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

Citi analyst Prashant Rao sees an “early 2020 rough patch” for Canadian large-cap energy companies before the impact of a rise in rail volumes is felt.

Believing climbing inventories are likely to keep crude differentials wide in the first quarter of 2020, Mr. Rao reduced his production and earnings expectations for the both the fourth quarter of 2019 as well as fiscal 2020.

“A combination of pipeline issues (Keystone), rail service issues (CN strike), and maintenance activity at U.S. complex refiners caused Western Canadian crude oil inventories to climb from a near-normalized 23 million barrels to 38 million barrels through Nov/Dec 2019, widening Canadian heavy crude discounts to our forecast US$23 per barrel to WTI. Though ultimately transitory, we think there will be further upward pressure on inventories in the coming weeks, adding trading pressure on more Upstream exposed equities (CVE, Buy) while favoring more integrated names (SU, Buy).”

"Our continued checks indicate that rail volumes resumed ramping in late 4Q19, and combined with some pipeline capacity expansion (150,000 barrels per day by end 1Q20 versus end 3Q19), we think Alberta storage levels resume their previous path downward in 2Q20 and beyond. The inflection point for inventories could come sooner, if the timing mismatch between seasonally lower 1Q rail activity and typical strong crude production turns out to be less of a factor than we expect."

Mr. Rao lowered his funds from operations estimates for the fourth quarter by 23 per cent, or 15 per cent below the consensus on the Street. His earnings per share expectation shrunk by 60 per cent, which is 50 per cent below the consensus.

He attributed those declines to “a combination of: 1) lower price realizations in the Upstream; 2) significantly higher diluent/NGL/gas costs; 3) slightly lower production levels; and, 4) some material Downstream turnaround impacts (HSE, CVE).”

His largest cut came to Husky Energy Inc. (HSE-T). He now expects EPS of a 2-cent loss from a previous estimate of a 34-cent profit.

His smallest reduction was to Suncor Energy Inc. (SU-T), which slipped to 62 cents from 83 cents.

Concurrent with that change, he raised his target for Suncor shares to $50 from $47 wiht a “buy” rating (unchanged). The average on the Street is $50.24, according to Bloomberg data.

Mr. Rao also raised his target for Imperial Oil Ltd. (IMO-T) by a loonie to $31 with a “sell” rating. The average is $37.17.

The analyst maintained his $9.50 target (versus a $11.51 consensus) and “neutral” rating for Husky. He also kept a “buy” rating and $15 target (versus $15.51) for Cenovus Energy.


Following an “inevitable” cut in its guidance, CIBC World Markets analyst John Zamparo said he’s more “constructive" on shares of Aphria Inc. (APHA-T), leading him to raise his rating for the cannabis producer to “neutral” from “underperformer” on Wednesday.

“There will be issues to contend with, such as ongoing elevated capex spend and substantial working capital investments,” he said. “But the balance sheet is relatively strong and market share gains are encouraging. With the stock having breached our previous $6.50 price target [Tuesday] and in recent weeks, ... we upgrade Aphria.”

Mr. Zamparo made the move in response to Tuesday’s announcement by the Leamington, Ont.-based company that it has reduced its 2020 fiscal outlook and saw a decline in the latest quarter.

It expects 2020 revenue of $575-million to $625-million (from $650-$700-million) and EBITDA of $35-million to $42-million (from $88-95-million), which the analyst sees as “more realistic" and “much more achievable.”

“Despite a relatively encouraging quarter, we have reduced our forecasts for the remainder of F2020, and F2021 owing to a slower retail rollout than previously envisioned,” he said. "We now project total revenue of $536-million in F2020 (previously $569-million) and $703-million in F2021 (previously $728-million). For each year, our estimates are 6 per cent below consensus.

“On EBITDA, we now assume $24-million in F2020, down from $32-million, with nearly all of this being generated in FQ4. For F2021, we forecast EBITDA of $99-million, nearly unchanged from our prior estimate.”

Though he said the company’s balance sheer is “in good (not great) shape” and sees “significant” spending remaining, Mr. Zamparo raised his target for Aphria shares to $7 from $6.50, applauding its “impressive” market share gains. The average target on the Street is $9.02.

“Aphria’s immediate fate is tied to the government of Ontario, in particular, how quickly stores might open," he said. "Even considering its strong and increasing market share, without a quicker pace of development, APHA’s upside is limited, and catalysts are scarce, like every other Canadian cannabis name in the short term.”

