Inside the Market’s roundup of some of today’s key analyst actions
Husky Energy Inc. (HSE-T) now sits in a better position to deliver free cash flow growth and improved returns on capital, said BMO Nesbitt Burns analyst Randy Ollenberger, believing that strength could lead to a positive re-rating versus peers.
Mr. Ollenberger said the Calgary-based company has outperformed its competitors over the last month, but it remains undervalued by investors, leading him to upgrade his rating for the stock to “outperform” from “market perform.”
He maintained a target price for Husky shares of $23, which exceeds the current average target on the Street of $20.68, according to Bloomberg data.
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CIBC World Markets analyst Robert Sedran downgraded his rating for Laurentian Bank of Canada (LB-T), believing its ongoing review of its mortgage book will serve “as an incremental distraction and usage of resources going forward.”
On Tuesday, the Bank announced announces it has successfully resolved the identified issues related to mortgage loans purchased by an unnamed third-party purchaser. As part of an agreement with Canada Mortgage and Housing Corporation, the Bank will repurchase an additional $115-million of ineligible mortgages during the third quarter of 2018, slightly lower than its initial assessment.
“We have been troubled not so much by the financial implications of the issues that the bank has found within its mortgage book, but with the operational risk on display,” said Mr. Sedran. “With another set of disclosures coming out suggesting additional issues have been found and that the bank will repurchase between $125 million and $150 million in mortgages (this time from the CMHC) as it reviews its book for processing and underwriting errors, we believe that the underlying story – positive or negative – becomes less important. Notwithstanding a valuation discount that has the shares trading below book value ... we are downgrading the shares.”
Moving the stock to “underperformer” from “neutral,” he cut his target to $49 from $55. The average target is currently $55.67.
“This issue remains an operational one and no additional financial implications are anticipated from the announcement. However, they will serve as an incremental distraction and usage of resources going forward,” the analyst said. “As of the close of May 29, the shares traded at 7.8 times our fiscal 2019 EPS estimate and 0.9 times book value, which compares to its larger peers at 10.3 times and 1.8 times, respectively.
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With a declining smartphone market, Apple Inc. (AAPL-Q) faces a high risk that next year will be a “down year,” according to Maxim analyst Nehal Chokshi, who thinks the potential for its subscription services may be overstated.
“Prior survey data indicates attach rates for [Apple’s] subscription services will be at best 30 per cent, likely lower given ecosystem centric approach, especially for services where entrenched incumbents exist,” he said.
“We believe at best AAPL’s subscription businesses at maturity will generate an operating margin in-line with the current corporate average of 25 per cent with some risk that actual long-term OM [operating margin] will be lower.”
Expecting fiscal 2019 to bring only marginal upgrades to its iPhone lineup, which increases the possibility that the tech giant will only maintain even lose market share, Mr. Chokshi downgraded its stock to “hold” from “buy.”
He lowered his target price to US$200 from US$204. The average on the Street is US$196.85.
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A recent pullback in price led Raymond James analyst Johann Rodrigues to raise his rating for Park Lawn Corp. (PLC-T), believing it sits poised “unprecedented” growth.
“Park Lawn shares hit an all-time high in early-March but have since pulled back 14 per cent (versus a 2 per cent for the TSX Composite Index),” he said. “We think the recent subscription receipts offering and some profit taking have contributed but see no changes to the business strategy, growth profile, or the stock’s long-term prospects.”
Mr. Rodrigues said shareholders are set to “reap the rewards” over the company’s search for “highly accretive external growth opportunities,” particularly south of the border, over the last 12 months. He expects earnings growth to accelerate to 40 per cent, compared to a historical 12-month average of 15 per cent and a 3-per-cent rise for the rest of the Canadian real estate sector.
“With the most recent acquisition, Park Lawn retained Brad Green (President) and Jay Dodds (COO) to head up their U.S. operations and focus on integrating the businesses into a centralized platform. The two founded Signature after lengthy careers as part of Carriage’s executive group,” the analyst said. “We believe these additions should help propel the U.S. operations to new high-water marks for revenue, margin, and EBITDA growth.”
