Inside the Market’s roundup of some of today’s key analyst actions
Shopify Inc. (SHOP-N, SHOP-T) is “fostering a global ecosystem” with developers, according to RBC Dominion Securities’ Paul Treiber.
On Tuesday, the Ottawa-based e-commerce giant hosted its Unite conference, which the analyst said was “more technical than previous years and shows the company’s increasing prioritization of developers.”
Though investors had a mixed reaction to the news, which included a revamped revenue share model, sending its shares down 0.3 per cent in Toronto, Mr. Treiber thinks a shift in direction was evident.
“While the event appears to have disappointed the market, given the lack of new high profile product announcements, we believe Shopify creating a robust developer ecosystem is the company’s most important strategic priority,” he said. “A robust ecosystem better enables Shopify to address the long-tail of global commerce use-cases and TAM.”
“Shopify’s shares declined 2 per cent when Unite concluded without a new high profile product announcement. Recall in 2019, Shopify announced SFN (Shopify Fulfillment Network) at Unite, and there were some media reports of a similarly large announcement. Although the lack of catchy new product announcements weighed on the stock, we believe Shopify’s platform improvements and prioritization of developers create a strong foundation for sustained long-term growth.”
Mr. Treiber thinks the “most visible” product announcement at the conference was its Online Store 2.0, which he said “represents a material upgrade to Shopify’s core offering.”
“The upgrade allows merchants to better customize their stores and create unique online experiences. Shopify’s Payments Platform better supports additional payment gateways and addresses commerce outside of North America,” he said.
Seeing its shares starting starting to look past a 2021 deceleration in gross merchandise volume, Mr. Treiber raised his target for Shopify shares to US$1,700 from US$1,500 with an “outperform” rating. The average is US$1,509.37.
“Shopify’s shares have rallied 15 per cent since Q1 results (vs. S&P500 up 3 per cent),” he said. “This reflects improved investor sentiment for software stocks in general, along with greater investor conviction that the deceleration in Shopify’s GMV growth in 2021 may be less than feared and the traction of Shopify’s global platform may be accelerating. While Shopify’s stock looks expensive (at 42 times forward 12-month EV/S and 74 times FTM EV/GP), Shopify has a larger TAM and a more attractive platform monetization opportunity than most of its peers in our view.”
=====
After a “soft” fourth quarter capped a “transformative yet challenging year,” Desjardins Securities analyst Kevin Krishnaratne lowered his recommendation for Martello Technologies Group Inc. (MTLO-X), awaiting signs of stronger traction from its digital experience monitoring (DEM) solutions portfolio before “getting more constructive.”
“While we believe management is laying the building blocks necessary to position it for strong future growth, investors may have to be a little more patient before the stock starts to work, in our view,” he said.
On Monday after the bell, the Ottawa-based firm reported revenue for the quarter of $4.48-million, up 57 per cent year-over-year and ahead of the analyst’s $4.7-million forecast. However, he was “disappointed” by the performance of GSX, which fell short of his estimate ($1.15-million versus $1.22-million).
“Our revenue forecast in FY22 moves to $19.1-million from $19.7-million,” Mr. Krishnaratne said. “We now model a more notable increase in DEM users starting in 2H based on guidance (goal of 3.5 million users by FY22 from 2.7 million at FY21). ... MTLO has been laying the foundation to accelerate DEM growth, including updates to its tech stack and an MSP program launch, strategies we agree with but we also think this will take a few quarters to show up in results.
“We suggest waiting for leading indicators such as new DEM client/partner wins and pipeline build that may signal potential for outperformance vs historical trends (these have been inconsistent of late—in line to slight misses.”
Moving the stock to a “hold” recommendation from “buy,” he also cut his target to 20 cents from 35 cents. The current average is 37 cents.
=====
Seeing television advertising revenue growth accelerating in the wake of a steep pandemic-driven drop, a group of analysts raised their targets for shares of Corus Entertainment Inc. (CJR.B-T) in response to the release of its third-quarter results on Tuesday before the bell.
The Toronto-based company reported a 15-per-cent year-over-year increase in revenue from its key television segment to $380-million, topping the consensus projection of $373-million. Overall, adjusted EBITDA turned positive to $1.3-million from a loss of $1.8-million but falling short of the $2-million estimate on the Street.
BMO Nesbitt Burns analyst Tim Casey said there were few surprises in the earnings release, and he expects momentum to continue as demand from key categories, including travel, entertainment, consumer goods, grows with “a wave of spending” from consumers.
