Inside the Market’s roundup of some of today’s key analyst actions
The negative reaction toward Canadian Tire Corp. Ltd.'s (CTC-A-T) second-quarter results has created an opportunity for investors, according to Desjardins Securities analyst Keith Howlett.
Before the bell on Thursday, the retailer reported adjusted earnings per share of $2.97, which was assisted by an $18-million real estate gain but fell 4 cents short of the consensus expectation on the Street. That miss led to a 4.8-per-cent share price drop during trading that day.
"Same-store sales were relatively good in the context of the poor spring weather, which persisted to mid-June," said Mr. Howlett. "Same-store sales increased by 1.9 per cent at Canadian Tire stores, 2.6 per cent at Mark’s and 3.7 per cent at SportChek.
"Canadian Tire is gradually unveiling the separate components of its strategy for the digital era, once implementation action is underway. Major U.S. retailers such as Walmart, Target and Best Buy provided more upfront disclosure of their plans, and then updated the market on the progress on implementation. Canadian Tire is now providing some glimpses into its plan, and some data points on consumer reaction. While we do not view the percentage of sales made online in and of itself meaningful, it is positive, in our view, that SportChek is now somewhere in the 13–15-per-cent range online (from a standing start 3–4 years ago), while enjoying positive same-store sales growth and maintaining a leading market share position."
Mr. Howlett also said he’s “positive” on the $174.4-million acquisition of Party City Holdco Inc.'s (PRTY-N) 65 Canadian stores, which he said will “be complementary to the existing assortments at Canadian Tire stores.”
The analyst raised his 2019 and 2020 EPS projections for Canadian Tire to $13.18 and $14.80, respectively, from $13.13 and $14.62.
Keeping a “buy” rating for the stock, he hiked his target to $190 from $185. The average is $171.50.
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Cineplex Inc.'s (CGX-T) non-traditional assets have found “their legs,” said CIBC World Markets analyst Robert Bek, leading him to raise his rating for its stock to “outperformer” from “neutral.”
“While the shares have been too cheap for several quarters now, we held back from chasing the stock given a mixed tone from the core theatrical business and choppy results for non-traditional growth initiatives,” he said. " Given a strong Q2, a stable outlook in theatrical (premium ticket growth and strong concessions offsetting modest attendance), a solid H2 film slate, and some traction in the company’s growth assets, the shares are finally too cheap, in our view. While we missed the bottom on the post-Q2 bounce, we still see upside for the shares, plus a 7.4-per-cent dividend yield."
Mr. Beck raised his target to $28.50 from $27.50 “to reflect our increased confidence the story (and the shares) have recovered their bearings.” The average is xxx.
“The stock had been too cheap heading into the quarter, and even after a post-Q bounce, it still offers a compelling opportunity for investors over the next 12 to 18 months,” he said.
Elsewhere, Echelon Wealth Partners analyst Rob Goff lowered his target to $34 from $36 with a "buy" rating (unchanged).
Mr. Goff said: “We trimmed our PT by $2 reflecting modest forecast trims; however, our longer-term bullish view remains unchanged. We continue to see value in the shares considering its FCF yield of 12.5 per cent against capex of $77-million where Topgolf (Private) and The Rec Room are excluded but theatre upgrades of $21-million beyond maintenance are included. We look for attractive returns on CGX’s growth initiatives where its scale, local market distribution strength, partnerships, and early returns to date suggest attractive returns. We have CGX investing $139-million or $2.30 per share annually over the next three years in the growth initiatives.”
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Despite an “exceptionally good” second quarter, Laurentian Bank Securities analyst Barry Allan lowered his rating for Wesdome Gold Mines Ltd. (WDO-T) to “hold” from “buy” in the wake of an “excellent” rise in share price.
“Q2/19 production (pre-released) was 22.4 Koz at a direct cost of US$626/oz compared to our original forecast of 18.5 Koz at US$837/oz,” he said. "The better-than-expected production was entirely due to a very high grade of ore mined and processed from the Eagle River mine (23.4 g/t vs 12.0 g/t forecast). As result operating cash flow (before working capital) was $0.11/sh compared to our forecast of $0.06/sh. However, we do note the Eagle River Complex only processed 47.4 K tonnes of ore, well below capacity of 75 Ktonne, and that the cost per tonne of ore mined and processed was very high. In short, we expect operations to return to a more normalized ore grade (12 g/t) and for the rate of through-put to increase back to capacity.
