Inside the Market’s roundup of some of today’s key analyst actions
RBC Dominion Securities analyst Amit Daryanani expects Apple Inc. (AAPL-Q) to see an uptick in the average selling price of iPhones along with “healthy” volumes, citing a survey of almost 5,300 consumers.
“We think demand for this generation iPhones – XS Max/XS/XR - is robust and ASPs and gross margins could improve given mix benefits,” said Mr. Daryanani in a research note released Wednesday.
The analyst said iPhone purchase intentions grew to 26 per cent from 20 per cent a year ago. The iPhone XS Max was seen to be the most popular model among prospective buyers with 25 per cent preferring it despite its high price.
“On aggregate, 57 per cent of prospective iPhone buyers preferred the new generation of iPhones (iPhone X/8/8+), which is slightly lower than 64 per cent for iPhone X/8/8+ models last year and 71 per cent in the iPhone 7/7+ generation," said Mr. Daryanani. "While heading into this cycle, we expected ASPs to head downwards versus challenging comps of last year’s iPhone X cycle, the new lineup indicates ASPs should continue to go up. This is likely due to two reasons - (i) Combined iPhone XS and iPhone XS Max mix should be higher versus iPhone X; and (ii) Base model prices are going up 7 per cent or iPhone XR is $50 higher versus iPhone 8 last year.”
Also seeing “significantly higher” consumer interest for AirPods and Apple Watches, Mr. Daryanani raised his 2018 and 2019 fiscal earnings per share projections to US$11.75 and US$13.77, respectively, from US$11.73 and US$13.30.
Maintaining an “outperform” rating for Apple shares, he raised his target to US$250 from US$240. The average target on the Street is US$233.44, according to Bloomberg data.
“We believe AAPL’s current stock price creates an attractive entry point for investors to benefit from its ability to generate revenue and EPS growth in FY18,” he said. “We believe multiple catalysts remain as the company benefits from: 1) iPhone ramps; 2) Mac/iPad refresh cycle; 3) potential iTV launch or other major product lines; and 4) improvements in capital allocation policy. We believe the fundamental reality remains that AAPL’s valuation is materially sub-par to what we anticipate is its long-term revenue and EPS potential”
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After reporting “industry-leading” pro forma revenue in its fourth-quarter financial results, Canaccord Genuity analyst Matt Bottomley raised his target price for shares of Aurora Cannabis Inc. (ACB-T).
“With an industry leading top line and rec purchase orders in 11 provinces/territories (covering 98 per cent of the Canadian population), we have decreased Aurora’s recreational discount rate from 10 per cent to 8 per cent (to be in line with Canopy, which we believe will also have a leading rec presence in Canada),” he said. “In addition, we have included the company’s recent strategic investments at book value and updated Aurora’s public company investments to fair value.”
On Tuesday before market open, the Edmonton-based producer reported revenue for the quarter of $19.1-million, slightly below Mr. Bottomley’s $22.6-million projection. However, the result would have been $33.1-million if it has included the acquisition of MedReleaf Corp., which closed in late July.
“We note that even when excluding Aurora’s patient counselling (CanvasRx) and engineering services (Larssen), pro forma revenue for cannabis sales alone would still have been more than $28-million, which currently represents the highest quarterly run-rate among all the large-cap Canadian LPs for the period ended Jun 30, 2018 (including Canopy, Aphria and Tilray),” the analyst said.
“Further, during the quarter, the company saw its average price per gram (including both bud and oil) increase by 15 per cent to $9.20, which is also at the higher end of industry range. This increase was largely due to a higher proportion of oil sales in the quarter (31 per cent of the top line; up from 20 per cent in FQ3). We believe the company will continue to shift towards higher priced and higher margin derivative products, both in the domestic cannabis market and in international markets over the next few quarters.”
Though he thinks Aurora has one of the more “robust” cultivation and production footprints in the industry and has successfully secured a number of diversified strategic investments, Mr. Bottomley lowered his revenue and earnings expectations for fiscal 2019 and 2020.
