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

Lululemon Athletica Inc.’s (LULU-Q) “strong” fourth-quarter results appear to be continuing into early 2018, according to Canaccord Genuity analyst Camilo Lyon.

On Tuesday, the Vancouver-based apparel maker reported adjusted earnings per share for the quarter of US$1.33, exceeding the US$1.27 projection of both Mr. Lyon and the Street. Comparable same-store sales growth of 11 per cent also topped his estimate (7 per cent), which he attributed largely to an “impressive acceleration” in e-commerce (up 42 per cent).

“An improved product assortment (particularly in outerwear and tops) drove a +LDD [low double-digit increase] comp in women’s with men’s maintaining mid-teens [increase in] comps,” said Mr. Lyon. “Furthermore, traffic turned positive in Q4 and accelerated further in Q1. Based on improving traffic trends, a more seasonally appropriate spring color palette, and its easiest comparison, LULU guided Q1 comps +LDD, consistent with our preview.

“That said, comparisons get tougher from Q2 on. While there are a number of initiatives in place to drive sustained growth (product innovation, accelerating co-located store openings, e-commerce, data capture, and international acceleration), we view the risk/reward as balanced, particularly without a CEO in place. While LULU certainly appears to be hitting on all cylinders, we can’t ignore the fact that at least once per year since 2014, it has hit a speed bump that has derailed its momentum and caused it to lower guidance.”

The analyst said the company’s initial 2018 implied revenue growth guidance of a 12.7 per cent to 14-per-cent increase, based on mid-to-high single digit comp growth and 40-50 new store openings, fell short of his expectations due to a difference in tax rate. It did, however, meet the expectations of the Street.

He lowered his 2018 and 2019 EPS projections to US$3.09 and US$3.34, respectively, from US$3.20 and US$3.44.

Mr. Lyon did hike his target for the stock to US$85 from US$75, keeping a “hold” rating. The average target on the Street is currently US$87.60, according to Bloomberg data.

“With expectations high and the stock already at a full valuation of 27 times NTM P/E [next 12 month price-to-earnings], we prefer to wait for such an opportunity,” he said.

Elsewhere, RBC Dominion Securities analyst Brian Tunick increased his target to US$92 from US$90 with an “outperform” rating (unchanged).

Mr. Tunick said: “In a specialty retail space desperate for growth, our Outperform rating on LULU is based on our expectation for sustained baseline low-double-digit top-line, assuming: (1) low- to mid-teens footage growth, including international expansion; (2) baseline mid-single digit comps aided by men’s and ongoing strength in the women’s business as innovation, omnichannel, and brand-building efforts take hold; and (3) at least a 400-basis points benefit from the Direct business. Despite prior peak margins at 28 per cent, we believe that LULU’s margins troughed at 18 per cent in 2015-2016 but are making progress to the 20-per-cent-plus level by 2020. We expect LULU can see at least a superior mid-teens EPS growth profile in 2018-2020, aided by: (1) merchandise margin expansion due to more favorable product costs including freight opportunities; (2) eventual leverage in non-merchandise items in COGS; and (3) a return to SG&A leverage. Assuming a rebuild to a 20-per-cent level, our longer-term base case model suggests a $4-billion brand with earnings power of $4.25-plus per share.”


RBC Dominion Securities analyst Amit Daryanani “modestly” lowered his iPhone unit expectations for Apple Inc. (AAPL-Q), believing the U.S. tech giant may work to curtail its inventory ahead of a new product launch in the fall.

“We think AAPL will launch all its devices this September (versus doing a staggered launch),” he said. Furthermore, we think units have been more stable on the LCD models versus OLED, which could dampen the ASPs [average selling prices] as well. As a result, for March/June-quarter we are modestly reducing both iPhone units and ASPs; for FY19 we are increasing our iPhone unit expectations but lowering our ASPs to reflect incremental demand from the LCD models.”

With the changes, Mr. Dayanani lowered his 2018 and 2019 revenue projections to US$259.5-billion and US$275-billion, respectively, from US$263-billion and US$278.1-billion. His earnings per share estimates fell to US$11.39 and US$13.15 from US$11.54 and US$13.28.

Keeping an “outperform” rating for Apple shares, his target fell to US$203 from US$205 to reflect the lower EPS expectation for the next 12 months. The average is US$191.67.

Mr. Daryanani: “We are sticking with our OP rating as we see several levers that AAPL can use to convert low single digit unit/ sales growth to mid-teens EPS growth – 1) Gross margin upside from cost downs, NAND tailwinds & yield efficiencies, 2) Services growth that should contribute to sales and 50-60 basis points to GMs [gross margins], 3) Capital allocation that could enable 500-600 basis points of share reduction annually over the next 5-plus years.”

Elsewhere, Goldman Sachs also lowered its iPhone sales projections for the next two quarters.

For the second quarter of fiscal 2018, or the three months ending in March, the firm expects sales of 53 million units, down from 54.7 units. It expects sales of 40.3 million units for the third quarter, falling by 3.2 million.