“However, we expect an element of caution from advertisers until the threat of more lockdowns is definitively behind them. Streaming growth remains a positive success story, and we anticipate it will provide offset to linear television subscriber erosion in the near term. We expect some modest margin pressure as normalized programming costs return and CEWS (wage subsidies) expire,” he said.
Keeping a “market perform” rating for Corus shares, Mr. Casey raised his target to $6.75 from $6.50. The average is $8.08.
“Corus is rated Market Perform based on its relative growth profile. Most of its cash flow is generated by television advertising and subscriber fees. Corus also has a growing streaming business which provides some offset to cord-shavers/cutters/nevers. We believe the company faces medium to long-term structural and regulatory headwinds (exacerbated due to the pandemic),” he said.
Others making changes include:
* CIBC World Markets’ Robert Bek to $7.50 from $7.25 with an “outperformer” rating.
“We are encouraged by the company’s progress in streaming and Ad Tech adoption which provide an additional boost, as advertising markets continue a post-COVID recovery,” said Mr. Bek. “We remain focused on the long-tail FCF of the business, and execution through this crisis has not dampened that view.
“In our view, the growth in company’s streaming and digital portfolio further enhances FCF-generation capabilities and argues for a valuation recovery.”
* RBC Dominion Securities’ Drew McReynolds to $8 from $7 with an “outperform” rating.
* TD Securities’ Vince Valentini to $9.50 from $9 with an “action list buy” rating.
=====
Credit Suisse analyst Allison Landry remains bullish on North American railway companies, believing “favorable” fundamentals will extend well into 2022.
In a research report released Wednesday, she explained: “Why We’re Incrementally Positive on the Group: 1) In the short term, we see mainly Q2 beats - with upside to both the top line and ORs [operating ratios]; 2) to the extent that we are right, this could serve as a positive catalyst to re-engage what we would otherwise call waning fundamental investor interest over the last couple of months; 3) the group has largely underperformed - which we think in part was driven by a rotation into the parcels … and UPS/FDX seem to have taken a breather for the time being; 4) the rails are a good place to be during periods of rising labor inflation; 5) favorable fundamentals should extend well into ’22, driven by prolonged TL tightness, cyclical rail pricing acceleration (which is on a lag), stubbornly low mfg inventories, rising commodity price inflation, and infra bill potential.”
With that view, Ms. Landry raised her 2022 forecasts for every railway company in her coverage universe with exception of Canadian National Railway Co. (CNI-N, CNR-T).
“We saw a strong start to Q2 carload growth, helped by easy comps.” she said. “However, as comps got tougher through the quarter, the rate of volume growth decelerated, with volumes tracking 1 per cent below our initial expectations on average with just 1 week left in the quarter. Additionally, auto volumes remain constrained given the prolonged ‘chip dip.” That said, positive mix dynamics and a strong pricing backdrop should support healthy yield growth, while headcount levels are tracking well below vols; and although the fuel lag is an incremental headwind, we continue to see strong operating leverage.”
Ms. Landry reduced her target for CN shares to US$121 from US$122 with an “outperform” rating. The average target on the Street is $150.60.
Conversely, she raised her Canadian Pacific Railway Ltd. (CP-N, CP-T) target to US$91 from US$84 with an “outperform” rating. The average is $105.31.
“Given ongoing constraints across the supply chain (which have shown no sign of easing), consistently low inventories, prolonged tightness in the trucking market (with spot rates remaining elevated for the longest period of time cyclically) - rail fundamentals should remain positive into 2022. Although volume growth is likely to decelerate from 2021, we note that rail pricing is on a cyclical lag (owing to a large percentage of multi-year contracts); historically during the mid-cycle, rail pricing accelerates, leading to continued upward estimate revisions and stock outperformance,” said Ms. Landry.
Elsewhere, National Bank Financial analyst Cameron Doerksen also trimmed his CN target to $140 from $143 with a “sector perform” recommendation. He lowered his CP target to $98 from $102 with a “sector perform” recommendation.
=====
Citing strong share price appreciation thus far in 2021, Raymond James analyst Jeremy McCrea lowered Bonterra Energy Corp. (BNE-T) to “market perform” from “outperform,” seeing limited return to his $6 target, up from $5.50 and above the $4.74 average on the Street.