“Our overall forecast for the year remains relatively unchanged in spite of a very good Q2/19. Financially in good shape in spite of a high level of reinvestment. In Q2/19, $12.3 million of capital expenditures were reinvested in underground development and drilling at both the Eagle River and Kiena Complexes. However, due to the good level of operating cash flow, a quarter-end cash balance of $27.4 million and working capital of $20.5 million were flat compared to Q1/19. For 2019, we continue to forecast a high level of reinvestment with working capital trending sideways to down.”
Calling Wesdome his favourite junior gold producer, he maintained his $7.75 target for its shares. The average is $6.42.
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Following “another disappointing” quarter with results well below his expectations and expressing concern about its monthly dividend given its “continuing high” payout ratios, Industrial Alliance Securities analyst Neil Linsdell downgraded his rating for Medical Facilities Corp. (DR-T) to “hold” from “buy.”
"For now, this becomes a 'show me' story as we watch for sustained improvements in case and payor mix at several facilities," he said.
On Thursday before the bell, the Toronto-based company, which owns surgical facilities in the United State, reported adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $19.1-million, after excluding a $29.5-million impairment charge. That fell short of both Mr. Linsdell's $25.6-million forecast and the consensus expectation on the Street of $24.8-million. Revenue fell 5.2 per cent year-over-year to $101-million, also missed estimates ($109.6-million and $106.1-million, respectively).
The company's payout ratio came in at 179 per cent in the quarter, leading Mr. Linsdell to say: "We had expected 84 per cent versus 74 per cent in Q2/18. Cash available for distribution declined from $11.7-million to $4.9-million. The Company had been targeting a full-year payout ratio in the 70-per-cent range, which now seems unlikely. We were previously more conservative, forecasting an 82-per-cent ratio in 2019, but with our revised forecasts we have increased that ratio to 135 per cent for the full year. While this would cause a drain on cash of $9-million for the year, we forecast improvement to 106 per cent in 2020 and 77 per cent in 2021. This is manageable with over $80-million in unused credit facilities although the Company also has $41.7-million in convertible debentures maturing at the end of 2019. For the time being, the monthly dividend is staying at 9.375 cents per share providing a current dividend yield of 12.9 per cent. However, we expect this payout ratio to cause concern of a dividend reduction, which in turn reduces support for the share price."
Citing “negative surprises,” Mr. Linsdell lowered his financial expectations and target multiple for the company’s stock, leading to a drop in his target price to $8.50 from $16.50. The average on the Street is currently $14.70.
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Citing the “contrast of negative share price action and improved margins,” Raymond James analyst Andrew Bradford raised his rating for CES Energy Solutions Corp. (CEU-T) following a second-quarter earnings beat.
After the bell on Thursday, the Calgary-based company reported EBITDA of $41-million, excluding gains from equipment sales. The result exceeded both the $35-million consensus and Mr. Bradford's Street-high $38-million estimates.
He attributed the beat to a pair of factors: a “stepwise jump” in U.S. drilling fluids market share and improvements to operating costs.
“CEU points to its recent Kermit, Tx plant expansion enabling it to ‘take on new work and continue to grow market share,’” he said. “Indeed. CES’s share of the US drilling fluids market increased to 13.2 per cent from 12.1 per cent in 1Q and 11.8 per cent last year. And it didn’t just increase market share; it increased operating days in absolute terms by 5 per cent in a quarter where the U.S. rig count declined 5 per cent.
“CES has a long history of growing market share year-over-year, in both the US and in Canada. Over the almost 10 years in which it has competed in the US, CES has a very strong tendency to retain the market share once it grabs it.”
Mr. Bradford moved the stock to “strong buy” from “outperform” and kept a $4.50 target. The average is $4.48.
Elsewhere, despite the results “solid,” BMO Nesbitt Burns analyst Michael Mazar downgraded CES to “market perform” from “outperform.”
“We don’t expect much growth from the company in 2H/19 and into 2020,” he said.
Mr. Mazar lowered his target to $2 from $4.
