Inside the Market’s roundup of some of today’s key analyst actions
The upside displayed by BlackBerry Ltd. (BB-N, BB-T) in its better-than-expected fourth-quarter financial results is not sustainable, according to CIBC World Markets analyst Todd Coupland.
On Thursday, the Waterloo, Ont.-based tech company reported non-GAAP sales for the quarter of US$239-million, beating the Street’s expectation of US$216-million while missing Mr. Coupland’s projection of US$246-million. Likewise, adjusted earnings per share of 5 US cents topped the consensus (1 US cent) and well short of Mr. Coupland’s estimate (7 US cents).
“BlackBerry has guided that F19 double-digit revenue growth is expected to come from software and services billing,” said Mr. Coupland. “QNX and Radar are not contributing at the same pace but should start to see a pick-up in 2H 2019. Our view is QNX potential and upside need to materialize for a more positive thesis.
“To achieve after-tax EPS of 50 cents requires positive operating leverage, and revenue would need to be $1.15-billion (up 30 per cent). We assume 4-per-cent decline for 2019.
Keeping a “neutral” rating for BlackBerry shares, Mr. Coupland lowered his target by US$1 to US$14. The average on the Street is US$11.68, according to Thomson Reuters data.
“While management guided to double-digit software revenue growth for 2019, we model overall sales in the first half of the year to be a decline of 6.5 per cent versus the second half of F18,” he said. “Taken together, these have a neutral impact on the stock price. We lower our price target … as our prior growth was higher than the new guidance, but we maintain our Neutral rating as we believe BlackBerry’s shares are close to fair value (5 times 2019 estimated revenue, and $3.15 in QNX value plus cash per share of $2.93).”
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Though he sees the potential for sequential improvement in trends for Hudson’s Bay Co. (HBC-T), RBC Dominion Securities analyst Sabahat Khan thinks the retailer could be forced to de-emphasize certain banners.
He also anticipates investor focus will remain primarily on potential transactions that could produce value from its real estate holdings.
On Wednesday, HBC reported fourth-quarter results that Mr. Khan deemed “mix” despite adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $317-million falling short of both his expectation ($351-million) and the Street’s projection ($391-million). It was a drop of 22 per cent year over year.
Though sales of $4.695-billion, a rise of 2 per cent from the previous year, exceeded estimates ($4.371-billion and $4.561-billion, respectively), that result was offset by both deterioration in gross margins and higher-than-anticipated expenses.
“On the Q4 earnings call, CEO Helena Foulkes noted that she has spent the recent weeks visiting the company’s stores and meeting with employees, and is in the process of identifying areas for change/improvement,” said Mr. Khan. “Over the coming months, we would expect a more comprehensive assessment of HBC’s current operations and the new CEO’s plan to revitalize the company’s banners. Our read is that all options are on the table, and would not be surprised if the new strategic plan includes the deemphasizing of certain banners. We would view Gilt and Lord & Taylor as potential candidates for banners which can be deemphasized.”
“HBC is guiding to $450-$500-million of capex for 2018 (net of landlord incentives), versus $600-million invested in 2017. We expect major capex initiatives to include the ongoing renovations at the Saks Fifth Ave. Manhattan flagship ($125-million in further spend expected over the next three years), 10 new store openings, and further investment in HBC’s Digital platform and IT infrastructure. HBC has previously noted that it is directing 25 per cent of its capex towards digital initiatives, with this amount potentially increasing to 30-40 per cent of capex over the coming years. Management indicated that it expects annual capex to be within the range of $450-$500-million going forward.”
Mr. Khan now projects a fiscal 2018 EPS loss of $1.54 for HBC, rising from $1.07. His 2019 estimate fell to a loss of $1.21 from 80 cents.
Though he kept a “sector perform” rating for its shares, his target fell to $10 from $11 based on that earnings reduction. The average target on the Street is currently $10.50.
