Inside the Market’s roundup of some of today’s key analyst actions
Dollarama Inc.’s (DOL-T) consumer proposition continues to resonate despite price points stretching to $4, according to Desjardins Securities analyst Keith Howlett.
Ahead of Thursday’s release of its third-quarter 2019 financial results, he upgraded his rating for the Montreal-based retailer’s stock to “buy” from “hold.”
“The Dollarama consumer proposition has been one of the most powerful we have encountered, while its business model is one of the most financially productive,” said Mr. Howlett. “The questions are how far the original concept may be stretched to higher price points (eg from $2 at the IPO in 2009 to $4 now) and how many stores with the elevated current level of profitability the Canadian market can absorb. These are the same questions as at the IPO, but have been escalated back to top of mind by two consecutive quarters of same-store sales growth of 2.6 per cent (below the ‘usual’ level).
“While Dollar Tree Canada has improved its execution and is gaining share at the $1.25 price point (as Dollarama shifts its price points higher), our greater concern is that either ‘consumer fatigue’ has set in with the concept, or that the major discount players, such as Walmart and Canadian Tire, have successfully fine-tuned their competitive responses at price points over $2.”
Mr. Howlett is projecting earnings per share for the quarter of 42 cents, matching the consensus on the Street, with same-store sales growth of 3.9 per cent. That result exceeds the 2.6-per-cent growth seen in the first half of the fiscal year, but it will fall short of both the average for the third quarter over the last 10 years (5.8 per cent) and be the lowest reading for that span (4.2 per cent).
“Over the last few years, Dollarama has improved speed of checkout, store layout, store lighting, in-stock position, product adjacencies, and store and product merchandising,” the analyst said.
“Our view is that the current weaknesses of Dollarama, from a consumer’s perspective, are: (1) products cannot be returned for a refund (which becomes more of an issue as price points escalate); (2) there is no online catalogue of products or a transactional website; (3) pricing of products in certain categories is not obvious (eg gift bags) given that prices cover a range from $1–4, and (4) there is a charge for plastic bags (5 cents) to carry home purchase.”
Mr. Howlett maintained a target price of $45 for Dollarama shares. The average target on the Street is $46.64, according to Bloomberg data.
“The relative value offered is still compelling, and there are no good alternatives to Dollarama,” he said. “The Canadian discount segment is intensely competitive and only the best are able to survive and prosper. These include Walmart Canada, Dollarama and Canadian Tire. As Dollarama moves price points higher, it may draw more targeted responses from Walmart and Canadian Tire. Dollarama must also not lose more ground than planned at the $1.25 price point as overall price points move higher.”
Elsewhere, Industrial Alliance Securities analyst Neil Linsdell thinks the quarterly results will bring back some investor confidence.
“The focus with the Q3 results will be on the outlook for SSSG for the remainder of fiscal 2019 and initial guidance for fiscal 2020, as the company has made the decision to limit price hikes to preserve its value proposition,” he said. “We also expect clarity on store openings, which we have expected to accelerate through the end of the year to offset a slow start to fiscal 2019. We believe that a solid outlook for sales growth through the end of fiscal 2019 and into fiscal 2020, along with the realization of margin improvements as discussed last quarter, should bring confidence back to DOL shares. As such, we see the recent sell-off as a buying opportunity.”
Mr. Linsdell maintained a “buy” rating and $54.50 target.
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In the wake of its November sell-off, Apple Inc. (AAPL-Q) now trades at a level “too late to sell,” said HSBC analyst Erwan Rambourg, who downgraded the U.S. tech giant to “hold” from “buy” with the belief its core iPhone business will “slow dramatically.”
“Apple's iconic hardware unit growth is broadly over for now,” he said. “Revenues are only supported by higher selling prices and by the development of services. Flat unit growth has hit Apple's share price and incidentally its key suppliers. What has made the success of Apple, a concentrated portfolio of highly desirable (and pricy) products is now facing the reality of market saturation."
Mr. Rambourg cut his target for the stock to US$200 from US$205. The average on the Street is currently US$225.31.
"As Apple moves from very high double-digit revenue growth to a more pedestrian mid single-digit (both top and bottom line), the slowdown in the second derivative of growth will weigh on the stock's investment case," he said. "While we understand the company's interest of not disclosing unit sales of hardware and focusing more on service gross margin, investor enthusiasm could be the victim of a lengthy transition phase as the focus shifts."
