Inside the Market’s roundup of some of today’s key analyst actions
Stifel analyst Martin Landry thinks there were few surprises in Aritzia Inc.’s (ATZ-T) second-quarter fiscal 2024 financial results, however he warned the Vancouver-based clothing retailer is losing market share after its same-store sales slid 4.3 per cent year-over-year during a summer period when its competitors saw gains. It’s the first drop in more than five years, excluding the pandemic.
“This decline comes from limited product innovation, which resulted in soft traffic trends,” said Mr. Landry. “It is not clear when new styles will stimulate traffic again, but the company anticipates negative same-store sales for Q3FY24 and Q4FY24. This is somewhat disappointing and a longer timeframe than expected. To stimulate sales, management will invest in digital marketing, something new for the company, and with the appearance of a change in strategy. We reduce our FY25 EPS forecasts by 9 per cent to reflect slower revenue growth and related lower fixed cost absorption. We believe that Aritzia is still in a ‘show-me’ mode with investors until visibility on turnaround improves. This could leave the stock range-bound near-term.”
Aritzia is in a rut. That’s putting a lot of pressure on its next quarterly results
After the bell on Thursday, Aritzia reported net revenue of $534.19-million for the quarter, rising 1.6 per cent year-over-year and above the analyst’s $522.97-million estimate. Adjusted fully diluted earnings per share fell 93.2 per cent to 3 cents, ahead of Mr. Landry’s expectation of a 4-cent loss, as the retailer battled margin headwinds from inflationary pressure on product costs and labour, normalization of markdowns and transitionary dual warehousing costs.
Maintaining its full-year fiscal 2024 guidance, the retailer revealed a new digital marketing initiative. It’s a move that concerned Mr. Landry.
“On the earnings call, management discussed seeing opportunities to increase investments in digital marketing (i.e. paid search and paid social media marketing), to drive traffic online,” he said. “While this strategy may end up being successful, it represents a slight change in strategy, which raises questions, in our view. Historically, Aritzia has acquired new customers with limited marketing spending, primarily from opening new stores, which resulted in its marketing spending being less than 5 per cent of sales. Hence, the need for higher marketing spending might suggest that customer acquisition has slowed in recent months. Our concern is that the need for higher marketing spending will be difficult to reverse and could end up being permanent.”
Mr. Landry reduced his 2025 forecast by almost 7 per cent to “better reflect macroeconomic headwinds combined with slower same-store-sales growth assumption given our limited visibility as to when the company returns to positive SSS.” That led him to cut his target for Aritzia shares by $8 to $32, keeping a “buy” recommendation. The average on the Street is $32.88.
“We see significant growth potential for Aritzia, which should come from: (1) Geographic expansion in the U.S., where ATZ sees a potential for 100-plus stores vs 48 stores currently, (2) Product depth expansion with additional sizes, lengths and colors, and (3) Category expansion including swimwear, intimates and men’s apparel,” he said.
“Despite near-term earnings volatility, long-term thesis unchanged. While gross margins are expected to be under pressure in FY24, we believe these issues are not permanent. In addition, the U.S. expansion should be margin accretive as price points in the US are the same as in Canada, providing an approximate 25-per-cent lift in Canadian dollars. Larger U.S. revenues also reduce Aritzia’s FX exposure as the company buys the majority of its products in USD.”
Elsewhere, TD Securities’ Brian Morrison cut his target to $26 from $32 with a “hold” rating.
“There were a number of encouraging takeaways from the release and call,” said Mr. Morrison. “This included price increases implemented successfully, new product introductions being well-received, inventory normalization taking hold, promotional activity tracking expectations, attractive new-store economics, cost efficiencies being realized, and the outlook for declining transient cost pressure remaining on track. This enabled management to maintain its F2024 guidance and 500bps of forecast margin improvement for F2025. The overriding concern we have, that not surprisingly, we did not get clarity upon, was the outlook for revenue/volume improvement. The Q3/F24 revenue guidance is “flat-to-down”, which implies an ongoing negative SSSG outlook. With the growing pressure on discretionary income available to the consumer, we believe that consensus revenue expectations may have further risk to the downside, and in turn potentially margins. In our view, we believe another quarter-or-two of improved visibility may be required for investor confidence to improve and lead to a sustained increase in the share price.”
