1. business and industrial

EQUITY RESEARCH
CANADIAN RESEARCH AT A GLANCE
January 9, 2015
Price Target Revisions
! Postmedia Network Canada Corp.
! Surge Energy Inc.
! Valeant Pharmaceuticals
Summary
1Q - Underlying EBITDA below our forecast; Awaiting approval of Sun Media deal
Summary
Lowering target on conservative H1/15 budget and 50% dividend cut
Summary
2015 Setting Up to Be Another Solid Year with Several Capital Deployment Options
Summary
Revised 2015 Capex; Growth Maintained
Summary
Ambatovy 2014 production at low end of guidance; focus on ramp-up in 2015
Summary
2015 Guidance Ahead of Expectations, Jublia Forecasts Increase as Expected
Summary
Further gains expected in 2015
Summary
Platreef Phase 1 PFS supports economics of previous PEA
Summary
Q4 production misses guidance
Summary
Rx for stable growth: Q3 light due primarily to stock-based comp, outlook unchanged
Summary
Paying for the Rx:Q3/F15 light due primarily to stock-based comp, outlook unchanged
Summary
Metals & Mining/Golds
Summary
PXT; CNE; GPX; PMO; TLW
Summary
Airfreight & Surface Transportation
Summary
December 2014
International
First Glance Notes
! Parex Resources Inc.
! Sherritt International Corp.
! Valeant Pharmaceuticals
International
Company Comments
! Detour Gold Corporation
! Ivanhoe Mines Ltd.
! Teranga Gold Corporation
! Jean Coutu Group (PJC) Inc.
! Jean Coutu Group (PJC) Inc.
Industry Comments
! 2015 New Year Preview
! RBC International E&P Daily
! The Weekly Haul
Quantitative Research
! Attributions
Technical Research
! Does the first trading day, week or
!
!
Summary
month have any year-end 'predictive
value'?
Macro Technical Update – Waiting Summary
for Small-caps to ‘break-out’
US Sector Review – Consumer,
Summary
Healthcare and Technology Ideas In
Focus
! - Action-Oriented Research
Priced as of prior day's market close, EST (unless otherwise noted).
For Required Non-U.S. Analyst and Conflicts Disclosures, see Page 13.
EQUITY RESEARCH
U.S. RESEARCH AT A GLANCE
January 9, 2015
Ratings Revisions
! Advance Auto Parts, Inc.
! Calpine Corporation
! CMS Energy Corp.
! Edison International
! Exelon Corporation
! Noble Corp. PLC
! O'Reilly Automotive, Inc.
! Pinnacle West Capital Corp.
! Rowan Companies plc
! Unitil Corporation
! Xcel Energy Inc.
Summary
Downgrading to Outperform from Top Pick given strong 2014 performance; no drama
Summary
Reaping the Fruits of Labor; Upgrading to Outperform
Summary
It's Been a Great Ride; Downgrading to Sector Perform
Summary
Steady Edi High Single-Digit Growth; Upgrading to Outperform
Summary
Catalyst-Driven 2015; Upgrading to Outperform
Summary
Upgrading to Outperform
Summary
Downgrading to Sector Perform from Outperform; margin expansion likely to slow, valuation robus
Summary
Time to Slow Down; Downgrading to Underperform
Summary
Downgrading to Sector Perform
Summary
Trading Ahead of Itself; Downgrading to Underperform
Summary
Collateral Damage to Negative Sector Call; Downgrade to Sector Perform
Summary
Raising PT to $17: Doc Surveys Highlight S-ICD/Synergy Share Gain Potential
Summary
Tough start to the new fiscal year; shareholders won’t stick around without a deal
Summary
FQ2/15 continues a strong FY15; beats by $0.05 raises guidance
Summary
2015 Setting Up to Be Another Solid Year with Several Capital Deployment Options
Summary
Spinning out Specialty Chemicals
Summary
STZ shares higher? No problemo; Reiterate Top Pick
Summary
FSL reduces debt and cash, increasing our 2015 EPS estimates
Summary
Battens Down The Hatches With 50% Reduction In 2015 Budget
Summary
Q4 earnings preview and cheat sheet: Reducing Estimates
Summary
Q4 earnings preview and cheat sheet: reducing 2015 estimates
Summary
Sales update; Goodbye, Troy...for now
! 2015 New Year Preview
! 2015 Outlook: Health Care Services
! 2015 Power & Utility Best Ideas
Summary
Metals & Mining/Golds
Summary
Outlook and sector operating trends snapshot
Summary
Shifting to Dereg. from Reg.; YieldCos Best Upside
!