Contending the Park Lawn offers “growth at an attractive price,” Mr. Rodrigues raised his rating for the Toronto-based company to “strong buy” from “outperform.” He also added the stock to the firm’s “Canadian Analyst Current Favourites.”
“Despite offering the highest level of earnings growth in our coverage universe over the next two years, the Company trades at an attractive PEG [price/earnings to growth ratio] ratio of 0.5,” he said. “While traditionally not a metric utilized in analyzing low-growth REITs, we believe it is useful when looking at growth companies. Park Lawn’s 2019 PEG ratio is the lowest in our universe, and compares favorably to the Canadian real estate average of 3.5 and the U.S. death-care peer average of 1.2. We think the current entry point provides investors with a chance to align themselves with one of the true growth stories in North American real estate.”
His target remains $30, which exceeds the consensus of $29.79.
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RBC Dominion Securities analyst Biraj Borkhataria sees the potential for Exxon Mobil Corp. (XOM-N) to deliver “substantial” dividend growth alongside “superior returns” through 2025, which he believes are both currently “underappreciated.”
“A combination of disappointing results and the acceleration of its investment plans has led Exxon to underperform peers significantly recently,” he said. “Exxon is in the early phases of rejuvenating its upstream portfolio, and its recent capex increase was also a stark contrast to the path taken by its peers, who have focused on hard capex ceilings and a greater emphasis on returning excess cash to shareholders .
“Significant share price underperformance for counter-cyclical behaviour is a little frustrating, as the #1 criticism of this sector is the cyclicality of capex profiles. We think ramping up investment levels towards the bottom of the cycle to take advantage of improved costs is likely to be positive for returns further out. However, given that this sector has a pretty terrible track record of capital stewardship, it is perhaps not surprising to see investors favour those who maintain capex at lower levels and return excess cash to shareholders.”
Feeling Exxon should “suit patient, long-term investors looking for sustainable dividend growth with oil price upside,” the analyst upgraded the U.S. energy giant to “outperform” from “sector perform.”
“In March, Exxon announced an acceleration of its capital investment plans in the upstream, which resulted in capex estimates rising 10-15 per cent over 2018-20,” he said. “This turn was a marked contrast to peers, who have been more focused on “lower-for-longer” capex frameworks. That said, Exxon notes its key upstream projects should generate a 20-per-cent ROACE [ return on average capital employed] in a $60 per barrel environment, while the majority of its growth is also oil-linked, implying uncapped upside in a higher oil price environment. We see Exxon’s future opportunity set as one of the most attractive in the sector, and expect it to start bearing fruit from 2019.
“Investing in low breakeven projects at the bottom of the cycleshould lead to higher returns over time, yet given the sectors’ track record on execution, the market remains rightly skeptical. We estimate Exxon’s ROACE relative to peers should trough in 2018/19, with superior growth thereafter. We see above-average returns as critical for Exxon to maintain its premium rating.”
Mr. Borkhataria raised his target price for Exxon shares to US$100 from US$90. The average is US$86.50.
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CIBC World Markets analyst David Haughton initiated coverage of Leagold Mining Corp. (LMC-T) with a “sector outperform” rating and $5 target. The average target on the Street is $5.26.
“An experienced operating and development team backed by a solid balance sheet should offer investors greater assurance that Leagold can achieve the full potential of the Brio assets and Los Filos,” said Mr. Haughton.
He added: “Leagold provides an attractive combination of a better-than-average growth profile and value amongst mid-tier gold producers. The P/NPV of just 0.5 times at spot reflects the legacy issues at Brio that Leagold has the opportunity to improve.”
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In other analyst actions:
Ladenburg Thalmann & Co initiated coverage of Opsens Inc. (OPS-T) with a “buy” rating and $2 target, which is the current consensus.