Inside the Market’s roundup of some of today’s key analyst actions
Following “tepid” third-quarter 2024 financial results, National Bank Financial analyst Vishal Shreedhar downgraded Alimentation Couche-Tard Inc. (ATD-T) to “sector perform” from “outperform” previously, expecting “weakness in merchandising performance will persist in the near term.”
“Furthermore, lacklustre merchandising trends call into question ATD’s aggressive plans under its ‘10 for the Win’ strategy,” he added. “While ATD has executed well against prior growth ambitions, the current plan calls for growth largely outside traditional vectors (such as fuel margin and M&A).
“Given valuation which is not inexpensive (vs. history) and ongoing macroeconomic uncertainty, our preference is to monitor execution from a neutral vantage point.”
Shares of the the Laval, Que.-based company fell 4.2 per cent on Thursday after it reported quarterly revenue of $19.6-billion, down from $20.1-billion a year ago and below both Mr. Shreedhar’s $20.6-million estimate and the consensus projection of $20.9-million. Merchandise gross profit of $1.722-billion also missed the analyst’s forecast of $1.769-billion, despite rising from $1.67-billion in fiscal 2023. That le to earnings per share of 65 cents, a drop of 9 cents and below expectations (84 cents and 88 cents, respectively).
“We consider Q3/F24 results to be weak given a miss across many key metrics,” said Mr. Shreedhar. “Specifically, relative to our EPS estimate, we calculate deltas of negative $0.13 due to weaker aggregate fuel performance, $0.04 due to weaker aggregate merchandising performance, and $0.06 due to higher D&A and interest.”
“Fuel performance, including U.S. margin, fell short of our expectations and drove the majority of the miss (vs. NBF). While we expect tepid fuel margins to persist for the near term, our data shows a long-term appreciating fuel margin trajectory, and we expect that to continue, albeit with a bumpy cadence. Management indicated that ‘deal flow is good’ and we believe ATD is well positioned for further acquisitions. That said, even a sizable $5-billion deal would only be accretive to EPS by 6-9 per cent (using average parameters).”
Reducing his 2024 and 2025 EPS estimates to $2.86 and $3.28, respectively, from $3.15 and $3.49, Mr. Shreedhar cut his target for Couche-Tard shares to $83 from $89. The average target on the Street is $85.14, according to LSEG data.
Elsewhere, other analysts making changes include:
* Desjardins Securities’ Chris Li to $86 from $90 with a “buy” rating.
“ATD’s results and outlook reflect consumer demand headwinds that are expected to weigh on earnings for two more quarters,” said Mr. Li. “Despite the near-term headwinds, we believe ATD remains well-positioned for attractive long-term growth, supported by a robust pipeline of organic growth initiatives and M&A. After revising our estimates, we have lowered our target ... based on 18 times FY26 EPS, which is supported by at least high-single-digit organic net earnings growth, with upside from M&A.”
* Scotia’s George Doumet to $87 from $90 with a “sector outperform” rating.
“ATD shares have been down 7 per cent into the quarter, reflecting expectations for headwinds to amplify inside the box,” said Mr. Doumet. “Q3 EBITDA and EPS still missed consensus expectations by 11 per cent/23 per cent. The unexpected incremental weakness came from U.S. fuel margins and (to a lesser extent) volumes. This was offset by impressive declines in normalized SG&A, under ATD’s Fit to Serve cost-reduction program.
“Despite near-term macro pressures and some transitory noise, we continue to expect ATD to deliver on its long-term algorithm (12-per-cent EBITDA growth per year, over five years) and therefore see today’s weakness as a buying opportunity. That said, we acknowledge that (absent M&A), shares will likely remain range bound until we see improvements in merchandise and fuel internals, which will likely come in the late FQ1/early FQ2 quarter.”
* BMO’s Tamy Chen to $89 from $91 with an “outperform” rating.
