Inside the Market’s roundup of some of today’s key analyst actions
Apple Inc.'s (AAPL-Q) shocking warning that disappointing iPhone sales will result in a significant drop in its revenue over the crucial holiday season compared to earlier projections has led Canaccord Genuity to cut its price target for the tech giant. And it was hardly alone; numerous analysts cut their price targets on Apple, bringing the average 12-month target to US$186.41, down from about $220 prior to Apple’s announcement late Wednesday. There were also three ratings downgrades: Jeffries cut its rating to “hold” with a target of $160; Macquarie cut its rating to “neutral” with a target of $149; and Loop Capital Markets downgraded its rating to “hold” with a price target of $160.
Canaccord had already lowered its iPhone and overall estimates for Apple’s sales but the company’s first quarter fiscal year 2019 expectations were “well below our lowered estimates,” analyst T. Michael Walkley said in a note Thursday.
“Management cited weaker-than-anticipated iPhone revenue, primarily in China, accounted for all of the roughly US$7-billion shortfall with management lowering guidance from US$91-billion at the midpoint to US$84-billion. Despite slowing iPhone sales, we still anticipate Apple will continue to grow its install base and believe the company’s ecosystem will contribute to ongoing growth, particularly for higher-margin Services and Other Products. In fact, management indicated revenue outside of iPhones grew 19 per cent year-over-year, and this growth was consistent with our estimates. Given the soft start to the latest lineup of iPhones, we are lowering our iPhone estimates and now forecast a 12 per cent year-over-year unit decline in C’19 iPhone sales and anticipate modest unit growth in C’20 based on an increasing installed base driving stable to slightly higher iPhone sales. We maintain our belief Apple can expand its leading market share of the premium-tier smartphone market and the iPhone installed base (excluding refurbished iPhones) will exceed 700 million in 2018. This impressive installed base should drive iPhone replacement sales and earnings, as well as cash flow generation to fund strong long-term capital returns,” he said.
While he kept his “buy” rating on the stock, he cut his price target to US$190 from US$225.
“With our survey work indicating declining sell through share and disappointing overall sales due in part to soft smartphone demand combined with Apple’s pre-announcement, we are lowering our iPhone estimates. While we believed the lower-priced iPhone XR would generate strong sell through trends, our surveys indicated muted demand versus our expectations. Feedback for lackluster initial sales included its inferior quality perception given its aluminum construction versus the XS and XS Max, lack of HD screen, and viable lower-cost alternatives in the older iPhone X and 8 models. We have reduced our C’18/C’19/C’20 iPhone unit sales estimates from 213M/208M/217M to 203M/180M/194M,” he said.
“Despite softer near-term iPhone sales trends, we anticipate Apple will sell over 175 million iPhones annually helping to drive a growing ecosystem to drive ancillary revenue streams. We continue to believe Apple can sustain double-digit Services revenue growth driven by growth from the App Store, strong subscriber growth in Apple Music, Apple Care, iTunes/iCloud and Apple Pay. Further, our survey work indicates strong performance of wearables consistent with Apple’s pre-announcement indicating wearables grew nearly 50 per cent year-over-year in the December quarter. With higher margin Services and Other Products revenue expected to grow faster than the overall company, our reduced iPhone unit sales revisions are partially offset, resulting in our C’18/C’19/ C’20 EPS estimates going from $12.60/$13.90/$15.03 to $12.14/$12.55/$13.50. We also believe an eventual settlement with Qualcomm could have a positive impact to Apple gross margins,” he said.
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With a few key catalysts behind United Technologies Corp. (UTX-N), Citi Research is resuming coverage of the stock.
“The biggest catalyst came in late November when the company announced two important events: (1) the closure of the approximately US$30-billion Rockwell Collins acquisition and (2) the planned three-way split between Aero, Otis & Carrier. With those announcements behind us, the next big catalyst isn’t for another 18-24 months when the split becomes official. There are other watch-items in the meantime including Rockwell integration updates, potential M&A developments for the non-aero business, global growth & trade rhetoric. Overall, we like that UTX is spending money to generate value (whether it’s new products, business or corporate structures). But all of the moving pieces over the next year could make it tough for shares to outperform,” said analyst Jonathan Raviv.
He resumed coverage with a “neutral” rating and US$120 price target. The median is US$149.
“There is a lot of effort and cost being put into the separation. The end-result is a cleaner and more tailored investment case for each business where one story won’t distract from another. The key enabler is that the aero business can now sustain investment requirements thanks to the COL acquisition. Over time, this Aero-focused “New UTX” likely emerges as a compelling standalone A&D investment. And the commercial businesses (Carrier and Otis) have long-term population growth trends on their side, not to mention M&A potential. However, global growth could weigh on numbers or sentiment. Our sum-of-the-parts analysis supports a stock in the US$125-$150 range which could mean nice upside. But it’s a lengthy and complicated path to separation such that it might be too soon to get involved,” he said.
“UTX trades at about a 5 per cent discount to the market vs. its historical 5 per cent premium on NTM [next 12 months] PE. [price to earnings]. This discount valuation is attractive in light of the aero synergy opportunities ahead. However, there could be downside to the non-aero businesses (especially Otis) if global growth slows. As a result, we’re still on the sidelines as we expect the next year to be dominated by volatile numbers (as UTX digests integration/spin costs) and a global growth/trade overhang.”
