Inside the Market’s roundup of some of today’s key analyst actions
CIBC World Markets analyst John Zamparo believes investors should stay clear of Canopy Growth Corp. (WEED-T), warning that its credibility on achieving financial targets is getting strained and that its EBITDA guidance seems “unachievable.”
In an notably bearish research report to clients, Mr. Zamparo reiterated an “underperformer” rating - the equivalent of a sell recommendation - and dropped his price target to C$5 from C$6.50.
Canopy on Friday reported a fourth-quarter loss that was far bigger than analysts expected, sending the company’s shares plunging 13.6%.
“We believe WEED faces more downside, as ongoing elevated cash burn combined with optionality investments have stretched its balance sheet, while operating results have declined materially and will have to improve more than previously expected to achieve profitability,” Mr. Zamparo said.
“Some assets in Canopy’s portfolio have value, but we believe WEED has built a strategy dependent on U.S. legalization, where prospects have worsened. This stock still trades at 4.7x estimated calendar year 2023 sales, more expensive than peers, particularly questionable given declining fundamentals,” he added.
Mr. Zamparo reduced his forward sales estimates by about 10%.
He said Canopy’s guidance of positive EBITDA in 2024 “is difficult to bridge to.” He estimates current EBITDA is negative $424-million, and planned cost cuts will only take the company 35% of the way towards a positive number.
“We estimate Canopy would need a 50% sales compounded annual growth rate, and no new SG&A [selling, general and administrative expenses] spending, to reach the target. This does not seem plausible. Divestitures of unprofitable segments (retail) could help, but domestic cannabis industry growth is about 25% year/year, and Canopy’s strategy differs little from others, while past execution has been lacking,” he said.
Meanwhile, he commented that Canopy’s “once-enviable” balance sheet has deteriorated, moving from a net cash position of $4.1-billion in 2018 to a net debt position of $135-million today.
“Gross cash sits at $1.4-billion, but $600-million of convertible debentures mature next summer. These will need to be refinanced in one form or another: Canopy’s approximately $900-million King Street loan contains a US$200-million minimum liquidity covenant, that, without additional fundraising, would be breached in just six quarters if Canopy were to repay the converts, by our estimates. Even if WEED hits positive EBITDA, annual cash burn will be nearly $200-million from debt servicing and capex alone,” the analyst said.
CIBC wasn’t the only broker expressing disappointment with the results: Eight Capital cut its price target to C$4 from C$5.5; Cowen and Company cut its target price to C$6.50 from C$12.50; and Benchmark downgraded its rating from a “hold” to a “sell.”
The average price target on the Street is now $7.89, down from $9.81 a month ago, according to Refinitiv data.
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Several analysts raised their price targets on National Bank of Canada (NA-T) in the wake of a better-than-expected earnings report on Friday.
Canada’s sixth biggest lender reported an increase in profits of 11 per cent in the fiscal second quarter ended April 30 from a year ago, with revenue up 9 per cent, with higher loan balances and fees as consumers and businesses spend and borrow more.
But the bank’s expenses were up 8 per cent as it hired staff, increased salaries and invested in technology.
CIBC raised its target price to C$102 from C$100; RBC raised its target to C$109 from C$103; Scotiabank increased its target to C$107 from C$106; and Credit Suisse raised its target by $5 to C$111. No changes to ratings were made.
“Q2/22 results were stronger than expected from good revenue growth and some surprising cost discipline,” commented RBC analyst Darko Mihelic. “Credit also remained solid and NA’s outlook for impaired PCLs [provisions for credit losses] in 2022 improved. Our EPS estimates move higher but we continue to view NA as fairly valued.” As such, he maintained a “sector perform” rating.
Desjardins Securities cut its price target by $1 to C$103 and maintained a “hold” rating, seeing limited upside for the stock over the next 12 months.
Joo Ho Kim of Credit Suisse termed the quarterly results as “clean” and in line with the bank’s consistent performance. “The results included solid growth from domestic P&C segment as well as its trading business that outperformed peers this quarter, both of which helped support quarterly PTPP [pre-tax, pre-provision] earnings growth at the top of its peer group. We also highlight continued conservatism behind allowances and capital (standing near the top of its peers on pro forma basis) as a key positive from defensive perspective,” he said.
