated even more rapidly, pushing our target return down to 4.4 per cent and prompting a rating revision.”
Mr. Linsdell raised his revenue projections for DIRTT, a Calgary-based manufacturer of customized interiors, for fiscal 2019 through 2021 to $388-million, $427-million and $474-million, respectively, from $381-million, $417-million and $463-million. His earnings per share estimates for 30 cents, 42 cents and 46 cents from 29 cents, 38 cents and 43 cents.
"When releasing Q4/18 results, the Company provided guidance of revenue growth in 2019 of 5-10 per cent, which would be a deceleration from the generally double-digit growth that we have become accustomed to from DIRTT over the last few years," he said. "Our initial concern was that the more moderate growth was related to the reduced sales & marketing spend, but when we went through recent expense reductions with management, we became more comfortable that the reductions would have little impact on sales growth. With the value proposition of DIRTT’s solutions remaining intact, and our view that the new management team is being conservative in its guidance, we are more comfortable in slightly raising our forecasts for 2019, but still remaining within the guidance range. We now forecast 2019 revenue growth of 8.8 per cent and Adj. EBITDA growth of 9.9 per cent, with short-term impacts being an already disclosed issue with certain MDF wall tiles that are being addressed, but that could pressure gross margins in the next couple of quarters, as well as $3-million in restructuring costs expected to be realized in Q1."
Mr. Linsdell’s new target of $9 sits above the consensus of $9.82.
"2019 will be a transition year. With a mostly changed, and beefed up, senior management team, DIRTT is finalizing restructuring efforts and establishing a platform for sustainable growth that will also deliver strong profitability and cash generation," said Mr. Linsdell. "Management is planning to present its three- to five-year strategic plan in Q3. Although we do not expect any dramatic changes to the existing business plan, we do anticipate more insight into efficiency improvements, capacity additions, a more focused sales & marketing strategy (including a national accounts program), and returning capital to shareholders, with a roadmap towards a higher growth rate into 2020. In the interim however, the recent rapid share price appreciation prompts us to reduce our recommendation from Buy to Hold."
Citing concerns about its slow move toward branching out into new services, HSBC analyst Erwan Rambourg dropped Apple Inc. (AAPL-Q) to “reduce” from “hold.”
"Recent announcements on services has Apple putting money where its mouth is but returns could take some time to extract,” said Mr. Rambourg. “While the new offerings may garner consumer attention, we do not expect these services to move the needle significantly. We believe Apple has come too late to the game and its offering, by and large do not differ much or are below par to offerings from competition.”
The analyst thinks Apple’s recent price cuts in India may dilute its brand positioning and lead customers to adopt a “wait and buy” approach in anticipation of possible price reductions. He also thinks revenue and profitability from its credit card venture with Goldman Sachs will be limited.
Mr. Rambourg did raise his target for Apple shares to US$180 from US$160. The average is US$193.10.
"Cash generation and a probable beat next quarter after a China-related warning early in the year will have some investors think the current valuation of Apple is reasonable,” Mr. Rambourg said. “We believe that following a 41-per-cent rise from January 2019 lows and relative optimism / complacency on the services announcement as well as sell-side ratings, there is now some downside.”
Calling Nike Inc. (NKE-N) “one of a kind,” Citi analyst Paul Lejuez said “there are more things we like about the story than things we don’t” upon assuming coverage of the stock from colleague Kate McShane.
"The bottom line is that NKE is the dominant player in the global athletic footwear and apparel market, which is a healthy and growing market buoyed by structural tailwinds, including the rise in of health consciousness and active lifestyles (even in its most mature markets)," said Mr. Lejeuz. "NKE’s deep pockets and unrivaled innovation pipeline should help drive high-single digit constant currency sales growth over the next several years.
"After facing headwinds in North America (its most mature region) in 2016/2017, the market has returned to growth. And NKE’s DTC-focused strategy and focus on reducing exposure to lower quality wholesale distribution should help drive margin expansion over time. Combined, we believe NKE will achieve at least mid-teens EPS growth for the foreseeable future."
After reducing the firm's 2019 earnings per share projection marginally to US$2.55 from US$2.57, he raised his 2020 and 2021 estimates to US$3.10 and US$3.66, respectively, from US$3.07 and US$3.56.
Maintaining a "buy" rating for Nike shares, his target increased to US$100 from US$96. The average is US$90.71.
"While NKE is trading near an all-time high valuation, we think a premium multiple relative to its 5-yr avg is warranted. NKE has proven its ability to reaccelerate growth even in its most mature U.S. market," he said. "And with secular tailwinds at its back in China, we see opportunity for that region being the single largest driver of growth/profits over the next 5 years."
In a separate note, Mr. Lejuez raised the firm’s rating for Under Armour Inc. (UAA-N) to “buy” from “neutral” after assuming coverage.
"UAA is growing up with a renewed focus on driving profitability and ROIC [return on invested capital]," he said. "After chasing 20-per-cent-plus top line growth during the 2010-2016 period, UAA has taken action to adapt to the changing athletic landscape. With just a 3.4-per-cent EBIT margin in 2018, UAA has the opportunity to recapture 600 basis points or more in EBIT margin over the next several years. And near-term, we see upside to management’s F19 gross margin guidance."