! RBC International E&P Daily
! The Weekly Haul
Summary
2015 Outlook: Picking our spots amid global volatility
Summary
PXT; CNE; GPX; PMO; TLW
Summary
Airfreight & Surface Transportation
Price Target Revisions
! Boston Scientific Corp.
! Family Dollar Stores, Inc.
! Global Payments Inc.
! Valeant Pharmaceuticals
International
First Glance Notes
! MeadWestvaco Corp.
Company Comments
! Constellation Brands, Inc.
! Freescale Semiconductor
! Halcon Resources Corporation
! Intel Corporation
! SanDisk Corporation
! Starbucks Corporation
Industry Comments
Portfolio
Global Consumer Staples
2
EQUITY RESEARCH
! US E&P Valuation Weekly
Summary
Expect Continued Volatility In 1H15, 2H15 Could See A Big Rally
Technical Research
! Does the first trading day, week or
!
!
Summary
month have any year-end 'predictive
value'?
Macro Technical Update – Waiting Summary
for Small-caps to ‘break-out’
US Sector Review – Consumer,
Summary
Healthcare and Technology Ideas In
Focus
In-Depth Reports
! 2015 Hardline Retail Outlook
! SVB Financial Group
Summary
Key stock thoughts in the Hardline Retail space
Summary
VC Financing and Exit Activity Ends Year On Strong Note
3
EQUITY RESEARCH
UK & European Research at a Glance
January 9, 2015
Price Target Revisions
! Banco Santander SA
Summary
A Welcome Capital Increase
Summary
Q4 IMS - due 13 Jan 2015E; Hays' statement provides encouragement
Summary
Metals & Mining/Golds
Summary
Another positive for the US consumer
Company Comments
! Michael Page International PLC
Industry Comments
! 2015 New Year Preview
! RBC European consumer staples
Find our Research at:
RBC Insight (www.rbcinsight.com): RBC's global research destination on the web. Contact your RBC Capital Markets' sales representative to
access our global research site, or use our iPad App "RBC Research"
Thomson Reuters (www.thomsononeanalytics.com)
Bloomberg (RBCR GO)
SNL Financial (www.snl.com)
FactSet (www.factset.com)
4
Price Target Revisions
Postmedia Network Canada Corp.(TSX: PNC.B; 1.88; TSX: PNC.A)
Haran Posner (Analyst)
(416) 842-7832; haran.posner@rbccm.com
Drew McReynolds, CFA, CA (Analyst)
(416) 842-3805; drew.mcreynolds@rbccm.com
52 WEEKS
10JAN14 - 02JAN15
3.00
2.70
2.40
Rating:
Underperform
Risk Qualifier: Speculative Risk
Price Target: 1.25 ▼ 1.50
1Q - Underlying EBITDA below our forecast; Awaiting approval of Sun Media
deal
Despite our positive view of the Sun Media acquisition (pending Competition
Bureau approval, management is hoping to close the transaction in calendar
1Q15), we remain on the sidelines awaiting an improvement in revenue visibility.
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EBITDA Prev.
130.4
109.5
134.9↑
132.8
183.5↓
186.3
2013A
2014A
2015E
2016E
All values in CAD unless otherwise noted.
Surge Energy Inc.(TSX: SGY; 3.02)
Shailender Randhawa, CFA (Analyst)
(403) 299-6576; shailender.randhawa@rbccm.com
Keith Mackey, CFA (Associate)
403 299 6958; keith.mackey@rbccm.com
52 WEEKS
Rating:
Price Target:
17JAN14 - 05JAN15
Sector Perform
4.00 ▼ 5.00
Lowering target on conservative H1/15 budget and 50% dividend cut
In our view, Surge Energy's conservative $22 million H1/15 capital guidance
and 50% dividend cut are necessary given the challenging commodity price
environment. However, we've reduced our target price on Surge's shares from
$5.00 to $4.00 due to above-average financial leverage, and a lower production
outlook with targeted capex set below maintenance levels.
