Surrounded by a field of blooming canola, an oilfield pumpjack, belonging to Penn West, at work near Brooks, Alta.Larry MacDougal
Inside the Market's roundup of some of today's key analyst actions. This file will be updated often during the trading day so check back for new details.
Pengrowth Energy Corp. (PGF-T;PGH-N) is taking the "appropriate steps" toward protecting its balance sheet given the recent struggles in the commodity markets, said BMO Nesbitt Burns analyst Gordon Tate.
In response to the price downturn, the company announced it is cutting its annual dividend in half to 4 cents starting with the December payout. It's also suspended its dividend reinvestment and optional common share purchase plan. Other initiatives include targeting non-core asset sale of $600-million in 2015, staff reductions and other capital cost savings.
"The company's dividend cut appears to have been anticipated by investors and represents a pro forma yield of approximately 2.4 per cent," said Mr. Tate. "The company is also one of the best hedged E&P's in our coverage universe with [approximately] 78 per cent of crude oil hedged for [the second half] of this year and 64 per cent hedged next year at prices at or above $89 (Canadian) per barrel."
Mr. Tate maintained his "market perform" rating for the stock but lowered his target price due to weak commodity price fundamentals and the company's "above-average" debt levels. It moves to $3 from $3.50 (Canadian), compared to the consensus of $3.30.
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Buoyed by "impressive" momentum from its U.S. operations, Alimentation Couche-Tard Inc. (ATD.B-T;TD.A-T) reported "strong" first-quarter 2016 results on Tuesday, said Canaccord Genuity Derek Dley.
The retailer reported earnings per share of 53 cents, beating Mr. Dley's 50-cent estimate and the consensus projection of 46 cents.
"For the second quarter in a row, Couche-Tard reported U.S. merchandise same-store sales above 5 per cent, with same-store sales increasing 5.1 per cent during the quarter, which coupled with the[fourth quarter of 2015] is the strongest result we have seen from Couche-Tard since [the 2008 fiscal year]. Meanwhile, same-site fuel volumes increased by 9.4 per cent, the best result we have seen since [fiscal] 2006. Both Couche-Tard's legacy network and Pantry network significantly outperformed the general market, which exhibited organic demand growth of roughly 2-3 per cent."
Mr. Dley also expects "strong" second quarter results due to the company's U.S. fuel margin, which he estimates is 27 cents per gallon over the first four weeks of the quarter.
"Given the weakness in the commodity complex, we view Couche-Tard as a very attractive hedge to a weak oil price," he said.
The analyst added: "Meanwhile, Couche-Tard's balance sheet remains healthy, with [adjusted net debt/earnings before interest, taxes, depreciation, amortization and restructuring or rent costs] of 2.2 times, well below Couche-Tard's 3.0 times acquisition threshold, leaving management with [approximately] $2.8-billion of capital to put to use towards acquisitions. We believe the company will continue to search for accretive acquisition opportunities both in North American and Europe, providing investors with an upside catalyst alongside of steady organic growth."
Reiterating his "buy" rating for the stock, Mr. Dley raised his target price to $64 from $61 (Canadian). The analyst average is $63.36, according to Bloomberg.
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Penn West Petroleum Petroleum Ltd. (PWT-T) continues to make operational strides, according to RBC Dominion Securities analyst Greg Pardy, but the need to fix its balance sheet "will remain a market overhang for some time."
Mr. Pardy called the company's decision to cut its capital investment program, suspend its dividend and cut its workforce by 35 per cent "tough choices" necessitated by the "challenging" oil market and a leveraged balance sheet.
"In our view, Penn West is taking concrete steps to improve its operational focus and capital efficiency," he said, calling both 2015 and 2016 "challenging years"
Penn West announced it is reducing its capital program by 13 per cent (or $75-million) to $500-million in 2015, and, going forward, capital expenditures will be limited to funds from operation (on a full-year basis). It also reduced its production guidance for the year by 7 per cent.
The company also suspended its "modest" quarterly dividend of 1 cent, which is expected to save $20-million in annual cash outlays. It also expects to save $45-million annually from reducing its workforce by 400 works.
Mr. Pardy did not alter his "sector perform" rating for the stock, but he did reduce his price target by a dollar to $2 (Canadian). The analyst average is $1.22, according to Bloomberg.
"The multiples we have chosen reflect Penn West's turnaround stage and leveraged balance sheet in 2015," he said. "Although Penn West's principal risks revolve around commodity prices, project execution risk could also affect its production volumes."
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Credit Suisse analyst Edward Kelly said Dollar Tree Inc. (DLTR–Q) provided investors with a "disappointing" second-quarter update, noting "core sales momentum slowed, [Family Dollar Stores Inc.'s] transitional performance was soft, and management unexpectedly failed to provide any near-term earnings guidance."
Mr. Kelly said it is difficult to analyze the quarterly results given they include only a single month of earnings following the $9.2-billion merger of the Family Dollar chain, which was finalized in early July. He said he continues to view the execution risk on that transaction as "high" and believes the company will "struggle to digest and turnaround this asset."
"The significant negative impact of FDO was the larger surprise, as we believe most, including us, anticipated minimal dilution," said Mr. Kelly. "It appears that the shortfall was the result of sharp gross margin pressure related to the company's inventory/merchandising initiatives. We were also underwhelmed by management's unwillingness to provide updated 2015 guidance or back its prior first-full-year accretion estimate. While the company still sounds positive on the acquisition, the lack of near-term earnings visibility is disappointing and may weigh on the stock."