After hiking his earnings projections through 2021, his target increased to US$29 from US$23. The average is US$21.10.
"Beyond North America (its most mature region), UAA is growing double-digits in Europe and Asia," he said. "And we think this rate of growth can continue as overall market growth is supported by UAA’s own marketing efforts but perhaps even more importantly the heavy marketing investment by NKE. NKE is looking to grow the overall pie for the athletic apparel and footwear market globally, and we believe UAA will be one of the beneficiaries of increased participation in different forms of athletics."
Mr. Lejeuz lowered Foot Locker Inc. (FL-N) to “neutral” from “buy” upon assuming coverage.
"While FL has tailwinds at its back in North America with comps inflecting positively in 4Q18, the company still faces many of the same headwinds as other specialty retailers (significant mall exposure; EBIT pressure from DTC)," he said. "And while FL has a strong partnership with NKE (which accounts for 66 per cent of FL purchases), we believe NKE’s DTC ambitions are a secular headwind."
His target fell to US$68 from US$72, which falls just short of the US$70.26 average.
He also assumed coverage of Dick’s Sporting Goods Inc. (DKS-N) with a “neutral” rating (unchanged) and US$40 target, up from US$38. The average is US$37.33.
"While DKS is the leader in the sporting goods channel and a valuable partner to the most important brands in athletic apparel and footwear, DKS is facing declining traffic trends as more business moves online, which will likely continue to pressure EBIT margins," the analyst said. "In addition, their largest brand partners each have initiatives in place to go more direct to the consumer, which could further pressure DKS traffic in years to come."
Seeing a number of catalysts over the next 12 months, beginning with its investor day on Thursday, BMO Nesbitt Burns analyst Daniel Salmon raised his rating for Walt Disney Co. (DIS-N).
“When we upgraded to Market Perform from Underperform a year ago, we felt the stock had downside protection, but lacked catalysts,” he said.
Pointing to "two Star Wars-themed lands opening in the domestic parks this summer, the launch of Disney+ before year-end, and a potential re-start of the buyback program within 12 months," he raised his rating to "outperform" from "market perform."
Mr. Salmon thinks the stock is protected from downside, as even if earnings estimates fall due to investments in the Disney+ streaming service, this "will only feed the Bull case by deepening the library/improving the product."
His target rose to US$140 from US$114. The average is US$128.50.
“We continue to like NFLX and AMZN more than DIS, but are comfortable recommending all three, as we expect them all to be long-term winners in global DTC streaming,” said the analyst.
Paradigm Capital analyst Corey Hammill initiated coverage of Slang Worldwide Inc. (SLNG-CN), a Toronto-based vertically integrated cannabis company, with a “buy” rating.
“The growing global legalization of cannabis will quickly transform the once illicit drug into a new consumer packaged goods industry. SLANG, through partnership and acquisition, is a collection of leading cannabis-focused consumer brands. The prize is an industry expected to be worth over $100 billion in annual sales in North America and Europe over the next 10 years. SLANG has an early advantage as its products are already considered household names in its initial target markets.
Mr. Hammill did not specify a target for the stock.
“We believe the evolution of the legalized cannabis derivative products market is still in the first inning," he said. “As the retail environment for cannabis consumer products evolves, we expect it to look increasingly like all other types of CPG businesses. Within the CPG category, alcohol and tobacco companies trade at 4–6-times revenue, while growing their top line at 3–5 per cent per year. Given the early stage but aggressive plan for SLANG’s geographic and product build-out, we believe it is appropriate to assign its stock a higher near-term revenue multiple. We then project a moderating trend in that multiple over time. Following that we replace an absolute target price with what we regard as a more useful range of scenarios and multiples that provide an attractive indication of potential share price trajectory. T his yields a near-term potential share price of $3.50 (35-per-cent-plus upside), increasing to nearly $9.00 over four years.”
In other analyst actions:
Seeing positive catalysts on potential divestments and better gold prices, Deutsche Bank upgraded Barrick Gold Corp. (ABX-N, ABX-T) to “buy” from “hold” with a target of US$15, rising from US$12.75. The average is US$14.38.
It downgraded First Quantum Minerals Ltd. (FM-T) to “hold” from “buy.”
AltaCorp Capital analyst Thomas Matthews downgraded Torc Oil & Gas Ltd. (TOG-T) to “sector perform” from “outperform” with a target of $6.75, rising from $6.25. The average is $7.39.
Mr. Matthews upgraded Bonterra Energy Corp. (BNE-T) to “outperform” from “sector perform” with a target of $11.75, up from $9.75 and above the $9.38 consensus.
RBC Dominion Securities analyst Tyler Broda dropped Glencore PLC (GLEN-L) to “sector perform” from “outperform” with a target of £330, down from £350. The average is £362.03.
“Glencore provides solid and diversified long-term exposure to the sector,” said Mr. Broda. “Weakness in thermal coal prices removes a positive from the investment case with uncertainty still heightened elsewhere on DOJ, DRC, and rising ESG concerns. We continue to see potential in the medium-term, but after a 14-per-cent increase in share price year to date, we move our rating.”
With files from Reuters and Bloomberg news