A pump jacks pump oil at an Encana well near Standard, Alta., May 12, 2014.Todd Korol/The Globe and Mail
Inside the Market's roundup of some of today's key analyst actions
Finning International Inc.'s (FTT-T) fourth-quarter financial results drew a mixed reaction from analysts on the Street.
On Tuesday before market open, Vancouver-based Finning, the world's largest distributor of Caterpillar products and support services, reported adjusted earnings per share of 40 cents, exceeding the consensus expectation by 2 cents and representing a rise of 41 per cent year over year.
That result prompted a 2-per-cent jump in share price on the day.
However, it also prompted Raymond James analyst Ben Cherniavsky to downgrade his rating for the stock to "market perform" from "outperform." He called the move a valuation call, citing a limited return to his $36.25 target price following a 28-per-cent increase in share price after he upgraded his rating on May 11, 2017 (versus a 2-per-cent decline for the TSX).
"We still like the sector trends and applaud the company's achievements but feel this is now reflected in the stock price," he said. "Furthermore, with 4Q17 meeting our expectations, we have little reason to raise our forecasts materially or boost our target. If the cycle continues to unfold uninterrupted, we still see long-term upside to Finning's shares. But with volatility (finally!) resurfacing, we expect investors will have a chance to buy this stock at a more attractive price in the near-term."
"Over the years we have used Finning's historical price-to-earnings range as the main tool for deriving our target price. At present, the stock trades at 20.1 times our 2018 EPS estimate. This is within the company's average P/E range over the past 5, 10, and 15 years, albeit towards the upper end. With earnings still recovering and the broader markets remaining 'expensive' we are comfortable assuming an elevated multiple for this stock, but we see little room for further multiple expansion from here and we have no reason to argue for anything higher than what we have seen in the past."
Meanwhile, CIBC World Markets analyst Jacob Bout kept his "outperformer" rating for the stock and raised his target by $2 to $40. The average target on the Street is currently $38.28, according to Thomson Reuters data.
"We are increasing our price target … as we increase our estimates to reflect higher backlog levels and the prospect of stronger-than-expected revenue growth," said Mr. Bout. "This does not diminish the margin expansion story as increased capacity utilization should help FTT get back to historical margins. With commodity and construction end-markets rebounding, significantly higher backlog levels, benefits of operating leverage flowing into results, and strong forecast free cash flow (in contrast to past early-stage up-cycles when investments in inventory weighed heavily on FCF), we see FTT set up for another solid year."
Believing Finning is poised to deliver greater than 20-per-cent EPS growth, Canaccord Genuity's Yuri Lynk hiked his target by a loonie to $37 with a "buy" rating (unchanged).
"Finning displayed impressive operating leverage as management remains focused on controlling 'cost creep' as markets recover," said Mr. Lynk. "On single-digit top-line growth between 2017 and 2019, we see a 22-per-cent adjusted-EPS CAGR. Driving this growth are further fixed-cost reductions in Canada (Centre of Excellence closed during the quarter), margin upside in South America as ERP [enterprise resource planning] costs roll-off in H2/2018, and strong underlying demand for Caterpillar equipment, parts, and service in Finning's territories. With just a turn and a half of debt and management committing to generate positive FCF in 2018, we see further room to increase the dividend 5-10 per cent and/or move on complementary, likely accretive acquisitions."
Believing its momentum is intact, National Bank Financial analyst Maxim Sytchev raised his target to $39 from $37.50 with an "outperform" rating (unchanged).
"Historically, a material pick-up in new equipment sales (until that crested) has corresponded to expanding multiples," said Mr. Sytchev. "With Latam, Chile especially, lagging the new equipment rebound, we also have some good upside in H2/18 and 2019E to sustain the new equipment uptick; as a result, we believe investors should be commit to staying long Finning. With revenue momentum recovering faster (and higher) than we thought 12 months ago (in fact in 2018, we will be close to the all-time high achieved in 2014 at $6.9-billion), the sheer volume is offsetting some of the margin decline on the back of new equipment cycle rebound."
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The recent sell-off in Encana Corp. (ECA-N, ECA-T) is "overdone," according to AltaCorp Capital analyst Nick Lupick, leading him to raise his rating for the stock.
