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

Despite logging a “solid” second quarter that prompted a dividend increase, Industrial Alliance Securities analyst Elias Foscolos lowered his rating for Pason Systems Inc. (PSI-T) on Wednesday after revising his near-term outlook for North American land drilling.

“Rig activity has been slow in both Canada and the U.S. for different reasons,” he said in a research note. “In Canada, we are seeing the same lack of egress and confidence as usual, combined with mandatory production curtailments in Alberta that are still slowing down drilling programs. In the U.S., according to Debtwire, banks are becoming increasingly conservative in energy amongst a low commodity price outlook and dry M&A market and are trying to reduce their exposure, resulting in a liquidity squeeze on smaller E&Ps. This has been an important reason for the decline in rig counts we are seeing in the US, and we expect these conditions to continue into Q4/19 and 2020. Our revised Canadian rig counts for Q4/19 and 2020 are 138 (down 3 per cent from our previous estimate of 143) and 146 (down 9 per cent from our previous estimate of 161), as we now believe the increase in drilling through 2020 will not be as significant as we were previously projecting. Our revised US rig counts for Q4/19 and 2020 are 830 (down 12 per cent from our previous estimate of 938) and 850 (down 14 per cent from 987), as we now see 2020 rig counts in the U.S. remaining fairly consistent with H2/19, resulting in a projected 9-per-cent year-over-year decline in activity.”

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Seeing a low probability of near-term improvement, Mr. Foscolos said North American exploration and production (E&P) companies are now taking a “very cautious” approach to capital spending, while, at the same time, banks are taking a similarly conservative view of them, seeing “lenders are pulling funds out of the Permian.”

“Commentary from PSI is supportive of the thesis that North American drilling will remain low growth for the foreseeable future, with the International segment offering a better growth outlook,” he said. “The recent acquisitions in the Solar Power/Energy Storage and Completions spaces represent an effort to diversify away from drilling markets.”

Expecting “minimal growth through 2020, with lower drilling in the U.S. and a moderate uptick in Canada,” Mr. Foscolos lowered his 2019 and 2020 operating income projections for Pason by 8 per cent and 15 per cent, respectively.

In reaction to those lower revenue and income assumptions, Mr. Foscolos downgraded Pason to “hold” from “buy” with a target of $17.50, falling from $20.50. The average target on the Street is $20.42, according to Bloomberg data.

“With a 19-per-cent projected total return, which includes a dividend currently yielding 5 per cent, we are choosing to downgrade to a Hold at this time,” he said.


Though he called Algonquin Power & Utilities Corp.'s (AQN-T) recent 21.5-million common share equity offering “discrete" and in keeping with its long-term funding strategy, Industrial Alliance Securities analyst Jeremy Rosenfield downgraded its stock to “buy” from “strong buy” based on revised financial estimates it prompted as well as recent share price appreciation.

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“AQN’s shares have climbed 36 per cent on a year-to-date basis, outpacing peers in the Canadian utility sector (up 29 per cent year-to-date, on average) and the broader S&P/TSX Composite Index (up 15 per cent YTD), as well as small/mid capitalization U.S. utilities (up 20 per cent YTD, on average),” he said.

The proceeds from the offering are expected to be used to fund previously announced acquisitions, including New Brunswick Gas, finance renewable growth projects, and for general corporate purposes.

Mr. Rosenfield sees Algonquin’s fundamentals and growth outlook remaining strong, noting: “We continue to expect the Company’s overall five-year US$7.5-billion capital investment plan to drive high single-digit EPS and FFO/share growth over the forecast period (2018-23). We are forecasting Q3/19 EPS of US$0.14/share (versus consensus of US$0.13/share and Q3/18 of US$0.10/share), with year-over-year growth driven by investments in both regulated and non-regulated assets.”

He maintained a $19 target for its shares, which tops the average by 43 cents.

“AQN remains the most well-balanced growth and income investment option in our coverage universe, supported by the Company’s (1) diversified business model (regulated utilities & non-regulated power), (2) strong near-term organic growth (8-10-per-cent EPS and FFO/share growth, and 13-per-cent-plus FCF/share growth through 2023), (3) attractive dividend growth (10 per cent per year through 2021), (4) international investment opportunities (via the AAGES joint venture and equity stake in Atlantic Yield), and (5) upside from additional growth initiatives that are not included in forecasts,” the analyst said.


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Roots Corp. (ROOT-T) is enduring a “transition” year in fiscal 2019 as a new distribution centre comes online and inventory is being discounted, said Canaccord Genuity analyst Matthew Lee upon assuming coverage of the apparel maker.

However, pointing to its “very strong” brand and “significant” potential for long-term sustainable growth as well as seeing it alluring valuation, Mr. Lee expects Roots to “become more attractive going into F20 as we see some of management’s initiatives bear more fruit.”

