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

Apple Inc.'s (AAPL-Q) iPhone offerings continue to be a “cash cow” and are likely to continue to generate “significant” cash flow, according to RBC Dominion Securities analyst Robert Muller, who predicts its 5G products will further accelerate growth going forward.

In a research report released Wednesday, he initiated coverage of the tech giant with an “outperform” rating, seeing “avenues for deeper integration into its customers’ lives and the balance sheet strength to return significant cash flow to shareholders.”

“Since its launch in 2007, Apple’s iPhone has been an unquestionable success, helping AAPL grow into one of the largest companies in the world by market cap,” said the analyst. “Given the ubiquitous nature of smartphones and consumer attachment to them (try entering a room or walk down the street without seeing multiple people staring into one’s phone), we expect the smartphone market to remain resilient. Even without significant market growth, we view the iPhone brand, as it currently sits today, to be a cash-generating machine. Importantly, we view iPhone sales largely as recurring revenue. With high switching costs (transferring files, contacts, learning an operating system, etc.), we expect sticky customers that could, conceivably, be viewed as an annuity. Instead of viewing iPhone sales as discreet events, it may be best to view AAPL’s 900 million iPhone users as $200-$500/yr annual revenue with lumpy cash flows.”

Mr. Muller did say he's "cautious" about iPhone sales in fiscal 2020 given a lack of a 5G model. However, he remains optimistic a "sizable" portion of its customer base will look to upgrade its phones for a variety of reasons, including improved cameras and the desire for newer models.

“In addition, we note wait times for the iPhone Pro models had been ~3-4 weeks at launch, suggesting solid customer adoption (although, admittedly, that could be more a factor of supply),” he said. “We see parallels to FY12, when AAPL’s newest iteration, the 4S, remained on 3G network capabilities while competitors began introducing 4G LTE cellular compatible models. Interestingly, AAPL maintained its market share in CY12 in the absence of a 4G phone before losing a few points the following year with its 4G enabled version. AAPL has largely maintained 15 per cent of worldwide unit volumes through 2018, although that has fallen to 12 per cent in 2019 year-to-date.”

In justifying his rating, Mr. Muller said Apple continues to return "market-leading" amounts of cash to investors.

“Since 2015, AAPL has repurchased $242-billion of common shares, over 3 times the amount of the second-place MSFT and ORCL. At present, AAPL has $100-billion of net cash on hand. With management’s intention to achieve a cash-neutral position, we expect the majority of that amount to return to investors via buybacks. We note that this is on top of our estimated $35-55-billion annually available for repurchases (range depends upon handling of debt maturities).”

Believing its current valuation provides a “call option on future innovation,” he set a target of US$295. The average on the Street is US$256.10, according to Bloomberg data.

“We believe AAPL’s valuation is reasonable and, in its current position, represents solid value,” the analyst said. “That says nothing about future growth opportunities. For a company with a long, successful track record of innovation (iPod, iPhone, iPad, Apple Watch, AirPods), we do not believe current pricing factors in any potential nextbig-thing. We view connected smart home devices as the logical complement to AAPL’s existing portfolio from both a product and services standpoint. We also note that AAPL has invested in autonomous vehicle technologies, and whether AAPL (or whoever else) succeeds is still up for debate, but we would not dismiss the multi trillion dollar TAM potential.”


Separately, Mr. Muller initiated coverage of Jabil Inc. (JBL-N), a Florida-based manufacturing services company, with a “sector perform" rating and US$41 target, which falls short of the US$38.70 average.

“Following high revenue growth in 2018 and 2019, maturing contracts should drive operating margin expansion,” he said. “Diversification strategy, both overall and within Apple, is working, which should reduce earnings volatility, in our view. Selective wins in growth/high margin areas position JBL to capitalize on secular tailwinds while continuing to grow its margin.”

Mr. Muller also gave Sonos Inc. (SONO-Q) an “outperform” rating and US$18 target. The average is US$18.25.

“We expect repeat purchases from Sonos’ current customer base, when combined with first-time sales, to drive 10-per-cent revenue growth through our forecast period," the analyst said. "We do not believe current valuation adequately captures acquisition potential, expansion opportunities, or current baseline growth.”


