Inside the Market’s roundup of some of today’s key analyst actions
Citi analyst Paul Lejuez expects a “solid” third-quarter beat and guidance raise from Lululemon Athletica Inc. (LULU-Q) when it reports its results on Thursday, admitting “the bar is high.”
“We anticipate a big top/bottom line beat in 3Q (10/8 after market close) relative to consensus,” he said. “We are currently modeling a 22.5-per-cent comp in 3Q (vs. consensus up 18.5 per cent and buy side comp bar of 21-23 per cent) and EPS of $2.04 (vs. cons $1.96). We believe the momentum LULU was seeing in 1H continued in 3Q and early 4Q driven by broad strength across categories and geographies.
“We expect management to raise F22 EPS guidance, flowing through the 3Q beat and raising 4Q top/bottom-line outlook. We expect much of the conversation on the conference call to shift to management’s initial thoughts on F23 given the tough comparisons LULU faces next year. We note that if management talks about incremental cost headwinds/investments next year, that could be a negative to shares. Stepping back, while we believe business is strong, expectations are high heading into the print, making for a tough setup.”
With the expectation of a guidance raise, Mr. Lejuez said he’s more in-line with buy side expectations for the fourth quarter, projecting a comp increase of 22 per cent, which is higher than the Street’s 20-per-cent projection. His earnings per share forecast is US$4.38, exceeding the consensus by 9 US cents.
“Recall, last year LULU’s comps slowed as they entered the last week of Xmas selling and into Jan due to the Omicron surge, which makes for a relatively easier comparison (though they still delivered a 22-per-cent comp in 4Q21),” he said. “We note that our 4Q GM estimate is 130 basis points s higher than cons (we are modeling gross margins up 140bps vs. consensus up 10bps), as we expect LULU to get better leverage on fixed expenses within COGS and benefit from lower air freight vs. last year when it was a 450bps headwind to GM.
“We expect much of the conversation on the conference call to shift to management’s initial thoughts on F23 given the tough top line comparisons LULU faces next year. While current F23 cons sits at $11.37, we believe the buyside is closer to or higher than our est of $11.96. We believe investors want to better understand what (if any) major cost headwinds LULU is facing next year, whether they will see the benefit of lower freight costs flow through the PnL and how sustainable the current comp trajectory is in the U.S.. We note that if management talks about incremental cost headwinds/investments next year, that could be a negative to the stock (given the strength of the stock recently, relatively high multiple and high expectations).”
Pointing to stronger comps in both the third and fourth quarter, Mr. Lejuez raised his fiscal 2022 and 2023 EPS estimates to US$10.06 and US$11.96, respectively, from US$9.95 and US$11.85.
With those changes, he hiked his target for Lululemon shares to US$400 from US$350, maintaining a “neutral” recommendation. The average target on the Street is US$384.17.
“Citi’s trading desk has not seen a lot of flow in LULU recently, but anything they have seen has been on the long side from both hedge funds and long-onlys,” he said. “Short interest is 2 per cent of the float, down from 3 per cent last month, one of the least shorted stocks within our coverage universe. Consistent with what we are seeing on the trading desk, our conversations indicate LULU is a well-owned stock and investors are anticipating another solid beat & raise in 3Q (similar to 2Q). Although Citi’s Quant crowding data are not available, we believe LULU should be thought of as crowded.”
“Comp momentum has been among the best in retail and margins have expanded singificantly over the years. Product innovation continues to drive strong results in seemingly developed categories such as women’s pants, the men’s business is a big opportunity, and the customer has given LULU license to broaden into new categories. However, with the LULU being valued as one of the most expensive specialty retail concepts ever, we believe the risk/reward is fairly balanced.”
Elsewhere, others making changes include:
* Stifel’s Jim Duffy to US$450 from US$400 with a “buy” rating.
“We expect revenue led upside to FY2H results fueled by active customer growth, better instocks, and International,” said Mr. Duffy. “Despite elevated inventory, U.S. checks show promotions in FY3Q and FY4Q to date below both FY2Q and 2019. With evidence of FY2H to date strength and considering FY4Q21 Omicron impediments, FY2H guidance implying deceleration seems a low hurdle and we expect estimates rebase higher. The high-twenties growth in FY22 is nicely ahead of multi-year mid-teens objectives through 2026 outlined in April. Assuming sustained mid-teens growth beyond FY22 yields meaningful lift to FY26 goals ($14-billion and EPS more than $19 vs. objective $12.5-billion and EPS $16). Shares reflect a 26 times P/E on the more than $19 EPS discounted at a 10-per-cent rate for 3 yrs. Ahead of opportunity for upward revisions, we see this as an attractive entry point and are raising our 12 month TP.”