“To us, the negative out of FQ3/24 results is that macro headwinds deteriorated quarter-over-quarter for ATD and will likely weigh on merchandise SSS and margin for a few more quarters. We believe 2-per-cent SSS [same-store sales] and modest, but consistent margin expansion in U.S. merchandise are key components to achieving ATD’s five-year targets. The key positive from FQ3/24 was strong opex management. Remain Outperform as we believe the medium-term growth opportunities remain. The stock remains lower in our pecking order given limited nearterm catalysts,” he said.
* TD Securities’ Michael Van Aelst to $90 from $94 with a “buy” rating.
* Canaccord Genuity’s Luke Hannan to $84 from $89 with a “buy” rating.
* CIBC’s Mark Petrie to $88 from $84 with an “outperformer” rating.
* Wells Fargo’s Anthony Bonadio to $86 from $88 with an “overweight” rating.
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While the fourth-quarter 2023 financial results from Lululemon Athletica Inc. (LULU-Q) topped the Street expectations, displaying “impressive” strength in China and gross margin improvement, Citi analyst Paul Lejuez said the gains were overshadowed by a “weaker” result in the United States and a further slowing to start the current fiscal year.
“As a result, management guided 1Q/F24 below consensus and their mid-teens long-term growth algo,” he said. “Management attributes the weakness to a softening U.S. consumer, though it is unclear why their higher-income consumer would be feeling incremental macro pressures. Management plans to make additional marketing/product investments in 1Q to drive a reacceleration in US growth beginning in 2Q.
“We expect this to be viewed skeptically by the market until visibility into a reacceleration is more clear and see the overhang of a weakening U.S. biz weighing on shares near-term. We note that int’l growth will be the most important driver of LULU’s growth going forward, and 4Q results highlight the momentum they have in key international markets.”
After the bell on Thursday, the Vancouver-based activewear company reported earnings per share of US$5.29, exceeding both Mr. Lejuez’s US$5.05 estimate and the consensus expectation on the Street of US$5. That was driven by a total sales gain of 15 per cent year-over-year, including a 60-per-cent jump in China. However, the Americas saw a gain of just 7 per cent.
For the current fiscal year, Lululemon is projecting revenue between US$10.70-billion to US$10.80-billion and diluted earnings per share of US$14 to US$14.20. Both fell short of the Street’s forecast (US$10.90-billion and US$14.13).
He said: “Incremental info from management call back: (1) Seeing a broad-based slowdown in U.S. consumer demand (both traffic and conversion) which could be a result of a holiday “overhang”; (2) They have not seen a meaningful reacceleration in their biz in the US in March vs Feb (which is when the weakness began); (3) Management believes they did not have enough color in their assortment, which is why they are chasing into more color (also chasing smaller sizes); (4) Markdowns came in line with expectations in 4Q; (4) Management does not believe that Alo/Vuori are making a meaningful dent in their market share in the US since they are both relatively smaller brands; (5) Management does not anticipate any incremental markdown risk (for now) from US slowdown; (6) They made decisions to pull back on discretionary spending and have a list of expense items they can take action on if sales come in below plan; (7) Management expects growth across all categories in F24; (8) While belt bag sales are lower, strong growth in other bags are offsetting the weakness in belt bags.”
To reflect weaker U.S. sales, Mr. Lejuez cut his 2024 and 2025 EPS estimates to US$14.12 and US$16.12, respectively, from US$14.24 and US$16.81. That led him to reduce his target for Lululemon shares to US$500 from US$520, keeping a “buy” rating. The average target on the Street is US$497.52.
“Investment highlights that support our Buy rating include: (1) inventory to sales gap narrowed (with limited markdown pressure); (2) US is positioned to grow LDD+ [low double-digits] in F23, underscoring LULU’s brand strength/momentum in its largest market; (3) China is poised to rapidly grow in F23 and become a much more meaningful long-term growth driver (just 8 per cent of sales in F22 going to 22 per cent by F27); and (4) we model 20-per-cent-plus EPS growth annually through F27 as LULU unlocks its global growth potential (and it is not ‘over-earning’ despite doubling sales from 2019 to 2022),” he said.
Elsewhere, other analysts making adjustments include:
* Stifel’s Jim Duffy to US$539 from US$596 with a “buy” rating.
