Inside the Market’s roundup of some of today’s key analyst actions
A pair of equity analysts on the Street downgraded BRP Inc. (DOO-T) on Wednesday, anticipating a longer-than-expected recovery for the recreational vehicle manufacturer following its Club BRP 2025 event, an annual gathering where it unveils its new line-up and hosts dealers for business discussions.
Stifel’s Martin Landry said the three-day showcase in Anaheim, Cal., which began on Monday, was well-attended, however he found dealer sentiment to be “cautious” and “not encouraging.”
“We had the opportunity to discuss informally with several dealers on the current state of the industry,” he said. “Inventory levels continue to be elevated with several dealers still working to clear model year 2024s. Consumers are responding to promotions and old model year are selling when heavily discounted. However, several dealers are burden by high floor plan financing costs and high interest rates, which combined with slower sales and lower margins create a perfect storm. There is a risk that bankruptcies increase amongst dealers which could create delays in clearing inventory in the channel.”
While Mr. Landry touted the potential from the Valcourt, Que.-based company’s long-awaited unveiling of its electric motorcycle line, which marks its entry into the growing segment of the powersport industry, he reduced his forecast for the next fiscal year, citing “weak traffic and high inventory levels” and concluding “the industry recovery may take longer than expected and that consensus estimates may have to come down for FY26.”
“Management expects 2024 North-American industry retail sales to decline low to mid-single digits and that BRP would fare better than the industry given market share gains,” he said. “These expectations appear too optimistic as we believe that the industry may decline further than mid-single-digits before returning to a growth mode in light of the discussions we had with dealers. We believe that difficult industry conditions may be present next year as well and that as a result, it may take longer to clear excess inventory. Previous industry downturns lasted 2-4 years, and we cannot see why this cycle would be different. Hence, we have reduced our FY26 EPS estimate by $1.28 to $8.27.”
Given that pessimistic view, Mr. Landry lowered his recommendation for BRP shares to “hold” from “buy” previously and cut his target to $97 from $106. The average on the Street is $99.11, according to LSEG data.
“It is difficult to see what could move the shares higher in the near-term,” he said. “We see limited catalysts to point to aside from the expected interest rate decline in the U.S. which could help consumer confidence. But, we believe it may take at least 12 months before we see the impact on consumer confidence. BRP’s shares benefited from good support around the $80-85 levels as investors see the company as a long-term industry winner. However, we believe that BRP’s shares may test these levels again as investors price a longer recovery than currently expected.”
Elsewhere, National Bank’s Cameron Doerksen said he’s “incrementally more cautious in the near term,” expecting its retail results may “weaken further in the coming quarters with incremental downside to guidance possible.”
He moved his rating to “sector perform” from “outperform” ahead of the Sept. 6 release of its second-quarter results, believing BRP’s valuation is currently “reflecting re-set earnings expectations.”
“BRP slashed its F2025 guidance with Q1 results in late May, but we believe retail demand has remained sluggish and promotional activity elevated, so we see a risk that guidance will be trimmed further with Q2 results,” said Mr. Doerksen. “Furthermore, while we believe F2025 will represent a trough for BRP and the broader powersports industry, our prior F2026 forecast assumed a more robust rebound in earnings that we now view as overly optimistic. We have therefore lowered our F2026 earnings forecast for BRP as well, which drives our target reduction.”
“We continue to be positive about BRP’s long-term growth as we believe the company will gain additional market share and generate new revenue from new-product introductions. We also believe that the current year will represent a market trough for the powersports industry; however, we are taking a more cautious approach on the stock in the near term.”
Mr. Doerksen’s target is now $100, down from $109.
“Our position has consistently been that while the powersports market was clearly softening, the market was already pricing in a significant downturn for BRP,” he added.=
“Valuation multiples for both BRP and its closest peer Polaris have moved higher in recent months largely due to earnings expectations being re-set lower. For BRP, on our updated F2025 estimates (with our forecast below the low end of the guidance ranges for EBITDA and EPS), which we consider to be trough earnings, BRP is trading at 8.4 times EV/EBITDA versus its five-year forward average of 7.4 times. On P/E, DOO is trading at 1
7.1 times earnings versus its five-year forward average multiple of 13.2 times. Forward valuation multiples may move higher in the coming quarters as stocks move even higher ahead of an eventual earnings recovery.”