Mr. Lee lowered the firm’s rating for Roots shares to “hold” from “buy," emphasizing he’s opting “to remain on the sidelines as we await operational execution on the company’s strategic plan.”

“If Roots can execute on its current strategic vision, the company should be able to drive consistent same-store sales growth, improve margins and produce robust FCF, which should set the stage for a re-rating of the shares, especially given the attractive current valuation,” he said. “We believe this could happen as soon as F20, with the inventory headwinds behind the company, a new suite of products released, and the distribution centre at maximum capacity. Seeing some combination of these factors coming into play would very likely make us more constructive on the shares.”

The analyst lowered Canaccord’s target for the stock to $2.50 from $5.50. The average on the Street is $3.81.

“Roots is one of Canada’s most recognizable retailers and has built a deep personal connection with consumers through its authenticity and reputation for quality,” he said. "We believe this brand value provides a sturdy backbone from which the company can develop a sustainably growing business over the long term. In our view, Roots has significant untapped potential both in North America and internationally, which the company can leverage to drive sales growth as it increases marketing, renovates its existing locations, and builds out a network of experiential retail stores.

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“Execution is critical in the near/medium term. While the potential for Roots is attractive, we believe the company will have to demonstrate its ability to implement its growth initiatives to drive shareholder value. On the sales front, we expect management’s efforts to renovate stores, introduce new products and increase marketing to propel improved growth. On the margins front, we believe the new distribution centre and improved inventory management will help augment profitability.”


MedMen Enterprises Inc.'s (MMEN-CN) decision to walk away from its previously announced acquisition of PharmaCann LLC should alleviate near-term capital requirements, said Canaccord Genuity analyst Matt Bottomley.

However, he said the California-based cannabis company’s “pathway to profitability [is] still a ways out.”

“Given the currently challenging equity environment for many U.S. players and MedMen’s elevated cash burn, we believe the decision to terminate PharmaCann should help mitigate the financing risk currently faced by the company,” said Mr. Bottomley. “Between its remaining facility with Gotham Green and its ATM, we estimate that MedMen still has access to US$170-million of capital as it works towards profitability. However, as also noted in the press release, the company does not expect to break even on Adj. EBITDA until the end of calendar 2020, which was further out than we had originally anticipated.”

With the news, which was accompanied by an announcement that its chief financial officer has been dismissed after less than a year, Mr. Bottomley reduced his financial estimates for MedMen to eliminate the expected contribution from PharmaCann, noting 168 million shares will no longer be issued and assets will be retained by the company).

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“Markets we have eliminated from our model include Pennsylvania, Ohio and Maryland, including reduced contributions in Illinois, New York and Massachusetts,” he said. “In addition, we have pushed out profitability by almost a year to CY2021 and increased our discount rate by 200bps (on average) to account for higher uncertainty with the story on top of continued changes to senior management over the past year.”

With those changes, which included revenue and EBITDA declines, his earnings per share estimates for 2019 and 2020 fell to losses of $2.59 and 29 cents, respectively, from $2.50 and 4 cents.

Keeping a “speculative buy” rating for the stock, his target dropped to $3.75 from $6.75. The average on the Street is currently $5.08.

“We believe MedMen’s remaining portfolio (although still attractive) is not as competitive as a number of the larger MSOs in the space at this time," said Mr. Bottomley.

Elsewhere, Cormark Securities’ Jesse Pytlak downgraded the stock to “market perform” from “speculative buy” with a $2.50 target, down from $6.50.


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Seeing “strong” share gains with all four major U.S. carriers in September driven by the launch of iPhone 11, 11 Pro, and 11 Pro Max, Canaccord Genuity analyst T. Michael Walkley raised his financial expectations and target price for shares of Apple Inc. (AAPL-Q).

“We believe the September quarter results could come in at the high end of guidance,” he said. "Further, given the stronger initial demand for the new iPhone lineup, we modestly increase our calendar 2019/2020 estimates, introduce our calendar 2021 estimates, and increase our target price from $240 to $260.

“Despite near-term headwinds from some consumer willingness to wait for 5G iPhones in 2020 and ongoing trade tensions with China, we are encouraged by the stronger than anticipated initial demand for the iPhone 11 lineup and believe Apple will maintain its market share leadership of premium-tier smartphones. Coming off strong Q3/F’19 results and $7-billion in debt recently raised at attractive pricing, we anticipate management could bolster share repurchases and increase dividends. We also believe Apple continues to execute its high margin Services-driven growth strategy on its 1.4-billion device installed base.”

Mr. Walkley increase his September quarter iPhone unit sales estimates to 43 million from 41 million and his 2019 and 2020 iPhone unit sales estimates to 182 million and 200 million, respectively, from 180 million and 198 million. He also introduced his our 2021 iPhone unit sales estimate of 205 million, which he said reflects "the anticipated launch of a lowcost iPhone and 5G iPhones in 2020 with continued strength through 2021 as consumer 5G upgrade cycles take hold.

