Inside the Market’s roundup of some of today’s key analyst actions
Air Canada’s (AC-T) second-quarter results were “solid” in the face of the grounding of Boeing Co.'s (BA-N) 737 Max fleet, said AltaCorp Capital analyst Chris Murray, despite warning of capacity constraints “taking a bit” out of the third quarter.
On Tuesday before the bell, the airline reported revenue, earnings before interest, taxes, depreciation and amortization (EBITDA), and adjusted fully diluted earnings per share of $4.76-billion, $916-million and 88 cents, respectively. The Street had projected $4.71-billion, $856-million and 75 cents.
“We view the result as positive with the performance of the company, now including Aeroplan, continuing to exceed expectations,” said Mr. Murray in a research note released Wednesday.
“Management noted that even with ‘one of the largest Boeing 737 MAX fleet in the world and being squarely at the heaviest phase of ramp up,’ the company delivered record adjusted pre-tax income, record revenues and record liquidity in the quarter, with management adding that the company successfully covered 97 per cent of its originally scheduled flying with little over 80 per cent of its narrow-body fleet. Management maintained that it still does not have any additional information to share with respect to the status of the grounding.”
He emphasized the results came amid capacity constraints, adding: “With relatively robust demand for air travel in the quarter, Q3 has historically been a seasonally strong period for the Company. In conjunction with the constrained capacity that the company is currently seeing due to the 737 MAX groundings however, Q3/19 may be an apt test of the company’s ability to remain flexible as it works to balance a ramp up in air travel demand with little over 80 per cent of its narrowbody fleet. We believe that the Firm’s pricing power and its ability to leverage the Rouge network, in addition to a now stabilized benefit to yield from Aeroplan redemptions, will be critical in reporting strong results for the quarter. Management has guided to Q3/19 EBITDA of $1.42-billion, a 5-per-cent increase from Q3/18 reflecting capacity constraints and cost items expected in the quarter, with capacity down 2 per cent. Management noted it would protect about 95 per cent of total capacity in Q3/19, reducing some routes and frequencies which were uneconomic.”
Maintaining an “outperform” rating for Air Canada shares, Mr. Murray raised his one-year target price to $56 from $51. The average target on the Street is $50.61, according to Bloomberg data.
“We are increasing the multiples applied to our estimates to incorporate the company’s demonstrated pricing power and the incremental benefit to yields from the Aeroplan program,” he said.
Elsewhere, Raymond James’ Ben Cherniavsky hiked his target to $44.50 from $38 with a “market perform” rating (unchanged).
Mr. Cherniavsky said: “With planes parked, unit revenues at Canada’s airlines have surged: for 2Q19 Air Canada’s RASM [Revenue Per Available Seat Mile] jumped 7.3 per cent, the biggest increase in over ten years, on ASMs growth of just 2.4 per cent, which was less than half of what had been scheduled pre-Max grounding and the lowest increase since 2Q13! WestJet similarly reported a strong 8.5-per-cent increase in 2Q19 RASM on ASM growth of just 2.8 per cent. Pricing improvements were particularly pronounced for Air Canada in the domestic market where its yields rose 8.6% on capacity growth of just 0.7 per cent and a capacity cut of 3.7 per cent at WestJet. There are, of course, other factors contributing to Air Canada’s higher RASM, including revenue from Aeroplan, currency tailwinds, stable demand, fare mix, etc., but we believe this vividly demonstrates the power of capacity discipline--albeit one that has been forced on the industry.”
Canaccord Genuity Group Inc.'s (CF-T) “track record speaks to strategy, discipline and success,” said Echelon Wealth Partners analyst Rob Goff.
Calling the firm’s “high premium” wealth management platform a “crown jewel" and “significantly” undervalued by investors, Mr. Goff initiated coverage with a “buy” rating on Wednesday.
