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Inside the Market’s roundup of some of today’s key analyst actions

Despite reporting third-quarter financial results that exceeded expectations on the Street and raising its full-year 2018 guidance, Desjardins Securities analyst Maher Yaghi downgraded his rating for Rogers Communications Inc. (RCI.B-T, RCI-N) to “hold” from “buy” based on its current valuation and in the wake of outpeforming peers thus far in 2018.

“With nine months in the bag and given continued solid momentum, management gave the market what it wanted — a guidance increase that put expected EBITDA growth in 2018 at 7–9 per cent, ahead of peers,” said the analyst. "This strong growth is the result of robust margin improvement due to the cost-cutting that management began last year, as well as continued subscriber loading. That being said, we expect EBITDA growth will begin to slow down in 4Q as comps become more difficult and margin accretion becomes harder to achieve.

“As it relates to wireless, over the last two years (except for a hiccup in 4Q17), Rogers has been a market leader in both subscriber loading and ABPU [average billing per user] growth. We expect the wireless segment to continue to generate good growth; however, we foresee some increased pressure due to Shaw’s improving wireless product offering, which started to target the higher end of the market in late September.”

With the release of its quarterly results on Oct. 19, Rogers increased its EBITDA growth guidance to 7-9 per cent for 2018 and its free cash flow guidance to 5-7 per cent from 3-5 per cent.

Mr. Yaghi said the company was “already well-positioned” to reach or exceed guidance after the first half of the year, adding: “many investors wondered why management did not increase its forecast at that time. We believe the fears of lower management expectations for 2H18 were alleviated with the guidance increase. RCI’s year-over-year EBITDA growth is now leading the Big 3, surpassing BCE’s guided growth of 2–4 per cent and Telus' 3–6 per cent.”

Based on those changes, Mr. Yaghi raised his EBITDA growth forecast for the year to 8.2 per cent, near the mid-point of the guidance. His earnings per share projections for both 2018 and 2019 rose slightly to $4.23 and $4.34, respectively, from $4.21 and $4.32.

With the downgrade, the analyst did raise his target for the stock by a loonie to $71. The average target on the Street is currently $72.53, according to Thomson Reuters Eikon data.

“Rogers is outgrowing most companies in the sector, supported by improving metrics and margins, and potentially declining cable capex as the investment in node-splitting is well-advanced,” he said. “We expect somewhat tougher comps, with margin expansion becoming harder to achieve, as wireline and wireless competition is expected to intensify in 2019. While the company’s fundamentals are strong, we see better value elsewhere in the group.”

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The downside risks for Corus Entertainment Inc. (CJR.B-T) are “more than reflected at current levels,” according to CIBC World Markets analyst Robert Bek, leading him to upgrade its rating to “outperformer” from “neutral."

“While we have long viewed the Corus valuation as extremely low, the wall of worry needed to be climbed to see a valuation recovery was too high and required time and events to clear up,” said Mr. Bek. "Over the past few years, we have witnessed the needed recalibration of forward expectations (adequately reflecting structural risks), regulatory hurdles clarified, a material dividend cut, and the index ramifications applied. While there remains uncertainty with the objectives of the Shaw family and their large stake (including voting control), we believe this is all priced in from here.

"The driver of the valuation opportunity is the strong FCF at Corus, which we view as material enough to adequately reflect structural risk unknowns. With a current FCF yield of 35 per cent, Corus shares are simply too cheap for us to ignore. As FCF is applied to debt, while easily covering off dividend requirements, we expect to see a recovery in the equity to a more reasonable level. Even at our $7.00 price target, the shares would reflect issues, however in a more balanced and reasonable way. "

Mr. Beck’s unchanged $7 target sits above the current average of $5.83.

Meanwhile, Though he said Corus ended fiscal 2018 on “an improved trend,” Desjardins Secruities analyst Maher Yaghi thinks “visibility on future results remains low.”

“4Q FY18 results were a positive surprise overall even though the company met expectations due to increased merchandising and licensing sales, which tend to be volatile,” the analyst said. "Management was a little more optimistic on the call as advertising trends seem to have slightly improved lately; however, visibility beyond a couple of months is still limited.

“The focus remains on debt repayment and investments in new technologies that are expected to eventually lead to improved advertising revenue by helping advertisers better target their audience. The quarter’s strong FCF helped the company reduce its net debt to EBITDA to 3.3 times at the end of FY18, down from 3.4 times at the end of the previous quarter. We believe indebtedness is still elevated, but significant progress has been realized on that front in the last few quarters.”