* Credit Suisse’s Michael Binetti to US$465 from US$390 with an “outperform” rating.
* Cowen’s John Kernan to US$542 from US$535 with an “outperform” rating.
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While Goodfood Market Corp. (FOOD-T) reported fourth-quarter financial results that largely fell in line with the Street expectations, Stifel analyst Martin Landry emphasized the “lack of revenue growth, lumpy track record and macroeconomic uncertainty remains.”
“FY22 has been a challenging year for Goodfood,” he said in a research note released Monday. “The company’s revenues declined by more than 29 per cent and cash burn accelerated driven by declining profitability, triggering a going concern note on its financial statement. Coupled with the overall macroeconomic environment and tightening financing conditions, FOOD was forced to adjust its strategy and refocus towards improving profitability and cash conservation. As a result, the company returned to its roots, by exiting its on-demand delivery service to focus entirely on meal kits. Q4 results showed the benefits from the switch in strategy with improved profitability metrics, increasing visibility on a potential return to positive EBITDA by H1FY23 and reassuring investors on the viability of the company.”
Shares of the Montreal-based company surged 39.4 per cent on Friday following its premarket earnings release, , which saw gross margins improve 7.8 per cent year-over-year to 30.7 per cent. However, revenue slid 37 per cent to $50.4-million, falling in line with the company’s pre-released results as well as Mr. Landry’s $50.2-million estimate. An Adjusted EBITDA loss of $1.9-millionwas an improvement of $15.8-million year-over-year and better than the $3.4-million-loss estimate of both the analyst and the Street.
Mr. Landry did call the earnings improvement “a step in the right direction.”
“In an attempt to return to positive EBITDA by H1/FY23, Goodfood established a series of strategic initiatives to improve its operations,” he said. “The main initiatives taken by the company included: (1) the exit of on-demand delivery services to focus entirely on weekly meal kits, (2) head count reduction, facility exits and contract renegotiation resulting in $22 million in annualized costs savings since Q3FY22 and (3) the consolidation of all operations into two facilities in Montreal and Calgary, which is expected to contribute to further margins improvements as the company fully exits its other facilities,” adding: “In light of the Q4 results, and the profitability improvement achieved, we have updated our estimates, which are now more aligned with management’s target. Despite expecting revenues to decline by 32 per cent year-over-year in FY23, we have reduced our EBITDA loss by 94 per cent and now expect Adj. EBITDA of ($335) thousand in FY23, with 2 quarters of positive EBITDA (i.e. Q2 and Q3). However, our visibility on these forecasts is limited as reduced demand due to the economic slowdown and increased competitive landscape could derail our forecasts.”
Emphasizing a “lack of conviction” on its growth potential and an economic environment that “could result in an industry wide slowdown,” Mr. Landry cut his target for Goodfood shares to 52 cents from 60 cents. The average target is 48 cents.
“Despite the profitability improvements displayed on the Q4 results, we remain on the sidelines. We do not expect the company to return to revenue growth until FY24 and thus see limited upside potential for FOOD’s shares over the coming year. The company remains in cash burn mode and overall valuation multiples across the industry suggest more downside risk,” he concluded.
Elsewhere, RBC’s Paul Treiber downgraded the company to “underperform” from “sector perform” with a 35-cent target.
Others making target changes include:
* National Bank’s Ryan Li to 50 cents from 75 cents with a “sector perform” rating.
“We remain on the sidelines given the tepid online backdrop, uncertainty regarding the company’s ability to pivot back to meal kits successfully, and balance sheet/cash flow concerns (if a new credit facility arrangement isn’t reached),” said Mr. Li. “In our view, over the near term, the share price will remain under pressure until Goodfood can demonstrate traction with returning focus to the subscription business, reaching EBITDA profitability by H1/F23, and significantly reducing the quarterly cash burn.”
* Canaccord Genuity’s Luke Hannan to 50 cents from 60 cents with a “hold” rating.