““iPhone demand expectations for March and June are already weak but we believe that early CQ1 (calendar first quarter) demand indications suggest even lower actual numbers than consensus is modeling,” the firm said.


Atlantic Gold Corp. (AGB-X) has re-rating potential with the successful ramp-up of its Moose River Consolidated (MRC) open pit gold mine in Nova Scotia, said Beacon Securities analyst Michael Curran, upon re-launching coverage of the Vancouver-based development group with a “buy” rating.

“In our view, Atlantic Gold could garner premium trading multiples among the junior gold producers for successfully delivering a low cost operation at the MRC mine,” he said. “The recent life-of-mine update, which could expand production from 80-90,000 ounces per year to 200,000-plus ounces per year, should also increase investor interest in the name. We also see the potential for 200,000 ounces per year of low cost production (in a politically stable jurisdiction) as an attractive acquisition target for other producers, particularly established mid-tiers.”

He set a price target of $3.25 for Atlantic Gold shares. The average is $2.52..


Ascendant Resources Inc.’s (ASND-T) share price is likely to continue to rise as it moves through its turnaround plan, said Laurentian Bank Securities analyst Ryan Hanley, who initiated coverage with a “buy” rating.

“With an extensive operating history and strong exploration potential, the acquisition of the El Mochito mine has turned Ascendant into one of a limited number of pure play zinc producers,” he said.

Mr. Hanley said the acquisition of El Mochito, located in northwest Honduras, provides an investors with the opportunity to gain zinc exposure through its pure-play status, noting zinc represents nearly 69 per cent of his revenue expectation for 2018.

“The zinc market has tightened over the last several years, as evidenced by declining inventory levels, which we expect will continue to support the current zinc price,” he said.

“We believe that the existing 1.9 million ton reserve understates the potential of El Mochito, and is the direct result of Nyrstar’s prior lack of exploration. Given the mine’s extensive operating history and an abundance of both near-term and long-term exploration targets, we believe that this reserve base will continue to grow, beginning with the release of updated reserves & resources in Q2/18.”

He set a target of $2 for Ascendant shares, which is 18 cents more than the average.

“Ascendant currently trades at 0.45 times on a P/NAV [price-to-net asset value] basis and 1.6 times on a 2019 estimated P/CF [price-to-cash flow] basis versus an (albeit limited) peer group of zinc producers which average 1.0 times and 4.8 times, respectively,” the analyst said. “We believe that as Ascendant’s potential is realized by the market, that this valuation gap will narrow.”


Detour Gold Corp.’s (DGC-T) valuation on long-term net asset value (NAV) is now at a “quite compelling” level, said RBC Dominion Securities analyst Dan Rollins in a research note released Tuesday.

It led him to raise his rating for the Toronto-based intermediate gold producer to “outperform” from “sector perform.”

“We believe Detour’s discounted valuation on long-term NAV is now at a level which cannot be ignored given the long-life nature of Detour Lake (reserve life of 22+ years versus industry average of 10+ years), district-scale exploration potential, and favourable jurisdictional setting,” said Mr. Rollins. “In addition, the expected release of an initial resource on the higher grade 58N deposit in Q2 is likely to demonstrate the potential to enhance the medium-term economics of Detour Lake. Successful permitting of West Detour would further reduce perceived operational risk.

“At spot commodity prices and currencies, we estimate Detour trades at 0.51 times NAV, which represents a 44-per-cent discount to the company’s average trading level of 0.91 times since 2015. The valuation discount becomes more evident when comparing Detour to its Intermediate peers, with the company trading at a 20-per-cent discount to its peers relative to historic trading levels over the same period. The discount to historical levels on both an absolute basis and relative basis are more than 1.5 standard deviations below respective means.”

He maintained a target for Detour shares of $20, which is 4 cents ahead of the average.


In other analyst actions:

Canaccord Genuity analyst David Galison downgraded Hydro One Ltd. (H-T) to “hold” from “buy” and dropped his target by a loonie to $23, which is 69 cents less than the average target on the Street.

TD Securities analyst Timothy James raised his rating for Chorus Aviation Inc. (CHR-T) to “buy” from “hold” with a target of $10 (unchanged). The average is $10.68.

Tudor Pickering & Co analyst Matthew Murphy upgraded Cenovus Energy Inc. (CVE-T, CVE-N) to “buy” from “hold.”

TD Securities analyst Aaron MacNeil initiated coverage of Source Energy Services Ltd. (SHLE-T) with a “hold” rating and $6.50 target, which sits well below the average on the Street of $11.25.

Cormark Securities Inc. analyst Tyron Breytenbach downgraded GoldQuest Mining Corp. (GQC-X) to “market perform” from “speculative buy” with a 30-cent target, down from 90 cents. The average is 45 cents.

DZ Bank AG analyst Robert Czerwensky downgraded General Electric Co. (GE-N) to “sell” from “hold” with a target of US$11.20, down from US$15.40. The average is US$16.92.

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