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• Modest downward estimate revisions. We have made changes to our forecast
mostly to reflect (i) slightly lower print advertising revenue growth, partially
offset by higher digital growth; (ii) higher compensation costs, offset by lower
distribution expenses (with lower fuel prices providing ~$2MM in annual savings)
and our assumed $8MM annual benefit relating to digital tax credits (beginning
F2016E); and (iii) a larger rights issue (~$174MM) and higher pro-forma shares
outstanding (~198MM) as the conditional sale of the Calgary Herald facility has
not materialized. While our F2015E EBITDA estimate increases from $133MM
to $135MM (including $13.8MM in retroactive digital media tax credits), our
F2016E EBITDA estimate decreases from $186MM to $183MM. Our price target
decreases to $1.25.
• Underlying 1Q results modestly below our forecast. In the seasonally important
1Q period, revenue of $170MM was largely in-line with our $172MM estimate
(-12.6% YoY), but normalized EBITDA of $32MM (excluding $13.8MM of
retroactive tax credits) was shy of our $38MM forecast (-30.8% YoY). Net debt/
EBITDA increased to 4.4x at the and of the quarter (versus our 4.3x estimate and
4.2x in 4Q).
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Cash Flow Prev.
120.2
241.2↓
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All values in CAD unless otherwise noted.
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• Lowering production estimate by 5%. We have lowered our 2015 production
outlook from 20,250 boe/d to 19,250 boe/d to reflect the Company's H1/15
guidance of 20,000 boe/d. Our corresponding CFPS decreases by 7% to $0.79 in
2015, and 35% YoY. Surge's $22 million capital budget includes drilling a mere 3.8
net wells, likely below its PUD commitments. For the back half of 2015, we've
assumed $58 million capital spending based on RBC's improving commodity price
outlook. Surge plans to issue formal guidance for the second half of the year in
July.
• Discounted NAV multiple reflects higher leverage. Surge trades at a 2015E EV/
DACF multiple of 7.8x (vs. dividend-paying peers at 7.5x) and a P/NAV ratio of
0.5x (vs. peers at 0.8x) at RBC's price deck.
• Maintain Sector Perform rating, with a revised $4.00 price target. Our 12-month
price target is driven by our expectation of Surge executing its H1/15 business
plan, above average financial leverage, with a total return proposition weighted
to the dividend yield. Our price target reflects a 0.6x multiple of the $6.22/
5
share sum of our adjusted base NAV of $5.57 plus $0.79 from risked resource
development.
Valeant Pharmaceuticals International(NYSE: VRX; 154.10; TSX: VRX)
Douglas Miehm (Analyst)
(416) 842-7823; douglas.miehm@rbccm.com
Fred Garcia (Associate)
(416) 842-7876; fred.garcia@rbccm.com
52 WEEKS
Rating:
Price Target:
17JAN14 - 05JAN15
150.00
144.00
138.00
Outperform
188.00 ▲ 173.00
2015 Setting Up to Be Another Solid Year with Several Capital Deployment
Options
Valeant's 2015 guidance exceeded our expectations and consensus. We should
not be surprised considering the well-diversified nature of the business and
the success associated with the pipeline and recent launches. Several capital
deployment options exist and point to further upside. M&A remains a strategic
objective but there appears to be less urgency for a large deal at this time.
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EPS, cash Diluted Prev.
2013A
6.21
2014E
8.34↑
8.31
2015E
10.37↑
9.98
2016E
12.54↑
11.90
All values in USD unless otherwise noted.
• Total revenues expected to be $9.2–9.3B. 2015 total revenues guidance is set
at $9.2–9.3B, slightly ahead of prior disclosures of ~$9.1B, our previous $9.1B
forecast, and consensus of $9.05B (Bloomberg 18 analysts: range $8.69–9.25B).
Organic growth in the ~10–12% range is led by Jublia (~$300–400MM and
another ~$250–300MM from other key product launches).
• Cash EPS between $10.10 and $10.40 also ahead of expectations. Cash EPS
guidance for 2015 of $10.10–10.40 is a bit ahead of prior disclosures of ~$10.00,
our previous $9.98 forecast, and consensus of $9.99 (Bloomberg 18 analysts:
range $9.68–10.40).
• Q4/14 guidance updated. Revenues in Q4 are forecast to be ~$2.2B vs. the prior
range of $2.1–2.3B. Cash EPS in Q4 is anticipated to be >$2.55 vs. the prior range
of $2.45-2.55. A negative FX impact of ~$50MM or ~$0.10/sh is expected. Jublia
sales for the quarter should be >$50MM (annualized run rate of >$200MM).