"Given the trouncing that Encana's stock has taken since mid-January, we believe that investors who believe in a stable improvement in WTI crude pricing above US$60 per barrel and are nimble enough should add to their position in Encana at US$11 per share to increase their exposure to the commodity," said Mr. Lupick, who upgraded the Calgary-based energy company to "outperform" from "sector perform."
"Encana's selloff to $11 per share has been overdone. The stock has underperformed its ACC covered peers by an average of down 6.5 per cent (since mid-January), down 19.3 per cent since we downgraded the stock (versus a 13.8-per-cent decline CNQ, a 16.1-per-cent decline for CPG and a 8.6-per-cent decline for ARX). Given the implied upside and the Company's exposure to the improving WTI price through its US based portfolio, we are upgrading our rating."
Mr. Lupick maintained a price target of US$14.50 for Encana shares. The average on the Street is US$15.64.
"One of our reservations when we when we changed our rating on the stock from Outperform to Sector Perform with our price deck update on Jan. 15 , was the fact that the reduction in our medium term WCSB gas price outlook offset the improvement in our more bullish outlook on crude oil. The reason for this mitigation stems from the fact that, of the Company's 150,000 barrels of oil equivalent per day of near term growth (2019 estimate versus 2017 estimate baseline), 95,000 boe/d of this growth (or 63 per cent) originates as Montney gas production exposed to weak pricing. As a result, its US$14 share price at the time (which implied limited upside to our target price of just 4 per cent) we downgraded the stock. Today, with greater-than 31-per-cent implied upside to the share price we believe that US$11 per share is an attractive entry point for investors who would like to add WTI exposure to their portfolio (in spite of the increasing exposure to WCSB gas)."
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Sleep Country Canada Holdings Inc. (ZZZ-T) has a "firm foundation" for future growth, according to Laurentian Bank Securities analyst Elizabeth Johnston.
Citing "strong" organic growth and a growing market share alongside a "conservative" balance sheet, Mr. Johnston initiated coverage of the mattress retailer with a "buy" rating.
"Strong brand recognition and new store openings [are] driving organic growth," she said. "SCCH has continued to grow organically, in excess of industry growth rates, as a result of increasing market share and growing sales within the sleep accessories category. The Sleep Country and Dormez-vous? brands command strong customer awareness, supported by strong marketing / advertising campaigns."
Mr. Johnston said the company has a "well-defined" opportunity to expand in both existing and new markets, with a goal of opening 8-12 new stores annually.
"With a conservative balance sheet (trailing 12-month net debt/EBITDA 0.8 times) and strong free cash flow generation ($60-million LTM Q3/17; forecasting $65-million in 2018), along with high cash on cash returns for new store openings, the greenfield [store opening] strategy is both supported by the strong balance sheet and store-level economics," she said.
"In May 2017, Sleep Country launched their ecommerce platform along with the Bloom mattress ("bed in a box"). Additional product launches are anticipated under this brand for sale online, positioning SCCH to take advantage of increasing online retail sales. Sleep accessories represent 21 per cent of total LTM sales, and have grown 15-per-cent CAGR [compound annual growth rate] since 2012."
Calling its current valuation "conservative with potential upside," Ms. Johnston set a target price of $40, which is a loonie below the average on the Street.
"SCCH currently trades at 12.5 times our 2018 estimated enterprise value-to-EBITDA, below diversified retail peers at 13 times," she said. "We believe that our 12.5-times valuation multiple is reasonable, given the company's strong SSSG, conservative balance sheet and compelling market growth opportunity."
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Klondex Mines Ltd.'s (KDX-T) update on its Fire Creek in mine in Nevada led a trio of analysts to downgrade their rating for the Vancouver-based company.
On Tuesday, Klondex announced proven and probable ("P&P") gold reserves at the facility of 229,000 ounces as of Nov. 30, 2017, with grading of 0.69 ounces per ton. Those results are a drop of 22 per cent and 44 per cent, respectively, from their previous update at the end of June.
Canaccord Genuity analyst Rahul Paul said he was surprised by the decline in both reserves and grades, noting Fire Creek, the company's cornerstone asset, has "benefited from healthy levels of exploration and development spending (cumulative capital investment of $66.6-million from Q1/15 to Q3/17)."
