Inside the Market’s roundup of some of today’s key analyst actions
While his long-term view on Boyd Group Services Inc. (BYD-T) remains bullish, National Bank Financial analyst Zachary Evershed says near-term profitability concerns continue to exist.
Shares of the Winnipeg-based collision repair centre operator soared 12.5 per cent on Wednesday following the premarket release of fourth-quarter 2021 financial results. However, Mr. Evershed called its guidance “subdued” and reiterated labour and supply chain constraints “remain topical.”
“Management confirmed most of the company’s insurance clients have increased labour rates, essentially addressing wage cost increases encountered up to Q3/21,” he said. “Boyd highlights the need for additional increases to address the ongoing inflationary labour cost environment since then. We flag that hikes are implemented at the time work is booked, and therefore do not relieve pressure on the existing backlog and work-in-process. Compounding labour pressures, supply chain issues remain, as management notes WIP is bottlenecked by technicians waiting on parts to complete largely finished work, seeing industry backlogs breaking above 4 weeks.”
For the quarter, Boyd reported revenue of $516.2-million, up 27.9 per cent year-over-year and above the Street’s $483.3-million forecast (though narrowly below Mr. Evershed’s $528.1-million estimate). Adjusted earnings per share of 28 cents easily topped both the estimates of both the analyst (15 cents) and the Street (12 cents) as margins beat projections.
“We remain confident in Boyd’s long-term goal of doubling the size of the business by 2025,” said Mr Evershed. “We calculate the gradual industry recovery from the pandemic leaves the company’s 2021 revenue 5.9 per cent below the level implied by a straight line to the objective, though the 127 locations acquired in 2021 fall right in line with the 125 locations we forecast annually to complement organic growth. Though we believe the M&A pipeline remains robust, we could see a slowdown in activity during 2022 as the company directs energy toward increasing capacity and recouping profitability.”
Despite his positive long-term outlook, the analyst cut his profitability and growth estimates for the first quarter, citing “guidance on the flow-through of rate adjustments from insurers.” He also reiterated the presence of supply chain issues, which will continue to weigh on margins, and the impact of a shortage of technicians, expecting organic growth and profitability to “continue to be constrained.”
Maintaining a “sector perform” recommendation for Boyd shares, Mr. Evershed reduced his target to $200 from $240. The average target on the Street is $218.54.
“We agree with management’s positive commentary regarding the effective inevitability of labour rate hikes eventually lifting margins, but we remain wary in the short term as wage pressure represents a moving target and supply chain issues persist,” he said. “The trajectory of full margin recovery remains uncertain as we have yet to see the impact of realized hikes on gross margins and have no visibility on the timing and magnitude of the next round of increases.”
Elsewhere, Desjardins Securities analyst David Newman upgraded Boyd to “buy” from “hold” with a $225 target, citing “the reopening (higher driving activity, normalization of supply chains), ongoing pricing to cover rising costs, transitory parts challenges and M&A.”
“In 1Q22, the two-year stacked SSSG should remain below pre-pandemic levels (5 per cent below in 4Q),” he said. “Demand has exceeded capacity, which continues to be impacted by labour and parts. BYD has negotiated an unprecedented number of meaningful price increases from clients, which take time to flow through work in process (WIP). It continues to pursue further pricing to address rapid wage inflation, with P&C insurers amenable to rate adjustments to remain competitive, which should aid margins over time. Margin pressure should persist in 1Q as BYD works through its backlog (prices impact new work), absenteeism (Omicron) and higher payroll taxes.
“BYD is addressing labour shortages with its technician development program (doubling number of trainees) and a proactive approach to recruiting, training and onboarding technicians. BYD has resorted to OE parts at lower margins to replace aftermarket parts usually sourced from its primary suppliers, but even OE parts are scarce, leading to higher WIP. However, it views supply chain disruptions as transitory.”
Elsewhere, others making target changes include:
* ATB Capital Markets’ Chris Murray to $230 from $265 with an “outperform” rating.
“The results were in-line with consensus as the labour and parts supply environment continues to pose a challenge to margins though management reiterated that the situation should begin to ease in H2/22 while providing positive commentary around discussions its having with its insurance partners concerning pricing increases to offset inflation, particularly in the labour market,” said Mr. Murray. “We remain positive on BYD and view the weakness in the share price since Q3/21 as representing a compelling buying opportunity for longer-term investors with the Company remaining positioned to deliver on its 2025 growth targets after delivering record levels of M&A in 2021.”
* Stifel’s Maggie MacDougall to $185 from $200 with a “hold” rating.
“The outlook and messaging on the conference call was as expected with cost inflation a continuing issue that requires more price increases from insurance companies,” she said.