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After Barrick Gold Corp. (GOLD-N) completed its acquisition of Randgold, CIBC is resuming coverage of the stock.
Analyst Anita Soni resumed coverage with an “outperformer” rating and a 12-18-month price target of US$17 per share. That compared to CIBC’s previous rating of “neutral” and price target of US$14.50. The median is US$14.
“We use a 2.2 times [price to net asset value] P/NAV multiple (prior 2.2 times ABX, 2.8 times RRS) and 15 times CF [cash flow] multiple (prior 13 times ABX, 20 times RRS). While Barrick shares have outperformed peers by 11 per cent since the deal announcement, there remains a 26 per cent return to our price target at current multiples, and the potential for further upside opportunity with delivery of the strategic plan,” the analyst said.
“The newly combined company will create a platform of the highest concentration of Tier 1 assets, combined with a strong management team known for delivering industry-leading returns for investors. We believe Barrick provides a unique opportunity to garner a premium multiple.”
“Barrick owns five of the world’s top 10 Tier 1 gold assets and extensive land positions in major gold districts. The diverse asset portfolio of 21 mines and six projects across North and South America, Australasia and Africa offers significant opportunities for production growth, asset rationalization, operational improvement, and optimization through exploration additions and mineral resources management,” she said.
“We expect new CEO Mark Bristow to continue his disciplined approach to assessing new projects, with high after-tax hurdle rates, which should drive improved shareholder returns. The Randgold team delivered an industry-leading ROIC [return on investment capital] of 9.4 per cent, on average, for 2013-2017, consistently outperforming other North American seniors,” she said.
“Barrick is trading at 9.7 times P/CF (Avg. 2019E-2020E) and 2.1 times P/NAV 5 per cent at a US$1,300/oz gold price, compared to the senior averages of 10.7 times and 1.6 times, respectively.”
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The latest moves by Stingray Group Inc. (RAY-A-T) are being viewed positively by CIBC Research, which has reiterated its rating on the stock.
“Stingray’s new deal with Altice USA is a strong positive lever for further organic growth in the years ahead. While the failure to acquire Music Choice is disappointing on the strategic front, it does reduce some near-term risk, and should allow for the management focus required for this story to rebuild investor sentiment in 2019,” said analyst Robert Bek.
“We continue to believe that the stock has been over-penalized for the surprise purchase of NCC, and consider the shares excellent value at current levels. This is even more the case as organic growth potential is solidified through the Altice USA deal. While quarterly execution is required to rebuild value, we do not expect this to be an issue in 2019.”
He reiterated his “outperformer” rating on the stock and kept his $11 price target.
“In the final hours of 2018, Stingray announced a new content deal with Altice USA, the former Cablevision base and the fourth-largest U.S. MSO. Stingray will bring its 50 music channels and hundreds of on-demand music videos to Altice USA’s subscribers. Altice USA also gets rights to other Stingray offerings, such as linear music, SVOD and TV apps. This is a strong deal for Stingray, as it materially expands its reach in the U.S. cable market, which is a key element of our positive thesis on the company. We have not adjusted numbers specifically, but we believe that our inherent organic growth assumptions are now well supported,” he said.
“In addition to the Altice USA deal, Stingray has announced that it is abandoning pursuit of Music Choice (in whole or in part), its primary competitor in the U.S. market. Although the lack of success on Music Choice is disappointing, we had not built in positive expectations that Stingray would receive more than a token ownership position at this point; therefore, this announcement is certainly not an issue for the story. In fact, given the management focus required to integrate NCC, and the pursuit of organic growth (such as Altice USA), we would regard the abandoned Music Choice deal as a positive for the story right now.”
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After Delta Air Lines Inc. (DAL-N) updated its guidance, Citi Research cut its price target on the air line.
“Delta updated Q4 guidance this morning. Although EPS was technically guided to the high end of the original range provided in October (now US$1.25-US$1.30), pricing was weaker than anticipated (RASM [revenue per available seat mile] now +3 per cent vs. original 3-5 per cent). A gain from the DAL Global Services transaction aided non-operating income and allowed EPS to be at the high end. The core trend here is a bit softer,” said analyst Kevin Crissey.
“We updated our estimates to incorporate these changes, including a slightly higher tax rate than previously forecasted. Our 2019 EPS estimate falls to US$6.48 from US$6.68,” he said.
He kept his “buy” rating on the stock but cut his price target by US$1 to US$67. The median is US$68.
“Our US$67 PT is derived using a ~10 times multiple on our forward EPS estimates. This multiple is in line with the company’s long-run valuation but slightly higher than how it has traded recently. We think the historical multiple is somewhat conservative given structural improvements in the sector, including higher ROIC and better operating execution.”
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In other analyst actions:
Intact Financial Corp: Morgan Stanley cuts target price to C$114 from C$118
Lundin Mining Corp: Morgan Stanley resumes coverage with overweight rating; price target of C$8.70
With a contribution from Darcy Keith