Inside the Market’s roundup of some of today’s key analyst actions
Canaccord Genuity analyst Matt Bottomley lowered his rating for Cronos Group Inc. (CRON-T, CRON-Q) on Wednesday, pointing to both its current valuation and a “soft start” in the Canadian adult-use marijuana market.
In the wake of Tuesday's release of fourth-quarter results that "came in a bit light" to his "relatively low" expectations, Mr. Bottomley moved the Toronto-based company to "sell" from "hold."
"Since announcing a $2.4-billion strategic investment from Altria Group back in December, Cronos has seen its share price almost double as one of only two Licensed Producers (LPs) to receive a significant equity investment from a global strategic partner," he said. "As we believe CRON's valuation was somewhat stretched at Altria’s investment price of $16.25, we are lowering our recommendation primarily on valuation. However, in addition to its valuation, Cronos also reported Q4/18 financial results that we believe were fairly light in a period that represented the company’s first full quarter of recreational sales in Canada. CRON currently trades at 91.7 times our 2020 EV/EBITDA [enterprise value to earnings before interest, taxes, depreciation and amortization], which is a significant premium to even the leading large-cap players in the space at 40.0 times with significantly higher recreational market shares and greater near-term revenue visibility versus Cronos."
The producer reported net revenue for the quarter of $5.6-million, falling short of Mr. Bottomley's $6.6-million projection.
"Given the significant growth profile of the industry, we do not believe valuation should be materially impacted by near-term financial results," he said. "However, we note that CRON's first full quarter of recreational sales fell well behind its large-cap peer group, which reported net revenues that ranged from $21-million to $83-millionfor the same period. Finally, cash opex for Q4 came in at $10.8-million, resulting in an adjusted EBITDA loss of $7.9-million compared to our forecast loss of $3.2-million."
He now expects revenue and EBITDA for 2019 of $114-million and $22-million, respectively, falling from $178-million and $55-million. His 2020 estimates sit at $241-million and $87-million, down from $276-million and $107-million.
Mr. Bottomley maintained a target price for Cronos shares of $17. The average target on the Street is $21.32, according to Bloomberg data.
"Although we believe Cronos’ valuation has gotten ahead of its fundamentals, we also note that the company has compiled a number of strategic initiatives that could eventually unlock longer-term value, most notably; a partnership with Ginkgo Bioworks, which aims to produce targeted cultured cannabinoids; various international ventures; a supply agreement with Cura Cannabis; and a JV with MedMen aimed at securing retail opportunities in Canada," he said.
Elsewhere, Cormark Securities' Jesse Pytlak lowered Cronos to "market perform" from "speculative buy" with a $25 target, rising from $17.
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Though he sees more volatility ahead and doubts Boeing Co.'s (BA-N) stock “can work until it’s clear the MAX will fly again (could take weeks or months),” Citi analyst Jonathan Raviv thinks the risk/reward for investors “still skews positive.”
Upon coming off a research restriction in place since July of 2018, Mr. Raviv reiterated his "buy" rating for Boeing in a research report released Tuesday evening.
"Obviously, the near-term narrative is focused on getting the MAX back in the air following two tragedies," he said. "We don’t claim to know what happened or what will happen. But we offer context for thinking about various scenarios using our FCF [free cash flow] tool which lets you adjust production rates & profitability. Our low probability (5 per cet) downside case suggests a $220 stock based on lower 737 volume (from cancellations), margin & pricing. Our base case is a multiple-month grounding punctuated by a manageable fix; meaning the stock can resume its move into the $400s with a path more than $500."
"BA’s down 12 per cent since the 2nd tragedy and 17 per cent since early March all-time highs. It yields 7.2 per cent vs. 2019 FCF guide & 8.4 per cent vs. Citi 2020 estimates. While relatively cheap, it’s not distressed which could mean downside risk. But we’re encouraged that the market’s placing some confidence in a fix which is critical since 737 is 40 per cent of gross profit & the largest driver of cash growth through 2021."
Mr. Saviv thinks a "clear path to a fix" exists if the two crashes are linked, hence he emphasized the importance of the results of the Ethiopian Airlines crash of March 10.
"Amidst the headlines, keep in mind that little matters unless it impedes the MAX’ ability to fly again," the analyst said. "Everything else is timing: costs will be spread out & missed deliveries recovered.
"Our published estimates reflect what we know: there are no MAX deliveries in late March. So we have a 'normal' 9M19 assuming BA recovers lost sales & cash. But we include FCF sensitivities if the grounding lingers. Recent margin & cash results have put upward pressure on sustainable FCF per share where we now see $31 in 2020. That’s a $450 stock at 7-per-cent FCF yield; attractive considering less than 0.5 times leverage, 100-per-cent FCF returning to shareholders & multis at 5-7 per cent."
Mr. Raviv raised his target to US$450 from US$415. The average is US$438.42.
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Shares of Kinder Morgan Inc. (KMI-N) are currently “fairly valued with growth opportunities looking balanced against downside risk to existing assets over the near-term,” said Citi analyst Mirek Zak, leading him to downgraded his rating to “neutral” from “buy.”
"KMI shares have reached our target price, handily outperforming the rest of the space up 30 per cent year-to-date vs Alerian’s AMUS Index at 18 per cent, and one of the best performing midstream stocks so far this year," said Mr. Zak. "We believe this was partly driven by both an increased level of investor comfort around KMI’s expected project backlog returns as well as having garnered the attention of a broader investor base looking for assets with U.S. natural gas midstream exposure."
