Inside the Market’s roundup of some of today’s key analyst actions
It will likely take another year before the strategy behind Alimentation Couche-Tard Inc.'s (ATD.B-T) plan to double its business over the next five years becomes evident to investors, according to Desjardins Securities analyst Keith Howlett, who expects the strategy to involved a combination of further acquisitions and organic growth.
Based on his fiscal 2019 estimates, Mr. Howlett projects the Quebec-based company will have increased its adjusted EBITDA by US$2-billion from 2014 to the end of fiscal 2019 in April.
"It is now one of the three pre-eminent convenience/fuel store chains in the U.S. and Canada, along with 7-Eleven and Marathon Petroleum," he said. "It is in the midst of a global rebranding program to the new Circle K logo and get-up (colours and design), converting all convenience stores outside of Quebec to Circle K (excluding automated fuel stations in Europe, with no convenience store and no employees). In a significant percentage of sites, fuel is also branded Circle K (and in some markets under the Miles sub-brand).
"The last leg of growth has been powered by seven successful acquisitions and integrations. Results in Europe and Canada have been suppressed by substantial local currency devaluations relative to the U.S. dollar (Couche-Tard’s reporting currency). Regardless, compound EPS growth to the end of FY19 is forecast at 20 per cent over five years."
On Wednesday before market open, Couche-Tard reported adjusted diluted earnings per share for the second quarter of 84 US cents, exceeding the projections of both Mr. Howlett (83 US cents) and the Street (82 US cents). Same-store sale sales trends " were good in all markets," said the analyst, with increases of 4.4 per cent in the U.S., 4.6 per cent in Europe and 5.1 per cent in Canada.
"For the first five weeks of 3Q FY19, fuel margins have been at an extraordinary level," said Mr. Howlett. "The national average of the weekly fuel margins is 36.9 US cents, well above our prior forecast of 18.5 US cents for the quarter (16-week quarter). Over the last three 3Qs, Couche-Tard has reported an average fuel margin in the US of 17.95 US cents. If the fuel margin averages 18.5 US cents over the final 11 weeks of the quarter, the average fuel margin for the quarter will be 24 US cents. We have revised our forecast to 23.5 US cents. The positive impact on EPS is US$0.25. We have chosen to exclude what we view as 'surplus fuel earnings' when establishing our target price. We do not expect the margins to be repeated."
The analyst raised his 2019 EPS estimate to US$3.36 from US$3.07 to account for the change to his fuel margins. His 2020 expectation remains US$3.40.
Keeping a "buy" rating for the stock, he increased his target price for the company's shares to $77 from $74. The average on the Street is $80.51, according to Thomson Reuters Eikon data.
"Management of Couche-Tard has continuously operated its stores at a higher level than the competition within a very challenging industry," said Mr. Howlett. "This was the case when it was a small up-and-coming entrepreneurial organization, and it remains true today. It has maintained its culture even as it ascended to the top of the North American convenience store industry. Management is now seeking to elevate its game once more, adopting some of the research rigour of leading CPG companies, while beginning to deploy the new technological tools available to improve decision-making and lower costs. Convenience stores are, in general, behind other retailers in this journey. The balance sheet and cash flow will continue to support acquisitions."
Elsewhere, CIBC World Markets' Mark Petrie increased his target to $80 from $75 with an "outperformer" rating (unchanged).
Mr. Petrie said: “Couche-Tard’s strong Q2 results highlight its excellent momentum in the U.S. in both fuel and merchandise. The company is reaping the benefits of a favourable macro environment, a unified brand, and growth in tobacco, while further opportunity lies ahead in improving and scaling foodservice.”
=====
Ahead of the release of its third-quarter financial results on Dec. 6 before market open, Raymond James analyst Kenric Tyghe modestly raised his financial expectations for Dollarama Inc. (DOL-T).
Mr. Tyghe is projecting a 7.1-per-cent year-over-year revenue increase to $868-million, which is slightly below the consensus expectation of $873-million. His same-store sales growth estimate of 2.9 per cent is “driven by strong expected ticket growth, partially offset by a negligible decrease in traffic.”
His EBITDA estimate of $214.2-million is also narrowly below the consensus of of $220.8-million, while his earnings per share forecast of 42 cents falls in line with the Street.
“The Halloween timing shift is a material headwind in quarter, but supports strong expected F4Q19 SSS of 5.8 per cent, for fiscal 2019 estimated SSS growth of 3.5 per cent,” he said. “We expect the combination of tough gross margin comps, a less positive mix impact (on the Halloween shift), and a potential investment in the value proposition (concentrated in the $3.50 and $4.00 price points), to translate into gross margin compression of 71 basis points to 39.4 per cent. The 89 bp compression in our EBITDA margins to 24.7 per cent (for EBITDA of $214.2-million), reflects gross margin headwinds compounded by modest SG&A deleveraging, on wage pressures more than offsetting cost reduction initiatives.”
Mr. Tyghe raised his EPS projections for 2019, 2020 and 2021 to $1.69, $1.98 and $2.21, respectively, from $1.66, $1.90 and $2.21.
He maintained a "buy" rating and $50 target, which exceeds the average on the Street of $47.21.
=====
Though there were no surprises at Vermilion Energy Inc.'s (VET-T, VET-N) Investor Day presentation in Toronto on Tuesday, Desjardins Securities analyst Kristopher Zack made “modest” increases to his financial projections, maintaining his “positive view of its disciplined operating strategy and significant commodity diversification relative to peers.”