• Mr. Pearson extends contract to 2020 with only incentive awards. One item
not in the presentation but announced during the call was Mike Pearson's
contract. He agreed to a new five-year contract ending in 2020 (prior ended in
2017) whereby he forgoes his base salary and will only be paid in stock. If VRX
shares do not gain at least 10% per year over the next five years, he will not
receive a payout. This should signal to investors his long-term commitment to the
business, alignment with shareholders, and belief that the shares are significantly
undervalued.
First Glance Notes
Parex Resources Inc.(TSX: PXT; 6.31)
Nathan Piper (Analyst)
+44 131 222 3649; nathan.piper@rbccm.com
Haydn Rodgers, CA (Associate)
+44 131 222 4911; haydn.rodgers@rbccm.com
52 WEEKS
Rating:
17JAN14 - 05JAN15
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Outperform
Revised 2015 Capex; Growth Maintained
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Reduced Capital Spend: Parex has announced given current Brent oil prices, 2015
Capex will be reduced from the initial $300m guidance (provided in November
assuming $85/bbl Brent) to $145-155m (now based on $50-$60/bbl Brent). This
reduction preserves balance sheet strength (debt free end Q3/14) and underlines
the flexibility of its portfolio onshore central Colombia. Investment will be funded
from cash flow maintaining Q4/14 production levels of 26,500b/d through 2015
(18% y-o-y growth). Spending is split $75m maintenance (including six development
wells focused on Block LLA-34) and $75-80m growth spending on exploration
drilling commitments (eight wells) and the first well on the Capachos Block (farmin deal signed with Ecopetrol).
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All market data in CAD; all financial data in USD.
Fraser Phillips, P.Eng. (Analyst)
(416) 842-7859; fraser.phillips@rbccm.com
Sherritt International Corp.(TSX: S; 2.68)
6
Rating:
Melissa Oliphant (Associate)
416 842 4126; melissa.oliphant@rbccm.com
52 WEEKS
17JAN14 - 05JAN15
4.50
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All values in CAD unless otherwise noted.
Rating:
17JAN14 - 05JAN15
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Outperform
2015 Guidance Ahead of Expectations, Jublia Forecasts Increase as Expected
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• December production from Ambatovy came in below our estimates but
improved MoM as expected: The 40%-owned Ambatovy Joint Venture produced
3,254t of nickel and 189t of cobalt on a 100% basis in December, with ore
throughput in the PAL circuit at a record 83% of nameplate capacity and nickel
production at 64% of nameplate capacity. Nickel and cobalt production improved
by 17% and 13% respectively MoM, following planned maintenance that affected
production in November. However, nickel and cobalt production declined by 16%
and 44% from the record levels achieved in October due to maintenance that
continued into December.
• Full-year production met the low end of guidance: 2014 production guidance
for Ambatovy was 37,000-41,000t of nickel and 2,700-3,100t of cobalt. Actual
production of 37,053t of nickel met the low end of guidance, while cobalt
production of 2,915t came in mid-range. Production missed our annual estimates
as the December result did not return to October levels as required to meet our
forecasts.
• Key target is reaching 90% of finished metal capacity in 2015: Maintenance of
one autoclave is slated for February, which we expect will hinder the targeted
ramp-up of production. However, Sherritt's focus is to achieve nickel production
of 90% of the 60ktpa nameplate capacity over a period of 90 out of 100 days by
mid-2015 in order to meet project financing completion tests by the deadline of
September 2015. If financial completion can be achieved, project debt of $2.1B
will become non-recourse to the partners.
Valeant Pharmaceuticals International(NYSE: VRX; 145.12; TSX: VRX)
Douglas Miehm (Analyst)
(416) 842-7823; douglas.miehm@rbccm.com
Fred Garcia (Associate)
(416) 842-7876; fred.garcia@rbccm.com
52 WEEKS
Outperform
Ambatovy 2014 production at low end of guidance; focus on ramp-up in 2015
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• Few surprises in 2015 outlook. As we stated in our preview note, we anticipated
few surprises in VRX's 2015 guidance considering the recent (November 2014)
financial disclosures during the AGN courtship. That said the revenues and cash
EPS guidance for 2015 was slightly ahead of our and consensus expectations.
The negative impact associated with foreign exchange and generics appears
to be manageable ($300MM and $0.47/sh) and is largely offset by ~$500MM
of revenues expected from key launch programs (Jublia, Ultra, Luza, RAM,
Onexton).
