Inside the Market’s roundup of some of today’s key analyst actions
“Bracing for the worst, hoping for the best,” Desjardins Securities analyst Benoit Poirier downgraded SNC-Lavalin Group Inc. (SNC-T) a day after it announced challenges stemming from both its Oil & Gas and Mining & Metallurgy segments.
Citing “unpredictable results,” Mr. Poirier was one of several equity analysts on the Street to downgrade the stock on Tuesday, moving his rating to “hold” from “buy.”
“While we continue to believe SNC’s valuation is attractive vs its peers, we anticipate that the stock will remain cheap until operational challenges and political risks associated with the business in Saudi Arabia are resolved,” he said. “In addition, we prefer to remain on the sidelines until we have better clarity on the divestiture of Highway 407.”
Before market open on Monday, the Montreal-based revealed its full-year 2018 financial results will be lower-than-expected, pointing to a major problem with a project in its mining and metallurgy unit as well as ongoing trading challenges in the Middle East and Saudi Arabia for its energy unit. The firm is now projecting earnings per share of between $2.15 to $2.30 in 2018, falling from $3.60 to $3.85 per share.
In reaction to that news, Mr. Poirier reduced his 2018 adjusted earnings per share projection for its Engineering & Construction (E&C) business to $1.22, versus management’s expectation of $1.15–1.30. His 2019 estimate fell to $2.15 from $3.00 (management has yet to provide guidance).
“Divestiture of Highway 407 remains a key catalyst for SNC — valuation must be fair for a transaction to materialize. SNC continues to work with various parties on the sales process for Highway 407 and hopes to progress on this opportunity prior to releasing 4Q18 results,” he said. “However, management reiterated that it would not proceed with a transaction if the price offered does not reflect the asset’s fair value. We would be disappointed if the deal is canceled as it remains the key catalyst for the story, in our view.
“[Free cash flow] generation capabilities will be negatively impacted by recent operational challenges. As a result, we anticipate that SNC’s balance sheet will deteriorate in 4Q18 to 2.5 times net recourse debt/adjusted EBITDA (still below covenant level of 3.25x)—an item to monitor.”
Alongside the downgrade, Mr. Poirier dropped his target for SNC shares to $47 from $72 given adjustments to his estimates and valuation multiples “to reflect operational challenges and uncertain outlook.” The average target on the Street is currently $49.67, according to Bloomberg data.
The company also received downgrades from the following analysts:
Raymond James’ Frederic Bastien, who moved it to “market perform” from “outperform” with a $45 target (from $58).
Mr. Bastien said: “With little to inspire us in the short-term — not even a valuation that defies logic — we downgrade the stock ... A better way to gain exposure to growing global infrastructure markets, in our view, is to be long WSP Global and trade Aecon Group at the right points of the cycle.”
Laurentian Bank Securities’ Mona Nazir, who moved it to “hold” from “buy” with a $40 target price (from $60).
Ms. Nazir: “Yesterday’s over 50-per-cent reduction in 2018 guidance took the market by surprise with the stock hitting a new 10 year low. The current issues within the Oil & Gas and Mining & Metallurgy segments are likely to negatively impact 2019 revenue/ EBIT performance, alongside reducing cash flow. In light of such events and the fact that M&A is put on hold (unchanged), the consolidated 2020 EPS target of $5.00 per share is effectively unrealizable. With the continued overhang of an impending trial, added uncertainty related to its Oil & Gas business and questions now surrounding risk mitigation practices, we believe that near to medium term upside is limited.”
BMO Nesbitt Burns’ Devin Dodge moved it to “market perform” from “outperform” with a $42 target (from $60).
Mr. Dodge: “Though valuation appears undemanding, we believe the lack of visibility into earnings performance and elevated financial leverage could keep a lid on the stock in the coming quarters.”
Conversely, CIBC World Markets’ Jacob Bout raised his rating to “outperform” from “neutral,” believing SNC’s E&C segment is now trading at a steep discount compared to its peers and the business should be worth more than $5 per share.
His target price fell to $49 from $56.
=====
Iamgold Corp.’s (IMG-T) announcement on Monday that it will not proceed with the construction of its Côté Gold project in Ontario should be viewed “positively” by investors, according to Desjardins Securities analyst Josh Wolfson, emphasizing it now sits in a more “favourable” financial position.
That led Mr. Wolfson to raise his rating for its stock to “buy” from “hold.”
