Inside the Market’s roundup of some of today’s key analyst actions
Raymond James analyst Andrew Bradford sees few positive catalysts for Canadian contract drillers through early 2019, however he cautions investors not to ignore the sector completely.
“The 3Q rig count in Canada faltered part way through September and E&Ps are poised to pack-it-in early for Christmas,” said Mr. Bradford in a research note released Monday morning. "Nor is the initial slate of 2019 budgets likely to inspire tremendous confidence as these budgets are likely being drafted in the current economic environment. Consequently, we expect the near-term trajectory for consensus estimates will be downward, making the contract drillers a tactically unattractive group for investors.
“However, a modestly longer view would instruct investors to be adding to positions – even starting new positions – especially given the slate of more attractive stock prices. Consider the following: (a) the Permian rig count is continuing to rise – both Precision Drilling’s and Trinidad Drilling’s U.S. fleets are disproportionately weighted in the Permian Basin, (b) crude-by-rail capacity is scheduled to increase materially in 1Q19, (c) the NEB will release its Reconsideration report for the Trans Mountain Pipeline by Feb-22-19 – given its positive initial report, it’s reasonable to expect a recommendation will be forthcoming, and (d) Line 3 is scheduled for recommissioning later in 2019.”
After lowering his financial expectations for both the third quarter and fourth quarter across the sector, Mr. Bradford also downgraded his rating for Western Energy Services Corp. (WRG-T) to “market perform” from “outperform” with a target price of $1, falling from $1.60. The average target on the Street is currently $1.07, according to Bloomberg data.
“We have long viewed Western as a leveraged play on a recovery in Canadian drilling activity, with above average debt, high weighting towards high-spec double rigs that are the swing rigs in Canada, and limited U.S. exposure,” he said. “This leverage cuts both ways for Western. With the lower Canadian rig count outlook for 2019, we see a large impact on our 2019 estimates for Western.”
On the sector, as a whole, Mr. Bradford said: "While the headwinds are challenging, we can articulate specific events whereby these headwinds turn to tailwinds through 2019. We believe the factors that will be valued first will be U.S. exposure, participation in the technical developments of the Montney and Duvernay, and market liquidity. These arrows point toward Precision Drilling and/or Trinidad Drilling.
"From a tactical viewpoint, we view Precision as the safer vehicle. Firstly, Trinidad is still priced above the 0.445:1 exchange ratio, so if PD is successful in its bid for Trinidad, PD shareholders would realize a greater return than TDG. Secondly, if another bid were to come for TDG – presumably from ESI – we expect PD shares would recover to a degree as they underperformed over the 2 days following its bid for TDG."
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Canopy Rivers Corp. (RIV-X) “represents best-in-class exposure to the emerging global cannabis sector,” according to PI Financial analyst Devin Schilling.
He initiated coverage the stock, which began trading on the TSX Venture Exchange on Sept. 20, with a "buy" rating.
"Canopy Rivers is anticipated to have a strong growth profile from a pipeline of domestic and global operators seeking alternative financing solutions," the analyst said. "Strategic support provided to the portfolio companies is expected to expedite the growth of the underlying holdings which could provide upside to the value of the Canopy Rivers portfolio. Early success is evident by the large returns generated from the TerrAscend (1170 per cent), James E. Wagner (98 per cent), and Solo Growth (354 per cent) investments."
Mr. Schilling emphasized Canopy Growth Corp.'s 25-per-cent ownership stake in the company, which he believes provides “a strategic relationship that enables Rivers and its portfolio companies the ability to leverage Canopy Growth’s distribution network and operational expertise in license applications, production, genetics, and brand strategy.”
He set a target price of $10 per share.
"We believe Canopy Rivers Corporation provides investors with a target return of 75 per cent based on our target price," said Mr. Schilling.
Elsewhere, GMP analyst Martin Landry initiated coverage with a "buy" rating and $8 target.
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Raymond James analyst Steve Hansen said he continues to recommend shares of Methanex Corp. (MEOH-Q, MX-T), citing both a constructive view of the global methanol market and the company’s “rich” free cash flow profile.
Believing recent contract postings corroborate his bullish tone and support his view that pricing strength will continue into the first half of 2019, Mr. Hansen said: “Methanex recently posted its North American and Asian contracts for October at US$496/mt and US$495/mt, respectively, representing an increase of $11/mt (2.3 per cent) and 15/mt (3.1 per cent) month-over-month increases (vs. September). Similarly, the company recently posted its 4Q18 European contract price at €428/mt (US$496/mt), solidifying the tone heading into the volatile winter period. Robust energy and spot methanol trends further support this constructive outlook, in our view.”
Mr. Hansen believes a recent pullback in the price of Methanol shares brings long-term investors an attractive opportunity, pointing to the fact that the stock now trades an 11-per-cent free cash flow yield.
He maintained an "outperform" rating and US$90 target. The average is US$97.57.
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Maverix Metals Inc. (MMX-X) sits in a strong position to benefit from long-term metal price appreciation as well as exploration success, said PI Financial analyst Justin Stevens, who reinstated coverage with a “buy” rating.
"We believe Maverix’s portfolio presents a 'sweet spot' in the precious metals royalty & streamer space: large enough to offer diversification of production across jurisdictions, operators, and production profiles, yet small enough to benefit materially from a positive event at even one its assets (discovery, expansion, extension, development)," he said.
Mr. Stevens set a price target of $2.60, which falls 5 cents below the average.