• Total revenues expected to be $9.2-9.3B vs. $9.05B consensus. Management is
calling for 2015 total revenues of $9.2-9.3B, slightly ahead of prior disclosures of ~
$9.1B, our $9.1B forecast and consensus of $9.05B (Bloomberg 18 analysts: range
$8.69–9.25B). Organic growth levels are expected to be in the ~10-12% range
led by a Jublia forecast that was increased to ~$300MM-$400MM (we believe)
from ~$225MM due to a stronger-than-anticipated launch uptake. The negative
headwind from FX and generics is expected to be ~$300MM and <$200MM,
respectively.
• Cash EPS~$10.10-10.40 also ahead of expectations. Cash EPS guidance for 2015
of $10.10-10.40 is slightly ahead of prior disclosures of ~$10.00, our $9.98
forecast and consensus of $9.99 (Bloomberg 18 analysts: range $9.68–10.40).
Relative to our forecasts, the variance appears to be driven by lower R&D
investments of ~$250MM (vs. ~$280MM RBC forecast), and higer gross margins
of ~75% (vs. ~72% RBC forecast). Adjusted cash flows expected to be >$3.1B
(~90% cash conversion).
Company Comments
Dan Rollins, CFA (Analyst)
(416) 842-9893; dan.rollins@rbccm.com
Mark Mihaljevic (Associate)
(416) 842-3804; mark.mihaljevic@rbccm.com
Detour Gold Corporation(TSX: DGC; 10.89)
Rating:
Outperform
Risk Qualifier: Speculative Risk
7
52 WEEKS
17JAN14 - 05JAN15
Price Target:
15.00
Further gains expected in 2015
14.00
12.00
We expect Detour's shares could appreciate further in 2015 as operational/financial
gains are achieved, project risk declines, and investors grow more confident in the
company’s underlying cash flow potential. Although Detour has started the year off
on a strong note, we expect the company's shares could continue to re-rate higher.
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EPS, Adj Diluted
2013A
(0.55)
2014E
(0.52)
2015E
(0.28)
2016E
0.11
P/E
81.3x
All market data in CAD; all financial data in USD; dividends paid in
CAD.
Ivanhoe Mines Ltd.(TSX: IVN; 1.10)
Fraser Phillips, P.Eng. (Analyst)
(416) 842-7859; fraser.phillips@rbccm.com
Steve Bristo, CFA (Associate)
(416) 842-7826; steve.bristo@rbccm.com
Thomas Klein (Associate)
(416) 842-5339; thomas.klein@rbccm.com
2.00
1.80
52 WEEKS
Rating:
Outperform
Risk Qualifier: Speculative Risk
Price Target: 2.50
Platreef Phase 1 PFS supports economics of previous PEA
17JAN14 - 05JAN15
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EPS, Adj Diluted
2013A
(0.34)
2014E
(0.24)
2015E
(0.19)
2016E
(0.07)
All market data in CAD; all financial data in USD.
• Detour appears well positioned to deliver further operational gains and increased
cash flow in 2015. Higher production is expected to be driven by increased
throughput while cash costs are expected to benefit from economies of scale,
lower fuel prices and a weaker Canadian dollar.
• Mill expected to achieve steady state throughput in early-2015: With 12%
higher throughput expected and flat grades, we forecast annual production of
516 Koz in 2015, up 12% from our forecast of 459 Koz last year.
• Cash costs expected to benefit: Based on our commodity/currency assumptions,
total and all-in sustaining cash costs are forecast to decline 8% and 13%
respectively, year-over-year given increased production, reduced level of
contractors on-site, productivity improvements, lower fuel prices and a weaker
Canadian dollar.
• Improved mining rates key to maximizing cash flow: In our view, the biggest risk
to Detour maximizing cash flow this year will be the company’s ability to deliver
improved mining rates following a number of challenges in 2014.
• Number of initiatives could enhance value proposition: Detour is evaluating
a number of initiatives, which could enhance the overall value of Detour Lake,
including regional exploration, development of Block A, extraction of barren
pebbles from the milling circuit, segregation of fines, and heap leaching of lowgrade material.
• Well positioned to outperform again in 2015
• Detour remains a preferred precious metal investment entering 2015 as we
expect ongoing operational and financial gains to lead to a further re-rating of
the company’s shares.