Concurrently, Mr. McCrea resumed coverage of seven mid-cap energy stocks after the firm raised its commodity price deck
“Although our commodity assumptions have moved up toward strip, higher sliding scale royalty rates, expected higher opex and hedging losses do limit some of the upside,” he said. “Nevertheless, at current strip prices, we believe the sector is still seeing the most profitable outlook it has in several years. That said though, many companies are still focused on paying down (and equitizing) debt and when we combine this with the rise in commodity prices, we believe these two factors have been the primary drivers of outperformance relative to the sector YTD for certain operators. Over the next twelve months, we believe we should start to see more of a multiple expansion as investors start to price in the strong economics seen with undrilled inventory with most of the sector still trading at multi-year low valuations in the context of profitability and value creation capability.”
Mr. McCrea assumed coverage of two stocks with “strong buy” recommendations: Tourmaline Oil Corp. (TOU-T, $44 target) and Topaz Energy Corp. (TPZ-T, $41 target)
He gave “outperform” ratings to these four stocks: Advantage Energy Ltd. (AAV-T, $6.50 target), Enerplus Corp. (ERF-T, $11 target), Pipestone Energy Corp. (PIPE-T, $2.50) and Paramount Resources Ltd. (POU-T, $20 target).
He has a “market perform” rating for Crescent Point Energy Corp. (CPG-T, $6 target).
=====
As it shift to the much larger North American eyeglass market, Scotia Capital analyst George Doumet thinks Kits Eyecare Ltd. (KITS-T) has a “substantial” opportunity to “ increase its penetration by attracting new customers and leveraging its predominantly contact lens customer base.”
Also seeing its poised to benefit from strong online industry growth, he initiated coverage of the Vancouver-based company, which began trading on the Toronto Stock Exchange in mid-January following a $55-million initial public offering, with a “sector outperform” recommendation.
“Given management’s strong track record of execution and its success in building a high-growth online eyewear retailer (and selling it to Essilor International SA, now EssilorLuxattica SA, in 2014), we have confidence in KITS’ ability to deliver an estimated revenue CAGR [compound annual growth rate] of 34 per cent from 2021 to 2023,” Mr. Doumet said. “This growth will be supported by the company’s fully automated and vertically integrated model, which enables it to provide an end-to-end eyecare online experience and ship out same-/next-day delivery products (versus typically one to two weeks for many competitors). Furthermore, the company’s low-cost manufacturing advantage allows it to price eyeglasses substantially lower than its competition.”
Touting a “compelling” entry level for investors, Mr. Doumet set a $10.50 target. The average is currently $12.35.
“KITS’ shares are currently 12 per cent below the IPO price of $8.50 and trade at an undemanding 1.5 times EV/revenue on our 2022 estimates,” he said. “While the company’s messaging remains largely unchanged from the time of its IPO, there have been downward revisions to revenue estimates in the last few months. This, coupled with investments in customer acquisition, has also likely pushed out breakeven adjusted EBITDA later than initially forecast. This has all coincided with a market rotation away from so-called COVID-19 beneficiaries toward ‘re-open plays.’
“We believe KITS’ current discount to its peers is too punitive, especially in the context of the company’s expected revenue growth of 31 per cent in 2021 and 45 per cent in 2022 versus its peers at 23 per cent and 6 per cent, respectively. Furthermore, while we don’t expect the company to break even until 2022, we believe it will carry similar structural margins and arguably higher free cash flow (FCF) conversion once fully scaled.”
=====
In a research report released Wednesday, TD Securities analyst Craig Hutchison lowered Labrador Iron Ore Royalty Corp. (LIF-T) to “hold” from “buy” with a $51 target, up from $48 and above the $44.93 average on the Street.
Mr. Hutchison also made these target price adjustments:
- Entree Resources Ltd. (ETG-T, “hold”) to $1.05 from 85 cents. Average: 85 cents.
- Ero Copper Corp. (ERO-T, “hold”) to $28 from $26. Average: $28.41.
- Taseko Mines Ltd. (TKO-T, “buy”) to $3.50 from $3.25. Average: $3.07.
- Trevali Mining Corp. (TV-T, “hold”) to 30 cents from 25 cents. Average: 31 cents.
- Trilogy Metals Inc. (TMQ-T, “hold”) to $3.75 from $3.50. Average: $3.85.
- Turquoise Hill Resources Ltd. (TRQ-T, “speculative buy”) to $32 from $33. Average: $26.50.
Analyst Greg Barnes made these changes:
- First Quantum Minerals Ltd. (FM-T, “buy”) to $37 from $36. Average: $33.87.
- Hudbay Minerals Inc. (HBM-T, “buy”) to $13 from $14. Average: $13.40.