“FY4Q topped the pre-announcement though shares are under pressure in response to a below consensus FY1Q guidance and an FY24 guide that embeds acceleration from the guided FY1Q revenue trend,” said Mr. Duffy. “Commentary on FY1Q cited a softer U.S. consumer. Consider, however, FY1Q to date is 1) the lowest seasonal period in apparel retail and 2) February traffic was impacted by winter storms. We acknowledge the North America growth rates will feel the gravity of large numbers, but we continue to view high single-digits North America growth as sustainable. Assuming reasonable growth rates from international (36 per cent vs. 54 per cent in FY23), guidance implies just 4.5-per-cent growth for North America. We encourage investors to BUY on weakness and look for revenue upside and resulting leverage of SG&A to deliver upside to earnings and shares as the year unfolds.”
* BMO’s Simeon Siegel to US$420 from US$408 with a “market perform” rating.
“LULU reported better revenues and a healthy EPS beat with strong GM. However, and likely aligning with recent investor fears, Americas underperformed vs. international and management guided 1Q/FY below consensus, citing a soft U.S. start to the quarter. Although this will likely prove conservative, suggesting published estimate revisions should likely be less severe than the after-market share drop, at current valuation, we expect the burden of proof will lie on management to allay N.A. concerns,” said Mr. Siegel.
* Piper Sandler’s Abbie Zvejnieks to US$525 from US$560 with an “overweight” rating.
“We were prepared for below algo sales growth, but this level of deceleration in the US does raise some concerns on market share opportunity. We think this could be a factor of lapping higher markdowns and a general spending lull between buying periods, and we will closely watch reception to spring products such as skirts, shorts, and tanks. International growth was a highlight in 4Q (up 54 per cent, 78-per-cent China), and we expect continued strength in 2024, powering the next leg of growth for LULU. Our long-term thesis on LULU’s differentiation through data-driven product, scale, and community has not changed, and we maintain our Overweight rating,” she said.
* Keybanc’s Ashley Owens to US$515 from US$570 with an “overweight” rating.
“The majority of regions continue to experience broad-based strength; however, softer trends in the U.S. led to FY guidance below expectations. While we come away from the print revising estimates and lowering our PT to $515 to reflect the softer guide, long-term fundamentals remain intact, in our view, and we remain confident in management’s ability to execute on its Power of Three x2 plan of $12.5-billion in revenue and modest operating margin expansion by 2026,” said the analyst.
* Needham’s Anna Andreeva to US$500 from US$525 with a “buy” rating.
“To the bears, QTD choppiness suggests competition is catching up, while to the bulls, the issues are fixable as response to innovation remains strong. ... LULU has become a controversial stock, and while we believe upside to estimates is needed for shares to work, ‘24 appears to be de-risked,” she said.
* Guggenheim’s Robert Drbul to US$525 from US$550 with a “buy” rating.
* Truist’s Joseph Civello to US$498 from US$561 with a “buy” rating.
* Wells Fargo’s Ike Boruchow to US$425 from US$450 with an “equal weight” rating.
* Barclays’ Adrienne Yih to US$546 from US$610 with an “overweight” rating.
* TD Cowen’s John Kernan to US$515 from US$553 with an “outperform” rating.
* Wedbush’s Tom Nikic to US$492 from US$548 with an “outperform” rating.
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Desjardins Securities analyst Chris MacCulloch thinks fourth-quarter earnings season for the Canadian energy sector “revealed the growing dichotomy in the sector as oil producers continued benefiting from relatively strong commodity prices while eagerly anticipating further tightening of WCS differentials with the impending startup of TMX.”
Conversely, it was a much more challenging environment for natural gas–weighted producers now staring down one of the bleakest short-term price outlooks in recent memory, which forced industry to re-evaluate development plans while formally acknowledging the painful reality of moderating capital returns,” he said.