“We do not place much merit on a weak quarter being a snick better than forecast. Although encouraged by the operational progress toward management’s target objectives, we believe that macro headwinds may continue to prove challenging. As such, we have lowered our F2025 financial forecasts, and we believe a multiple toward the low end of its historical range is currently appropriate.”
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With the fundamental outlook for the uranium market continuing to improve, Scotia Capital analyst Orest Wowkodaw increased this price forecast, leading him to raise his forecast for Cameco Corp. (CCO-T), believing “the inflection point in financial performance has arrived.”
“We have updated our U308 supply-demand outlook,” he said. “We now forecast a larger 2023-2030 average market net deficit of 20.0M lbs per annum (vs. 15.6M lbs pa previously), largely reflecting downgrades to our supply expectations in Niger (Arlit mine and Dasa project) following the recent coup, and to a lesser extent, in Canada (CCO’s operations). On average, our forecast net deficit represents a substantial 10 per cent of annual demand. Although uranium prices have improved (spot and term prices are US$74/lb and US$61/lb), we envision an environment of higher prices ahead based on tightening fundamentals. As a result, we have increased our 2023E-2027E U308 price deck to US$58/lb, US$75/lb, US$80/lb, US$85/lb, and US$90/lb (or by 27 per cent per annum) and our long-term price to US$75/lb (vs. US$65/lb previously). Moreover, we would not be surprised to see spot prices of more than US$100/lb in the years ahead (perhaps challenging the 2007 record high of US$136/lb).”
Increasing his earnings projections though 2025 as well as his net asset value estimate, Mr. Wowkodaw hiked his target for Cameco shares to Street-high $70 from $54, reiterating a “sector outperform” rating. The average target is $57.15.
“We rate CCO shares SO based on improving fundamentals driven by the dual Western World agendas of decarbonization and energy independence,” he said. “Given heightened global geopolitical risks, we anticipate CCO and WEC to be prime beneficiaries of Russian replacement demand for U3O8 and nuclear services. Our revised 12-month target ... is based on a 50/50 weighting of 20.0 times 2025 estimated EV/EBITDA and 2.0 times our 8-per-cent NAVPS. The higher multiple reflects scarcity in a rising price environment. CCO remains a Top Pick.”
Elsewhere, Raymond James also raised his uranium price forecast for 2023 and 2024 as well as its long-term assumption (to US$75 per pound from US$65).
“We believe the combination of growing uncovered demand over the next few years (which is a function of consumption plus inventory policy), increased security of supply concerns given the concentrated supply and current geopolitical situation, long lead times for greenfield production and the fact many greenfield projects would need higher uranium prices, and growing financial interest could lead to higher uranium prices; we have increased our uranium price forecasts,” said analyst Brian MacArthur. “Spot uranium prices continue to rise but unlike 2022 when some of the price move reflected financial players, this year we believe the price move is more reflective of end user demand. While our long-term price increase reflects our updated estimate of incentive prices, we note historically prices can trade through incentive prices especially if security of supply issues occur because shutting down nuclear base load electricity is not an attractive/viable option and the cost of uranium is only a small part of the operating cost of a nuclear reactor. We have also increased the target prices for our uranium coverage (CCO, DML, NXE) given these higher uranium price forecast.”
His target for Cameco rose to $66 from $56 with an “outperform” rating.
Mr. MacArthur’s other changes are:
* Denison Mines Corp. (DML-T) to $2.90 from $2.40 with an “outperform” rating. Average: $2.65.
* NexGen Energy Ltd. (NXE-T) to $11 from $9 with an “outperform” rating. Average: $10.06.
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Seeing as “overlook and undervalued,” Jefferies analyst Christopher LaFemina initiated coverage of Lundin Mining Corp. (LUN-T) with a “buy” recommendation on Friday.
“Lundin Mining is a Canada-based copper, zinc and nickel miner with operations in the Americas and Europe,” he said. “We note that copper comprises 80 per cent of EBITDA, and we believe the Street underappreciates LUN’s significant leverage to copper pricing, execution of key acquisitions and promising growth projects. We anticipate Lundin will grow copper production to grow by 62 per cent through the end of the decade, relative to expected industry growth at 17 per cent for the same period. We expect delivering increased volumes into a tightening market should improve earnings, cash flow, capital returns and drive upside for shares. We note our EPS est. for ‘24 and ‘25 are well above consensus.”