“We expect a longer ramp to Canada’s recreational implementation as most retail stores in the country will not be open by October and provinces will need to leverage off their online platforms to kick-off the market,” he said.
Despite lowering his earnings per share projections for 2019 and 2020 to 6 cents and 19 cents, respectively, from 10 cents and 23 cents, he raised his target price for Aurora shares to $13 from $11, keeping a “speculative buy” rating. The average target is now $12.
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New Gold Inc. (NGD-A, NGD-T) will be “hard pressed” to keep up with its sector peers without higher medal prices or an “opportunistic” takeover offer, according to RBC Dominion Securities analyst Dan Rollins.
On Sept. 19, the Toronto-based company announced the sale of its Mesquite mine in California to Equinox Gold Corp. for US$158-million in cash.
Mr. Rollins said the transaction improves its near-term financial flexibility and should help in its ability to refinance or extend its $400-million line of credit which expires in August of 2020. However, he believes New Gold’s medium-term balance sheet risk remains unchanged, given it receives an upfront payment for Mesquite rather than future free cash flow.
“The sale of Mesquite reduces operational diversification and places a greater load on New Afton and Rainy River,” he said. “While New Afton has been a consistent producer of cash flow, Rainy River remains a ‘show me story’ with respect to first achieving design throughput of 21 Ktpd (prior to a planned expansion to 24 Ktpd), demonstrating higher grade ore can be effectively segregated in the pit, and delivering on steady-state unit costs. Failure to execute on these factors could increase balance sheet risk and further impair investor sentiment.”
“With the sale of Mesquite, average gold production between 2019 and 2020 is expected to decline to 375,000 ounces at an all-in sustaining cost of $925 per ounce versus 525,000 ounces at $950 per ounce. As a result, average EBITDA, operating cash flow, and sustaining free cash flow over this period are forecast to decline by $60-million ($0.11 per share), $50-million ($0.09 per share) and $40-million ($0.07 per share) at a flat gold price of $1,300 per ounce.”
With a lower near-term free cash flow projection and a resulting decline in his net asset value estimate, Mr. Rollins dropped his target for New Gold shares to US$1 from US$1.25. The average is US$1.29.
He maintained an “underperform” rating.
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Providing “superior growth at an average price,” Conagra Brands Inc. (CAG-N) should be a target for long-term investors, said RBC Dominion Securities analyst David Palmer.
“Conagra’s stock is down 5 per cent since announcing its acquisition of Pinnacle Foods on June 27,” he said. “his performance is no better than the average U.S. food stock despite continued peer-leading baseline sales growth (up 2 per cent in FQ1) and significant margin and EPS upside associated with the Pinnacle integration. Our best guess explanation for this lackluster stock reaction is a combination of 1) short-term-oriented investors' disappointment about deal structure (only 60-per-cent cash component) and 2) recent low-single-digit consumption declines at Pinnacle against difficult Duncan Hines and BirdsEye comparisons.
“Inflation and growth investments will likely pressure near-term margins (e.g. fiscal 1H19). However, we also view synergy guidance as conservative and see potential for value-creating spin-offs (that also may use the company’s previous loss on sale to defray tax liability).”
Ahead of the release of its first-quarter financial results on Thursday, Mr. Palmer maintained his earnings per share projection for the Chicago-based packaged foods company of 49 US cents, a rise of 7 per cent year over year and at the top end of its guidance (46-49 US cents). His 2019 and 2020 EPS estimates remain US$2.26 and US$2.38.
He has an “outperform” rating and US$46 target. The average is US$42.08.
“We believe gross margin upside post-Pinnacle integration is greater than the company’s initial synergy targets (e.g. our previous assumption was 8 per cent of acquired sales versus company estimate of 6.5 per cent, $215-million),” said Mr. Palmer. “That said, we acknowledge that the upside to these synergies is likely from COGS and therefore long term in nature. In other words, it may take a number of years to drive gross margin upside from a combination of fixed manufacturing, warehousing, and distribution assets (and third-party relationships). We believe this longer time frame to value creation would justify the significant equity participation component of the deal (63.4% cash, 36.6% equity) but also may help explain stock weakness since the announcement.”