“All told, we’re encouraged by the margin expansion brought on by the exit from ODG, a business we were initially skeptical about, given how notoriously difficult it is for operators to achieve consistent, long-term profitability in the space. Though the balance sheet situation is no doubt concerning, the company is pulling the necessary levers to manage its cash position by cutting spend where possible. We’ll be curious to see what the near-term growth profile looks like in the business with a focus on driving revenues from its most loyal customers and how much runway there is for this type of growth moving forward,” said Mr. Hannan.
* Raymond James’ Michael Glen to 30 cents from 20 cents with an “underperform” rating.
“We view Goodfood as an extremely risky stock (we would flag that there is a going concern provision in the notes), and we are maintaining our Underperform rating,” said Mr. Glen. “That said, given the updated metrics with regard to the balance sheet, coupled with management guidance towards a path to positive EBITDA, we are increasing our target price slightly.”
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“Reactively positively to the negative reaction” from investors to its US$7.3-billion acquisition of IAA Inc. (IAA-N), Scotia Capital’s Michael Doumet upgraded Ritchie Bros Auctioneers Inc. (RBA-N, RBA-T) to “sector outperform” from “sector perform” on Monday.
“The initial reaction to the proposed deal was quite negative (RBA shares declined almost 20 per cent that day, despite the 3Q beat), with the immediate pushback being that it (i) muddied the end-market exposure, (ii) signaled limited organic potential for RBA, and (iii) did not generate sufficient financial upside to compensate for risk (leverage would rise to more than 3 times, 70-per-cent s/o dilution, for low single-digit year-1 EPS accretion),” he said.
“Having examined the deal more closely, we have made a complete U-turn; to us, the deal offers strategic opportunities for RBA/IAA that are unique to this combination: for RBA, IAA adds scale and complementary capabilities to accelerate its growth strategy; for IAA, RBA facilitates a reversal in its market share loss. Combined, we think pro forma EBITDA can reach $1.2 billion by 2025 (including $200 million of synergies), leading to more than 40-per-cent upside in the shares.”
Mr. Doumet thinks buying Ritchie Bros shares is now “a win-win” for investors.
“If the deal does not go through, RBA shares should gradually re-rate (at least) back to the pre-deal share price; if the deal goes through, it would be because RBA’s shares are higher (i.e., it would have to be high enough to entice IAA shareholders to tender),” he said.
“As the deal and its potential upside becomes clearer and more convincing, we believe a rising RBA share price could generate a positive feedback loop, in that the deal becomes more accretive the higher the RBA share price goes. In the report, we lay out the major pushbacks we heard from investors in the last several weeks and make arguments as to why a successful merger would generate more upside for RBA shares in the medium term. We updated our estimates to include IAA (w/ 2Q23 close), conservatively baking-in $60 million of synergies in 2024, versus an estimated potential of $200-million by 2025.
Touting a “good entry point,” he increased his target for U.S.-listed shares of the Burnaby, B.C., company to US$65 from US$59, exceeding the US$57.40 average.
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JP Morgan analyst John Royall made a pair of rating changes to Canadian large-cap energy stocks in his coverage universe on Monday.
He upgraded MEG Energy Corp. (MEG-T) to “overweight” from “neutral” while lowering his target by $1 to $23. The average on the Street is $24.
Mr. Royall downgraded Imperial Oil Ltd. (IMO-T) to “underweight” from “neutral” with a $76 target, up from $70 but below the $79.53 average.
His target changes included:
- Canadian Natural Resources Ltd. (CNQ-T, “neutral”) to $92 from $96. Average: $96.52.
- Suncor Energy Inc. (SU-T, “neutral”) to $51 from $50. Average: $54.21.
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In response to Friday’s fourth-quarter earnings release, which sent its shares down 4.5 per cent, KBW’s Mike Rizvanovic downgraded Canadian Western Bank (CWB-T) to “market perform” from “outperform” with a $29 target, down from $34. The average target on the Street is $31.57.
Other analysts making target adjustments include:
* Desjardins Securities’ Doug Young to $30 from $33 with a “buy” rating.
“Adjusted pre-tax, pre-provision (PTPP) earnings were 4 per cent below our estimate,” he said. “The focus was on NIM and the bank disappointed once again although this was not a big surprise given the Big 6 banks’ margin trends this quarter. We like its set-up for FY23, tilt toward commercial (vs retail) banking, lack of capital markets exposure (where we see headwinds) and valuation. We lowered our target and maintained our Buy rating although near-term patience is required.”