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AGF Management Ltd.’s (AGF.B-T) first-quarter 2018 results “checked all the boxes,” according to Desjardins Securities analyst Gary Ho, who called the Toronto-based asset management firm’s current valuation “compelling.”
On Wednesday before market open, AGF reported adjusted earnings per share of 15 cents, excluding a tax provision charge and severance costs, which exceeded Mr. Ho’s estimate by 3 cents and beat the Street by a penny. EBITDA from its wealth management segment came in at $18.8-million, which also topped his forecast ($16.1-million).
“AGF achieved retail net sales of $20-million (first quarterly net sales in a decade) on 45-per-cent year-over-year gross sales growth and this momentum carried into March with net sales of $58-million,” said Mr. Ho. “We are encouraged to see traction in the IIROC channel, and the institutional pipeline looks robust at $1.2-billion. Further, its retail fund performance was solid for the second consecutive quarter (49 per cent and 61 per cent on a one- and three-year basis, respectively). We believe this positions the company well for positive retail net flows in FY18. SG&A of $51.9-million (excluding severance) was better than our $52.7-million forecast and annualized guidance of $210-million. EIF II (targeting $1-billion) should launch by late 2018/early 2019; the added scale should benefit 2019 results.
“Lastly, buyback activity could pick up, and management continues to evaluate potential dividend increases vs capital uses.”
Though he raised his 2018 EPS projection by 15 cents to 72 cents, his 2019 estimate dropped by a penny to 65 cents after his EBITDA expectation fell to $78.3-million from $83.4-million based on lower assets under management (AUM) stemming from recent market “softness.”
Maintaining a “buy” rating for AGF shares, his target fell to $8.50 from $9.25. The average on the Street is $8.41.
Mr. Ho said: “We foresee a few near- or medium-term positive catalysts: (1) sustaining fund performance (60 per cent of AUM above median over three years) driving sales growth, (2) net retail flows improving relative to industry, (3) investors recognizing a proper valuation of S&W [Smith & Williamson], (4) restoring management’s credibility, and (5) all of these factors leading to better sentiment and valuation.”
Elsewhere, Barclays upgraded AGF to “overweight” from “equal weight” with an $8 target.
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Spotify Technology S.A. (SPOT-N) has a “very, very large” opportunity to grow, according to RBC Dominion Securities analyst Mark Mahaney, who initiated coverage of the music streaming company with an “outperform” rating.
Spotify is set to go public on Thursday through its direct listing on the NYSE.
“Per IFPI, Global Music Sales (both physical and digital) are approximately $14-billion annually. And per Magna Global, Global Radio Advertising is an approximate $28-billion market. So that implies a market opportunity for Spotify of over $40-billion,” he said.
“But we believe that the opportunity could actually be much greater, especially as Music, like Video, moves from a Transaction/Purchase to an Access Model. The way we think about this opportunity is to consider that within five years there will be approximately 3 billionpayment-enabled Smartphones globally (ex-China), per research firm Ovum. Given how popular Music Apps currently are – our research shows that Music is a Top 20 App on iOS devices in the majority of the Top 20 GDP countries – we believe that almost every one of those 3 billion Smartphones could have a Music App on it. Assuming half are Paid Streaming Apps (and have Spotify’s current monthly Premium ARPU [average revenue per user] of approx. $6) and half are Ad-Supported Apps (with $1 ARPU – halfway between Spotify and Pandora’s current monetization levels), that maps out to a $125-billion market opportunity. That’s very, very large, no?”
Mr. Mahaney acknowledged rivals Apple Music, Amazon Prime Music and Google Play also have a competitive advantage given each possess a proprietary device connection (iPhones, Alex-enable Echos and Android phones). YouTube also presents a challenge through its 1-billion monthly user “ubiquidity.”