Seeing a “favourable” risk/reward proposition for investors, Citi analyst Itay Michaeli raised his target for shares of Magna International Inc. (MGA-N, MG-T) despite a cut to its 2019 outlook with last week’s release of largely in-line third-quarter results.

“Q3 results were mixed with various puts/takes, but the core of the Magna investment story appears intact—solid revenue growth-over-market (4-5 points in Q3), scope for margin expansion in the coming years, FCF [free cash flow] strength/resilience and arguably underappreciated assets within ADAS/AV [advanced driver assistance systems and automated vehicles] (key next-gen vision + LiDAR awards, complete vehicle assembly assets). When weighing that against the stock’s 12-per-cent FCF yield and the company’s consistent buybacks, we still see an overall compelling risk-reward in the stock. The next key event is likely to come from Magna’s initiation of 2020 guidance early next year (Citi 2020 estimates EPS greater than consensus), as well as updates to the company’s 3-year forecast.”

In order to reflect changes to Magna’s guidance, Mr. Michaeli raised his 2019 earnings per share forecast to US$5.90 from US$5.71. Maintaining his 2020 estimate of US$6.94, he also increased his 2021 projection of US$7.48 from US$7.39.

“We continue to believe that Magna should consider segmenting its businesses somewhat differently in order to allow investors to more easily distinguish between ‘1.0’ and ‘2.0’ assets — both of which are well-positioned, in our view,” he said. “To that, we’ve updated our 'two-entity’ valuation approach that considers Magna as a sum of: (a) Assets that are tied to fuel economy & outsourcing trends, highlighted by high-barriers-to-entry and solid EBITDA margins; and (b) Non-powertrain assets that are tied to ADAS/AV growth and emerging new-mobility (RoboTaxi etc.) supply chains, including within seating and complete vehicle assembly. We believe that evaluating Magna in this manner can better contextualize the investment thesis, and therefore allow for greater multiple expansion.”

With a “buy” rating, his target for NYSE-listed Magna shares rose to US$65 from US$63. The average on the Street is US$58.99.

“We see two paths for further multiple expansion,” said Mr. Michaeli. “The first is simply delivery of Magna’s 2018-20 FCF growth/conversion plan. The second, in our view, is to reposition the segments/story (including for a possible future spin) towards the increasingly important & unique role that Magna can play in AV/EV mobility scaling. This ‘two-entity’ thesis is a way to perceive Magna in the context of Car of the Future investing.”


Raymond James analyst Chris Cox raised his financial expectations and target price for shares of Imperial Oil Ltd. (IMO-T) following its Investor Day event on Tuesday, which he called a “swan song” to departing chief executive Rich Kruger.

“Overall, Imperial’s 2019 Investor Day served to reinforce the company’s commitment to a free cash flow focused business model, with the 5-year spending profile modestly lower than previously expected, primarily due to the official removal of Aspen from the development program,” said Mr. Cox. “Offsetting the lower spending profile, results out of Cold Lake are expected to remain subdued for the foreseeable future; while we believe the Street was broadly taking a pessimistic outlook toward Cold Lake, the combination of lower production and higher opex was likely worse than most expected. The good news is that while Cold Lake looks to be a longer-term turnaround story, Kearl looks poised for significant growth into next year as the Alberta Government’s recent rail above curtailment policy should allow Imperial to take full advantage of supplemental crusher project, with Management’s tone fairly confident toward the 240 Mbbl/d (gross) target.”

In response to the company’s outlook, Mr. Cox raised lowered his cash flow per share estimates for 2019, 2020 and 2021 to $4.45, $4.19 and $3.85, respectively, from $4.60, $4.29 and $3.89.

“Primarily reflecting the elimination of Aspen from the 5-year plan, average spending over the 5-year plan is expected to be $1.3-billion - a reduction of $350-million per year from last year’s Investor Day - with the sum of the reduced capex from Aspen made-up by incremental capital tied to the Grand Rapids project in the Cold Lake region,” the analyst said. "Despite the lower spending profile, our revised forecasts for IMO point to a relatively muted 6% free cash flow yield at strip for 2020, noticeably lagging peers that are generally in the 8-12-per-cent range (despite 2020 marking the low-point on capex).