“We are bullish towards wealth managers with scale considering overall growth, competitive dynamics, and consolidation opportunities in the UK, Australia, and Canada, where CF has in-market scale to support accretive economics," he said. "Our baseline forecasts for Wealth Management reflect mid-single-digit organic growth in AUA while increased regulatory burdens drive further market consolidation and in turn growth through acquisitions. We see the dominant Canadian bank-owned Wealth Management divisions, leveraged to efficiency versus market share, continuing to pressure payout ratios, limiting advisor flexibility, further striating tiered service levels by account balances and limiting succession plans in an industry where the average advisor age exceeds 50 and certain banks have backed away from training programs for new advisors as branch services offer efficiencies.
“Further moves along these paths by Canadian bank-owned dealers to increase Wealth Management profitability are expected to replenish the pool of available advisors and accounts while creating a positive backdrop for independent manager economics with scale. These trends have seen a modest, but significant industry revenue share shift to independent wealth managers in Canada where the three-year annual growth in AUA at 9.1 per cent compares with 6.1 per cent for the Big Six banks. The outperformance has occurred within a Capital Markets context of heightened risk aversion and underperformance of commodity and small/medium capital stocks where the stability of the banks would be expected to see them gain share.”
Mr. Goff said he sees the “consistent” growth and strength of its wealth management segment as a “strong reflection of the baseline growth trajectory.”
“We recognize the significant volatility for Capital Markets forecasts in particular and to a lesser extent for Wealth Management as well,” he said. “On this front, we are pleased that CF has successfully executed its strategic plan to make Wealth Management become the larger contributor to EPS thereby reducing its variability. We present our forecasts as baseline results recognizing that there will be years of outperformance and underperformance about Capital Market conditions. Our bullish call considers our baseline trajectory and gives significant weight to management’s ability to create shareholder value through its strategic and operational acumen. Our judgement here relies heavily on management’s track record of past performance and CF’s success both in making accretive acquisitions and its internal execution.”
Seeing “continued growth and recognition of the Wealth Management EPS to overshadow concerns over the past year of the sustainability in cannabis related activity,” he set a target price of $10 per share. The average target on the Street is $9.33.
Greenbrook TMS Inc. (GTMS-T) is poised to benefit from both a first-mover advantage and “highly” replicable business model, according to Desjardins Securities analyst David Newman.
He initiated coverage of the Toronto-based provider of transcranial magnetic stimulation (TMS), which is used to treat of major depressive disorder (MDD) and other mental health disorders, with a “buy” rating.
“While TMS is in its infancy, it is considered a more effective approach to treating depression for patients whose moods have not improved through antidepressant drug therapy, according to clinical trials (sponsored by Neuronetics and the National Institute of Mental Health (NIMH)),” said Mr. Newman. “Adult TMS therapy has gained broad U.S. reimbursement given its lower cost and higher remission rates (with fewer side effects/toxicities). GTMS is rapidly developing a U.S.-wide network of treatment centres to address a large and expanding market, with depression and mental health issues considered an epidemic by health organizations such as the WHO, further compounded by a growing shortage of psychiatrists. With time, we believe GTMS’s nationwide network could comprise up to 800 centres (vs 71 today), which could drive revenue of up to US$800-million (vs US$21.3-million in 2018) at a 20-per-cent EBITDA margin upon achieving maturity.”
In justifying his rating, Mr. Newman pointed to a series of factors, including Greenbrook’s “capital-light” business model, its balance sheet strength, experienced management team and a fragmented market ripe for M&A activity.
“We envision several catalysts that could meaningfully drive the GTMS story, including: (1) execution of the company’s regional expansion strategy and same-region sales/organic growth, aided by potentially more indications in time; (2) greater investor confidence over time given GTMS went public in October 2018; (3) accretive acquisitions at reasonable multiples, augmented by synergies; and (4) strong cash flows and the financial resources to support its growth plans,” he said.
Mr. Newman set a target price of $4.25 per share. The average is currently $5.38.
“While the stock trades at a premium to its peer group (including healthcare service companies and TMS device manufacturers on an NTM EV/revenue basis), we believe this is justified based on GTMS’s stellar growth profile (driven by its regional expansion strategy and organic growth in the nascent TMS industry), a large addressable market with attractive end-market dynamics, and scarcity value given the dearth of publicly traded Canadian healthcare service providers,” he said.