“Results closely aligned with consensus expectations as the Street appeared to have been properly calibrated for a slight moderation in sector cash flows relative to 3Q23. That said, there were a handful of notable standouts, with CNQ, CPG, CR, CVE, ERF, NVA, SDE and TPZ all posting stronger-than-expected cash flow prints. SU and VET also reported stellar results, although headline numbers were positively impacted by non-recurring tax savings — namely, the successful harvesting of tax pools from the TotalEnergies Canada transaction (68 cents per share) and a reversal of the Australian petroleum resource rent tax (PRRT) accruals following last year’s extended Wandoo outage (16 cents per share).”
In a research report released Friday, Mr. MacCulloch adjusted his target prices for most of the producers in his coverage universe, which he said reflects “significant” adjustments to his 2024 natural gas and crack spread forecast.
“While we have seen greater evidence of multiple expansion as equities continue outperforming the underlying commodities, further thinning returns to target, we still believe there are select pockets of value in the sector,” he said.
“Our top picks are CVE (large-cap oil), TOU (large-cap natural gas), CPG (small/ mid-cap oil), AAV (small/mid-cap natural gas), VET (special situation) and TPZ (royalty).”
The analyst raised his targets for these companies:
- Athabasca Oil Corp. (ATH-T, “buy”) to $5.75 from $5.50. The average on the Street is $5.96.
- Cenovus Energy Inc. (CVE-T, “buy”) to $29.50 from $28. Average: $30.22.
- Crescent Point Energy Corp. (CPG-T, “buy”) to $12.50 from $12. Average: $13.04.
- Enerplus Corp. (ERF-T, “tender”) to $19.25 from $17.50. Average: $24.15.
- Imperial Oil Ltd. (IMO-T, “hold”) to $88 from $86. Average: $87.31.
- MEG Energy Corp. (MEG-T, “hold”) to $31 from $30. Average: $31.77.
- Suncor Energy Inc. (SU-T, “hold”) to $48.50 from $46. Average: $51.74.
- Tamarack Valley Energy Ltd. (TVE-T, “buy”) to $4.75 from $4.50. Average: $4.85.
Mr. MacCulloch cut his targets for these stocks:
- Arc Resources Ltd. (ARX-T, “buy”) to $29 from $29.50. Average: $26.56.
- Crew Energy Inc. (CR-T, “buy”) to $6.25 from $6.50. Average: $6.75.
- Nuvista Energy Ltd. (NVA-T, “buy”) to $14.75 from $15. Average: $15.02.
- Pine Cliff Energy Ltd. (PNE-T, “buy”) to $1.25 from $1.50. Average: $1.51.
- Spartan Delta Corp. (SDE-T, “buy”) to $4.50 from $4.75. Average: $4.66.
- Tourmaline Oil Corp. (TOU-T, “buy”) to $75 from $76. Average: $76.50.
- Vermilion Energy Inc. (VET-T, “buy”) to $20 from $20.50. Average: $20.54.
“Going forward, 1Q24 financial reporting is just around the corner, which will likely continue driving incremental support for liquids-weighted producers and further pain in Gasland,” concluded Mr. MacCulloch. “Either way, we expect industry to continue gradually accelerating capital returns toward 100% of FCF, with a particular emphasis on share buybacks despite the recent expansion of valuation multiples toward historical averages. Otherwise, sector consolidation will remain at the forefront of investor discussions as producers continue seeking opportunities to enhance profitability through operational and financial synergies while high-grading their respective asset base and strengthening inventory depth. Tick tock.”
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CIBC World Markets analyst Dennis Fong made a series of target price adjustments to large-cap Canadian energy stocks in his coverage universe on Friday.
“Q4/23 results were characterized by weaker quarter-over-quarter upstream realization, headwinds on downstream margins and significant progress made on net debt targets,” he said. “Progress on lowering leverage was driven by oil price volatility (lower royalties), working capital adjustments and de-inventory events. Looking into H1/24, companies have enjoyed stronger liquids pricing and a recovery of downstream margins. The tone on conference calls shifted towards timing of achieving net debt floors and the catalyst of increasing free cash flow allocated to shareholder returns. We estimate the group is discounting US$71 WTI or US$7 discount to 2024 strip pricing of US$78, and close to longer-term pricing (2025 - 2027) of US$70.”