* BMO’s Jonathan Lamers to $188 from $185 with a “market perform” rating.
“Boyd is in an inflationary spiral,” said Mr. Lamers. “Wage increases are needed to attract labor, requiring another round of price increases from the insurers. Street estimates that assume snapback to historical operating margin by H2/22 seem optimistic as efforts to increase labor capacity will take time. Acquisitions have slowed with the company (rightly) focused on the organic improvement opportunity. We expect these ongoing industry challenges will limit valuation expansion for the stock.”
* Jefferies’ Bret Jordan to $225 from $250 with a “buy” rating.
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National Bank Financial’s Ryan Li expects to see clear evidence of continued inflationary headwinds when Lassonde Industries Inc. (LAS.A-T) reports its fourth-quarter 2021 financial results on Friday.
The analyst is projecting earnings per share of $2.92, down 14 per cent year-over-year (from $3.39) and 2 cents below the consensus forecast on the Street. He attributes the decline to lower sales (estimating $492-million versus $515-million a year ago), rising costs (input, labour, transportation) and “unfavourable” FX.
”Our analysis suggests inflationary headwinds continued in Q4/21, particularly with juice concentrates (apple in particular), plastic/packaging and shipping,” said Mr. Li. “While price increases are anticipated to offset to a degree, full benefits may not emerge until H1/22. Recall that in Q3, the U.S. business was particularly challenged by labour scarcity which impacted Lassonde’s ability to meet demand. We anticipate continued labour challenges in Q4, with emerging pressure from rising Omicron cases towards the end of the quarter.
“Our review of management commentary from select peers suggests mixed outlooks regarding normalizing labour/production trends. We look for further outlook commentary with Lassonde’s Q4 results.”
After reducing his revenue and earnings expectations for fiscal 2022 and 2023, Mr. Li lowered his target for Lassonde shares to $172 from $190, reaffirming an “ouperform” rating. The average is $176.
“We believe Lassonde is a mature and historically well-managed company, with potential to grow through future acquisitions (over the medium-to-long term) and continued organic vectors (market share gains),” he said. “Looking beyond near-term cost and labour pressures (which we view to be largely transient), investors will be focused on Lassonde’s ability to continue executing against its strategic blueprint while managing the controllable aspects of its business.”
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“Taking a cautious stance” after weaker-than-expected fourth-quarter results and the “transformational” $2-billion acquisition of Columbia Care Inc. (CCHW-CN), Stifel analyst Andrew Partheniou lowered Cresco Labs Inc. (CL-CN) to “hold” from “buy.”
“Should the deal close and be successfully integrated according to management’s expectations, we believe CL has the potential to enhance its capital markets position through greater scale and access to capital,” he said. “However, we see risks to the above scenario including the transaction being terminated with our limited visibility on the likelihood of CCHW obtaining the necessary shareholder approvals, the potential for significant regulatory delays and CL’s M&A track record of three previous terminations, the impairment of its last largest acquisition and no termination fee.
“In addition, we believe there is material execution risk currently as both companies prepare for REC conversions while securing regulatory approval and integrating previous acquisitions.”
Mr. Partheniou thinks Cresco has a “formidable” task in the closing and integrating of Columbia Care at a “pivotal time in the industry.”
“This is on top of CL recently acquiring five companies in 2021 that likely continue to require integration as well as NJ poised to turn REC potentially next month, NY within the next year and VA potentially the year after that,” he said. “As a result, we believe this environment creates competing priorities for management which will likely be challenging, resulting in an elevated risk that CL and the proforma company may not be able to fully capitalize on the present opportunities.”
Also seeing limited visibility on West Coast expansion, he cut his target for Cresco shares to $8 from $30, warning “shares could suffer from an overhang.” The current average is $22.08.
“Our neutral stance on CL is supported by: 1) a diverse platform, providing exposure to many attractive markets in the U.S. with a particular emphasis in IL, where it has a sustainable competitive advantage through 3 times greater production capacity than most of the large producers in the state.; 2) a clear brand message that resonates with consumers, which our initial channel checks show has been created by CL’s product quality and effective marketing; offset by 3) significant execution and M&A risk over our forecasting period resulting from its pending acquisition of CCHW,” the analyst said.
Elsewhere, Echelon Partners’ Andrew Semple lowered his target to $15 from $18 with a “buy” rating.
“This is the second-largest M&A transaction in the US cannabis industry, with the pro forma entity likely to be amongst the largest three cannabis businesses in the U.S.,” said Mr. Semple. “We view this transaction as likely to be modestly accretive to Cresco, though that assessment remains subject to uncertainties around the amount received from likely divestitures. The announcement overshadowed the Company’s Q421 results which underwhelmed relative to expectations, even in the context of a slow Q421 quarter for most operators.”