He set a target of $13 per share, exceeding the average on the Street of $11.83.
“Delivering increased copper volumes into a tightening market with higher prices would improve Lundin’s earnings and cash flow and lead to higher capital returns and a higher share price, in our view,” said Mr. LeFemina. “This is a key reason why we like this stock.”
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Touting “compelling value and growing shareholder returns,” BMO Nesbitt Burns analyst Michael Murphy upgraded Baytex Energy Corp. (BTE-T) to “outperform” from “market perform”
“Supported by strengthening crude prices, and our bullish outlook for 2024, we are upgrading Baytex ... With post-acquisition deleveraging well underway, we forecast the company will generate upwards of $1.4 billion of free cash flow next year, half of which will be returned to shareholders, primarily through share buybacks,” he said. “The stock currently trades at a compelling 2024 FCF yield of 31 per cent (BMO Deck) relative to mid-cap peers at 15 per cent.”
Believing its valuation is “too attractive to ignore,” Mr. Murphy now has a $7.50 target for Baytex shares, up from $5.50 previously. The average target on the Street is $7.31.
“Baytex trades at one of the highest free cash flow yields, and lowest multiples in its peer group, based on our estimates,” he said. “We estimate that the company could liquidate its entire market cap through free cash flow in 3.5 years and its EV in 5.0 years at $90/bbl WTI.”
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While TD Securities analyst David Kwan sees Sangoma Technologies Corp. (STC-T) as “attractively valued, particularly given its solid FCF (9-per-cent trailing yield),” he thinks near-term upside could be limited “given the lack of catalysts and the impact of potential disruptions from changes implemented by the new leadership team.”
That led him to lower his recommendation for the Markham, Ont.-based cloud-based communications provider to “hold” from “buy” following its fourth-quarter earnings miss and a suspension to its guidance.
On Wednesday after the bell, Sangoma reported revenue of $63.7-million, narrowly above Mr. Kwan’s $63.2-million estimate and the consensus projection on the Street of $62.9-million. Gross margin slid to 66.3 per cent, below the analyst’s 70.2-per-cent expectation and leading to lower-than-anticipated adjusted EBITDA of $10.9-million (versus Mr. Kwan’s $12.6-million estimate).
“As part of new CEO Charles Salameh’s strategic plan to position the company in an ideal position for long-term profitability and growth, Sangoma has suspended guidance for F2024, but it currently plans to resume providing guidance in F2025,” the analyst said. Management remains focused on driving profitable organic growth, with no plans for M&A for the next year or two.”
“Both Mr. Salameh and new COO Jeremy Wubs believe Sangoma has an attractive suite of communication solutions complemented by its managed services offering. One near-term priority is to determine how to better package these offerings for its core SMB customer base (e.g., vertical-specific solutions). They also plan on transforming the organization, including building crossfunctional teams and better consolidating platforms/systems.”
Lowering his 2024 and 2025 revenue forecast to “reflect a more conservative growth assumption for Sangoma’s Services revenue, in part due to the ongoing challenging macro environment,” Mr. Kwan cut his target for its shares to $7 from $9.50. The average on the Street is $10.12.
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After hosting meetings with chief executive Tracy Robinson this week, Citi analyst Christian Wetherbee thinks Canadian National Railway Co. (CNI-N, CNR-T) “appears to be controlling what is controllable, as service levels have remained consistent through the west coast port strike and wildfires.”
“However, macro trends remain challenging and are negatively impacting CN’s international intermodal business,” he added in a research note released Friday. “This will contribute to challenging 3Q23 earnings, but CN remains confident in a significantly better 4Q volume performance as bulk commodities are improving sequentially. Collectively, it appears CN is effectively laying the groundwork to leverage an eventual freight recovery into solid incremental margins, but near-term headwinds and tough early ‘24 comps suggest some time before the growth inflection becomes apparent.”
Seeing its third quarter looking “soft,” Mr. Wetherbee lowered his earnings per share estimate to $1.55 from $1.80, expecting revenue ton miles (RTMs) to decline by low double-digits year-over-year.