His changes include:
- Canadian Natural Resources Ltd. (CNQ-T, “outperformer”) to $105 from $95. The average is $101.64.
- Cenvous Energy Inc. (CVE-T, “outperformer”) to $31 from $30. Average: $30.13.
- Imperial Oil Ltd. (IMO-T, “neutral”) to $90 from $85. Average: $87.20.
- MEG Energy Corp. (MEG-T, “neutral”) to $30 from $26. Average: $31.69.
- Suncor Energy Inc. (SU-T, “outperformer”) to $60 from $58. Average: $51.61.
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Pointing to a volume guidance reset, its liquidity and valuation, Scotia Capital analyst Ben Isaacson upgraded Lithium Americas (Argentina) Corp. (LAAC-N, LAAC-T) to “sector outperform” from “sector perform” previously.
“First, and consistent with our Q4 reporting moves across our universe, we’ve reduced our deck to $20k/mt LCE from $25k, and have shifted to a 10-per-cent discount rate from 8 per cent,” he said. “Second, we have reset our valuation multiple to 1.0 times NAV, identical to our move on LAC. LAAC is an operator (unlike LAC) and so can also be valued on an earnings metric. Third, any perceived near-term financing risk (liquidity was already $200-million) was just reduced following a $70-milllion sell down of a 15-per-cent stake in Pastos Grandes (PG) to Ganfeng. Ganfeng is also helping LAAC restructure debt to better reflect its status as an operator. Fourth, the ‘24 volume guide of 20k to 25k mt (100-per-cent basis) is a slight negative vs. expectations that all of 2H would run near capacity. Now, Caucharí-Olaroz will run near full capacity ‘on a limited basis’. LAAC cites weather-related power disruptions, and suggests nameplate should be met by year-end. This is partially offset by guidance for +ve CFO in ‘24, related to reduced SG&A + discretionary spending. Fifth, we like LAAC’s ability to partner with Ganfeng as it develops the entire PG basin and surrounding properties with scale in mind, including possible DLE. Buy LAAC.”
Mr. Isaacson’s target remains US$8. The average is US$13.41.
Elsewhere, BMO’s Joel Jackson cut his target to US$6.50 from $7 with a “market perform” rating.
“LAAC is re-rating to a lithium producer and may prove value with its early-stage Argentine assets beyond its ramping flagship Cauchari-Olaroz JV. We are neutral, however, considering risk/reward. There’s tangible upside, but there are risks (operational, GM lockup, lithium macro, etc.), and LAAC seems relatively expensive versus peers even if contracting lithium prices and stock multiples recover,” said Mr. Jackson.
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In other analyst actions:
* TD Securities’ Graham Ryding downgraded Power Corp. of Canada (POW-T) to “hold” from “buy” with a $42 target, rising from $40. The average is $42.94.
* Scotia Capital’s Michael Doumet raised his Badger Infrastructure Solutions Ltd. (BDGI-T) target to $52 from $48 with a “sector perform” rating. The average is $52.94.
“BDGI hosted an Investor Day on March 20th, providing an operational update, detailing several successful initiatives, and bridging its current performance to its growth and margin targets,” said Mr. Doumet. “The presentation featured Rob Blackadar (CEO since October 2022), Rob Dawson (CFO since April 2023), Chis Gunn (VP Field Sales), and Bobby Love (VP National Accounts). With strong macro tailwinds and improved execution, management delivered a convincing message that there is a multi-year runway for low-teens organic growth and improved margins/ROIC. In our view, achieving its targets is heavily reliant on additional pricing gains (ahead of cost inflation), increased truck count, and enhanced capital efficiencies — which we believe to be achievable. Following several challenged years, BDGI took a major step forward in 2023 — and we believe it can extend its success beyond 2024.”
* Despite “light” fourth-quarter 2023 results, Raymond James’ Steve Hansen raised his Decisive Dividend Corp. (DE-X) target by $1 to $11.50, above the $11.21 average, with an “outperform” rating.
