Inside the Market’s roundup of some of today’s key analyst actions
Though he’s “encouraged” by the announcements made at its Unite Conference on Wednesday, including its own fulfillment network, CIBC World Markets analyst Todd Coupland downgraded his rating for Shopify Inc. (SHOP-N, SHOP-T) shares.
“At this point two years of our investment thesis and our upside have now been priced into the stock,” said Mr. Coupland, lowering the Ottawa-based tech firm to “neutral" from outperformer."
“We update our price target to US$350 (from US$260). Our valuation is based on 18 times our 2020 revenue estimate + $18.00 cash per share. The top five cloud peers (out of 50), plus Square, are trading at 18 times 2020 estimated EV/sales with revenue growth of 29 per cent. Shopify ranks 6th on this list, and is trading at 17 times with 2020 estimated growth of 33 per cent. While cloud multiples have increased in 2019, at this point, we recommend looking for another opportunity to re-enter the stock.”
Mr. Coupland’s new target of US$350 exceeds the average on the Street, according to Bloomberg data, of US$289.47.
“Our view is Shopify’s platform and competitive position continues to improve,” he said. “[Wednesday’s] platform announcements affirm this, and support greater confidence in the company’s ability to take advantage of its target market, both with Plus and International.”
Elsewhere, Rosenblatt Securities securities analyst Mark Zgutowicz raised his target price for its stock to a new high on the Street.
Mr. Zgutowicz said the fulfillment network represents “a robust and intelligent back office solution for managing inventory and getting orders delivered 2-day coast-to-coast"
Expecting the project to drive “significant incremental” gross merchandise volume, he hiked his target to US$395 from US$295 with a “buy” rating.
Mackie Research analyst Nikhil Thadani increased his target to US$360 from US$280, keeping a “buy” rating.
Mr. Thadani said: “While initially targeted to merchants shipping 10-10K orders/day, we expect this feature to be expanded over time. Merchants are expected to benefit via faster and cheaper shipping from fulfillment centers, as well as eliminating merchant friction of physically shipping products. Shopify machine learning algorithms can also help reduce merchants’ inventory costs/working capital by better managing stock keeping and inventory replenishment. We believe, SHOP could benefit through Q3 via better than expected merchant adds ahead of the seasonally strong Q4 as a result of new announcements. Medium to long term, new features, aid international expansion and a reduction in merchant friction, which is a tailwind for GMV.”
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Though he thinks its fundamentals remain enticing, Wesdome Gold Mines Ltd. (WDO-T) was downgraded by Canaccord Genuity analyst Tom Gallo on Thursday due to its high valuation in the wake of “strong” performance.
Maintaining a target price of $5.50 for Wesdome shares, which falls 25 cents short of the average on the Street, Mr. Gallo lowered his rating to “hold” from “buy,” noting his return to target was just 1 per cent based on Tuesday’s close. He also emphasized the stock has jumped 40 per cent since he initiated coverage in October of 2018 and over 100 per cent in the last 12 months.
"Wesdome operates the Eagle gold complex in Northern Ontario, which represents 37 per cent of our NAV [net asset value]," said Mr. Gallo. "We model production at Eagle to increase 6 per cent year over year due to grades above reserve (Canaccord estimate 17.5 grams per ton vs. reserves of 12.2 g/t). The mill has capacity for 1,100 tonnes per day (tdp); however, it is currently running at 500 tpd due to constraints on the mining rate at Eagle UG based on the location of the active mining horizon relative to the shaft.
“For 2019, the company is conducting a 51,000-metre underground drill program which is largely dedicated to exploring parallel zones of mineralization in the eastern half of the mine diorite. Should the company discover significant resources in any parallel zone we believe it could offer a different mining heading and boost production tonnage, which could be catalytic for the company. We note that the discovery and delineation of such resources is likely one year away.”
Mr. Gallo said Wesdome continues to create sufficient cash flow to internally fund its exploration work at both Eagle and its Kiena development property in Quebec.