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Desjardins Securities analyst Chris Li called Neighbourly Pharmacy Inc.’s (NBLY-T) $435-million acquisition of Rubicon Pharmacies “truly a transformative deal,” seeing it increase its revenue and geographic base and enhancing its position as “the leading consolidator in the highly fragmented pharmacy space” by removing an important competitor.
“While the purchase multiple of 12 times LTM [last 12-month EBITDA (pre-synergies) is higher vs the typical 6‒7 times for single/small chain operators, we believe this is supported by the size of Rubicon’s network (increases NBLY’s scale by 60 per cent), higher margins and strategic value,” he said.
Mr. Li said his “hold” rating for Neighbourly shares is due largely to its premium valuation, which he thinks “reflects strong growth expectations.”
“Pro forma Rubicon, NBLY trades at 17.1 times EBITDA vs 14.7 times for other high-growth Canadian consumer companies,” he said. “We believe the premium is supported by EBITDA growth of 20-per-cent-plus in calendar 2023 vs 14 per cent for its high-growth peers. Assuming NBLY’s underlying pharmacy business is worth 12 times EBITDA, we estimate the 5-times premium implied from its valuation reflects 3‒4 years’ worth of deals (30‒40 sites per year), which we believe is highly achievable.”
The analyst raised his target for Neighbourly shares to $35 from $33. The average is currently $38.36.
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Canaccord Genuity’s Mark Rothschild expects Automotive Properties Real Estate Investment Trust’s (APR.UN-T) funds from operations growth to gain momentum with its “accelerated” pace of acquisitions.
He was one of several equity analysts on the Street to raise their target price for the Toronto-based REIT, which focuses on dealership properties in urban markets, following Wednesday’s release of its fourth-quarter results.
“Automotive Properties REIT (APR) reported another quarter of steady financial performance in Q4/21, reflecting the REIT’s stable tenant base of leading automotive dealer groups and long lease terms,” said Mr. Rothschild. “While acquisition activity in 2021 was lower than anticipated, APR completed several acquisitions subsequent to year-end. The acquisitions included a land parcel underlying an Acura dealership, a land parcel adjacent a Toyota dealership, two Honda dealerships, and two Tesla dealerships, for a combined total purchase price of $65.1 million.”
For the quarter, APR reported FFO per diluted unit of 23.1 cents, which was flat year-over-year and just below the analyst’s forecast of 23.8 cents. He attributed the miss to a slower-than-anticipated pace of acquisitions.
“Considering the large volume of acquisitions already in 2022, this does not impact our outlook,” said Mr. Rothschild. “In spite of steady internal growth of 2.2 per cent, operating at lower leverage was dilutive, as the REIT primarily funded the $14.8 million acquisition of a Lexus dealership in Q1/21 entirely through the issuance of 1.4 million units. Same-property NOI growth was driven largely by contractual rent escalations. We expect internal growth to remain positive for the foreseeable future as the REIT has no lease maturities until 2026, and the leases typically have annual escalators.”
Largely maintained his financial projections, he bumped his target for the REIT’s units to $14.25 from $14, reiterating a “hold” rating. The average is $15.17.
Others making changes include:
* BMO’s Joanne Chen to $15.50 from $14.75 with an “outperform” rating.
“Our positive outlook on APR.UN is unchanged following Q4/21,” she said. “We continue to view favourably APR.UN’s predictable cash flow stability amidst the ongoing recovery and the fact that the automotive retail/service industry has been viewed as essential. Ongoing cap rate compression also speaks to the resiliency of the sector (overall WA-cap rate down 10 basis points quarter-over-quarter to 6.3 per cent). We expect cash flow growth will pick up through 2022 with an increase in acquisition cadence.”
* Raymond James’ Brad Sturges to $15.75 from $15.50 with an outperform” rating.
“Deployment of APR’s balance sheet capacity to fund a more active acquisition program may drive an accelerated pace in APR’s AFFO per unit growth year-over-year, which can support expansion in APR’s P/ AFFO multiple. We believe APR features an attractive risk-adjusted total return investment profile, with a relatively higher distribution yield that is supported by contractual annual rent bumps embedded in its existing long-term leases with credit-quality dealership groups,” said Mr. Sturges.
* TD Securities’ Jonathan Kelcher to $16.50 from $16 with a “buy” rating.
* Desjardins’ Kyle Stanley to $15 from $14.50 with a “hold” rating.
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In other analyst actions:
* Morgan Stanley analyst Ioannis Masvoulas downgraded First Quantum Minerals Ltd. (FM-T) to “equal-weight” from “overweight” with a $41 target, rising from $39 and above the $39.57 average.
