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Inside the Market’s roundup of some of today’s key analyst actions

The sell-off in Sleep Country Canada Holdings Inc. (ZZZ-T) creates an attractive entry point for investors, according to Raymond James analyst Kenric Tyghe, believing it’s “poised to bloom” in the second half of 2018.

The retailer’s stock dipped 4.5 per cent on Tuesday, a day after it reported in-line first-quarter earnings per share of 30 cents after market close.

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Mr. Tyghe called the company’s year-over-year same-store sales growth of 5.1 per cent “strong” given both a tough comp, lousy spring weather and what he characterizes as a “knee jerk” response to recent changes in mortgage rules.

That led him to upgrade his rating for Sleep Country to “outperform” from “market perform.”

“The SSS increase was not only well balanced (on solid performances in both mattresses and accessories), but also reflected further share gains given solid unit growth (complemented with an increase in AUSP),” said Mr. Tyghe. “This performance was achieved despite nervous consumers (as reflected in relatively volatile consumer confidence indicators) and an essentially hung Ontario real estate market (which is showing early signs of improving). eCommerce (bed-in a-box) initiatives continued to gain traction, supporting new SKU [stock keeping units] introductions later in 2018E, while the evolution of the store footprint (to expand the in mall test given early successes) is intriguing to us.

“The 1Q18 market share gains on the Sears demise serves to reaffirm our view that Sleep Country will over index on relative share gains through 2018 (which we do not believe is appropriately discounted into the shares). We believe that Sleep Country is better positioned in a market with a more attractive runway in 2018 (than we feared in our downgrade on Oct. 26-17), which supports our upgrade to Outperform.”

Based on the results, Mr. Tyghe raised his 2018, 2019 and 2020 EPS projections to $1.88, $2.11 and $2.33, respectively, from $1.85, $2.07 and $2.28.

He also raised his target price for Sleep Country shares to $39 from $38. The average on the Street is currently $41.94, according to Bloomberg data.


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WestJet Airlines Ltd. (WJA-T) faces a growing list of concerns, said CIBC World Markets analyst Kevin Chiang, who downgraded its stock following Tuesday’s release of lower-than-anticipated quarterly financial results that led to 9.8-per-cent plunge in share price.

Mr. Chiang was one of a trio of analysts to drop their ratings for WestJet on Tuesday.

“While WJA is down 25 per cent year-to-date, Q1 results shake our confidence that WJA can successfully execute against all of its targets over the next few years,” said Mr. Chiang, moving the stock to “underperformer” from “neutral.”

“While we believe WJA’s strategy is sound and that it does need to expand its network, the airline is in a period of heightened execution risk. We view this risk as having increased looking at Q1 results and WJA’s outlook for the year. Given how 2018 is shaping up for the airline, the WJA story now requires near flawless execution, which we view has a high hurdle for any company.”

Mr. Chiang justified his downgrade by pointing to five factors:

1. Its competitive advantages over rival Air Canada (AC-T), including unit costs, balance sheet strength and culture, “are narrowing or have been eliminated.”

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2. WestJet’s cost trends are “worrying.” Noting it has raised cost per available seat mile (CASM) guidance in three of the last four year, he said he’s concerned about its “ability to quickly rein in costs or that it has fully accounted for all the necessary investments related to its growth plans.”

3. It possesses limited upside until next year as it works through a “a transitional year for the airline where it will be incurring significant costs as it prepares for Swoop and the 787s while the revenue benefits do not start materializing until 2019.”

4. Unionization drives and pilot negotiations add risk, which he sees resulting in higher share price volatility.

5. Mr. Chiang said he’s “skeptical” about its ability to meet 2020 targets, particularly 13-16-per-cent return on invested capital. He said: “Concern over WJA’s ability to hit its investor day targets lowers the ceiling on its shares.”

With the downgrade, Mr. Chiang dropped his target for its shares to $20 from $26. The average on the Street is $23.61.

Meanwhile, AltaCorp Capital analyst Chris Murray also downgraded WestJet, moving his rating to “underperform” from “sector perform” with a $20 target, falling from $24.

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“Results from the quarter and a shockingly weak Q2 guide coupled with a less than comforting call with management leave us increasing bearish on the company’s strategy and leadership and its ability to operate in what is a company heading for significant challenges with labour,” said Mr. Murray. “We see the pilots as only the first of these types of events we see unfolding over the next several years. We are coming to the opinion that management may be outclassed in dealing with one of the most sophisticated unions in the industry, which also opens up concerns about how an agreement translates to other employees and what this does to an increasingly thinner cost advantage, not to mention the much more real prospect of a strike post May 19. While we expect the Federal government would step in after a short period of time with back to work legislation, we see the complexity of coming to a first contract likely leading to some form of binding arbitration. We expect this would introduce Air Canada’s pay scale as a benchmark as well as the pay scales of other U.S. carriers where ALPA has struck significant improvements in recent years, materially impacting the Company’s cost structure. At the same time, we continue to see the Company pursing a divergent strategy with no real clarity on the competitive advantages, particularly around international travel, which is likely to depress ROIC metrics over the coming years.”