"The company boasts a debt free balance sheet and over $27-million in cash at the end of Q1/19," he said. "Wesdome remains expensive and trades at a significant premium to peers at 0.97 times P/NAV versus peers at 0.78 times and 13.7 times 2020 EV/EBITDA versus peers at 5.9 times.
"We apply a 1.0 times P/NAV multiple to our operating NAV of $2.07. With the exploration and corporate adjustments added in, our target NAVPS is $5.55, which we round to $5.50."
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JPMorgan analyst Patrick Jones recommends investors look to inexpensive copper miners with strong balance sheets as a shelter from the recent global trade turmoil.
Though he thinks the ongoing China-U.S. trade dispute could bring copper volatility near-term, Mr. Jones expects the market to return to a surplus in 2020 after a balanced 2019.
He initiated coverage of Lundin Mining Corp. (LUN-T) with an “overweight” rating and added the stock to the firm’s “Analyst Focus List.” He set a $9 target, which falls 21 cents below the consensus.
In justifying the move, Mr. Jones pointed to Lundin’s cheap valuation and compelling spot free cash flow (FCF) yield inflection, adding the company is well positioned for further cash returns or opportunistic M&A.
Conversely, he cut First Quantum Minerals Ltd. (FM-T) to “underweight” from “neutral,” citing increasing risks from its two primary geographies, Zambia and Panama, and greater balance sheet pressure.
His target for the stock dropped to $11 from $14. The average is $17.18.
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Investors with “Canadian phobia” should consider PetroShale Inc. (PSH-X), said Laurentian Bank Securities analyst Jonathan Tempro, noting the Denver-based company is one of few Canadian-listed equities with pure-play U.S. exposure.
"PSH offers investors exposure to high-quality U.S. light oil production that receives premium pricing and has no exposure to Canada’s regulatory overhang," said Mr. Tempro in a research note released Thursday.
Touting its "compelling valuation for a high-growth, high-quality U.S. asset," he initiated coverage with a "buy" rating.
"PSH produced 5,000 boe/d [barrels of oil equivalent per day] in Q1/19 with an expected exit 2019 rate of 11,000 boe/d (85 per cent liquids)," he said. "Fully funded 2019 capital program and an attractive valuation allows investors to participate in the growth upside, compared to the majority of other small-cap Canadian E&P companies which have minimal growth plans in the current commodity environment."
Mr. Tempro said Petroshale possesses "high-quality and position in the heart of a prominent staked U.S. shale play," emphasizing the economic potential of the Bakken/Three Forks area in North Dakota.
"Although the total land position is relatively small, the high quality and stacked oil pay (Middle Bakken and 2-3 Three Forks benches) provide a compelling opportunity with 77 future drilling locations equating to 10 years of inventory at the current development pace. The Williston Basin has sufficient take-away capacity and provides a high netback light oil product. PSH has a history of completing strategic acquisitions, having added drilling locations every year since 2013 in the highest quality areas. We believe that management will continue to execute on adding to its land position as it continues its development.
"PSH has transitioned from an acquisition focus with non-operated interests to a development mode with a focus on materially growing operated production and increasing future drilling locations in the 'Tier 1' assets. In the long-term we believe there is opportunity for further consolidation and with continued drilling execution, we believe management can execute on its target of sustainable production over 10,000 boe/d."
Mr. Tempro set a $2 target for Petroshale shares. The average is $2.10.
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The share price correction endured by Gran Tierra Energy Inc. (GTE-T) on Wednesday following the disclosure of issues across its portfolio and subsequent production curtailment presents an opportunity for investors, according to Canaccord Genuity analyst Jenny Xenos.