However, he sees several factors that will allow Spotify to maintain its leadership, noting: “First, a very well established global brand presence – with 69-per-cent aided global brand awareness (per Spotify). Second, a platform neutral presence –Spotify has the unique privilege of being the #1 Music App on Android phones in 11 of the top 20 largest countries in the world and the #1 Music App on Apple phones in 14 of the top 20 largest countries in the world (ex-China). Third, a product offering that in terms of selection and functionality is at least on par with every other Music Streaming service – our proprietary U.S. survey work has shown Spotify to have significantly higher satisfaction rates than every other Streaming Music service. Fourth, the option for consumers to choose between a free ad-supported and a premium paid-subscription offering – i.e. a broader value proposition. And fifth, a focus on personalization, which has translated into over a third of all streaming hours being user-generated playlists and an additional 30 per cent being Spotify-curated lists, which all in translates into unique (though not exclusive) content.”
He set a price target of US$220, which he notes represents over 70-per-cent upside on a recent private transaction price of US$127.50.
Mr. Mahaney said: “The pitch: Music is going streaming. Streaming is going global. Spotify is the global leader and has sustainable advantages. Biz model is inflecting. And valuation is highly reasonable.”
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Despite Badger Daylighting Ltd.’s (BAD-T) fourth-quarter financial results falling short of his expectations, Industrial Alliance Securities analyst Elias Foscolos believes the Street was expecting far worse.
In reaction to the results, released Tuesday after market close, Badger shares jumped over 12 per cent on Wednesday.
However, based on that positive reaction and a revised one-year return to his reduced target price for Badger shares, he downgraded his rating for the Calgary-based provider of non-destructive hydrovac excavation to “buy” from “strong buy.”
Badger reported revenue for the quarter of $133-million, missing Mr. Foscolos’s Street-high $148-million estimate, as both its Canadian and U.S. segments fell below estimates. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $35-million also missed his projection (a Street-high $35-million).
The company also announced his intention to build 140-180 hydrovac units in 2018, which is line with its 2017 output (157) but also short of the analyst’s projection (200-240 units).
It also raised its monthly dividend by 18 per cent to 54 cents per common share on an annualized basis.
In reaction to the results for the quarter and the truck build guidance, Mr. Foscolos lowered his revenue and earnings per share expectations for fiscal 2018 to $552-million and $1.43, respectively, from $590-million and $1.83. His 2019 projections fell to $611-million and $1.65 from $634-million and $2.03.
Accordingly, his target price for Badger shares dropped to $33 from $38.50. The analyst average target is $31.65.
Elsewhere, Acumen Capital analyst Brian Pow reiterated his “buy” rating and $36.75 target.
“We continue to view BAD’s go forward outlook positively and believe the increase in its monthly dividend signals that 2018 is off to a strong start,” said Mr. Pow. “We look to improving activity in the oil and gas sectors and further opportunities in non-energy markets, combined with U.S. corporate tax savings as positive catalysts for 2018.”
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Calling Trevali Mining Corp. (TV-T) “sultans of zinc,” Canaccord Genuity analyst Dalton Baretto initiated coverage with a “buy” rating.
“TV is a multi-mine base metals producer focused on the production of zinc (Zn), with four operating mines in various geographies,” he said. “TV is one of the only ‘pure play’ multi-asset Zn producers listed in North America.”
In justifying his rating, Mr. Baretto emphasized three attributes:
- It is poised to generate "substantial" free cash flow, stemming from a "transformative" acquisition in August of 2017 of the Rosh Pinah in Namibia and Perkoa mines in Burkina Faso from Glencore plc, which more than doubled the company's size.
- Its leverage to zinc pricing, which he believes could "stay stronger for longer." He added: "We note that zinc prices are at their highest levels since 2007, driven by a significant supply squeeze and strong demand. Given zinc’s primary use in galvanizing steel (greater-than 50 per cent of demand), demand for the metal has benefited significantly from the recent synchronized global growth phenomenon as well as increasing galvanization rates in the developing world (particularly China). We believe that zinc prices have likely peaked, as new supply is set to come online in H2/18 and modest demand destruction is already occurring at current price levels. However, given synchronized and increasing global growth as well potential hiccups to supply scheduled to come online, zinc prices could possibly peak above our current $1.50-per-pound forecast, and remain at elevated levels for longer."