Mr. Paul downgraded Klondex shares to "hold" from "buy," citing the tempered expectations.
The analyst lowered his 2018 and 2019 earnings per share projections to 2 cents and 1 cent, respectively, from 24 cents and 10 cents.
"Our forecasts have been updated to reflect recently provided FY2018 guidance which was weaker than expected," said Mr. Paul. "This drives the reduction in our FY2018 financial forecasts. Materially lower assumed grades at Fire Creek going forward (partly offset by lower unit costs) explain the reduction in our operating and financial forecasts in 2019 and beyond. While Fire Creek remains a profitable operation, our forecasts suggest that FY17/18 production levels could be difficult to sustain with grades trending lower."
Mr. Paul's target for the stock fell to $2.75 from $4.15. The average is $3.71.
"Considering the limited implied return to our target price, we are lowering our rating," he said.
"Klondex currently trades at 0.72 times price-to-NAV, a premium to the peer group which trades at 0.54 times P/NAV. While the high grades and low geopolitical risk would typically justifying a premium, near term re-rating may be limited considering the challenges faced in 2017."
Elsewhere, RBC Dominion Securities analyst Mark Mihaljevic dropped the stock to "sector perform" from "outperform" with a $3 target (from $4.50).
Paradigm Capital analyst Don Blyth lowered it to "hold" from "buy" with a target price of $2.75, falling from $4.25.
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Snap Inc.'s (SNAP-N) fourth-quarter results elicited widespread applause from the Street with four analysts upgrading their ratings for the social media company and others hiking their target price.
On Tuesday after market close, the Los Angeles-based company, which owns the popular Snapchat app, reported active users jumped to 187 million in the quarter from 178 million in the third quarter, exceeding analysts' average expectation of 184.2 million users.
Revenue grew 72 per cent year over year to US$286-million, topping the Street's expectation of US$255-million. An adjusted EBITDA loss of US$159-million was also better than the consensus estimate (a loss of US$187-million).
Those results prompted RBC Dominion Securities analyst Mark Mahaney to raised his rating for Snap to "outperform" from "sector perform" with a target of US$21, rising from US$15. The average target among analysts covering the stock is US$15.35.
"Among our Top 10 Surprises for the Internet sector in '18, we included: Snap Snaps Back," said Mr. Mahaney. "We thought that the company's app redesign, its Android overhaul, and its auction-based ad inventory pricing change could cause DAU [daily active user] and Ad Revenue growth to reaccelerate. We thought the timing would be H2:18. We were both right & wrong… The reacceleration and the inflection are here.
"And we believe they are sustainable thanks to 4 FGDs (Future Growth Drivers): 1. The Android overhaul is still not finalized – so there are more future benefits to come, esp. with ROW DAUs; 2. The auction transition for Snap Ads is largely behind us, and the number of advertisers is doubling year over year – so ad pricing has a LOT of upside ahead; 3. Early testing of the new app redesign is causing gains in engagement and ad performance – and the app redesign is only 25 per cent rolled out; & 4. SNAP plans to moderate its employee growth – so there will be more opex leverage ahead. At a high level, we continue to see very good signs of Product Innovation – maybe the only real sustainable growth driver in 'Net Land – and we'd point to Maps and Promoted Stories as examples. As an aside, we would note that comps will get materially easier over the next three quarters."
Other analysts upgrading the stock were:
- SunTrust Robinson Humphrey's Youssef Squali to "hold" from "sell" with a US$15 target (from US$10).
- J.P. Morgan's Douglas Anmuth to "neutral" from "underweight" with a US$16 target (from US$10).
- Evercore ISI's Anthony DiClemente to "in-line" from "underperform" with a US$13 target (from US$7).
Conversely, Susquehanna Financial analyst Shyam Patil downgraded Snap to "negative" from "neutral" with a US$7 target, falling from US$10.
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The recent share price weakness for Nutrien Ltd. (NTR-N, NTR-T) presents an opportunity for investors as it now offers earnings and dividend growth at a "reasonable" valuation, said RBC Dominion Securities analyst Andrew Wong.