“Negative mix within Bulk commodities and fuel surcharge headwinds couple with a 5-6-per-cent decline in RTMs to yield a mid/high teens year-over-year revenue decline,” the analyst added. “These headwinds suggest a sequentially higher OR [operating ratio]. Nevertheless, we sense management will reiterate full-year guidance for flat-to-slightly negative EPS growth absent a big fuel move or incremental negativity in auto related to the UAW strike. We are moving our 2023 estimate below guidance to $7.10 (down 6 per cent year-over-year). While volume is improving, we think the ramp is steep.”
“Management remains confident in the incremental 800-900k annual carloads of volume opportunity by 2026 laid out at its investor day in May 2023. However, the international intermodal piece has been delayed as elevated inventories and decelerating consumer activity weighs on imports. That will likely push EPS growth negative in 2023 and while 2024 is likely to be a rebound year, the company doesn’t expect intermodal to improve until post-Lunar new year, suggesting EPS growth will be toward the lower end of guidance before accelerating in 2025 and 2026.”
While he noted CN’s service remains “stable” through a series of 2023 challenges, including wildfires and B.C. port strike, Mr. Wetherbee lowered his target for its shares to US$115 from US$122, maintaining a “neutral” recommendation. The average on the Street is US$128.39.
“While overarching macro concerns were present we believe CN is laying the groundwork of strong service to be well positioned to leverage the eventual freight recovery into strong incremental margins,” he said. “We also think that the company is relatively well positioned to compete with CPKC, as multiple commercial rail partnerships have emerged post-merger (most recently with Union Pacific and Norfolk Southern with more likely). These new opportunities support a case for CN to be relatively less impacted by the merger and we do not see CPKC’s success as a zero-sum game over the next several years.”
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In other analyst actions:
* TD Securities’ Menno Hulshof initiated coverage of Athabasca Oil Corp. (ATH-T) with a “hold” rating and $4.50 target. The average is $4.56.
“ATH not only survived the 2020 crash, but we believe it also emerged the strongest it has ever been. In our view, the balance sheet is pristine (anticipates exiting Q3/23 with $415-million of liquidity) and shareholder capital returns are competitive (75 per cent of excess cash flow in 2023),” he said. “We believe it also offers economic growth optionality (Leismer expansions) and is advantaged from a royalty/cash-taxation perspective. However, with the recent share-price rally (up 104 per cent trailing-12-months), our $4.50 target price and 9-per-cent target return point to a HOLD rating”
* Following the late Thursday announcement of a 10-year agreement with the City of Regina to process its organic waste through a new project, called Prairie Sky Organics, Desjardins Securities’ Brent Stadler raised his target for EverGen Infrastructure Corp. (EVGN-X) to $4.50 from $4.25, keeping a “buy” recommendation. The average is $5.69.
“In our view, EVGN offers investors a unique opportunity to take early advantage of the RNG wave, which we believe is essential to reaching global decarbonization goals,” he said. “We expect explosive growth as EVGN embarks on becoming a Canadian RNG leader.”
* RBC’s Greg Pardy raised his target for Enerplus Corp. (ERF-N, ERF-T) to US$21 from US$19 with an “outperform” rating. The average is US$24.31.
* In the wake of its Investor Day event on Thursday in Toronto, RBC’s Geoffrey Kwan cut his Onex Corp. (ONEX-T) target to $102 from $103, which is the current average, with a “sector perform” rating, while Scotia’s Phil Hardie increased his target to $110 from $100 with a “sector outperform” recommendation.
“We came away from the event with increased conviction on our investment thesis that Onex is likely entering an era of unprecedented focus on shareholder value creation,” said Mr. Hardie. “The combination of a leadership change and the sunset on multiple voting shares in 2026 likely creates a strong incentive and sense of urgency to surface shareholder value or risk being susceptible to a takeover.
“The path to value creation includes (1) compound investing capital by 14-16 per cent, (2) achieve US$55-million of run-rate Fee-Related Earnings by the end of 2025, (3) enhance and expand fundraising capabilities, (4) deploy capital into accretive and profitable growth opportunities, and 5) progress on the value-creating journey for shareholders. If successful, this has the potential to translate into a share price of $200, more than 2.5 times the current stock price.”