Inside the Market’s roundup of some of today’s key analyst actions
“Simple, clear messaging remains a hallmark” of Fortis Inc.'s (FTS-T) organic growth story, said Industrial Alliance Securities analyst Jeremy Rosenfield, which he thinks “continues to reassure investors in the current turbulent market environment, providing an attractive defensive investment option for long-term investors.”
Following Tuesday’s Investor Day event, Mr. Rosenfield said Fortis remains focused on self-funded organic growth, as the St. John’s-based company raised its five-year capital investment plan to $18.3-billion over 2020 to 2024 from $17.3-billion for 2019 to 2023. He said that spending is expected to bring a mid-year base growth of 6.5 per cent through 2024 and a 7.2-per-cent growth rate over the next three years.
"From a high-level perspective, FTS’s overarching 2019 investor day message remains consistent relative to last year’s investor day; senior executives unequivocally stated that FTS remains focused on self-funded (and therefore accretive) organic growth within its diversified portfolio of regulated utility businesses," he said.
He kept a “buy” rating and $58 target for Fortis shares. The average on the Street is $55.60.
“We continue to view FTS as a premium defensive utility and power growth play, with (1) stable earnings from a diversified portfolio of regulated utility investments (100 per cent of earnings), (2) healthy long-term EPS growth (5-7 per cent per year, CAGR 2019-24), driven by more than $18-billion of organic rate base investment, (3) solid dividend growth (6 per cent per year through 2024), and (4) potential upside from longer-term regulated utility and non-regulated energy infrastructure investment opportunities (e.g., the Lake Erie Connector, LNG expansions, and other projects). In our view, the Company’s simple, clear messaging around self-funded organic growth continues to reassure investors in the current turbulent market environment, providing an attractive defensive investment option for long-term investors.”
Elsewhere, BMO Nesbitt Burns analyst Ben Pham downgraded Fortis to “market perform” from “outperform” with a $55 target.
“Fortis delivered a series of crisp presentations at its well-attended 2019 investor day, the net of which reaffirmed the company’s low-risk, above-average growth profile,” said Mr. Pham.
“That said, we believe the current valuation of 21-22 times P/E already reflects those positive fundamentals (stock up 32 per cent over the last year vs. utility index at 25 per cent; total return of 65 per cent since ITC acquisition announcement early 2016 vs. utility index 46 per cent).”
Raymond James analyst Jeremy McCrea downgraded Obsidian Energy Ltd. (OBE-T) in reaction to Tuesday’s premarket announcement that it is initiating a process to explore strategic alternatives, including a possible sale or merger.
The company’s stock jumped almost 4 per cent with the news, leading Mr. McCrea to recommend investors “take these profits (or perhaps crystallize their losses as we move our rating to Underperform).”
“Over the past couple years, we gave OBE the benefit of the doubt as the company meaningfully focused on its high return Cardium wells,” said the analyst, lowering his rating from “market perform."
“On-going legacy issues/restructuring and leverage continued to hinder any meaningful growth and combined with the 4th CEO in the past five years, we suspect this led to [Tuesday’s] announcement. Overall, in the current energy market, we don’t see OBE receiving much of a premium over the current share price (and perhaps lower).”
Mr. McCrea said he expects capex spending to slow to preserve the company’s balance sheet strength while it seeks future direction. Accordingly, he dropped his spending projection for 2020 to $80-million from $120-million.
“Unfortunately for any ‘buyer’ looking to show prudence towards better profitability, given that OBE is trading at 5.8 times 2020 estimated EV/DACF [enterprise value to debt-adjusted cash flow] and 1.1 times EV/PDP (RJL deck), a first screen on this accretion metric will be difficult for many would-be buyers.”
“With strategic alternatives, a confidential data room will likely be available for qualified buyers. Given OBE’s history, there may be ‘unknown’ liabilities not readily apparent to investors today we believe.”
His target for Obsidian shares dropped to $1 from $2. The current average on the Street is $1.31.
Pointing to an improved outlook for precious metals and seeing it “in the early stages of a turnaround,” BMO Nesbitt Burns analyst Ben Kaip raised his rating for Newmont Goldcorp Corp. (NEM-N, NGT-T) to “outperform” from “market perform.”
Mr. Kaip sees the risk-reward proposition for its stock as “compelling” and “supported by a valuation discount we expect to begin to narrow as NEM executes against its strategy.”
His target for Newmont shares rose to US$50 from US$45, exceeding the current consensus of US$45.68.
Though it appears to be “attractively valued," Canaccord Genuity analyst Raveel Afzaal sees Spark Power Corp. (SPG-T) as a “show me story,” leading him to lower his rating for the Oakville, Ont.-based electrical power services and solutions company to “speculative buy” from “buy.”
“The company continues to trade at an attractive 6.4 times EV/EBITDA multiple on our revised-down 2020 estimates,” he said. “However, the recent performance, coupled with growing leverage on the balance sheet, has increased the risk profile associated with this investment opportunity, in our view. We believe the company will need to demonstrate a resumption of organic EBITDA growth which results in de-levering of the balance sheet before the valuation multiple discount relative to the peer group average narrows.”