Elsewhere, Cormark Securities analyst Jesse Pytlak raised Aphria to “buy” from “market perform” with a $8 target.


Raymond James analyst Rahul Sarugaser thinks Organigram Holdings Inc. (OGI-T, OGI-Q) has made a shrewd decision by selling its wholesale cannabis at premium pricing, feeling the Moncton-based company is "insulated from a full-on spot market price crash.”

“OGI’s robust sales into the wholesale market were a deft, agile response to the reported void of high-quality, high-cannabinoid content cannabis being offered in that market (with a corresponding strong demand from LPs whose business models have shifted toward making them net buyers of cannabis),” he said. “We had not anticipated this revenue diversification and — given that OGI is uniquely positioned to capture wide margins and solid wholesale market share (consistent supply, high quality) — we see OGI’s wholesale enterprise as a durable addition to its overall business.”

On Tuesday after the bell, Organigram reported first-quarter financial results that exceeded Mr. Sarugaser’s expectations. Revenue and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $25.2-million and $4.9-million topped his projections of $19.5-million and a loss of $1.1-million.

“As we noted in our 4Q19 earnings note, we described our prediction that ‘The Worst is Over’ for OGI,” he said. “With these 1Q20 results, we reaffirm this prediction. Given the headwinds we see facing the cannabis market - in particular, limited retail outlets and crashing wholesale cannabis prices — we anticipated a difficult 1H20 for OGI, motivating us to reduce our revenue estimates and our rating to Market Perform (maintained target price at $9.00). We are pleasantly surprised to see OGI beat our estimates, as well as the street’s; OGI has successfully sidestepped industry roadblocks that some of its peers have met, violently, head-on."

In reaction to the beat, he upgraded his rating for Organigram shares to “outperform” from “market perform” with a $9 target, which exceeds the current consensus of $6.25.

“We see the confluence of ramping Cannabis 2.0 sales, further Cannabis 2.0 product introductions (Edison brand 510 vapes and PAX+ Edison partnered vapes, chocolates, beverage powders), and the prospect of multifold increases in retail store counts in several provinces as a signal of OGI’s departure from the bottom,” said Mr. Sarugaser. “The stock has been punished on account of marketwide vagaries; we believe OGI will now begin reaping the rewards of its even-keeled, financially prudent, innovation-forward modus operandi.”

Elsewhere, CIBC’s John Zamparo maintained an “outperformer" rating and $5 target.

Mr. Zamparo said: “Organigram’s Q1 results were surprisingly encouraging in a difficult operating environment. A meaningful portion of this came from robust wholesale revenues, which aren’t overly sustainable, but this still speaks to OGI’s ability to cultivate quality products at reasonable cost. Crucially, Organigram has seen has seen promising early returns on its 2.0 products. Our only concerns out of the quarter are a capital projects to-do list that should see spending remain stubbornly high, and questionable timing of equity financing.”


Though its fundamentals are “intact,” Haywood Securities analyst Daniel Rosenberg sees Descartes Systems Group Inc.'s (DSGX-Q, DSG-T) shares as “expensive.”

That prompted him to lower his rating to “hold” from “buy.”

“Descartes has been one of the strongest performers in the technology sector, up 60 per cent over the past 12 months,” said Mr. Rosenberg. “Disciplined M&A has led to margin expansion and significant free cash flow generation. We continue to like the fundamentals of the company however share price appreciation leaves little upside. Market valuations multiples have expanded, however even when accounting for this, we see limited upside potential in the stock.”

He raised his target to US$46.50 from US$45. The average on the Street is US$45.91.

“With the broader market reaching new highs we have seen multiple expansion in our large cap technology comps,” he said. “As a result, we have increased our valuation multiples for Descartes (we made no changes to our forecasts). We utilize a blend of 28.5 times EV/EBITDA multiple (previously 28.0 times) and 10.5 times EV/Revenue multiple (previously 10.0 times) resulting in a slight increase to our target price ... Due to the limited upside at current levels we are reducing our rating to HOLD from Buy previously. Descartes is currently trading at 28.6 times EV/EBITDA of consensus CY20 estimates, ahead of its peer group average of 22.0 times. We rate Descartes with a Moderate Risk rating, due to its long-term growth potential, healthy positive cash flow, and highly visible revenue streams.”