Mr. Yaghi raised his EBITDA projection for 2019 to $551-million from $536-million. His revenue expectation also increased marginally.

He maintained a “hold” rating and $6.50 target for Corus shares.

"While revenue met expectations, the composition of the revenue line as well as continued cost control resulted in bottomline and FCF results which beat expectations," said Mr. Yaghi. "The company continues to generate healthy FCF and management is intent on using it to reduce leverage, which remains high. While valuation is attractive, given low revenue visibility and continued weakness in advertising revenue, we prefer to wait for a better entry point."

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Believing an “ugly chapter” is behind it with the sale of its construction division, CIBC World Markets analyst Jacob Bout raised his rating for Stantec Inc. (STN-T) to “outperformer” from “neutral,” citing its recent share price decline.

On Friday, the Edmonton-based global design firm announced the sale of MWH Constructors, to funds managed by Oaktree Capital Management L.P. A price was not disclosed, though Mr. Bout projects the sale garnered $75-million to $125-million.

“The biggest issue for STN since it acquired MWH (in 2016) has been the unpredictability of its lower-margin construction business,” said Mr. Bout. “We believe the removal of the Construction business would remove earnings surprises and improve Stantec’s margin profile (i.e., to 11-13 per cent versus consensus of 10.9 per cent in 2018) and that, therefore, STN warrants a higher multiple. While we had assumed that this transaction would be completed by the end of 2018 (estimates unchanged), the purchase price is likely less than our assumption. We have increased our target multiple from 10.5 to 11.0 times as previously we were unsure if STN could sell both the U.S. and U.K. construction businesses. As a result, the slightly lower anticipated purchase price is offset by a slight increase.”

His target remains $38. The average is $37.82.

Elsewhere, Laurentian Bank Securities analyst Mona Nazir upgraded Stantec to “buy” from “hold” with a target of $39.

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BMO Nesbitt Burns analyst Ketan Mamtora upgraded Norbord Inc. (OSB-N, OSB-T) to “market perform” from “underperform” with a target of US$26, down from US$34. The average is $45 (Canadian).

“Over the past 12 months, Norbord’s stock is down 30 per cent (S&P up 8 per cent),” he said. “While there is still some downside risk to the stock from rising OSB supply and signs of flattening out in housing starts, we think the risk/reward is much more balanced at current stock price levels.”

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BMO Nesbitt Burns' Ray Kwan lowered Crescent Point Energy Corp. (CPG-T) to “market perform” from “outperform” with a target of $8, falling from $10. The average on the Street is $12.58.

“While its transition plan is only at the preliminary stages, we think the tough market backdrop will likely push the resolution of its strategic plan beyond the expected 12 months, leaving the story with an ongoing overhang and the potential to trade at lower multiples until then,” he said.

“In the end, we think there are better opportunities in other beaten down Canadian oil weighted names, especially those not contingent on a ‘turnaround.’”

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The market was “relatively efficient” in accounting for Wajax Corp.'s (WJX-T) $52-million acquisition of Montreal-based Groupe Delom Inc., according to Raymond James analyst Ben Cherniavsky.

Shares of Wajax, a provider of diversified industrial products and services, jumped 5 per cent following the announcement of the deal for Delom, which specializes in the maintenance and repair of critical electromechanical and rotating equipment for continuous process industries, on Oct. 16.

“In the old Wajax model, where the company had three different operating segments, Groupe Delom would have fallen into the rotating products group of the Industrial Components business,” said Mr. Cherniavsky. “Today, the ‘One Wajax’ model refers to this as the Engineered Repair Services business (ERS), which is what we toured last week on our 48 Hours in Edmonton event. Wajax has been pursuing M&A opportunities in ERS for a long time. Four years ago, in fact, we did a deep dive on this market in a Sep, 3 2014 “Rotate Into This!” company comment. Better late than never, but with Groupe Delom representing the first major acquisition in this space since we published that report (they also acquired Wilson Machinery in 2016 for $5-million) , we believe that the opportunity has yet to live up to its full promise.

“One of the issues that concerned us back then—and still concerns us now is Wajax’s balance sheet. The company’s debt position today is only marginally better than it was in 2014, but poised to go higher with this transaction and the other major growth initiatives that are underway (Wajax has increased its senior secured credit facilities from $300 million to $400 million, and extended the maturity date, to fund this transaction and its other capital requirements). Given the macro risks that are mounting and the experience we had with Wajax the last time the market (and their balance sheet) suddenly turned against them in 2015, we are not comfortable recommending the stock at present. In short, we see the Groupe Delom acquisition as a relatively immaterial and long-anticipated acquisition that does little to change our thesis on Wajax’s stock.”