“Along with our continued expectation for Services to double its 2016 revenue in 2020 and sustain double-digit growth through 2021, we increase our C’19/C’20 EPS estimates from $12.21/$14.91 to $12.29/$14.94 and introduce our C’21 EPS estimate of $16.75,” the analyst added.

Keeping a “buy” rating for Apple shares, his new target of US$260 exceeds the current average target on the Street of US$223.21.

“While we anticipate product introductions could generate stronger sales in one year versus another, we believe Apple’s growing share of the high-end smartphone market positions the company with a strong, loyal customer base that could enable Apple to maintain the high levels of annual iPhone sales,” said Mr. Walkley. “We believe Apple has a very loyal consumer base and anticipate steadily rising iPhone sales over time even with consumers waiting longer to upgrade iPhones. With a mature smartphone market, we believe Apple has locked up strong share of the premium tier market and will continue to dominate high-end smartphones sales and capture the vast majority of smartphone profits for the next several years. While the smartphone market is no longer growing, Apple’s dominant profits of the world’s largest consumer electronics market is likely to continue. This combined with strong cash returns and a growing share of higher margin businesses in Services and Other Products leads us to reiterate our BUY rating.”


CIBC World Markets analyst Todd Coupland warned investors not to buy shares of Shopify Inc. (SHOP-N, SHOP-T) ahead of the release of its third-quarter financial results and fourth-quarter guidance on Oct. 29.

“While we like the trends in Plus, International and the SFN opportunity, we think the stock price reflects the company’s growth through 2020,” he said in a research note. “Our view is the 25-per-cent correction from the summer peak was justified. In past years, October has also been a negative month for the stock price.”

Mr. Coupland maintained a “neutral” rating and US$350 target, which falls short of the US$355.99 average.

“At this point, our 2020 outlook and upside scenario are reflected in today’s share price,” he said. "Our Shopify valuation is based on 18 times our 2020 revenue estimate and $21.20 cash per share. Shopify and its peer group valuations corrected lower by 20 per cent (from 18.5 times 2020 EV/Sales) during the summer of 2019. For comparison, we looked at the top five cloud high-growth cloud peers (out a total of 50) along with peer Square. These are also trading at 15.5 times 2020 estimated EV/sales on average, with an average forward revenue growth of 28 per cent. Shopify ranks fourth on this list (up from sixth), and is trading at 16.5 times with 2020 estimated growth of 34 per cent (based on consensus). We will look for another opportunity to re-enter the stock. Over time, its share price has been volatile around October. We also could see that the early investment headwinds from SFN could cause the share price to pull back further.


Believing the company is positioned well to dominate the industry, given the management’s background in retail, law and cannabis, GMP analyst Justin Keywood initiated coverage of Fire & Flower Holdings Corp. (FAF-T) with a “buy” rating, pointing to the promise of faster growth in digital sales and the expectation of retail store growth.

He set a $2.25 target, which falls short of the $3.03 consensus.


With a “favourable” valuation and “high-grade” assets, Atico Mining Corp. (ATY-X) is a “small producer in a growth mode,” according to Laurentian Bank Securities analyst Jacques Wortman.

He initiated coverage of the Vancouver-based company with a “buy" rating.

“We believe our sum-of-the-parts NAV is well supported by our conservative assumptions for the estimated remaining mine life at El Roble and our risk-adjusted valuation for La Plata based on the basic parameters of the PEA completed earlier this year,” said Mr. Wortman. "We also believe that there is real exploration potential to both extend the mine life at El Roble and to identify new discoveries at La Plata.

“Atico Mining has operated the El Roble copper-gold mine in Colombia for ~6 years and based on disclosure has demonstrated strong production and safety records, and is a good corporate citizen in-country. Despite this performance, we believe that Atico’s lower production profile may be a limiting factor on institutional investor interest and may weigh on market valuation at certain points in the mining cycle.”

He set a target of 60 cents per share, versus the average of 70 cents.


In other analyst actions:

RBC Dominion Securities analyst Paul Quinn cut Canfor Corp. (CFP-T) to “sector perform” from “outperform” with a $16 target. The average on the Street is $16.34.

Mr. Quinn also downgraded Acadian Timber Corp. (ADN-T) to “sector perform” from “outperform” with an $18 target, which falls 90 cents below the average.

Scotiabank analyst Michael Doumet initiated coverage of IPL Plastics Inc. (IPLP-T) with a “sector perform” rating and $10.50. The average is $14.06.

TD Securities analyst Juan Jarrah downgraded Birchcliff Energy Ltd. (BIR-T) to “buy” from “action list buy” with a $5 target. The average is $4.63.

GMP analyst Ian Gillies upgraded Horizon North Logistics Inc. (HNL-T) to “hold” from “reduce” with a target of $1. The average is $1.95.

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