Cormark Securities analyst David Tyerman dropped his recommendation to “market perform” from “buy” with a $20 target, down from $22.


Though Nutrien Ltd.’s (NTR-N, NTR-T) first-quarter results fell short of expectations, Raymond James analyst Steve Hansen raised his rating for its stock, seeing a ramp-up in activity and a “cycle bottom approaching.”

On Monday after market close, Saskatoon-based Nutrien, formed in January from the merger between Potash Corp. of Saskatchewan Inc. and Agrium Inc., reported quarterly adjusted EPS and EBITDA of 16 U.S. cents and US$553-million, respectively, which was “notably light” compared to the Street’s projections of 20 U.S. cents and US$599-million though largely in-line with Mr. Hansen’s estimates of 17 U.S. cents and US$560-million.

The company’s potash and phosphate segment results exceeded expectations, while its retail results fell short due largely to a late spring season in North America.

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“Despite a slow 1Q18, management indicated that 2Q18 retail sales rapidly accelerated through April, putting up several record days in recent weeks – particularly across key Midwest states. While northern U.S. states and western Canada are still lagging, they are expected to recover quickly,” said Mr. Hansen. “Finally, management indicated that the M&A pipeline remains robust, evidenced by the 29 outlets acquired year-to-date – very brisk for this time of year.

“NTR raised its FY18 global shipment forecast to 64.5–66.5 million tons (vs. 64–66 millionn prior), citing robust export demand (China, Brazil, India, SE Asia) and relatively low inventories. Underpinning this view, management further noted that Canpotex members are fully committed through Jun-18, and prices remain firm across most major markets, particularly Brazil. While new greenfield capacity is slowly ramping (K+S, Eurochem), NTR expects the these incremental tonnes to have a relatively muted impact on the market this year. Similarly, recent industry reports suggest the bellwether Chinese contract is likely to settle at $250– $260 per ton (up 9–13 per cent) before June 30, helping put a firm floor under the market.”

Despite the lower-than-anticipated results, Mr. Hansen raised his full-year EPS projection to US$2.42 from US$2.31.

Moving the stock to “outperform” from “market perform,” he maintained a target of US$58, which exceeds the average on the Street of US$56.55.

“While we continue to harbor reservations over the near-term (summer) direction of N/P pricing, this morning we upgrade our rating on Nutrien … reversing a cautious position we’ve held on the broader NPK sector for nearly four years,” said Mr. Hansen. “In short, we believe the residual downside risks are now greatly outweighed by the longer-term, cyclical upside through 2020—a backdrop only further enhanced by NTR’s ability to pull multiple strategic ‘levers’, optimize its portfolio, grow into strategic markets, and return capital to shareholders.”


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After the $1.69-billion buyback of Caisse de dépôt et placement du Québec’s 18.5-per-cent stake in Quebecor Media Inc., Quebecor Inc. (QBR.B-T, QBR.A-T) now possesses a very different investment profile, according to Canaccord Genuity analyst Aravinda Galappatthige.

“QBR’s investment profile transitions from a catalyst-based stock to one that is moving towards more meaningful dividends, but with healthy 3-5-per-cent underlying EBITDA growth - in other words, one more comparable with the rest of the Canadian telecom space,” he said. “However, we expect this gap will take time to close, particularly given the still low dividend yield and higher balance sheet leverage. Hence, while we have removed the 12.5 per cent holdco discount from our valuation model, we still assume a slightly lower multiple in our target price derivation relative to the group.”

On Tuesday, Quebecor reported first-quarter revenue of $1.007-billion, missing Mr. Galappatthige’s $1.026-billion projection. Adjusted earnings per share of 38 cents beat the consensus of 32 cents and was a 23-per-cent jump year over year.

“While revenue was a bit light and sub trends weaker than expected, EBITDA easily beat our forecast and was up a strong 9.5 per cent year over year helped by lower SBC and the benefit of the CRTC roaming decision which impacted Q1 with full retroactive effect,” the analyst said. “We expect investors would be pleased with the announcements of a 100-per-cent% DPS increase to 22 cents per share from 11 cents per share. and the buyback of the Caisse’s remaining 18.47-per-cent stake in Quebecor Media Inc. (QMI) for $1.69-billion (in line with our expectations). This should serve to finally eliminate any remaining holdco discount on QBR shares, provide the company with access to 100 per cent of QMI’s FCF and facilitate a shift in focus towards shareholder returns in the form of dividend increases. We note that the board has set has a dividend payout policy at 30- 50-per-cent FCF, to be achieved gradually within four years.”