Maintaining a “market perform” rating for Wajax shares, Mr. Cherniavsky dropped his target to $26.50 from $29.50 in order to “account for recent multiple compression in the equipment group and the increasing odds of next year being peak earnings.” The average target is $31.63.

“We believe Wajax’s stock may still grind a few dollars higher as end markets remain reasonably robust at present,” he said. “However, we still view Wajax primarily as a cyclical trading vehicle, and with cyclical risks on the rise we rate the stock Market Perform. We feel the shares are fairly-valued on a risk-adjusted and cyclically-adjusted basis.”

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RBC Dominion Securities analyst David Palmer expects Chipotle Mexican Grill Inc. (CMG-N) to report “lackluster” third-quarter results on Thursday.

However, based on his annual brand perception work, , he sees “significant” upside from both its menu and digital/deliver opportunities, and expects the fast food chain’s management to “increasingly execute” on them in 2019.

Viewing a recent pullback in share price as an "acceptable entry point," Mr. Palmer upgraded Chipotle stock to "outperform" from "sector perform."

"After a 19-per-cent retreat from recent highs, we believe Chipotle shares offer a compelling risk/reward heading into 2019 and 2020," said Mr. Palmer in a research note in which he identified 15 potential sales "wins."

"We are looking through 3Q18 earnings, which we believe have some downside risk given the food safety incident in Ohio (RBC estimated same-store sales growth of 4 per cent; consensus 5.3 per cent). That said, we believe there is a favorable stock set-up into 2019 given menu innovation, digital initiatives, and a focus on improving restaurant margins. While we expect quarter-to-quarter sales volatility throughout this turnaround, we believe new management will grow SSS through new menu news, digital/delivery awareness and other marketing wins."

Mr. Palmer increased his target for Chipotle shares to US$510 from US$450, which exceeds the average of US$466.50.

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Citi analyst Andrew Baum downgraded Bristol-Myers Squibb Co. (BMY-N) after dropping his forecasts for its Opdivo cancer and Yervoy melanoma medicines.

"Our downgrade today largely reflects further likely lowering of floor Opdivo, Yervoy and EPS estimates from a base, already materially below the consensus forecasts," said Mr. Baum, moving the New-York based pharmaceutical giant to "neutral" from "buy."

"We anticipate an extraordinary treatment effect from Keytruda in MRK’s KEYNOTE-426 trial in RCC given the statistical significance for both PFS and OS at the 1st interim analysis. ... While Pfizer/ Merck KGaA have already increased the competition with their Javelin Renal 101 data presented today at ESMO, we expect even more compelling data from MRK‘s KEYNOTE-426 trial. We note MRK posted an impressive 73-per-cent response rate for Keytruda in combination with Inlyta in their phase I trial compared with 58% for Pfizer/ Merck KGaA’s Bavencio Inlyta combination. We anticipate presentation potentially at AACR next year. Our revised forecasts for Opdivo and Yervoy reflect changes in our proprietary global Citi IO model."

Mr. Baum's target for Bristol-Myers shares fell to US$57 from US$62. The average is US$61.59.

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In other analyst actions:

TD Securities analyst Menno Hulshof upgraded Cenovus Energy Inc. (CVE-T) to “buy” from “hold.”

Canaccord Genuity analyst Matt Bottomley cut MPX Bioceutical Corp. (MPX-CN) to “hold” from “speculative buy” with a target of $1.25, down from $1.30. The average is $1.35.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 0:40pm EDT.

SymbolName% changeLast
CPG-T
Crescent Point Energy Corp
+0.82%11.04
RCI-B-T
Rogers Communications Inc Cl B NV
-0.47%55.64
RCI-N
Rogers Communication
-0.32%41.07
WJX-T
Wajax Corp
-0.24%32.92
CJR-B-T
Corus Entertainment Inc Cl B NV
0%0.72
CMG-N
Chipotle Mexican Grill
+0.29%2931.93
BMY-N
Bristol-Myers Squibb Company
+1.58%54.09
STN-T
Stantec Inc
-1.21%112.35
CVE-T
Cenovus Energy Inc
+0.45%27.05

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