“We are increasing our target price on Decisive Dividend Corp. ... and reiterating our Outperform rating based upon the company’s: 1) unique competitive position; 2) advanced M&A pipeline; 3) robust new credit availability; & 4) attractive synergy opportunities,” said Mr. Hansen.
* RBC’s Geoffrey Kwan cut his ECN Capital Corp. (ECN-T) target to $2.25, below the $2.80 average, from $3, keeping a “sector perform” rating. Other changes include: National Bank’s Jaeme Gloyn to $2 from $2.75 with a “sector perform” rating and TD Securities’ Mario Mendonca to $2.75 from $3 with a “hold” rating.
“We have a negative view on Q4/23 results, which were well below our forecast,” said Mr. Kwan. “While ECN is optimistic regarding a rebound in growth in 2024, its 2024 EPS guidance was cut by almost 50 per cent despite being reaffirmed last quarter. There were several other developments from Q4/23 results (e.g., continued significant negative fair value hits to revenue from prior risk management issues; CFO departure; Boat/RV sale or spin-off no longer happening, delayed and potentially slower rollout of SKY JV). We previously expected the Boat/RV business to be sold or spun-off (per ECN’s intention) and that might precipitate SKY or another party acquiring ECN in the near term, but with the Boat/RV business no longer being sold/spun-off, although this may still happen, it looks unlikely for now. In the long term, we think ECN’s shares could experience significant valuation upside, but in the near term, we view earnings visibility as low given recent fundamental challenges which contributed to the substantial decrease in 2024 EPS guidance and that it’s still unclear how fast and how much origination demand improves in 2024.”
* RBC’s Douglas Miehm bumped his target for Knight Therapeutics Inc. (GUD-T) to $7, exceeding the $6.64 average, from $6.50 with an “outperform” rating.
“We view Knight’s Q4/23 report as mixed, with revenues and adj. EBITDA below estimates but FY24 guidance better than expected. Knight introduced 2024 guidance that was 3.0 per cent ahead of consensus revenues and 2.5 per cent above consensus adj. EBITDA at the midpoint of the guidance range. The company signed a new contract with the MOH in Brazil for Ambisome, which is expected to generate $18.9-million in 2024 revenues (vs. $25.2-million in 2023 and $7.0-million in 2022). We continue to view Knight as a good long-term investment,” said Mr. Miehm.
* TD Securities’ David Kwan increased his Lifespeak Inc. (LSPK-T) target to 70 cents from 45 cents, keeping a “hold” rating. The average is 59 cents.
* In a review of quarterly earnings season for U.S. application software companies, Citi’s Steven Enders lowered his Open Text Corp. (OTEX-Q, OTEX-T) target to US$42 from US$44 with a “neutral” rating. The average is US$51.46.
“4Q23 results were largely split across our coverage with solid results in automation yet some softer results/guides within collaboration,” he said. “We view outlooks as relatively conservative with more of a de-risked view vs. other areas of our coverage, particularly for APPN, MNDY, and SMAR. While macro may remain a headwind, we see a favorable setup with valuation remaining low across the group (26th percentile over 5 years on EV/rev) and upside levers emerging from AI (ASAN, OTEX), packaging (BOX), and price increases (MNDY).”
* TD Securities’ Sam Damiani raised his Pro REIT (PRV.UN-T) target to $5.50 from $4.75 with a “hold” rating, while National Bank’s Matt Kornack moved his target to $6 from $5.75 with a “sector perform” rating. The average is $6.25.
“PRO put up a strong operational print to close out the year,” said Mr. Kornack. “The industrial portfolio continues to perform well, with leasing spreads (albeit on a smaller amount of space in Q4) displaying the strong mark-to-market potential of the underlying portfolio which is primarily concentrated on high demand small-to-mid-bay assets. Continued capital recycling initiatives have increased the industrial weighting in the portfolio. PRO is relatively well positioned vis-à-vis its small cap peers given its industrial weighting and shorter WALT with significant embedded MTM potential.”
David Leeder