* TD Securities’ Menno Hulshof lowered MEG Energy Corp. (MEG-T) to “hold” from “buy” with a $21 target, rising from $18 and above the $20.43 average.
* JP Morgan’s Ryan Brinkman downgraded ABC Technologies Holdings Inc. (ABCT-T) to “neutral” from “overweight” with a $7 target, down from $8 and below the average of $8.08.
* Mr. Brinkman cut his Magna International Inc. (MGA-N, MG-T) target to US$97 from US$105 with an “overweight” rating. The average is US$91.25.
* Canaccord Genuity’s Robert Young cut his Copperleaf Technologies Inc. (CPLF-T) target to $20 from $29 with a “buy” rating, while BMO’s Thanos Moschopoulos reduced his target to $20 from $30 with an “outperform” rating. The average is $26.25.
“Copperleaf reported strong Q4 results with revenue and EBITDA significantly ahead of our and consensus estimates,” Mr. Young said. “The driver of the strong performance, however, was perpetual license revenue, which dampens our enthusiasm on near-term visibility. Multiple deals which were expected to be subscription deals ended up in the license bucket. This dynamic is expected to persist in the near term despite management’s efforts to emphasize subscription. Given a lack of financial guidance, this inevitably complicates forecasting and increases volatility, which investors typically gravitate away from. Beyond the business model machinations, however, the demand environment remains very strong. Copperleaf reported strong growth in its pipeline and a record backlog. It noted strong traction in the transport market and extended its early steps into water and was able to announce two customers thus far in 2022, an impressive pace for a company with only 62 customers at IPO.”
“Growing demand, strengthening partner engagement and a strong product with limited competition and what still appears to be a long runway keeps us positive on the medium term. We reiterate our BUY but have reduced our target to $20.00 based on 11 times EV/2023E Sales (from $29 PT based on 16 times). As well, we would be remiss not to caution on the near-term reaction to the IPO lockup expiry but see weakness as a buying opportunity.”
* Mr. Young raised his Converge Technology Solutions Corp. (CTS-T) target to $14, exceeding the $13.83 average, from $13 with a “buy” rating.
“Converge exited 2021 with a strong Q4, in line with preannounced figures, driven by a very strong demand environment partly dampened by continued supply chain headwinds,” he said. “Management expects demand surpassing fulfillment to inflate the backlog further in Q1 with conversion more likely to materialize in H2/22. Management suggested that organic growth could eclipse 20 per cent (from 9.6 per cent in 2021) if the backlog reverts to more normal levels.”
* RBC Dominion Securities’ Douglas Miehm lowered his target for Dialogue Health Technologies Inc. (CARE-T) to $9 from $10, keeping a “sector perform” rating. The average is $9.83.
“Dialogue reported marginally better-than-expected revenue; however, adj. EBITDA was below estimates,” he said. “On the M&A front, management noted that the due diligence process is ongoing for one of the target companies, and it expects to reach an agreement in the coming months. We revise our EBITDA estimates slightly lower as we build in higher inflationary pressures. We lower our NTM EV/Revenue multiple from 7 times to 6 times, noting the decline in the peer set and ahead of the potential multiple rate hikes by CBs.”
* CIBC World Markets’ Todd Coupland cut his E Automotive Inc. (EINC-T) target to $27 from $28 with an “outperformer” rating. The average is $23.22.
* Ahead of the March 28 release of its fourth-quarter 2021 results, Scotia’s Jeff Fan cut his Enthusiast Gaming Holdings Inc. (EGLX-T) target to $8.25, below the $8.48 average, from $9.75 with a “sector outperform” rating, citing “growth equity valuation multiple compression.”
* Deutsche Bank’s Gabrielle Carbone lowered her target for Lululemon Athletica Inc. (LULU-Q) to US$410 from US$453 with a “buy” rating. The average is US$424.14.
* Canaccord Genuity’s Doug Taylor cut his target for Mogo Finance Technology Inc. (MOGO-T) target to $7, below the $7.50 average, from $10 with a “speculative buy” rating.
“Mogo reported Q4/21 results that were ahead of expectations, with the company maintaining its 2022 growth outlook and with improving operating leverage in H2/22,” he said. “The company also announced board approval of a share repurchase program worth up to US$10-million. Looking ahead, our attention turns to higher spending in support of growth over the coming year with its MogoTrade product and Carta business. We look to further revenue scaling within Mogo’s membership base (1.9 million strong) and narrowing EBITDA losses, while the various ownership stakes in the volatile, broader crypto/Web3 ecosystem remain a sizable portion of our valuation.”
* CIBC’s Scott Fromson raised his target for Sienna Senior Living Inc. (SIA-T) to $16.75 from $16.50 with a “neutral” rating. The average is $16.77.