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The Platreef Phase 1 pre-feasibility study (PFS) supports the results of the
preliminary economic assessment (PEA). The PFS is neutral to our view with a
lower net cash cost being offset by slightly higher total capital spending and
lower production versus the PEA. We have adjusted our NAV to reflect just the
Phase 1 development to take a more conservative approach in the current poor
commodity and mining share environment. The resource base and Phase 2 and 3
developments hold significant upside potential beyond Phase 1 and our current
valuation.
• Ivanhoe released the results of its Platreef Phase 1 pre-feasibility study
(PFS) and an initial reserve estimate: An optimization study is currently being
completed by Whittle Consulting focused on mine scheduling in order to increase
cash flow. The results of the study are to be used in the Phase 1 feasibility study,
which the is scheduled to begin in Q2/15. The company also plans to begin a PFS
on the 8 Mtpa Phase 2 in the near future.
• Cash costs expected to be lower than estimated in PEA: Ivanhoe now estimates
that the life-of-mine (LOM) average cash cost will be $322/oz 3PE+Au versus
$367/oz 3PE+Au in the PEA.
• Annual production lower as a result of lower grades and recoveries
• Pre-production capital cost estimate lowered; but total capex increased slightly
8
• NPV of project basically unchanged: The company estimates that the after-tax
NPV of the project is $972 million using an 8% real discount rate, versus our
estimate of $982 million and $897 million in the PEA.
• Sufficient capital on hand for 2015 development at Platreef: The Platreef
development work in 2015 will be focused on the sinking of Shaft No. 1.
• Conference call: The company will host a conference call on Friday, January
9 at 9:00 a.m. ET to discuss the details of the PFS. Dial-in: 800-355-4959 or
416-340-2216.
Teranga Gold Corporation(TSX: TGZ; 0.48; ASX: TGZ)
Jonathan Guy (Analyst)
+44 20 7653 4603; jonathan.guy@rbccm.com
Richard Hatch, ACA (Analyst)
+44 20 7002 2111; richard.hatch@rbccm.com
1.20
52 WEEKS
Rating:
Price Target:
17JAN14 - 05JAN15
Sector Perform
0.80
Q4 production misses guidance
TGZ produced 71koz in Q4, a beat vs. our 68koz but below company guidance of
75koz. Record plant throughput was set off by weaker reconciliation. TGZ ended
December with US$35.7 million in cash & equivalents, in line with RBC.
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EPS, Adj Diluted Prev.
2013A
0.18
2014E
0.02↑
0.01
2015E
0.11
2016E
0.18
P/E
2.2x
25.7x
3.6x
2.3x
Q4 production 71koz vs RBC 68koz: Teranga has reported Q4 production of 71koz,
which is better than our 68koz forecast (and up 47% qoq) but below revised
guidance of 75koz. Despite record quarterly mill throughout of 1mt which was aided
by the processing of softer Masato ore, lower recovery rates tempered production
vs. management forecasts. This brings FY14 production to 212koz; again a touch
better than our 209koz forecast, but below revised guidance of 215koz. Colour
on costs (guided to US$725/oz for cash costs and US$900/oz for AISC) will be
released with the financial results. We expect the company to provide an update
on the grade reconciliation problem which has impacted production for FY14 with
its financial results during w/c 16 February.
All market data in CAD; all financial data in USD.
Jean Coutu Group (PJC) Inc.(TSX: PJC.A; 25.83)
Irene Nattel (Analyst)
(514) 878-7262; irene.nattel@rbccm.com
Martin Gravel, CFA (Associate)
(514) 878-7264; martin.gravel@rbccm.com
Alex Carette (Associate)
(514) 878-7254; alexandre.carette@rbccm.com
52 WEEKS
Rating:
Price Target:
Sector Perform
28.00
Rx for stable growth: Q3 light due primarily to stock-based comp, outlook
unchanged
17JAN14 - 05JAN15
28.00
26.00
24.00
22.00
Putting aside the EPS shortfall due to stock-based compensation expense, Q3
results underscore the stability of PJC's business model and the challenge of driving
growth in the retail segment in the current environment. EPS $0.30 (flat), shy of
forecast/consensus $0.33/$0.32 due to estimated $0.02/share increase in stockbased comp expense.
20.00
2500
2000
1500
1000
500
J
F
M
Close
A
M
J
2014
J
A
S
O
N
D
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
EPS, Ops Diluted Prev.
2014A
1.10
2015E
1.19
2016E
1.33↓
1.34
2017E
1.45↓
1.46
All values in CAD unless otherwise noted.