“In our view, project development would have resulted in increased financial and development risk as well as an extended timeline to corporate FCF [free cash flow] generation (2024),” he said. “Following Côté’s deferral, we see IAMGOLD’s sizeable liquidity position, stable production and discounted valuation as positive differentiators.”
Mr. Wolfson said its analysis of the Côté project brought an internal rate of return (IRR) that he deems “insufficient” for a project of that scale.
“IAMGOLD’s announcement to delay development is inconsistent with recent management commentary, and the framing of its recent decision to complete a forward sale for 150,000 ounces of production in exchange for an upfront US$170-million is unusual (adding to its year-end elevated cash position of US$734-million),” he said.
“In 2018, sub-par Essakane heap leach returns were introduced and the project was subsequently deferred, weaker-than-expected Saramacca project criteria were introduced and Westwood’s ramp-up projections were revised negatively. In the context of assessing these implications as well as general business and financial risks, IAMGOLD’s decision to delay the Côté project is prudent. It is unclear if or when IAMGOLD might return to evaluating potential development.”
Calling its valuation “attractive” relative to its peers following the decision, Mr. Wolfson maintained a $6 target. The average on the Street is $6.92.
Elsewhere, BMO Nesbitt Burns analyst Andrew Kaip upgraded the stock to “outperform” from “market perform” with a target of $5, up from $3.75.
“With the announcement, we are of the view that the risk profile has changed, as the company targets incremental value additions, and works to gain a social licence for advancing the Cote Gold project under more appropriate market conditions,” said Mr. Kaip.
=====
Needham & Co. analyst Rajvindra Gill dropped his rating for Nvidia Corp. (NVDA-Q) by two notches on Tuesday in reaction to the chip maker’s reduced guidance for the coming fourth-quarter report.
After market open on Monday, the company cut its revenue estimate for the quarter to US$2.2-billion from US$2.7-billion, citing weaker-than-anticipated demand for its gaming chips in China and lower-than-expected data-centre sales.
Its stock fell 13.8 per cent on the day.
“Although the shares have fallen sharply, we believe end demand will deteriorate further in its core markets, gaming (54 per cent of sales) and data centre (25 per cent) driven by an ongoing deceleration in the Chinese economy,” Mr. Gill said.
He dropped the stock to “underperform” from “buy” and removed his target price of US$225 without specifying a new one. The average on the Street is currently US$184.45.
“We believe the stock’s P/E multiple will witness a ‘re-rating’ that will bring it closer to the overall group at 18-20 times,” said Mr. Gill.
Elsewhere, Morgan Stanley’s Joseph Moore lowered the stock to “equal-weight” from “overweight” with a US$148 target (from US$220), while DZ Bank AG’s Ingo Wermann dropped it to “hold” from “buy” with a US$140 target (from US$195).
Conversely, UBS upgraded the stock to “buy” from “neutral” with a target of US$180, falling from US$190.
“After a 3rd straight guide-down, we think NVDA is finally under-shipping demand and a new revision cycle is on the horizon,” said UBS' Timothy Arcuri.
=====
Believing expectations on the Street are now established for a “Q3 bottom,” RBC Dominion Securities analyst Mitch Steves raised his rating for Lam Research Corp. (LRCX-Q) to “outperform” from “sector perform,” pointing to an earlier-than-expected recovery.
“As noted in our initiation of coverage in June, we thought that 2019 would represent a down year and the 96-layer technology transition would be smoother than expected (but still a catalyst for Q3),” said Mr. Steves. “Looking at expectations today, the Street is modeling 3Q19 to represent the EPS floor but we see this as unlikely due to 1) buybacks, 2) 96-layer technology investment, 3) recovery in data center spending in 2H19, and 4) potential for CAPEX increases towards the back half of the year. While revenues could be down slightly on a year-over-year basis, we think EPS is protected by variable cost structure changes and buybacks alone.”
The analyst thinks current consensus expectations on the Street are “overly negative” and expects the third quarter to bring an “improving demand environment.”