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Scotia Capital analyst Jonathan Goldman recommends exposure to the heavy equipment sector.
“Positive commodity fundamentals should support equipment and service demand through our forecast horizon while improved availability suggests growth with be volume-driven,” he said. “We expect the resilient 1H EPS trend to segue into a reacceleration in the 2H as the comps ease and catalyze a positive re-rate for the sector as views on cycle longevity are extended.
“Our pecking order in terms of end-market exposure is: 1) Precious metals (Gold); 2) Base metals (Copper); 3) Oil Sands; and 4) Construction. Positive commodity fundamentals should support mid double-digit production growth in Canadian gold mining; high single-digit production growth in Chilean copper mining; and LSD% production growth in Canadian oil sands mining. The construction outlook is region-dependent with the backdrop more supportive in Eastern Canada, whereas Western Canada is lapping the completion of major pipeline projects. TIH should benefit from its gold exposure (total mining accounts for 23 per cent of sales) and infra/non-res exposure in Eastern Canada (construction 43 per cent). For FTT, mining accounts for 50 per cent of end-market exposure (primarily oil and copper); construction is 40 per cent.”
In a research report released Wednesday, Mr. Goldman resumed coverage of Finning International Inc. (FTT-T) and Wajax Corp. (WJX-T) with a “sector outperform” recommendation, while he gave Toromont Industries Ltd. (TIH-T) with a “sector perform” rating.
“In terms of positioning, we prefer the less expensive, more catalyst-visible names, that’s FTT and WJX. Both are trading at an 30-per-cent discount to midcycle valuations. For FTT, further proof of structurally improved earnings power (via mix shift), progress on the cost optimization program, and potential working capital unlock and buybacks could lead to upside to estimates/valuation. For WJX, scheduled deliveries of large mining shovels in 4Q should reverse new equipment declines year-to-date and precipitate destocking and deleveraging.”
His pecking order for the three companies is:
1. Finning with a $51 target. The average on the Street is $49.13.
Analyst: “We believe FTT (Sector Outperform) has the most room for outperformance. Shares are trading near trough levels at 9.5 times P/E on our 2025E – the same multiple during the GFC. We expect EPS to reaccelerate in the 2H as the comps ease (particularly in product support), which should alleviate concerns around cycle longevity. Moreover, structural mix shift and ongoing internal initiatives has high-graded earnings power by 2 times at midcycle (and likely more at trough). Further proof of a more resilient earnings profile should alleviate concerns that FTT is ‘over-earning’.”
2. Wajax with a $29 target. Average: $29.
Analyst: “WJX (Sector Outperform) falls into the ‘misunderstood’ category. Shares are down more than 30 per cent since the 1Q miss – but we attribute that to incorrect modeling by the Street. Results can be lumpy depending on the timing of mining shovel deliveries. The company expects all three shovels this year to be delivered in 4Q24, whereas it delivered three through the first nine months of 2023. Further, consensus estimates for IP/ERS have been rebased lower in line with peers. Shares are trading at 6.7 times P/E on our 2025E and the dividend yield is 5.7 per cent.”
3. Toromont with a $136 target. Average: $138.38.
Analyst: “We rate TIH Sector Perform due to the narrow return to target. We think the company merits its premium valuation, but we see limited room for further multiple expansion while gross margin normalization could weigh on earnings growth this year. M&A would be the main catalyst for a re-rate, in our view, but we have limited visibility on the timing, asset, or probability. TIH shares are trading at a 4.1-per-cent FCF yield on our 2025.”
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Following the release of “solid” second-quarter results earlier this month, Haywood Securities’ Gianluca Tucci sees Kits Eyecare Ltd. (KITS-T) “well-positioned to continue scaling revenue and margins organically while opportunistically acquiring to establish a presence in new regions.”
In a research report released Wednesday, the analyst updated his valuation for the Vancouver-based online retailer, leading him to recommend investors accumulate shares at their current level.
“While KITS is a vertically integrated player in the optical industry and relative optical peer valuations are undoubtably important, we believe that because of KITS’ pure ecommerce fulfillment model, it deserves to be valued more like one,” he said. “Thus, since our target price is DCF-derived, we raise our terminal EBITDA multiple to 20 times from 16.5 times, better reflecting a more appropriate, yet conservative blend of its internet/ecommerce peers with 20-per-cent-plus expected growth, and its optical peers. We highlight our terminal multiple and target price present upside potential if KITS continues to deliver on outsized revenue growth – our newly introduced 20 times terminal EBITDA multiple is well below its internet / ecommerce peer average of 33.6 times.”