In the wake of Monday’s release of “strong” holiday sales results and updated fourth-quarter guidance, Citi analyst Paul Lejuez raised his financial estimates for Lulumeon Athletica Inc. (LULU-Q) ahead of meetings at the ICR Conference in Orlando.

“The strong momentum in LULU’s business continued in 4Q with comps now expected to be up mid- to high-teens (vs. low double digits prior) and EPS expected in the range of $2.22-2.25 (vs. $2.10-2.13 prior),” he said. "While management did not provide details on margins in 4Q, our estimates suggest that margins will be in-line with their prior plan (50-100 basis points EBIT expansion).

“Looking ahead, LULU is now up against extremely difficult multi-year comparisons and while we’ve seen no sign of a slowdown in momentum, if comps normalize in the positive high single-digit range, we believe it would be difficult for LULU to expand EBIT margin given the investments they are making in their business.”

Mr. Lejuez increased his 2019 and 2020 earnings per share projections to US$4.92 and US$5.96, respectively, from US$4.79 and US$5.80 to reflect the better-than-anticipated fourth-quarter results.

With those changes, he hiked his target for Lululemon shares to US$245 from US$230 with a “neutral” rating (unchanged). The average on the Street is US$249.

“With shares trading at 26 times our fiscal 2020 EV/EBITDA estimate, we believe the stock is priced appropriately and we would wait for a more attractive entry point to get more constructive on the stock,” said Mr. Lejuez.


Pointing to “robust rate base and earnings growth, primarily from transmission,” RBC Dominion Securities analyst Shelby Tucker raised American Electric Power Company Inc. (AEP-N) to “outperform” from “sector perform.”

“Risk of lower ROEs [return on equities] in 2020 is likely limited as transmission utilities and TransCo already operate in line with new [Federal Energy Regulatory Commission] rates,” he said. “We view AEP as having best value in the same peer group of quality utilities and see it trading at an improved multiple.”

Mr. Tucker increased his target to US$103 from US$96. The average is currently US$96.80.


Coming off a “standout” year, Mr. Tucker lowered Atlantica Yield PLC (AY-Q) to “sector perform” from “outperform” in a separate note.

“We think the market has begun giving AY credit for its existing assets and growth profile,” he said. “As we look into 2020, we see limited catalysts on the horizon beyond a meaningful development on the strategic review front.”

Mr. Tucker raised his target for the U.K.-based sustainable infrastructure company to US$27 from US$25. The average is US$27.75.

“The main rationale behind our downgrade to Sector Perform is valuation, as AY is trading close to where we see its intrinsic value,” he said. “We acknowledge there is still some upside to close the gap between AY and its YieldCo peers; but using our $27 PT and 2021 estimated DPS would imply an 6.8-per-cent dividend yield. The overall YieldCo space (AY, CWEN, NEP and PEGI), is currently trading at a 2021 average dividend yield of 6.4 per cent. Broadly speaking, we think YieldCos as a whole are trading relatively in-line, as evidenced by a gap between current yields for YieldCos vs. defensive utilities that continues to narrow. We see limited upside for AY and the overall YieldCo space in 2020.”


Expecting “strong” trends across all its business lines to continue through 2021, Canaccord Genuity’s T. Michael Walkley joined the growing list of equity analysts on the Street in raising financial expectations for Apple Inc. (AAPL-Q).

“We believe Apple’s ecosystem approach, including an installed base that exceeds 1.4 billion devices globally, is leading to record services revenue, and we expect the higher-margin services revenue growth to continue outpacing total company growth," he said. “We are also encouraged by the strong demand for the iPhone 11 lineup and believe Apple will maintain its market share leadership of premium-tier smartphones that could be bolstered by a 5G upgrade cycle. Further, Apple has market share leading positions in wearables with Watch and AirPods, and both have strong sales and growth momentum. Following strong 2H/F’19 results and ongoing strong cash flows resulting in $98-billion in net cash, we anticipate management will likely continue to bolster share repurchases and increase dividends.”

Mr. Walkley increased his 2020 and 2021 earnings per share projections to US$13.45 and US$17.05, respectively, from US$13.01 and US$16.40.

Also believing its shares can sustain trading at higher multiples, he hiked his target to US$355 from US$275 with a “buy” rating. The average is currently US$288.83.