- He deems recent exploration at Perkoa a potential "game-changer," citing the grades at the mine.
Mr. Baretto set a target of $2 for Trevali shares. The average is 12 cents more.
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Pure Multi-Family REIT LP (RUF.UN-X) brings a “low risk” opportunity for investors to participate in the U.S. rental market, said Laurentian Bank Securities analyst Yashwant Sankpal, who resumed coverage with a “buy” rating.
“Pure Multi-Family REIT LP offers an opportunity to participate in the apartment market of one of the fastest growing regions in the U.S.,” sad Mr. Sankpal. “Because of its relatively small market cap and its growth-by-consolidation strategy (i.e. frequent equity issues), the market is not ascribing full value to this business. As a result, investors who can get into this investment at an early stage are likely to benefit as the company grows RUF’s unit price declined more than 15 per cent since marking the $7.13 high in June 2017,” he said. “At the current $6.25 price, RUF offers a 50-cent or 8-per-cent upside and a 6.0-per-cent dividend yield.”
Believing a recent pullback in price presents an attractive investment opportunity, Mr. Sankpal set a target for units of the Vancouver-based REIT of US$6.75. The average is US$6.86.
“RUF’s unit price declined more than 15 per cent since marking the $7.13 high in June 2017,” he said. “At the current $6.25 price, RUF offers a 50-cent or 8-per-cent upside and a 6.0-per-cent dividend yield.”
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Failing to see catalysts to drive upside in 2018, Wedbush analyst Nick Setyan downgraded Starbucks Corp. (SBUX-Q) to “neutral” from “outperform.”
“We no longer see drivers of upside to same store sales growth and EPS consensus expectations in 2018 and see rising risks to 2019 expectations,” Wedbush analysts write.
Mr. Setyan said customer loyalty continues to drive same store sales growth, however a slowing growth rate has led to little upside to current expectations.
He lowered his target to US$56, well below the average of US$63.82.
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CIBC World Markets analyst Sumayya Hussain initiated coverage of a trio of Canadian real estate investment trusts with “neutral” ratings.
She set a $12 target for Agellan Commerical REIT (ACR.UN-T), which is 60 cents less than the average on the Street.
“The REIT’s transformation from diversified, cross-border REIT into pure-play U.S. industrial REIT is, we believe, a solid strategic move,” she said. “However, while in theory this revised focus, combined with recently internalized management, could present potential upside, we believe the current valuation, at 8.9 times 2018 estimate FFO [funds from operations], may already reflect these factors.”
Ms. Hussain gave Morguard REIT (MRT.UN-T) a $14.50 target. The average is $14.55.
“Morguard REIT has a diversified, mainly retail-and-office, portfolio, with a long-term per unit growth track record that is in line with the industry, and a tempered growth outlook in certain challenged markets and asset classes,” she said. “While the 27-per-cent discount to NAV [net asset value] appears attractive, our outlook for internal and external growth is muted. NCIB activity, unit purchases by Morguard Corporation (64-per-cent unitholder including CEO stake), and stability in the balance of the portfolio drive our Neutral rating.”
She set a target of $8.50 with Melcor REIT (MR.UN-T). The average is currently $8.75.
“While we like the REIT’s strategic alliance with Melcor Developments and the defensive nature of its portfolio despite the large Alberta footprint, Melcor units appear to be, in our view, fairly valued, trading at 8.3 times 2018 estimated FFO, reflecting the REIT’s smaller size and liquidity, externally managed structure, and challenges in the Edmonton office market,” the analyst said.
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In other analyst actions:
Mizuho Securities initiated coverage of Enbridge Inc. (ENB-T, ENB-N) with a “neutral” rating and $45 target, which is $9 lower than the average on the Street.
Barclays initiated coverage of Bombardier Inc. (BBD.B-T) with an “overweight” rating and $5 target. The average is $4.27.