Mr. Kelly reduced his 2015 and 2016 earnings per share estimates to $2.88 and $3.90 from $3.36 and $4.23, respectively. Maintaining his "neutral" rating for the stock, he reduced his price target to $70 (U.S.) from $75. The average analyst price is $82.96.
Elsewhere, Feltl & Company analyst Brent Rystrom downgraded the stock to "buy" from "strong buy" and moved his target to $81.25 from $87.08. EVA Dimensions analyst Neil Fonseca downgraded his rating to "sell" from "hold."
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Enbridge's $30.4-billion drop-down of its liquids pipeline and renewable generation assets is a "game changer" for both Enbridge Income Fund, the operating company to which the assets were transferred, and its publicly traded holding company, Enbridge Income Fund Holdings Inc. (ENF-T), according to CIBC World Markets analyst Paul Lechem.
"The transaction is transformational for ENF and the Fund. The drop-down is over an order of magnitude larger than any prior transaction and provides significant organic growth over the coming years through completion of the development projects and volume-linked or contractually increasing returns, and by increasing ENF ownership in the assets over time," said Mr. Lechem.
In the wake of the move, the analyst estimates the Fund's cash flow outlook supports guidance of 10 per cent dividend per share cash compound annual growth rate (CAGR). That is above the 5-per-cent CAGR between 2004 and 2014.
"By transferring the assets to the Fund, Enbridge is seeking to raise up to $3-billion of equity through ENF, thereby reducing Enbridge's equity requirement," he said. "This facilitates Enbridge's higher dividend payout without increasing Enbridge's equity funding requirement (i.e., Enbridge increased its dividend 33 per cent in 2015, to be followed by 14–16-per-cent average annual dividend per share growth through 2018 versus prior 10–12-per-cent growth guidance)."
He added: "The dropped-down assets represent the core of Enbridge's business: the Canadian liquids pipelines, which remain the mainstay of Western Canada's crude oil transportation network," he said. "In addition to the assets dropped down in this transaction, there were also transferred a further $13-billion of associated assets under development and expected to enter service by 2017. We expect [approximately] 14-per-cent cash flow CAGR at the Fund through 2019 as these assets enter service, and from contractually increasing and/or volume-linked returns."
Mr. Lechem noted the "strong fundamental outlook" and "lower-risk" business model and called a price target of $40 (down from $41) "attainable." Consensus is $42.09.
He maintained a "sector outperformer" rating.
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In other analyst actions:
Adobe Systems Inc (ADBE-Q) was rated new "market perform" at Oppenheimer by equity analyst Brian Schwartz.
Antero Midstream Partners LP (AM-N) was rated new "buy" at Ladenburg Thalmann by equity analyst Eduardo Seda. The 12-month target price is $33 (U.S.) per share.
BB&T Corp (BBT-N) was raised to "outperform" from "neutral" at Robert Baird by equity analyst David George. The 12-month target price is $40 (U.S.) per share.
BCE Inc (BCE-T) was raised to "buy" from "hold" at TD Securities by equity analyst Vince Valentini. The 12-month target price is $59 (Canadian) per share.
Citizens Financial Group Inc (CFG-N) was raised to "buy" from "hold" at Sandler O'Neill by equity analyst R Scott Siefers. The 12-month target price is $27 (U.S.) per share.
PNC Financial Services Group Inc (PNC-N) was raised to "market perform" from "underperform" at Keefe Bruyette by equity analyst Christopher Mutascio. The 12-month target price is $101 (U.S.) per share.
PayPal Holdings Inc (PYPL-Q) was rated new "buy" at Argus by equity analyst Stephen Biggar. The target price is $42 (U.S.) per share.
Spin Master Corp (TOY-T) was rated new "outperform" at RBC Capital by equity analyst Sabahat Khan. The 12-month target price is $22 (Canadian) per share.
Wells Fargo & Co (WFC-N) was raised to "Buy" from "Hold" at Sandler O'Neill by equity analyst R Scott Siefers. The 12-month target price is $59 (U.S.) per share.
Deutsche Bank maintained a Hold rating on Ambarella Inc. (AMBA-Q) and lowered its price target to $85 (U.S.) from $100. The company reported solid second quarter earnings but its guidance was disappointing, analyst Ross Seymore said. Pacific Crest maintained its "overweight" rating on Ambarella with a price target of $123.
Imperial Capital reiterated its "outperform" rating on American Airlines Group (AAL-Q) after a strong quarter, but cut the price target to $65 (U.S.) from $73.
Piper Jaffray analyst Sean Naughton reiterated an "overweight" rating and $91 (U.S.) price target on Target Corp. (TGT-N), saying upcoming Star Wars merchandise releases and special Target in-store events could be a catalyst for continued toy sale momentum.
Hasbro Inc. (HAS-Q) was upgraded by Piper Jaffray to "overweight" from "neutral," following a recent pullback and expected benefits from the upcoming introduction of new Star Wars-themed toys.
Morgan Stanley upgraded General Mills Inc (GIS-N) shares to "equal weight" from "underweight," citing a more aggressive managing of costs.
AT&T Inc. (T-N) was upgraded to "buy" from "neutral" at Citigroup due to the recent pullback and potential upside from the company's recent acquisition of DirecTV.
With files from Jennifer Dowty and Bloomberg