* Credit Suisse’s Joo Ho Kim to $26 from $27 with a “neutral” rating.
“CWB’s Q4 was weaker than the headline suggests on several fronts,” he said. “Firstly, margin performance was weak largely due to continued pressure from funding costs, the bank’s expenses were also higher than expected, and non-interest revenue also benefitted from FX gains which seemed one-time in nature. The other negative was the delay in the AIRB implementation (now expected no earlier than F2025). We view the bank’s overall guidance going forward as modest, especially when it comes to the bottom line, and believe its achievability is at least somewhat dependent on NIM performance, an area that has disappointed for the past few quarters.”
* Raymond James’ Stephen Boland to $34 from $37 with an “outperform” rating.
“The stock remains heavily discounted and continues to trade at depression levels. As such, we believe the downside is limited at these levels but with the muted guidance achieving book value will be a challenge. We are hoping to hear a more positive outlook at the investor day this week,” said Mr. Boland.
* National Bank’s Gabriel Dechaine to $31 from $34 with an “outperform” rating.
“We are reducing our estimates to reflect lower NIM, partially offset by lower expense growth,” he said.
* RBC’s Darko Mihelic to $36 from $35 with a “sector perform” rating.
* Barclays’ Joseph Ng to $28 from $29 with an “overweight” rating.
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CIBC World Markets analyst John Zamparo thinks Diversified Royalty Corp.’s (DIV-T) $80-million acquisition of a royalty stream from Stratus Building Solutions “adds diversity and exposure to a recession-resilient industry, while its structure provides some protection if inflation lingers”
“Importantly, the equity raise solidifies the balance sheet for future deals, which seem more likely now that DIV has a blueprint for U.S. businesses,” he said. “DIV’s shares have rebounded of late, but we believe upside still exists. In what could be difficult economic conditions, DIV’s royalty structure and the continued solid performance from Mr. Lube should limit downside. Furthermore, we find the distribution attractive (7.9-per-cent yield), and the monthly payout structure is a compelling feature for investors in an uncertain macro environment.”
With that view, Mr. Zamparo raised his recommendation to “outperformer” from “neutral” with a $3.50 target, up from $3.25. The average is $3.98.
“DIV offers investors a relatively stable business with a high-quality flagship asset, a moderate level of diversification, attractive monthly income and a responsible payout ratio (we estimate 93 per cent for 2023),” he said.
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In a research report on base metals producers, CIBC World Markets analyst Bryce Adams made a group of target adjustments to mining stocks in his coverage universe on Monday.
His changes included:
- Capstone Copper Corp. (CS-T, “outperformer”) to $5.25 from $5.30. Average: $5.98.
- Copper Mountain Mining Corp. (CMMC-T, “neutral”) to $1.90 from $2. Average: $2.70.
- Ero Copper Corp. (ERO-T, “neutral”) to $17 from $18. Average: $19.96.
- First Quantum Minerals Ltd. (FM-T, “neutral”) to $28 from $26. Average: $29.75.
- Teck Resources Ltd. (TECK.B-T, “outperformer”) to $60 from $56.50. Average: $53.19.
Concurrently, analyst Anita Soni reduced her Centerra Gold Inc. (CG-T) target to $7.75 from $8.25, maintaining a “neutral” rating. The average is $8.36.
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In response to better-than-expected third-quarter results, Citi analyst Ashwin Shirvaikar raised his fourth-quarter estimates for payment processor Nuvei Corp. (NVEI-Q, NVEI-T) “to reflect the near-term trajectory.”
However, he lowered his forecast for fiscal 2023, citing concerns over mix, take rates and cyclical concerns.
“Several factors are at play and will likely continue to affect 1H23 we believe … the North America trajectory is affected by mix (positive e-commerce direct, negative traditional SMB); Europe affected by the 2021 push into crypto but beyond this intensive past M&A makes estimating a true organic growth rate in Europe tough to derive…continued expansion in APAC, LatAm a positive … and FX drag a continued factor. Gaming in the U.S. is a long-term opportunity but also one that comes with regulatory concerns … and obviously economic concerns remain as well given discretionary revenue streams,” he said in a note released Monday.