Bernstein analyst Alexia Howard downgraded Beyond Meat Inc. (BYND-Q) on Wednesday, believing its “near-term sales growth potential in the U.S. is largely priced in at this point.”

Seeing the risk/reward as “less attractive following the recent rally" that has seen its shares jump by almost 55 per cent thus far in 2020, Ms. Howard moved the plant-based food company to “market perform” from “outperform” with a target of US$106 (unchanged). The average on the Street is US$100.45.

“In our blue-sky scenario, we assume that following the trial in Canada, McDonald’s rolls out the P.L.T. nationwide in the U.S.," she said. "In this scenario, we expect Beyond Meat to grow its sales from $280-million in FY19 to $910-million in FY21, which will likely test the high end of Beyond Meat’s capacity based on its current capacity expansion plans.”

She added that “this will likely test the high end of Beyond Meat’s capacity based on its current capacity expansion plans, although further capacity expansion could unlock additional upside on the top line, especially if the company can scale its upstream pea protein sourcing and downstream co-packing capacity more rapidly.”


The “heightened investor anxiety” surrounding the development of Teck Resource Ltd.'s (TECK.B-T, TECK-N) Quebrada Blanca II (QB2) project in Chile “appears well overdone,” said Scotia Capital analyst Orest Wowkodaw.

He said concerns about the US$4.7-billion project, which Teck owns a 60-per-cent stake, have caused the company’s shares to “significantly” underperform peers over the past six months.

Mr. Wowkodaw said it is now “time to buy.”

“With the company scheduled to release a definitive project update in March, we have reviewed the potential impacts of several punitive capex overrun scenarios under various commodity prices on both valuation and the balance sheet," he said. "While Teck’s reputation has been bruised following the recent Neptune blowout, we do not see a credible scenario for QB2 that would seriously stress the balance sheet or materially impact our valuation. We anticipate the shares to rally despite a negative QB2 update.”

He maintained a “sector outperform” rating and $30 target for Teck shares. The average target on the Street is $31.10.


In other analyst actions:

* Citing an “improving risk and reward profile,” Noble Capital Markets analyst Mark Reichman raised Great Panther Mining Ltd. (GPL-N, GPR-T) to “outperform” from “market perform.” He did not specify a target. The average on the Street is US$1.18.

“While the stock appeared to be trading at well below our fair value estimate, risks and uncertainties to the long-term outlook reduced confidence in our estimate," he said. “Additionally, because the Tucano mine’s production profile is heavily weighted to the third and fourth quarters, we saw few catalysts to move the stock until investors had a better assessment of Tucano’s production potential. While we don’t expect our price target to be realized immediately, the company is taking the right steps to improve performance throughout 2020. Presently, Great Panther is a “show me” story and we believe the valuation could improve as it becomes more evident that earnings and cash flow will materialize. Several catalysts may serve to improve investor confidence including: 1) updated 43-101 technical reports for all three mines, 2) outcomes related to exploration activities at Tucano and Guanajuato, and 3) resolving operational issues at the Tucano mine.”

* A “sharp” rise in share price led Laurentian Bank Securities analyst Barry Allan to lower Wesdome Gold Mines Ltd. (WDO-T) to “hold” from “buy.”

“Wesdome continues to be a favoured junior gold producer," said Mr. Allan. "However, until we can get more visibility on the full extent of mineralization at both the Eagle River and Kiena mines, our target price of $9.50/sh remains unchanged. In our valuation of WDO we have already incorporated a target price of 1.25 times NAV because we feel the reserves and resources at each mine is understated, even after incorporating excellent exploration results to date.”

His target of $9.50 falls 24 cents below the Street average.

* Bernstein analyst Jonas Oxaard cut Nutrien Ltd. (NTR-N, NTR-T) to “market perform” with a US$53 target, dropping from US$68 and below the average of US$59.91.

* Canaccord Genuity analyst Dalton Baretto raised New Gold Inc. (NGD-T) to “buy” from “hold” with a $1.60 target, up from $1.10 and above the $1.49 average.

* CIBC World Markets analyst Mark Jarvi resumed coverage of Northland Power Inc. (NPI-T) with an “outperformer” rating and $30 target. The average is $30.33.

“Overall, we continue to have a positive outlook for Northland — 2020 should be a good year with a material step up in FCF from the DeBu offshore wind project and the development pipeline remains robust,” he said.

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