In reaction to its second-quarter results and “performance since going public,” Mr. Afzaal lowered his 2019 and 2020 EBITDA expectations to $21-million and $23-million, respectively, from $22-million and $30-million.
He noted: “The company’s EBITDA has declined organically for the last three quarters consecutively and averaged a 22-per-cent decline year-over-year, while leverage has substantially increased.”
His target for Spark shares dipped to $2.25 from $3. The average is now $2.42.
“We continue to derive our target price using an 8.0 times EV/EBITDA multiple, which compares with the peer group average of 8.5 times,” said Mr. Afzaal. “Our new target price implies an attractive potential return of 80 per cent following the recent decline in the share price.”
The market for memory-related chips is “turning the corner,” according to Longbow Research analyst Nikolay Todorov, leading him to raise his rating for Micron Technology Inc. (MU-Q) to “buy” from “neutral.”
“Excess inventory will be depleted faster than expected, triggering an improvement in pricing and margin ahead of current expectations,” said Mr. Todorov, who sees a bottom for dynamic random access memory (DRAM_fundamentals by the end of the year which will “pair with an in- process recovery” in NAND fundamentals.
His target for Micron shares is US$66, exceeding the consensus of US$48.93.
Citing its record valuation following a share price rally of over 45 per cent thus far in 2019, Oppenheimer analyst Rupesh Parikh downgraded Costco Wholesale Corp. (COST-Q) to “perform” from “outperform” on Wednesday.
“As we look forward, we now see less upside for shares driven by the now even more premium valuation, potentially aggressive Street forecasts, and difficult compares especially in Q2," said Mr. Parikh.
Though he thinks the company is well-positioned in both consumer staples and food retailing sectors and raised his target to US$300 from US$295, Mr. Parikh said Costco’s valuation is “well above prior peaks."
The average target on the Street is US$290.64.
With the expectation for “alumina prices to recover on significant capacity cuts in China, an end to inventory destocking, and the Alpart shutdown,” Credit Suisse analyst Curt Woodworth upgraded Alcoa Corp. (AA-N) to “outperform” from “neutral.”
“Smelter profit margins have improved significantly with LME prices remaining firm despite global macro headwinds and sharp declines in key raw material inputs for alumina, caustic soda, energy, and calcined coke,” he said. “Restructuring efforts (smelter and recent re-org announcement) should also drive material tailwinds to mid-cycle FCF starting early 2020 (estimated $150-200-million in total). Note we modestly lower 2019 EBITDA view to $1.6-billion (was $1.7-billion) on 3Q commodity mark to market.”
“Alcoa will continue to optimize its smelter portfolio in the coming years, and we expect the company also further streamline the business model via divestiture of non-core assets such as Warrick rolling mill and potentially Brazilian hydro assets. Capital spending is likely to pivot towards very low capital intensive brownfield alumina projects in Australia, where AA refineries are in first decile of cost curve (700 kt potential).”
Mr. Woodworth raised his target to US$27 from US$26. The average is US$26.83.
“Alcoa appears significantly undervalued on most metrics,” he said.
Firm Capital Property Trust (FCD.UN-X) is “well positioned for growth,” said Canaccord Genuity analyst Brendon Abrams, who sees it benefiting from the sponsorship of Firm Capital Corp.
“We believe FCPT is an attractive vehicle for investors looking for a sustainable and growing yield, which is supported by a stable cash-flowing portfolio and managed by an established real estate asset manager with a long track record of creating value,” said Mr. Abrams, who initiated coverage with a “buy” rating.
He set a target of $7 per unit. The average is 13 cents higher.
“While we believe FCPT’s portfolio will deliver stable results, we expect the REIT’s units to trade at a slight discount to NAV given investor sentiment toward retail assets, the REIT’s external management structure and its relatively limited liquidity," said the analyst. "Combined with a 7.7-per-cent distribution yield, our target price implies a one-year total return of 20.1 per cent.”
In other analyst actions:
BMO Nesbitt Burns analyst Brian Quast upgraded OceanaGold Corp. (OGC-T) to “outperform” from “market perform” with a $5 target, which tops the consensus by 8 cents.
“The company’s stock has experienced a steep decline in 2019, underperforming relative to its peers in a rising gold price environment," he said. "This was mainly attributable to ongoing issues at Didipio which resulted in a temporary suspension in mining, further compounded by choppy results from Haile.”
“We consider OceanaGold’s valuation attractive at these price levels given the temporary nature of these issues.”
BMO’s Ryan Thompson downgraded Silvercorp Metals Inc. (SVM-T) to “market perform” from “outperform” and raised his target to $5.75 from $5.50. The average is $6.08.
“This is merely a valuation call. We still maintain our view that Silvercorp is a high quality, low cost, consistent operator with a strong balance sheet. FCF should remain robust given higher silver prices,” said Mr. Thompson.