While it did not provide formal 2023 guidance with its earnings release on Nov. 3, Mr. Shirvaikar thinks the Montreal-based company expects fiscal 2023 to be “back-ended.” He’s now projecting total volume of US$148.8-billion, which is up 21.6 per cent year-over-year but down from his previous estimate of US$154.9-billion (an increase of 28.1 per cent). His adjusted earnings per share estimate slid to US$2.15 from US$2.26.
Maintaining a “neutral” rating, Mr. Shirvaikar cut his target for Nuvei shares to US$36 from US$39. The average is US$56.75.
“While we continue to believe in the many positives in the Nuvei story (high percentage of revenues from e-commerce; exposure to differentiated and growing revenue mix including online gaming; tech stack geared to take advantage of the revenue mix; attractive financial metrics, etc.), we are cautious of both macro and company-specific (M&A-heavy backdrop; limited track record in current form; controlled corporation dynamics, etc.) risks. Taken together, we believe the risk/reward is balanced. We believe the implied forward outlook should support the stock at current levels but also that a combination of sustained follow-through on the profitability metrics and better disclosure is needed to provide a material upside catalyst.”
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Canaccord Genuity analyst Katie Lachapelle views Sigma Lithium Corp. (SGML-X) as an “attractive” potential takeout target, seeing it “uniquely positioned as a fully funded, near-term producer with substantial growth on the horizon and a large portion of its production still uncommitted (no offtake).”
Following Sunday’s “very positive” release of its “highly anticipated” Production Expansion Study for its 100-per-cent owned Grota do Cirilo Project in Brazil as well as US$100-million debt financing, Ms. Lachapelle hiked her target for shares of the Vancouver-based miner to $65 from $45, exceeding the $50.24 average, with a “speculative buy” rating.
“Our previous forecasts were based on Phase 1 + Phase 2 only. Even at our far more conservative price deck , the inclusion of a combined Phase 2 + Phase 3 production expansion results in a 45-per-cent increase in our Net Asset Value and materially higher near-term free cash flow projections,” she said. “As a result, we are increasing our target price.
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In other analyst actions:
* Citing its high valuation and believing the Street’s expectation of 5-per-cent earnings per share growth in 2023 is too high, TD Securities’ Michael Van Aelst downgraded North West Co. (NWC-T) to “hold” from “buy” with a $39 target, up $1 and above the $37.80 average.
* Calling it a “long-term compounder past [the] worst of inflation challenges,” Laurentian Bank Securities’ Jonathan Lamers assumed coverage of Boyd Group Services Inc. (BYD-T) with a “buy” recommendation and a Street-high $264 target. The average is $223.50.
“Boyd’s stock price is up 70 per cent from its June low, as the Q2 and Q3 results demonstrated the insurance rate increases were sufficient to return gross margin to historical levels and accelerate SSS [same-store sales],” he said. “Our analysis suggests an opportunity for more ‘normal’ appreciation over the next few years driven by earnings growth from organic and inorganic sources.”
* National Bank’s Patrick Kenny bumped his Capital Power Corp. (CPX-T) target to $50 from $49, below the $51.92 average, with an “outperform” rating.
* Canaccord Genuity’s Yuri Lynk raised his Finning International Inc. (FTT-T) target to $43, exceeding the $40.25 average, from $42 with a “buy” rating.
“We believe investors are underestimating Finning’s earnings power, ”he said. “Our Street-high 2023 and 2024 EPS estimates imply growth throughout, albeit modest off a base of record TTM [trailing 12-month] EPS of $3.01 through Q3/2022. We believe product support growth will surprise in 2023 despite a tough comparable on (1) a full year of 2022 price increases, (2) the market share opportunity afforded by the strong new equipment sales of 2018-2019, and (3) improvements in the supply chain. Additionally, a record backlog (up 56 per cent year-over-year) and substantial backlog of rebuilds provide visibility through at least H1/2023.”
* RBC’s Alexander Jackson initiated coverage of Frontier Lithium Inc. (FL-X) with an “outperform” rating and $3.25 price target, below the $4.20 average.
* Cormark Securities’ Nicholas Boychuk initiated coverage of Northland Power Inc. (NPI-T) with a “buy” recommendation and $50 target, exceeding the $47.69 average.
David Leeder