He maintained an “underperform” rating with a target of $31, rising from $30. The average on the Street is currently $36.85.

Meanwhile, Desjardins Securities analyst Justin Bouchard maintained a “hold” rating and $39 target.

“IMO’s top-tier balance sheet, integrated assets and successes in driving operational improvements are positives, but we do not see a substantial disconnect between present trading multiples and the near-term fundamental outlook for the name,” he said.


DIRTT Environmental Solutions Ltd.'s (DRTT-T, DRTT-Q) Analyst Day event in New York on Tuesday provided a "challenging picture” of its future outlook, said Laurentian Bank Securities analyst Elizabeth Johnston, prompting her to downgrade its stock to “hold” from “buy.”

“We had previously ascribed a 9 times multiple (pre-IFRS 16) which is approximately in line with the US construction and furniture peers,” she said. “We remain cautious on the near term growth outlook for DIRTT, applying an in line multiple given its similar EBITDA margin and the company’s strong balance sheet, compared to peers. We acknowledge the meaningful execution risk, which we have reflected in our forecast.”

"We have shifted revenue into H2/20 (from H1/20) as we believe that the ramp up to rebuild the sales pipeline is likely to take multiple quarters. Our SG&A estimates move higher to reflect investments in sales and marketing in 2020. We are introducing our 2021 estimates, which include similar gross margin profile along with modest revenue growth of 5 per cent. Our estimates also include updated capex expenditures which exceed historical levels given the planned build out of the new millwork plant in South Carolina ($18.5-million, mostly in 2020), GXC refreshes ($3-million over 2020-2021), and the tile priming equipment ($2-million, already reflected in 2019).

Ms. Johnston said the focus remains on the Calgary-based interior design services company’s 2023 guidance of US$450-$550-million in revenue and 18-22-per-cent EBITDA guidance.

“A meaningful portion of the discussion surrounded the Distribution Partners, sales strategy, and marketing activity which all are indicated to need additional structural improvements and investments,” she said. “We view some improvements as more readily achievable (i.e. gross margin), and we have already seen some benefits year-to-date.”

“Over the next few quarters, we will be looking for validation of near-term goals (ex. priming equipment, key sales hires) in order to assess DIRTT’s ability to execute on their strategy.”

Ms. Johnston cut her target for DIRTT shares to $3.98 from $8.25. The average is currently $5.57.


In separate notes released Wednesday morning, Ms. Johnston also lowered her target price for shares of both Keg Royalties Income Fund (KEG-UN-T) and Recipe Unlimited Corp. (RECP-T), citing a competitive industry environment.

Her target for Keg Royalties Income Fund slipped by a loonie to $20.50, which matches the current consensus, with a “buy” rating based on lower-than-anticipated same-store sales growth.

“Our target yield reflects our expectation for some pressure on SSSG (compared to historical levels), which we expect will continue given the competitive industry environment in the near term,” she said. “That said, over time The Keg has been able to grow organically in the low single-digit range and the LTM payout ratio (and near term outlook) remains below 100 per cent."

For Recipe Unlimited, she also maintained a “buy” rating, cutting her target to $26 from $32, versus the $25.60 consensus.

“While we continue to believe that the company is well-positioned to execute on their long-term growth strategy, many of these initiatives will continue to take time. In the short term, industry-related headwinds are likely to weigh on SSSG and margin (which we have reflected in our forecast),” she said.


In other analyst actions:

Citing a worsening met coal outlook due to new supply and slower global demand growth in 2020, Bank of America Merrill Lynch analyst Timna Tanners downgraded Teck Resources Ltd. (TECK-N, TECK-B-T) to “underperform” from “buy” with a target of US$16, falling short of the US$25.12 consensus.

TD Securities analyst Brian Morrison cut Martinrea International Inc. (MRE-T) to “hold” from “buy.” He lowered his target to $14 from $15. The average on the Street is $16.

TD’s Michael Van Aelst downgraded Parkland Fuel Corp. (PKI-T) to “buy” from “action list buy” with a $54 target (unchanged). The average is $52.08.

B Riley FBR analyst Adam Graf raised SSR Mining Inc. (SSRM-Q, SSRM-T) to “buy” from “neutral” with a US$23 target, up from US$16.70. The average on the Street is US$19.97.

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