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Predicting “sustainable growth is on the horizon,” UBS analyst John Roy upgraded International Business Machines Corp. (IBM-N) to “buy” from “neutral.”
“Diving deep into IBM Analytics, Cloud, and Services we see little chance for revenue growth in 2019, but 2020 looks better driven by growing Analytics and Cloud," he said.
His target for IBM shares rose to US$180 from US$160. The average is US$166.10.
“The mainframe cycle will be ending and the FX headwinds are likely to hurt the top-line optics, but we believe this is priced in,” said Mr. Roy. “IBM is operating better but we believe the multiple could expand as it beats expectations on Analytics and Cloud.”
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With features like live streaming and image stabilization, GoPro Inc.’s (GPRO-Q) new products are “compelling,” said Oppenheimer analyst Andrew Uerkwi.
Upgrading its stock to “outperform” from “perform,” Mr. Uerkwi thinks sales should growth through both targeting marketing and a “vastly improved” software editing suite.
“In summary, overlooked GoPro should be a buy," said the analyst.
He set a Street-high target price of US$9. The average is US$6.31.
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Citi analyst Alexis Borden initiated coverage of Hostess Brands Inc. (TWNK-Q) with a “neutral” rating.
“Hostess is a tale of a company brought back to life in mid-2013 after a chapter 7 bankruptcy, which enabled new ownership and management to re-shape the business by marrying strong powerful iconic brands (Twinkie, Ding Dongs, Ho Hos) in the $6.6-billion sweet baked goods (SBG) category with significant capital investments in manufacturing, and a renewed, streamlined operating & distribution model (switched to warehouse from DSD),” she said. “However, after generally being perceived as one of the “growthier” stories in U.S. Food, there is now a host of questions over Hostess' near-to-medium term outlook given recent revenue headwinds from lost WMT display space, heightened cost inflation pressures & the ability to get pricing, and continued sluggish SBG category growth. While we see some longer-term positives supporting business expansion and market share gains, the cloud surrounding recent issues leaves us cautious nearer-term.”
Ms. Borden set a US$13 target price, which falls below the consensus of US$14.10.
“We believe that Hostess continues to possess opportunities supporting expansion and market share gains, incl. distribution upside, innovation, and better capture of breakfast with the Chicago Bakery,” she said. “Further, its warehouse distribution model provides competitive advantages in driving market share gains as SBG competitors appeared to be locked into DSD. Lastly, despite intense competition to buy snacking assets, we continue to see Hostess as a platform for a snacking M&A roll-up, which could represent upside to EPS over the long-term.”
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In other analyst actions:
GMP analyst Ian Gillies downgraded Trican Well Service Ltd. (TCW-T) to “hold” from “buy” and dropped his target to $2.50 from $4.50. The average target on the Street is $4.23.
Mr. Gillies also downgraded CES Energy Solutions Corp. (CEU-T) to “hold” from “buy” with a target of $5.25, down from $7 and below the consensus of $7.35.
National Bank Financial analyst Greg Colman also lowered CES to “sector perform” from “outperform” with a target of $6.50, falling from $7.
Mr. Colman also downgraded Trinidad Drilling Ltd. (TDG-T) to “sector perform” from “outperform” while maintaining a $2.20 target, which is 13 cents below the average.
D.A. Davidson & Co. analyst John Morris reinstated coverage of Lululemon Athletica Inc. (LULU-Q) with a “neutral” rating and US$155 target, exceeding the average of US$154.17.
Mr. Morris also initiated coverage of Canada Goose Holdings Inc. (GOOS-N, GOOS-T) with a “buy” rating and US$68 target. The average is US$64.03.