Though he continues to call it a “quality name to own," RBC Dominion Securities analyst Arun Viswanathan lowered his rating for Dow Inc. (DOW-N) to “outperform” from “top pick,” believing “compression in the PU/siloxanes earnings and macro weakness now appear to be bigger drivers of the stock.”
“Our positive thesis on DOW has been based on three main points: 1) strong exposure to North American PE at the trough cycle, 2) lower capex and EBITDA growth from prior investments resulting in improved FCF conversion, and 3) industry-leading capital return through dividends and buybacks. While our second and third thesis points remain intact and the stock remains attractive on valuation, we believe PU/siloxanes margin compression and a weaker rebound in H2/19 could overshadow DOW’s positive attributes in the near-term and delay an overall earnings recovery. We still believe DOW to be one of the highest quality names in our coverage, with best in class assets and a 5 per cent-plus dividend yield (rare in our industry), but concerns for near-term macro headwinds and volume weakness leads us to believe investors may have a slightly less positive view in H2/19.”
After reducing his financial expectations for the second half of the year, Mr. Viswanathan lowered his target for Dow shares to US$56 from US$62. The average target on the Street is US$56.13.
“Despite our downgrade, with industry-leading capital return and organic growth, we believe DOW still represents good value at 6.2 times our 2020 estimated EBITDA,” he said.
Following better-than-expected second-quarter financial results and pointing to a “more positive outlook for both premiums written and earnings,” CIBC World Markets analyst Paul Holden upgraded Genworth MI Canada Inc. (MIC-T) to “neutral” from “underperformer.”
“We now have modest growth in 2019 versus no growth previously,” he said.
Mr. Holden raised his target to $48 from $46. The average is $51.33.
BMO Nesbitt Burns analyst Jenny Ma upgraded Dream Office Real Estate Investment Trust (D-UN-T) to “outperform” from “market perform” with the belief "strong downtown office fundamentals in Toronto will support healthy rent growth and downward pressure on cap rates.”
Ms. Ma raised her target to $28 from $26. The average target is $26.38.
Investors are overlooking an important shift in Apple Inc.'s (AAPL-Q) business, according to Citi analyst Jim Suva.
“Read this slowly and ponder it: Apple’s wearable, home, & accessory category is larger than iPad sales,” said Mr. Suva. “This underscores a new theme that is starting to emerge from Apple, which we believe investors are overlooking and that is the diversity of Apple’s offerings. The bulls are overly focused on Apple’s services and the bears are overly focused on iPhone sales, units & ASP. While we do not discredit either of those views, we believe most are not realizing the diversity of Apple’s offerings, which we believe will continue in the quarters ahead with Apple Card (Apple’s credit card launching in August), Apple Arcade & Apple TV+ (launching in the December quarter but likely a free trial so financial impact in future quarters). We are materially increasing our financial model as the installed base keeps growing thereby helping sales of multiple Apple offerings; Apple is set to return to growth.”
Mr. Suva said the tech giant’s quarterly results, released after the bell on Tuesday, were “not as bad as feared, especially given the U.S./China political trade wars.” Sales and earnings per share of US$53.8-billion and US$2.18, respectively, exceeded expectations on the Street (US$53.3-billion and US$2.09).
The company’s outlook for the current quarter were also better-than-anticipated with the mid-point of its sales and earnings guidance exceeding the consensus estimate on the Street.
After raising his 2019, 2020 and 2021 EPS projections to US$11.68, US$12.67 and US$14.20, respectively, from US$11.18, US$11.48 and US$13.27, Mr. Suva hiked his target for Apple shares to US$250 from US$205. The average target on the Street is US$218.19.
He maintained a “buy” rating for its stock
“Smartphone growth remains tempered and China remains a key risk, while services revenue growth and installed base growth are positives,” said the analyst. “The full product + software + service package is what makes Apple unique as others do not control this. We see Apple shares as attractively priced given the revenue diversification, unique product + service set and potential for strong cash flow generation and shareholder returns.”