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The Alberta government’s mandatory cut for oil producers will be “negative overall” for Canadian energy services companies, said Industrial Alliance Securities analyst Elias Foscolos, who feels the extent of the damage will vary based on level of diversification and leverage.
In a research note released Tuesday, Mr. Foscolos lowered his target price for several stocks in the sector by an average of 4 per cent.
“Ultimately we view the cut as a short-term solution to WCS pricing woes, designed to tide Alberta over until new egress capacity can come online in the latter half of 2019,” he said.
Mr. Foscolos’s changes were:
CES Energy Solutions Corp. (CEU-T, “strong buy”) to $4.75 from $5. Average: $5.94.
Enerflex Ltd. (EFX-T, “buy”) to $22.50 from $23. Average: $22.59.
High Arctic Energy Services Inc. (HWO-T, “buy”) to $4.25 from $4.50. Average: $4.42.
Mullen Group Ltd. (MTL-T, “strong buy”) to $16 from $16.75. Average: $16.11.
Pason Systems Inc. (PSI-T, “buy”) to $23 from $23.75. Average: $25.20.
Pulse Seisimic Inc. (PSD-T, “buy”) to $2.70 from $2.80. Average: $2.70.
Secure Energy Services Inc. (SES-T, “buy”) to $10 from $10.25. Average: $11.18.
Source Energy Services Ltd. (SHLE-T, “buy”) to $2.50 from $2.75. Average: $3.50.
STEP Energy Services Ltd. (STEP-T, “buy”) to $6.50 from $7.75. Average: $6.94.
Strad Energy Services Ltd. (SDY-T, “buy”) to $2.20 from $2.30. Average: $2.15.
Tervita Corp. (TEV-T, “buy”) to $12.50 from $12.75.
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Investors will be focused on Hudson’s Bay Co.’s (HBC-T) outlook for the 2018 holiday season when it releases its third-quarter financial results on Wednesday before market open, said RBC Dominion Securities analyst Sabahat Khan.
He’s projecting sales for the quarter of $3.053-billion, a drop of 3.4 per cent year over year, with adjusted EBITDA of $45.1-million, which sits below the consensus of $54.2-million.
“We expect investor focus at Q3/18 reporting to be on: 1) outlook for sales growth during the holiday selling period across the U.S. and Canada; 2) SSS during Q3/18 and any notable variation across HBC’s banners; 3) any updates on the previously announced restructuring program and savings realized to date; and, 4) any potential commentary on the real estate strategy,” he said.
Mr. Khan maintained a “sector perform” rating and $11 target for HBC shares, which is 10 cents lower than the consensus.
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CRH Medical Corp.’s (CRH-T) acquisition of a 51-per-cent interest in a gastroenterology anesthesia practice in Tennessee is “supportive to the investment thesis,” said Acumen Capital analyst Brian Pow.
On Monday before market open, Vancouver-based CRH announced the deal for Tennessee Valley, which provides anesthesia services to one GI ambulatory surgical centre. The price was not disclosed.
“Acquisitions continue to be an integral part of CRH’s business plan,” said Mr. Pow, who raised his target price to $6.25 from $6, which exceeds the consensus of $6.11.
He maintained a “speculative buy” rating.
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Northland analyst Gus Richard thinks it’s “as good as it gets” for Intel Corp. (INTC-Q).
Pointing to both concerns stemming from trade “tensions” and a loss of market share Advanced Micro Devices Inc. (AMD-Q), he downgraded its stock to “underperform” from “market perform” with a target of US$42, falling from US$46 and beneath the average of US$54.30.
“Intel maneuvers like a battle ship,” said Mr. Richard. “It takes forever to turn the ship and even longer to change momentum. In addition, Intel threw the captain overboard six months ago and it remains to be seen if the new leader is Lord Nelson or Captain Queeg.”
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In other analyst actions:
Macquarie analyst Brian Bagnell downgraded Suncor Energy Inc. (SU-T, SU-N) to “neutral” from “outperform” with a target of $46, falling from $58. The average target on the Street is $59.60.
Mr. Bagnell also downgraded Paramount Resources Ltd. (POU-T) to “neutral” from “outperform” with a target of $8, down from $10. The average is $15.23.
He raised his rating for Advantage Oil & Gas Ltd. (AAV-T) to “neutral” from “underperform” with a target of $2.75, falling $3.25 and under the $4.91 average.
Macquarie’s Brian Kristjansen upgraded Cardinal Energy Ltd. (CJ-T) to “outperform” from “underperform” with a target of $4.45, increasing from $3.75. The average is $5.91.