"We believe the 'bad news' is priced in," she said. "The stock is down 24 times year-to-date, compared to average peer price depreciation of 2 per cent. GTE trades at 3.5 times 2019 estimated EV/DACF [enterprise value to debt-adjusted cash flow], below the peer average of 3.8 times. We believe the stock is pricing in 1P reserves only, needless to say the value of its significant resource, while the peer group is trading at 90 per cent 2P NAVs. Based on consensus estimates, GTE now trades more than 1 standard deviation below its historical avg. EV/forward 12-Month DACF. As such, we believe the 'bad news,' including the likely lower guidance, is already being priced in. We believe there is limited stock price downside and significant potential upside, should operational and other surface issues be resolved in the coming months, as we cautiously anticipate."
Based on the announcement, Ms. Xenos lowered his 2019 estimated production to 36,700 barrels of oil equivalent per day from 40,300 boe. That led her cash flow per share projection to 74 cents from 90 cents.
"While management’s near-term strategy execution has been lacking the market’s expectations, resulting in a certain level of frustration evident in the stock’s recent downfall, the team has amassed a large contiguous land portfolio with significant resource potential, making the company, in our view, an attractive acquisition target," she said. "Gran Tierra holds 2.1 million net acres of largely operated land in Colombia and an additional 0.1 million net acres in Ecuador contiguous with its Putumayo acreage. At year-end 2018, GLJ estimated the company’s lands in the Putumayo and the Middle Magdalena Valley basins of Colombia alone to contain 1.4 billion barrels of mean prospective resources, the value of which is not being reflected in Gran Tierra’s current share price, in our view. This substantial resource base, in our opinion, has significant underlying value that could at least in part be realized through a potential transaction."
Maintaining a “buy” rating, she dropped her target to $3.50 from $6. The average is currently $4.57.
"Our price target implies a potential return of 56 per cent over the next 12 months, with we believe significant additional upside possible if the company successfully resolves its operational issues and restores market confidence," she said.
Meanwhile, Paradigm Capital analyst Ken Lin lowered his target to $4.25 from $6 with a "buy" rating.
Mr. Lin said: “While this operational hiccup doesn’t impact the underlying assets, we believe this will be viewed negatively as it is one more operational road bump for the company. Until GTE is more consistent in its operations, it will be in the penalty box until it can prove otherwise. While we believe in the underlying assets, the struggle for the story remains unlocking the value potential.”
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Seeing demand likely to wane and a lower likelihood that it will hit its upside volume targets, Goldman Sachs analyst David Tamberrino sliced his target price for Tesla Inc. (TSLA-Q) on Thursday.
Though he saw the second quarter as a “better environment” for demand and deliveries, Mr. Tamberrino thinks the Street’s volume estimates for the second half of 2019 and beyond will prove to be to high, pointing to fewer “levers to pull to stoke demand going forward."
"We believe that is the largest question for investors to underwrite at this point — what are sustainable demand levels for the Model S, Model X, and Model 3 — and how does that change with the introduction of Model Y production,” he said. “We believe a downward path for shares will resume as it becomes more clear that sustainable demand for the company’s current products are below expectations.”
Maintaining a "sell" rating, he dropped his target to US$158 from US$200. The average is US$269.87.
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Though he still sees near-term volatility, Veritas analyst Dan Fong sees Canadian auto parts suppliers on a “better footing” than in past months.
In a research note released Wednesday afternoon, Mr. Fong said new vehicle inventories are normalizing, used vehicle pricing has improved and original equipment manufacturers are signaling a return to higher activity levels in the second half.
He upgraded a trio of the sector's leaders to "buy" from "sell." They are:
Magna International Inc. (MGA-N, MG-T) with a target of US$50 (from US$45). The average is US$55.38.
Linamar Corp. (LNR-T) with a target of $50 (from $48). The average is $62.60.
Martinrea International Inc. (MRE-T) with a target of $12 (from $11). The average is $17.43.
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In other analyst actions:
TD Securities cut Cobalt 27 Capital Corp. (KBLT-X) to “tender” from “buy” with a $5.50 target, down from $8.50. The average is $6.98.
With files from staff, Reuters and Bloomberg
David Leeder