On Tuesday, Nutrien announced fourth-quarter 2017 results for Agrium Inc. and Potash Corporation of Saskatchewan Inc. and provided financial guidance for 2018.
The newly formed company expects full-year 2018 EBITDA of US$3.2-billion to US$3.7-billion.
"We believe $3.2-3.7B EBITDA guidance is conservative," said Mr. Wong. "According to management, the low-end is based on average 2017 fertilizer prices, mid-point based on $20-plus per ton, and high-end based on $30-40-plus per ton. We note that current spot prices already reflect a $30-40 per ton increase vs. 2017 levels. Although prices may moderate through 2018 (notably nitrogen prices into mid-year), we think the implied mid-point price expectations are very reasonable.
"We also think initial disappointment with Nutrien's guidance was misplaced, as the consensus estimates compared well after making necessary adjustments - the delta between guidance ($3.2-3.7-billion EBITDA) and pre-release consensus ($3.8-billion) was largely due to excluding equity earnings and dividends (we estimate $200-million impact) and a Retail segment accounting change ($35-million) - after adjustments, consensus estimate of $3.55-billion compared well to the guidance range."
Mr. Wong said he expects "strong" free cash flow generation as well as "steady" performance from its retail segment. He also pointed to "significant capital allocation opportunities after selling equity investments worth $5-billion, and significant synergy realization with potential upside to the $500-million beyond the two-year time frame."
Keeping an "outperform" rating for the stock, he lowered his target to US$58 from US$60 due to "lower phosphate estimates and assigning equity earnings from Arab Potash, ICL, and SQM to discontinued ops, in-line with company reporting." The average target on the Street is US$58.41.
"With the recent pull-back, valuation is now in-line with the historical average at 8.5 times enterprise value-to-EBITDA on 2019 estimates - note that this valuation excludes the equity investments," said Mr. Wong. "We believe Nutrien now offers an attractive triple play of earnings and dividend growth at an attractive valuation."
Meanwhile, Raymond James analyst Steve Hansen moved his target to US$58 from US$60 with a "market perform" rating.
Mr. Hansen said: "While we continue to admire the synergistic merits of NTR's recent merger, our neutral rating continues to reflect lingering near-term concerns over the broader nutrient cycle. We will continue to watch for a more attractive risk-adjusted entry-point."
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In response to Tuesday's release of its quarterly results, AltaCorp Capital analyst Chris Murray upgraded WestJet Airlines Ltd. (WJA-T) to "sector perform" from "underperform" and raised his target by a loonie to $24, which sits below the average on the Street of $28.31.
"While we see WestJet benefiting from a recovery in the Western Canadian economy, we continue to remain cautious on the number of divergent strategies being pursued within a climate where labour challenges are present," he said.
"As management indicated, it could be eight quarters before seeing ROIC [return on invested capital] improve, which in our opinion, is not necessarily a given with the challenges associated with execution over that period. We are revising our rating to Sector Perform (previously Underperform) with our return to target moving to our plus-minus 10-per-cent band while increasing our 12-month price target to $24.00 from $23.00 previously as we roll forward our valuation period by one quarter."
The move came on the heels of Tuesday's upgraded by National Bank Financial analyst Cameron Doerksen, who moved the stock to "outperform" from "sector perform" with a $30 target.
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BMO Nesbitt Burns analyst Ben Pham downgraded Innergex Renewable Energy Inc. (INE-T) to "market perform" from "restricted" with a $15 target, dropping from $19. The average is $16.69.
"The Alterra acquisition diversifies INE's business mix and adds exposure to a new growth market," said Mr. Pham. "However, we believe the announcement reinforces a continued trend of lower returns and change in business mix away from premium hydro assets. We had previously thought the stock would lift on accelerated dividend growth as the Canadian backlog contributes this year, but now we believe it will remain in a range for the foreseeable future."
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In other analyst actions:
Wells Fargo Securities analyst Roger Read downgraded Canadian Natural Resources Ltd. (CNQ-T) to "market perform" from "outperform" and dropped his target to $43 from $59. The average is $52.40.
DZ Bank AG analyst Ingo Wermann upgraded Walt Disney Co. (DIS-N) to "buy" from "hold" with a target of US$125, up from US$110. The average is US$121.13.
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