CIBC analyst Paul Holden commented that National Bank delivered the strongest results out of the Big Six, with the highest revenue growth, a conservative credit update, and a positive capital update. “We maintain our outperformer rating based on capital strength, diversified sources of revenue, and relative valuation risk,” Mr. Holden said.
The average price target on National Bank is now $102.46, down from $108.36 a month ago.
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At least nine analysts slashed their price targets on Canadian Western Bank (CWB-T) after its latest earnings widely missed Street expectations.
BMO cut its target price to C$39.5 from C$42.5; CIBC cut its target price to C$32 from C$34; Credit Suisse cut its target to C$33 from C$35; National Bank of Canada cut its target to C$38 from C$44; RBC cut its target to C$38 from C$44; Raymond James slashed its target to C$37 from $43; Scotiabank cut its target price to C$37 from C$44; TD Securities lowered its target to C$39 from C$42; and Desjardins Securities reduced its target to C$38 from C$44.
No changes to ratings were spotted.
Canadian Western Bank earned 84 cents a share in adjust profit in its latest quarter, unchanged from a year ago, and below the average Street expectation of 90 cents.
The bank struggled with continued high expenses during the quarter, saw a decline in net interest margins, and loan growth slowed. CWB also lowered its 2022 guidance and now expects full year diluted EPS to decline in the low to mid-single digits given a softer revenue outlook.
CIBC analyst Paul Holden noted that this was the second consecutive quarter of disappointing results for the bank. “We are concerned that industry dynamics may be making it harder for CWB to achieve its loan and deposit growth targets,” he said. “Our revised F2022 EPS estimate implies growth of negative 6.5%, modestly worse than guidance given our concerns. There will be a lot riding on the delivery of better results next quarter.”
Despite his target price cut, Raymond James analyst Stephen Boland continues to rate CWB as an “outperform,” as the stock appears to offer good value on a historical basis. Shares lost 9.6% in Friday trading.
“The stock is trading at 0.8x our estimated 2023 book value. Over the past 15 years, CWB rarely traded at this low of a multiple and when that occurs, it did not trade long at these levels,” Mr. Boland said in a research note.
Desjardins Securities analyst Doug Young also took an optimistic view despite the lacklustre quarter. “We are maintaining our Buy rating as results should improve in the second half of fiscal 2022, and we like its commercial focus, the benefits from the eventual AIRB conversion and valuation. That said, the stock likely remains in the penalty box near-term, so some patience will be required,” he told clients.
The average price target on CWB shares is now $38.88, down from $43.21 a month ago.
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BMO analyst Joel Jackson hiked his price target on Sociedad Quimica Y Minera S.A. (SQM-N) in anticipation of higher lithium prices.
“Though SQM’s valuation gap to peers has been closing as political risk has eroded, we expect it to close further with SQM teasing over the possibility of announcing even more lithium capacity expansions beyond 250,000 tons at Atacama in the quarters to come (as well as expanding the Australian spodumene/hydroxide joint venture further),” Mr. Jackson said in a note.
His price target went up to US$125 from $100 and he maintained an “outperform” rating. The average Street target is US$96.63.
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BMO analyst Ryan Thompson trimmed his price target on Silvercorp Metals Inc (SVM-T) after the company disclosed higher operating costs than he was anticipating in its latest financials.
Silvercorp. reported adjusted earnings per share of 5 cents, slightly better than the consensus expectation of 4 cents, but below Mr. Thompson’s forecast of 6 cents.
The higher operating costs relative to the analyst’s forecasts was driven by a strengthening Chinese yuan and inflation on contractor fees, electricity, wages and benefits.
“That said, 2023 guidance has been reiterated. Overall, we don’t see any major surprises in this release with production results previously reported. SVM noted on the conference call that operations are largely unaffected by broader Chinese COVID-19 related restrictions,” the analyst said.
He cut his price target to C$6 from C$6.5. The average analyst target is C$7.19.
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Darcy Keith