“We’re updating our WFE model and now anticipate seeing $40-43-billion in annual spending in 2019 (current model at $43-billion as we await AMAT commentary),” said Mr. Steves. “This is largely in-line with LRCX’s reduction (implied $41-43-billion) as we think June quarter numbers will likely come in weaker but Sept. quarter and Dec. quarter will ramp up. Looking forward, we also believe that 2020 could see a notable increase in WFE spending as a supply/demand constraint reoccurs in memory. While the first half of 2019 is likely to be challenging, we think 2H19 should improve and 2020 will see growth as well. The major headwinds in our view would be: 1) overall macro environment - smartphone & data center demand, 2) China and U.S. trade tensions that have impacted valuations in the space, and 3) initial yields on 96-layer technology.”
Raising his 2020 earnings per share estimate to US$16.90 from US$14.68, Mr. Steves also increased his target for Lam shares to US$190 from US$160, which falls 9 US cents below the current average.
“Given the material reduction in expectations and new modeling for a Q3 trough, we think negativity is baked into the stock price at this time,” he said. “While we think we’re past the bottom, we note that semi-cap will remain cyclical and prefer to miss the first leg up (believe trough was in 4Q18) along with taking the first leg down to invest in the cycles effectively. Long-term we think the space can grow mid-high single digits through numerous up and down cycles.”
=====
In a separate research note released Tuesday, Mr. Steves upgraded his rating for Applied Materials Inc. (AMAT-Q) to “outperform” from “sector perform,” believing expectations may be “bottoming out.”
“We think expectations are now reset after the Lam Research conference call combined with Apple’s pre-announcement,” he said. “Based on Street models there are expectations for declines from Q1 of 2019 through Q3 of 2019 and we think this is overly severe. Even if there is weakness through Q3, we think 1) a memory supply/demand constraint could occur in 2020, 2) OLED demand could ramp up as early as Q4 - smartphone & TV rebound and 3) Data Center reinvestment could occur in the back half of the year after a digestion phase in 1H. Going forward, we believe the semi-cap equipment space will adjust its operations and prepare for 96-layer technology deployments in 2H19. Positively, we also believe there is a high possibility for supply/demand memory imbalance in 2020.”
Though he lowered his estimates for the next two fiscal quarters, Mr. Steves now sees sequential improvement earnings-wise in the October quarter.
“In the middle of last year, we believed that 2019 numbers would be down year-over-year and we think expectations now reflect this downward trajectory. Starting in Q3 of 2019, we anticipate the beginning of a soft and slow recovery.”
His target for Applied Materials shares rose to US$45 from US$38. The average is US$47.60.
=====
Desjardins Securities analyst Keith Howlett lowered his financial expectations for Cascades Inc. (CAS-T) ahead of the Feb. 28 release of its fourth-quarter financial results, pointing to ongoing issues with its Tissue Group.
On Monday after market close, the Kingsley Falls, Que.-based company said its quarterly results for the segment were “negatively impacted by several unforeseen non-recurring events,” including “difficult” market conditions and the impact of Hurricane Florence, a fire at its North Carolina facility, a third-party gas pipeline failure on the West Coast and operational issues at its St. Helens, Ore., mill.
“The tissue business has experienced a punishing period of rising input prices combined with minimal output price increases,” said Mr. Howlett. “To compound the above challenges, several transitory factors conspired to negatively affect 4Q18 results. We have reduced our tissue EBITDA estimate for 4Q by $4-million to zero. Major industry players have commenced increasing output prices, and input prices of NBSK and SOP have recently stabilized and slightly declined. We continue to expect the tissue business to turn by 2H19.”
Mr. Howlett’s EBITDA estimate for the fourth quarter fell to $125-million from $129-million, while his 2019 full-year projection dropped to $521-million from $524-million.
With a “buy” rating (unchanged), his target for Cascades shares dipped by a loonie to $14. The average is $13.25.
“The U.S. and Canadian tissue industry should turn upward in 2019,” he said. “Cascades is committed to the tissue segment and is in the midst of modernizing and optimizing its facilities.”
======
In other analyst actions:
Goldman Sachs analyst Neil Mehta downgraded Husky Energy Inc. (HSE-T) to “sell” from “not rated” with a $14 target, which falls beneath the consensus of $18.99.
Morgan Stanley analyst Benny Wong upgraded MEG Energy Corp. (MEG-T) to “overweight” from “equal-weight.”
TD Securities analyst Linda Ezergailis downgraded Fortis Inc. (FTS-T) to “hold” from “buy” with a $48 target, which is 65 cents less than the consensus.
Cormark Securities Inc. reinstated coverage of Algoma Central Corp. (ALC-T) with a “buy” rating with a $19 target. The average is $19.50.
MORE TO COME