Mr. Zak maintained a US$20 target for Kinder Morgan shares. The average on the Street is US$21.48.
"KMI has come a long way over the past few years having reduced leverage, deployed capital in a more disciplined manner, and focusing on its core competency of natural gas infrastructure," the analyst said. "We applaud KMI’s ability to contract not one but two Permian gas pipelines projects at attractive multiples, thanks to its existing intrastate network, but believe it may be some time before other such organic opportunities of scale materialize. Along these lines, based on our assumption of a “leaner” backlog post 2020, we view a sustainable dividend growth rate in the low single-digits post 2021. Also, risks around existing assets including pipeline re-contracting & tariffs, an updated FERC liquids indexation methodology, Jones Act vessel charters, and EOR production levels may pose some headwinds over the near-term."
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Although he’s been bullish on new media companies in the past based on “lacklustre” organic revenue trends, Citi analyst Jason Bazinet upgraded New Media Investment Group Inc. (NEWM-N), a New York-based holding company for 686 publications across 37 U.S. states, seeing a balanced risk-reward proposition for investors.
"In the most recent quarter, year-over-year organic revenue declined by over 6 per cent," he said. "We expect this trend to persist in early 2019.
"Although pressure on New Media’s top-line has endured, M&A has enabled the firm to maintain a fairly steady EBITDA and free cash flow."
Moving the stock to "neutral" from "sell," Mr. Bazinet emphasized New Media's "robust" dividend yield, noting: "Over the past four years, New Media has raised the dividend. The combination of a higher dividend and a falling stock price means New Media’s dividend yield is now almost 14 per cent. To us, that suggests investors are nervous about the sustainability of the dividend. In tandem, management may be frustrated that New Media’s equity value seems untethered from the dividend payment. (Recall, New Media typically raises capital via share issuance to fund M&A.)."
"We see three potential paths going forward: 1) New Media maintains the dividend and continues to pursue M&A. We estimate the dividend payout ratio is 75 per cent and the equity is worth $10. 2) New Media maintains the dividend and stops M&A. Similar to option #1, we estimate the payout ratio is 75 per cent and the equity is worth $10. 3) New Media cuts the dividend. Under this scenario, we expect the equity to rally (since the payout ratio will fall to more sustainable levels), allowing New Media to use post-dividend FCF for M&A."
Mr. Bazinet lowered his target for the stock to US$10, which is the current consensus, from US$12.
“While we are lowering our target price from $12 to $10 (still akin to 5 times EV-EBITDA), with the prevailing dividend, we no longer see downside risks over the next 12 months,” he said. “But, if the firm cuts the dividend, the equity may rally. As such, we no longer believe a Sell rating is warranted.”
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Though the wind down of a wholesale distributor prompted Gildan Activewear Inc. (GIL-N, GIL-T) to lower 2019 earnings guidance, RBC Dominion Securities analyst Sabahat Khan does not view the move as “a material headwind over the longer-term as that volume will likely be absorbed by other distributors.”
On Tuesday after market close, the Montreal-based apparel maker announced it expects to take a charge of approximately US$19-million to US$23-million in the first quarter of 2019 related to the impairment of a trade receivable from Heritage Sportswear, one of the company’s U.S. distributors within its imprintables segment. On March 26, after unsuccessful ongoing efforts to sell Heritage, the receiver appointed to administer the Heritage business filed a motion in court for approval of the wind down of Heritage’s operations and sale of its assets by liquidation.
With the move, Gildan lowered its adjusted earnings per share guidance for the first quarter to a range of 14 US cents to 16 US cents from 24 US cents to 26 US cents previously. Its full-year guidance is now US$1.90 to US$2 (from US$2 to US$2.10).
“Gildan noted that Heritage represented $60-million in sales in 2018; however, the company expects these sales to be ‘mostly’ absorbed by other wholesale distributors,” said Mr. Khan. “As a result, Gildan is not revising its full year sales guidance. We do, however, view some risk to the sales outlook and have reflected this risk in our forecasts.”
"On the near-term, we do expect some disruption in the distributor channel during the liquidation as other distributors potentially take a more cautious view on their inventories/replenishment. Given the 'non-recurring' nature of this charge, we are not necessarily concerned about the earnings impact in the quarter, but rather the potential for near-term disruption in the distributor channel."
Citing that potential for disruption, Mr. Khan lowered his full-year EPS estimate by 13 US cents to US$1.93. His 2020 projection dropped 4 US cents to US$2.13.
Maintaining a "sector perform" rating, his target for Gildan shares fell to US$33 from US$34. The average is US$35.54.
Elsewhere, despite lowering his own earnings forecast, Desjardins Securities' Keith Howlett raised his target to $48 from $46 with a "hold" rating (unchanged).
Mr. Howlett said: "Gildan continues to intensify its focus on the growing and higher-margin components of its business, being fashion basics, international printwear markets, contract manufacturing for lifestyle brands, private label for mass merchants and e-commerce. The actions taken over the last 18 months are expected to bear more fruit in 2H FY19. Management had already guided that 1Q results would be relatively weak within the context of EPS growth for the year of 10 per cent. Impairment of a receivable will now amplify the 1Q weakness."
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In other analyst actions:
Scotiabank analyst Trevor Turnbull upgraded Guyana Goldfields Inc. (GUY-T) to “sector outperform” from “sector perform” with a $2 target, which falls 39 cents below the consensus.