Emphasizing its “significant” commodity price diversification, Mr. Zack said: “Recall that almost 50 per cent of 2019 cash flow will come from properties directly exposed to more favourable Brent oil and European gas prices,” he said. "We also note the distinct price advantage relative to peers with the majority of VET’s Canadian light oil selling into LSB (ie Cromer), which continues to trade at a premium to MSW. Growth in Germany, CEE and the Netherlands should help maintain European exposure over the next five years.
"The company emphasized that its first priority is to protect the balance sheet, followed by maintaining the 8.4-per-cent dividend yield—one of the most attractive on our coverage list and critical, in our view, to providing stability to the current valuation. We estimate a capex-adjusted payout of 110 per cent at strip, noting that cash flow ($845-million) should still more than cover maintenance capex and the current dividend ($800-million total). Worth noting is that the company also highlighted ongoing efforts in the area of environmental sustainability (which specifically includes emissions and intensity reductions) as part of its HSE practices—an increasingly critical component for oil & gas producers, in our view."
Mr. Zack increased his 2018 and 2019 cash flow per share estimates to $6.04 and $7.16, respectively, from $5.99 and $7.03.
"The net impact is that our 2019 CFPS forecast is up just 2 per cent, a modest change that does not impact our positive bias toward the stock at current levels," he said. "Our estimate could be slightly conservative to the extent that the company can deliver further improvements in the cost structure—particularly in Canada post integration of the SPE assets. Our debt levels are up slightly due to the Powder River Basin acquisition in 3Q."
He continues to rate Vermilion a "buy" with a $50 target. The average on the Street is $51.20.
=====
In the wake of a third-quarter earnings miss and reduction in its fourth-quarter guidance, RBC Dominion Securities analyst Brian Tunick downgraded Chico’s FAS Inc. (CHS-N) to “sector perform” from “outperformer,” expecting margin pressure to persist in 2019 due to negative comps and omnichannel “pressures.”
On Wednesday, the Florida-based women's clothing retailer's share price plummeted 34.6 per cent following the release of weaker-than-anticipated results. The company reported earnings per share of 5 US cents, a drop from 13 US cents a year ago and 3 US cents lower than the expectation on the Street.
"Our original Outperform rating was based on our view that cost-savings programs bought the company time to right the volatility in the CHS portfolio, with an added TSR kicker via dividends and buybacks," said Mr. Tunick. "Following 3Q's miss and the 4Q guide-down (RBC estimate now at 9-cent loss) vs. consensus of $0.17), the top and bottom line uncertainty are harder to ignore. While fashion and marketing missteps are being blamed for the Chico's brand (50 per cent of sales) miss, the volatility following 2018's brand relaunch in a strong consumer environment speaks to something deeper, especially considering tougher results out of women's peers Francesca's Holdings Corp., J.Jill Inc., and Ascena Retail Group Inc. While an improvement at the brand is aimed for in spring 2019, fashion-led turnarounds often take time and can see bumps in the road. On top of deleverage on negative comps, omnichannel efforts are likely to continue their margin drags in 2019, with cost-savings efforts running out against CHS's 2.6-per-cent EBIT margin. While we believe the balance sheet can fund the turnaround and dividend in the medium term, little visibility on comps and margins into next year is pushing us to the sides."
Mr. Tunick dropped his target for Chico's shares to US$4.50 from US$10. The average is US$6.90.
=====
Seeing an improved raw materials outlook for 2019 and seeing it as a key beneficiary of industry consolidation, Citi analyst P.J. Juvekar upgraded PPG Industries Inc. (PPG-N) to “buy” from “neutral.”
"Rapidly falling oil prices are poised to reduce some of the intense raw material inflation pressuring the company," he said. "We think PPG is accelerating cash deployment to M&A with share repurchase as the fallback option, which we think would be viewed positively. Plus, with activist investor involvement we think the focus on execution at PPG has ratcheted higher, which should also help the stock outperform."
Mr. Juvekar hiked his target for PPG shares to US$123 from US$103. The average on the Street is US$111.96.
=====
Beacon Securities analyst Gabriel Leung initiated coverage of Quorum Information Technologies Inc. (QIS-X), a Calgary-based firm that focuses on the automotive retail business in Canada and the United States, with a “buy” rating.
"Within North America, we believe there are 22,165k addressable dealership rooftops representing an annual recurring software revenue opportunity of $700-million (based on a $2,500 monthly ARPU [average revenue per sure] for Quorum’s base platform)," he said. "If we include other add-on modules, we believe the monthly ARPU could hit $4,500, which would imply a $1.2-billiob annual recurring revenue opportunity.
"The competitive market for DMS [dealers management system] products is interesting in that it is dominated by a several larger players such as Reynolds & Reynolds (private), CDK Global (CDK–N), which is a spin-out of ADP (ADP–N), and DealerTrack, which was taken private by Cox Automotive (private) for $4-billion in 2015. Beyond these big three, there are number of smaller players of which we believe Quorum is one of the largest (in terms of revenues and OEM reach), which could make it an attractive takeout target down the road."
Seeing an "attractive" business model and entry point, based on its growth leverage and "strong" recurring revenue base, Mr. Leung set a target price of $1.25 per share.
=====
In other analyst actions:
TD Securities analyst Tim James upgraded AirBoss of America Corp. (BOS-T) to “buy” from “hold” with a target of $12.50, falling from $13.50. The average target on the Street is $12.60.
UBS upgraded Emera Inc. (EMA-T) to “buy” from “neutral” with a target of $51, rising from $42. The average is $46.57.