Keeping a “hold” rating for Quebecor shares, he raised his target by a loonie to $26.50. The current average is $28.96.

“With the primary catalyst for the stock now behind us, sharp relative outperformance by the stock year-to-date and in 2017 and a moderated outlook in cable through 2018, we have opted to maintain our HOLD rating,” he said.

Elsewhere, Echelon Wealth Partners analyst Rob Goff hiked his target to $30 from $28.50 with a “buy” rating (unchanged).

Mr. Goff said: “Quebecor successfully advanced two steps on its strategic roadmap with its agreement to repurchase CDPQ’s minority position in QMI for $1.69-billion and with its Board approving a dividend policy target of 30-50 per cent of FCF over the next four years. Both steps are largely in line with expectations for both the repurchase amount (we estimated $1.6-billion, note the implied 7.8 times EV/EBITDA multiple is a 10-per-cent premium to QBR’s market valuation relative to the 20% premium on the 2015 repurchase) and the direction of QBR moving towards a significant dividend (the doubling to $0.055 represents a symbolic move/start). Our $1.50 PT upgrade reflects the lower risk profile with both positive strategic steps forward together with modest forecast upgrade. For a stock that has historically been awarded a discounted valuation to its peers despite peer leading execution, the consideration that dividend yield may evolve as a valuation consideration together with any holding company discount debate is a significant positive.”


Ahead of the release of their first-quarter financial results on May 15, CIBC World Markets analyst John Zamparo hiked his target price for Premium Brands Holdings Corp. (PBH-T) after coming off restriction following the acquisitions of Oberto Sausage Co. and an increased stake in McLean Meats Inc. for a combined $237-million.

“Management communicated in the Q4 earnings release that this would be the ‘busiest year yet’ for acquisitions,” said Mr. Zamparo. “Without reaching even June, the company has followed through on that promise, demonstrating integrity and providing further evidence that the M&A opportunity has much more room to grow.”

With the acquisitions, he raised his EBITDA and EPS forecasts rise by 5.6 per cent and 1.0 per cent this year, respectively, and 8.6 per cent and 3.7 per cent next year.

“While the sandwich category captures most of the attention from investors and the media, meat snacks continue to be a material growth driver for Premium Brands,” the analyst said. “The segment increased from $85-million in sales in 2015 to what we expect will be nearly $240-million this year and $340-million next year, or 10 per cent of total PBH revenue, which would make it Premium’s fourth-largest source of revenue.

“Nielsen data suggests the meat snacks category has grown at a CAGR [compound annual growth rate] of 7 per cent over the past four years, as the migration towards more protein-centric items continues and on-the-go snacking gains popularity. Premium’s management team has shown a deftness for identifying targets that offer high-quality products in growing segments, and we believe this acquisition will prove to be no different.”

Keeping an “outperformer” rating, Mr. Zamparo increased his target to $141 from $126, which exceeds the consensus of $130.53.


Despite reporting first-quarter financial results before market open Wednesday, Raymond James analyst Kurt Molnar downgraded Paramount Resources Ltd. (POU-T) based on the potential for potential for near-term weakness.

“The company disclosed a Karr Specific income statement for the first time which implied cash netbacks of more than $27/boe which is very impressive when viewed against the $22.50/boe and $18/boe netbacks just reported by Seven Generations and NuVista respectively,” he said.

”But the impressive news at Karr will likely take a second chair to reduced guidance from the Company for 2Q18 and 3Q18 due largely to facilities issues. The market has had doubts about execution vs. guidance from Paramount and this news will play to those fears and will likely drive near-term weakness in the stock. This news is transitory but is an unwelcome distraction from the strong Karr economics. We have reduced our 2018 estimates on the back of new Paramount guidance.”

Moving the stock to “outperform” from “strong buy,” Mr. Molnar lowered his target to $25, which is the consensus on the Street, from $36.75.

“The way in which Paramount may best respond to the guidance reduction is to surprise to the upside with non-core asset sales which would confirm their financial resiliency as superior and would also allow for aggressive action under their NCIB,” he said.


In other analyst actions:

Scotia Capital’s Phil Hardie downgraded Alaris Royalty Corp. (AD-T) to “sector perform” from “sector outperform” with a target of $17.50, falling from $22. The average is $20.

Mr. Hardie said near-term multiple expansion is constrained due to a “highly competitive and uncertain environment for new capital deployment, coupled with the risk of further unexpected early redemptions of successful investments”

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