“Our new target reflects 4.5 times 2020 EBITDA compared to CES’s current multiple of 4 times,” he said. “This multiple is several turns below CES’s historical level, but we feel appropriately reflects the current low growth environment.”
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Though GDI Integrated Facility Services Inc.'s (GDI-T) second-quarter results fell in line with expectations, Industrial Alliance Securities analyst Neil Linsdell lowered his rating for its stock to “hold” from “buy” based on recent price appreciation.
"We continue to maintain our positive outlook as the Company continues to further integrate recent acquisitions and to capitalize on cross-selling opportunities," he said. "However, given the recent share price appreciation, bring the share price close to our target, we are moving to a Hold rating."
His target remains $29, which falls short of the $30.92 consensus.
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Pointing to its “its impressive track record and the potential value created by the 2019–21 strategic plan,” Desjardins Securities analyst Benoit Poirier recommends investors “revisit” WSP Global Inc. (WSP-T) following “robust” second-quarter financial results.
"We continue to like this quality name as we believe the value-creation opportunities arising from the 2019–21 strategic plan are sizeable and achievable in view of the company’s strong FCF profile, management’s track record and the predictability of the business," he said. "We derive a potential stock price of $87–92 by 2021 assuming management achieves its target without equity issuance."
With the better-than-expected results and based on management's 2020 outlook, Mr. Poirier increased his earnings per share projections from 2019 through 2021.
Keeping a “buy” rating for WSP shares, he hiked his target by a loonie to $81, which 21 cents short of the consensus.
Elsewhere, Raymond James analyst Frederic Bastien maintained an "outperform" rating and $86 target for WSP.
Mr. Bastien said: “Our constructive view of WSP Global is unwavering post 2Q19 results. With its geographically diverse operations, dynamic management team and dominant position in global transportation,we see our Best Pick for 2019 delivering consistently solid financial results through 2020. Beyond this time frame, the firm can count on a healthy balance sheet and the support of its two anchor investors to further consolidate the pure-play engineering sector. We can easily envision a scenario in which WSP solidifies its core design practice in OECD countries and at the same time accelerates the growth of its advisory, planning and permitting services.”
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In a separate note, Mr. Poirier said Stantec Inc.'s (STN-T) “focus on execution should help to unlock value for long-term shareholders.”
However, Mr. Poirier said he was surprised by the company's "weak" second-quarter results, which were hurt by larger-than-anticipated labour costs.
"Management has already taken actions to address these issues with an extensive cost-savings initiative," he said. "These efforts should enable STN to achieve the lower end of its 2019 guidance ranges."
Maintaining a “buy” rating, he lowered his target to $38 from $40. The average on the Street is $36.32.
“We maintain our bullish stance on STN as we believe its diversified business model offers significant opportunities to create shareholder value as operational performance improves,” he said. “While a few quarters will be required to recover its valuation gap vs WSP, we believe the current share price is attractive enough for long-term investors to overlook these challenges in the short term.”
Meanwhile, Canaccord Genuity analyst Yuri Lynk cut the stock to “hold” from “buy” with a $31 target, falling from $38.
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Though it reported a “weaker” quarter highlighted by “lighter” revenue and earnings that fell short of expectations, Laurentian Bank Securities analyst Elizabeth Johnston believes CCL Industries Inc.'s (CCL-B-T) long-term view remains intact, leading her to raise her target price for its shares.
“Despite the softer quarterly results, we continue to believe that CCL’s premium multiple remains warranted given the solid outlook for growth and the expectation for continued tuck-in M&A (which the balance sheet remains positioned to support),” said Ms. Johnston. “At the end of Q2/19, net debt/EBITDA (ex. IFRS 16 impacts) was 1.9 times and we forecast that the company will finish 2019 at 1.4 times. Over time, CCL has demonstrated its ability to grow the company and given ongoing initiatives within multiple segments, we expect this to continue.”
Keeping a “buy” rating, she raise her target to $74 from $71, which exceeds the consensus of $69.11.
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In other analyst actions:
Canaccord Genuity analyst Matt Bottomley raised Cronos Group Inc. (CRON-T) to “hold” from “sell” with a target of $17, rising from $16. The average target on the Street is currently $19.58.
RBC Dominion Securities raised KP Tissue Inc. (KPT-T) to “outperform” from “sector perform”