- Ivanhoe Mines Ltd. (IVN-T, “buy”) to $12 from $11.50. Average: $10.56.
- Lundin Mining Corp. (LUN-T, “hold”) to $13 from $16. Average: $15.40.
- Sherritt International Corp. (S-T, “hold”) to 70 cents from 65 cents. Average: 60 cents.
- Teck Resources Ltd. (TECK.B-T, “action list buy”) to $37 from $35. Average: $32.72.
Analyst Arun Lamba made this change:
- Solaris Resources Inc. (SLS-T, “speculative buy”) to $20 from $16. Average: $13.49.
=====
In other analyst actions:
* Citing an improved outlook to coal prices, BMO Nesbitt Burns analyst Jackie Przybylowski hiked her Teck Resources Ltd. (TECK.B-T) target to $39 from $33 with a “market perform” rating. The current average is $32.72.
* After its fourth-quarter results topped the Street’s expectations, RBC Dominion Securities analyst Irene Nattel raised her Alimentation Couche-Tard Inc. (ATD.B-T) target to $57 from $56, exceeding the $49.12 average, with an “outperform” rating.
* Seeing an “attractive” opportunity but “wide risk/reward,” Morgan Stanley analyst Thomas Allen initiated coverage of Score Media and Gaming Inc. (SCR-Q, SCR-T) with an “equal-weight” rating and US$22 target. The average is US$38.68.
“We see US & Canada sports betting/iGaming as attractive markets,” he said. “SCR offers a unique gateway into this opportunity, with a customer acquisition advantage, especially in Canada. However, U.S. results to date highlight a highly competitive market, which drives a wide R/R; Equal-weight.”
* Haywood Securities analyst Neal Gilmer initiated coverage of Calgary-based Decibel Cannabis Company Inc. (DB-X) with a “buy” rating and 60-cent target.
“In our opinion, Decibel has demonstrated the quality of its brands by obtaining an estimated 8th largest market share in Canada, based on Hifyre data for April and May 2021. As Decibel garners more awareness within the investor base, we believe the valuation will reflect this strong position in the market,” he said.
* Barclays analyst Raimo Lenschow downgraded Open Text Corp. (OTEX-Q, OTEX-T) to “equal weight” from “overweight” with a US$56 target. The average on the Street is US$56.88.
“OpenText continues its move towards the cloud, with greater exposure coming from acquisitions and an increased internal focus on migrating its existing customer base to its new cloud offering. However, the true multi-tenant cloud product will only become available in the future and in the meantime, OTEX has one of the lowest organic growth rates in the legacy software camp, when looking at constant currency results. In this respect, we see the current valuation level (16.5 times EV/CY22E FCF), in the context of other legacy software names as fair, hence our downgrade today,” he said.
* RBC’s Andrew Wong increased his Largo Resources Ltd. (LGO-T) target to $25 from $20, reiterating an “outperform” rating. The average is $26.20.
“We believe that Largo’s transition to a vertically integrated VRFB business creates significant additional value over and above the traditional mining business. We think the new Largo Clean Energy business should attract a higher valuation if executed properly. However, we recognize that much of this value creation will be over the long term, and near term cash flows may be impacted as Largo invests in the new business and builds up a portfolio of vanadium leases,” said Mr. Wong.
* Scotia Capital analyst Trevor Turnbull raised his Sandstorm Gold Ltd. (SAND-N, SSL-T) target to US$11 from US$10 with a “sector perform” rating, while TD Securities’ Derick Ma raised his target to $12.50 (Canadian) from $12 with a “buy” recommendation. The average is US$10.21.
* TD Securities Aaron MacNeil increased his Ensign Energy Services Inc. (ESI-T) target to $2.50 from $1.75 with a “hold” rating. The average is $2.24.
* TD’s Tim James raised his TFI International Inc. (TFII-T) target to $135 from $125, topping the $110.85 average, with a “buy” rating.
* Stifel analyst Cole Pereira raised her target for Step Energy Services Ltd. (STEP-T) to $1.90 from $1.70 with a “hold” recommendation, pointing to “improving WCSB frac fundamentals” after a business update with its management team. The average on the Street is $2.07.
* Canaccord Genuity analyst Tania Gonsalves raised her Antibe Therapeutics Inc. (ATE-T) target to $15 from $14.50, exceeding the $14.55 average, with a “speculative buy” rating.
* Ms. Gonsalves trimmed her target for Burcon NutraScience Corp. (BU-T) to $6 from $6.50 with a “buy” rating. The average is $6.67.
David Leeder