Mr. Tucci touted Kits’ long-term outlook, seeing the potential for it to reach capacity at its Burnaby optical lab in the next 2-3 years (approximately $250-million in revenue) if recent growth trends of 20 per cent or more continue.
“When looking at options to expand beyond current capacity limits, the Company has the ability to effectively double capacity again from $250-million in revenue to achieve $500-million in revenue with just $8-million in equipment capex within its existing Burnaby infrastructure. M&A is not core to the Company’s growth pursuits. In our universe of internet / e-commerce stocks, there are just eight listed companies with consensus 2024 revenue growth of over 20 per cent - these eight stocks trade at an average 2024E multiple of 4.4 times EV/revenue and 33.6 times EV/EBITDA.”
Also seeing partnerships, like a recent agreement with Telus Health, providing further growth upside, Mr. Tucci raised his target for the company’s shares to $15, exceeding the $13.58 average, from $13 with a “buy” rating.
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While Quisitive Technology Solutions Inc.’s (QUIS-X) second-quarter results fell in line with expectations, Desjardins Securities analyst Jerome Dubreuil emphasized its management was “more constructive regarding the state of demand for its services (but without disclosing bookings), as evidenced by the company’s new hires in sales.”
“Having a management team focused on execution (vs strategic reviews) should help in the coming quarters and we see resumption of top-line growth as a potential catalyst later this year,” he added.
After the bell on Tuesday, the Toronto-based Microsoft Cloud and AI solutions provider reported revenue of US$29.6-milion for the quarter, down 2 per cent year-over-year but largely in-line with the Street’s projection of US$30.3-million. Adjusted EBITDA of $3.9-million topped the consensus estimate of $3.6-million.
“QUIS is ramping up sales and marketing investments, some of which will be financially supported by Microsoft,” said Mr. Dubreuil. “Indeed, the software giant appears committed to contributing to accelerating adoption of some of its AI services such as Copilot. Microsoft has historically preferred attacking the mid-market with partners such as QUIS, which we believe would benefit if AI adoption finally accelerates. QUIS sees a path to achieving high-single-digit to double-digit growth by the end of 2025 — we currently model 8-per-cent organic growth in 2025.”
“Our forecast is at the lower end of revenue guidance for 2024; however, we note that our Buy rating is not based on stronger-than-expected near-term results, but on the very low valuation (4.5 times EBITDA on 2024) for an IT player with decent margins. We also point to the company’s reasonable leverage of 1.8 times EBITDA. Having the value of the PayiQ prefs recognized by the market appears to remain a challenge — we treat this as a hidden asset within the company.”
With his “buy” recommendation (unchanged), the analyst bumped his target to 65 cents from 60 cents. The average is 64 cents.
Elsewhere, Canaccord Genuity’s Robert Young raised his target to $1 from 75 cents with a “buy” recommendation.
“Quisitive reported FQ2/24 results that were broadly in line with expectations, suggesting stabilization after the divestiture of the payments business,” said Mr. Young. “F24 guidance was reaffirmed supporting modest H2 growth driven by cloud, infrastructure, and security projects with AI programs feathering into 2025. Management noted rising customer demand evident in the pipeline and an upward trend in average deal size, particularly supporting ProServ including a meaningful healthcare win. Expansion is the driver as approximately 90 per cent of revenue in H1 was from long-standing (i.e., repeat) customers. We highlight that Quisitive is adding sales capacity, given confidence on demand and pipeline activity. This is likely to partly offset gross margins strength driven by mix and to a lesser degree improved utilization. We have made modest estimate revisions to incorporate the Q2 results.”
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Touting its “proud past” and “bright future,” Acumen Capital analyst Jim Byrne initiated coverage of Leon’s Furniture Ltd. (LNF-T) with a “buy” recommendation on Wednesday.