"Key reasons to own Maverix include: near-term growth of attributable metals production as the Hope Bay and Silvertip mines ramp-up production (2019 estimate: 21 per cent versus 2018); exposure to several producing assets satisfying steady production over long mine-lives (including La Colorada, Hope Bay, and Karma); potential to benefit from exploration-driven mine life extensions at several operations including Mt Carlton, Beta Hunt, and Vivien; a proven management team that has demonstrated the ability to execute accretive transactions and assemble a portfolio of cash-flowing streams & royalties along with several advanced-stage development projects," the analyst said. "We also see MMX’s asset portfolio as offering diversity through exposure primarily to precious metals, but also to non-precious by-product production."
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Ahead of third-quarter earnings, Wedbush analyst Jen Redding raised her rating for both Lululemon Athletica Inc. (LULU-Q) and American Eagle Outfitters Inc. (AEO-N), seeing “current price level as an attractive entry point” following a recent pullback which she attributes to a broader market sell-off rather than company-specific fundamentals.
Ms. Redding expressed "conviction" in both retailers, expecting strong quarterly results ahead of solid holiday earnings.
Pointing to Vancouver-based Lululemon's "best-in-class" retail leadership team and "cutting-edge" data analytics and technology, Ms. Redding moved its stock to "outperform" from "neutral," seeing sustained strong performance.
She raised her 2018 earnings per share projection to US$3.68 from US$3.66, exceeding the average on the Street of US$3.59. Her 2019 projection moved to US$4.38 from US$4.25, which is the current consensus.
Her target for the stock is US$176, which sits above the average of US$160.71.
Ms. Redding also moved American Eagle to "outperform" from "neutral" with a US$29 target, which tops the average of US$26.93.
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CIBC World Markets Hamir Patel said he remains "comfortable" to remain on the sidelines on commodity wood product producers heading into third-quarter earnings season, believing U.S. housing indicators will continue to disappoint and seeing few catalysts to fuel a rebound in prices in the lumber market.
“We also believe the group still has a negative earnings revision cycle to work through as some components of consensus have been slow to reduce pricing assumptions (with some observers apparently still projecting SPF north of $500 per thousand board feet in 2019),” said Mr. Patel in a research report. “The longer lumber stays lower, the more likely the market is going to look to value the group based on $400 SPF (which would still be well above the 15-year nominal average of $298 and 15-year real average of $337).”
Mr. Patel updated his target price for shares of 12 companies in the sector to reflect “lower multiple assumptions (0.25-1.0 times reduction) for these housing-related equities given an increasingly uncertain outlook for housing growth in the United States.”
He lowered his target for:
Canfor Corp. (CFP-T, “neutral”) to $25 from $33. Average: $34.50.
CanWel Building Materials Group Ltd. (CWX-T, “neutral”) to $6 from $6.50. Average: $7.42.
Cascades Inc. (CAS-T, “outperformer”) to $15 from $16. Average: $17.
Conifex Timber Inc. (CFF-T, “neutral”) to $5 from $5.50. Average: $8.
Hardwoods Distribution Inc. (HDI-T, “outperformer”) to $20 from $21. Average: $23.75.
Interfor Corp. (IFP-T, “neutral”) to $23 from $26. Average: $30.20.
Norbord Inc. (OSB-N, OSB-T, “neutral”) to US$41 from US$46. Average: US$40.50.
Resolute Forest Products Inc. (RFP-T, “neutral”) to US$15 from US$16. Average: US$14.
Stella-Jones Inc. (SJ-T, “outperformer”) to $50 from $52. Average: $53.25.
West Fraser Timber Co. Ltd. (WFT-T, “neutral”) to $82 from $97. Average: $94.50.
Western Forest Products Inc. (WEF-T, “neutral”) to $2.25 from $2.50. Average: $3.22.
He raised his target for Mercer International Inc. (MERC-Q, “outperformer”) to US$23 from US$22, which is below the average of US$25.70.
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Seeing it “ahead of the pack on execution and capital discipline,” BMO Nesbitt Burns analyst Phillip Jungwirth upgraded his rating for Marathon Oil Corp. (MRO-N) to “outperform” from “market perform.”
“We’re raising our rating .... following the broader market pullback, plus an expectation for strong 2H18 execution and a differentiated 2019 outlook in terms of FCF with competitive production growth,” he said.
“This upgrade also follows time spent with management on the road last week which increased our confidence in the company’s strategy and ability to balance FCF deployment with direct shareholder return and resource capture.”
Mr. Jungwirth’s target for Marathon Oil shares is US$25, which is 2 US cents higher than the consensus.
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In other analyst actions:
GMP’s Martin Landry initiated coverage of Village Farms International Inc. (VFF-T) with a “buy” rating and $9.50 target. The average on the Street is $13.50.
TD Securities analyst Bentley Cross upgraded Stingray Digital Group Inc. (RAY-A-T, RAY-B-T) to “buy” from “hold” with a target of $11, rising from $10.50. The average is $11.67.
Seaport Global Securities analyst Mark Levin upgraded Teck Resources Ltd. (TCK-N, TECK-B-T) to “buy” from “neutral.”
Evercore ISI analyst Matt McGinley raised his rating for McDonald’s Corp. (MCD-N) to “outperform” from “inline,” citing combarable same store sales growth upside in 2019 and 2020, a pullback in valuation since last year and a move towards a more defensive business model. He did not specify a target price, while the consensus is US$186.
Cormark Securities analyst Jeff Fenwick downgraded Element Fleet Management Corp. (EFN-T) to “reduce” from “market perform” with a target of $7.50, rising from $7. The average is $8.90.
With files from Bloomberg News