Before the bell, Citi analyst Paul Lejuez released a series of research notes in the wake of a busy earnings day in the U.S. retail sector on Tuesday.
Though it “wasn’t a bad quarter” for Ralph Lauren Corp. (RL-N), Mr. Lejeuz lowered his financial expectations for the company in response to its warnings about the volatility of the North American retail environment, which prompted a 3.7-per-cent drop in share price on Tuesday.
“While not particularly surprising, the cautious commentary about N America was a reminder of how exposed RL is to some struggling channels (N Am wholesale and factory outlet make up 45 per cent of total sales),” said Mr. Lejuez. “2Q guidance seems to take these struggles into account, though hopes for a 2H recovery (particularly in N America AUR) may not materialize as planned.”
With a “neutral” rating, he reduced his target for Ralph Lauren shares to US$115 from US$131, which falls short of the consensus of US$128.75.
The analyst called Steve Madden Ltd.'s (SHOO-Q) second-quarter results “strong,” exhibiting “broad based sales growth in an environment management characterized as challenging.”
“SHOO enters 2H19 with clean retail inventories and momentum in wholesale with footwear up 13 per cent and accessories up 12 per cent in 2Q,” he said. “But tariff-related price increases (up low single digits and possibly increasing further) may weigh on demand, and GM pressure is likely to continue with tariffs acting as a 250-300 basis points headwind to wholesale accessories margins in 2H (and a 50 bps drag on total-company GMs). Against this backdrop, mgmt maintained conservative guidance implying second-half earnings per share decline of 12 per cent at the midpoint. We are at the high end of guidance and believe some upside may already be priced in at current levels with shares trading at a F19 P/E multiple of 22 times.”
Mr. Lejuez kept a “neutral” rating while lowering his target to US$37 from US$38. The average is US$36.70.
Though its stock dropped over 12 per cent in reaction to its earnings release, Mr. Lejuez thinks Under Armour Inc.'s (UAA-N) turnaround is “on track,” despite a sales shift.
“Overall 2Q was a decent qtr with sales and GM coming in-line with expectations,” he said. “Weakness in N America DTC [direct-to-consumer] was offset by stronger int’l growth. UAA traded down 12 per cent on weak 3Q revenue guidance (down 2-3 per cent vs. the consensus expectation of a mid single-digit gain) while management maintained full year rev guidance of a 3-4 per cent increase, implying a big acceleration in 4Q sales growth. With UAA in the early stages of its 5-year plan, choppiness quarter to quarter is not unexpected, as the company optimizes its wholesale distribution and reduces promos in DTC. As we laid out in our April. 4 upgrade note ... UAA is growing up and adapting to a changing athletic landscape. While we did not expect the 2H choppiness and 3Q vs 4Q shift, the business is moving in the right (more healthy) direction for the long-term.”
He maintained a “buy” rating and US$29 target. The average is currently US$23.38.
RBC Dominion Securities analyst Stephen Walker expects a “positive” share price reaction to Centerra Gold Inc.'s (CG-T) “strong” quarterly report, after both its financial and operating results exceeded estimates.
After the bell on Tuesday, the miner reported earnings per share of 11 cents , exceeding the Street’s expectation by 3 cents.
“Given strong year-to-date results, 2019 production & cost guidance was improved for Kumtor,” said Mr. Walker. “Guidance was reiterated for Mt. Milligan, where mill throughput successfully ramped up during the quarter; however, Centerra noted potential for water-shortage risks to throughput in early 2020, similar to 2019. The Oksut project is tracking on schedule and under budget.”
Mr. Walker maintained a “sector perform” rating and $9.50 target. The average on the Street is $11.11.
In other analyst actions:
TD Securities analyst Greg Barnes downgraded First Quantum Minerals Ltd. (FM-T) to “hold” from “buy” and lowered his target to $14.50 from $16.50. The average target on the Street is $16.18.