“One of Canada’s largest retail brands, Sleep Country (TSX: ZZZ; Not Rated) recently announced it will be acquired by Fairfax Financial for $35.00 per share or roughly 8 times 2024 estimated EV/EBITDA,” he said. “The acquisition has sparked a renewed interest in the retail space and LNF shares have performed well since the deal, adding 20 per cent. The company has a long established track record of success in its retail channel as it executes on its growth strategy. Leon’s banners include some of the best known brands in the country led by Leon’s Furniture and The Brick. The company’s footprint in all major centres, brand recognition, distribution and last-mile delivery systems set it apart from its competition. Leon’s scale provides purchasing and pricing power and its leading marketing campaigns drive customer traffic across its platforms.”
“Last year the company announced it intends to create a REIT, which it will vend in a significant portion of its 5.6 million square feet of real estate. Based on similar REITs in the public market and real estate data we estimate the value of the real estate assets could be $1.3-$1.5-billion, compared to LNF’s current enterprise value of $2.3-billion. The company is focused on growing their revenue and Profitability from their core brick and mortar footprint as well as expanding their warranty and insurance segment, and their e-commerce reach.”
Seeing it currently trading at an attractive valuation, Mr. Byrne set a target of $34 for Leon’s shares, which are 68-per-cent owned by Leon’s family and insiders. The average is currently $39.25.
“In our view, LNF offers investors an attractive investment opportunity in the retail sector with a long track record of stable growth,” he said. “The company is well positioned for organic growth as they continue to expand market share, increase brick and mortar revenue, and add high margin growth in its financial services segment. We believe strategic acquisitions, in addition to the REIT IPO, could act as positive catalysts over the next few years. The shares trade at just 7.7 times 2024 EV/EBITDA and the current dividend yield is 2.5 per cent.”
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While BTIG’s Janine Stichter acknowledges Lululemon Athletica Inc. (LULU-Q) “remains firmly in the ‘show-me story’ camp” ahead of its Aug. 29 earnings release, she views the “weakness as largely accounted for in valuation, view growth opportunities as under-appreciated, and believe current softness is more a function of self-inflected execution missteps vs. changes to the competitive landscape, suggesting opportunity as these challenges are addressed.”
The analyst reaffirmed the Vancouver-based apparel maker as her “top pick” despite warnings investors quarterly results are likely to come in at the low end of the company’s guidance. She’s currently projecting earnings per share of US$2.92, which is 3 cents lower than the consensus on the Street and at the bottom of the guidance range of US$2.92-US$2.97.
“While investors breathed a sigh of relief after the slightly better than expected Q1 report, sentiment has moved increasingly negative in the two months since (1) given continued softness in the data (corroborated by our own data, which shows some slowing in Q2 vs. Q1, and softer exit rates in July); (2), the pause in Breezethrough leggings sales, which precipitated concerns around not just the direct financial impact, but also around the depth of internal design challenges and how much this impacts the innovation embedded in the H2 guide; (3) concerns around macro weakness in China, a key growth driver,” said Ms. Stichter. “Overall, with concerns seemingly at all-time highs (as reflected in a P/E multiple that has been cut in half since the start of the year and well-below peers), we believe expectations are low as investors brace for a lowering of the guide well-below consensus.”
While she predicts Lululemon will likely lower its full-year outlook, the analyst reiterated her “buy” recommendation and US$360 target. The current average is US$356.60.
“Despite recent noise, LULU remains one of the most consistent growth stories in retail. Backed by a strong brand, the company has proven its ability to weather various macro, fashion, and competitive cycles,” she said. “While we are not making a call on the timing of a near-term U.S. re-acceleration, our rating reflects our view that the recent U.S. weakness is more a function of execution and some macro choppiness than the sudden onset of competition, and the U.S. will ultimately resume double-digits growth. Further, we note the risk the U.S. stays muted for longer is well understood and factored into buyside estimates, all while international growth provides a buffer. Shares now trade at recent trough levels and below growth peers, suggesting weakness is being viewed as more structural than temporary. We see an asymmetric risk/reward for a quality growth company with a consistent track record and remaining secular tailwinds.”
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In other analyst actions:
* Canaccord Genuity’s Zachary Weisbrod raised his target for units of Canadian Net REIT (NET.UN-X) to $6.25 from $5.75, keeping a “buy” recommendation. The average on the Street is $5.83.
* Jefferies’ Trevor Williams cut his Lightspeed Commerce Inc. (LSPD-N, LSPD-T) target to US$20 from US$22 with a “hold” rating. The average is US$19.14.