P/E
23.5x
21.7x
19.4x
17.8x
J
• Q3 results highlight stability of PJC's business model but underscore the
challenge of generating growth in earnings from Franchising in this mature
segment still facing intense competitive activity. Revenue trends were
consistent with prior quarter, reflecting decelerating pace of growth in generic
drug price deflation and generic penetration and investment in pricing/promo to
drive front of store.
• Hoping for some wiggle room on Bill 28: Negotiations are underway with the
Ministry in an endeavour to soften the blow and final terms of the Bill are
expected to be announced by early May. While the industry remains hopeful that
the government will moderate its planned $177 MM/$100,000 per pharmacy
reduction in pharmacist remuneration, our calculations suggest that the changes
as currently proposed would not have a material impact on PJC as they are
designed to hit directly at the pharmacist level. That said, PJC could choose to
"share the pain" as it has done in the past.
9
• Still very interested in acquisitions but M&A opportunities remain elusive:
While PJC is well positioned to fund M&A, overall dynamics in PJC's core region of
QC remain relatively favourable for independent pharmacists, who continue to
earn a very solid living and are in no hurry to sell. Nonetheless, implementation
of Bill 28 in its current form could see heightened interest from independents in
joining the PJC network.
Jean Coutu Group (PJC) Inc.(TSX: PJC.A; 27.38)
Irene Nattel (Analyst)
(514) 878-7262; irene.nattel@rbccm.com
Martin Gravel, CFA (Associate)
(514) 878-7264; martin.gravel@rbccm.com
Alex Carette (Associate)
(514) 878-7254; alexandre.carette@rbccm.com
52 WEEKS
Rating:
Price Target:
Sector Perform
28.00
Paying for the Rx:Q3/F15 light due primarily to stock-based comp, outlook
unchanged
17JAN14 - 05JAN15
28.00
26.00
24.00
22.00
Putting aside the EPS shortfall due to stock-based compensation expense, Q3
results underscore the stability of PJC's business model and the challenge of driving
growth in the retail segment in the current environment. EPS $0.30 (flat), shy of
forecast/consensus $0.33/$0.32 due to estimated $0.02/share increase in stockbased comp expense.
20.00
2500
2000
1500
1000
500
J
F
M
Close
A
M
J
2014
J
A
S
O
N
D
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
EPS, Ops Diluted Prev.
2014A
1.10
2015E
1.19↓
1.22
2016E
1.34↓
1.36
2017E
1.46↓
1.49
P/E
24.9x
23.0x
20.5x
18.7x
All values in CAD unless otherwise noted.
J
• Q3/F15 operating results solid, reflecting growth in generic drug unit, diligent
application of FCF to share repurchase: Q3/F15 EPS of $0.30 below forecast due
primarily to stock-based compensation expense of $4.4 MM, +$4 MM Y/Y, likely
reflecting a combination of higher current run rate and retroactive adjustment.
Revenue trends consistent with prior quarter, reflecting decelerating pace of
growth in generic drug price deflation and generic penetration and investment in
pricing/promo to drive front of store. Excluding the stock based comp expense,
contribution from retail operations stable Y/Y, contribution from Pro Doc, PJC's
generic drug unit, fell shy of forecast as well, although we note that PD's results
tend to bounce around on a quarterly basis. Results highlight stability of PJC's
business model but underscore the challenge of generating growth in earnings
from Franchising in this mature segment still facing intense competitive activity.
• Tweaking forecasts, maintaining $28 target: Reflecting actual Q3 results into
our model and tweaking assumptions around stock-based comp expense run
rate (slightly higher) results in F15E-F17E EPS of $1.19/$1.34/$1.46 from $1.22/
$1.36/$1.49. $28 target, generated by a blended P/E, EV/EBITDA approach, which
applies a 18.0x P/E multiple to our F2017E EPS and a 13.5x EV/EBITDA multiple
to our F2017E EBITDA.
Industry Comments
Stephen D. Walker (Analyst)
(416) 842-4120; stephen.walker@rbccm.com
2015 New Year Preview
Dan Rollins, CFA (Analyst)
(416) 842-9893; dan.rollins@rbccm.com
2015 New Year Preview - Metals & Mining/Golds
Metals & Mining/Golds
Sam Crittenden, P.Eng., CFA (Analyst)
(416) 842-7886; sam.crittenden@rbccm.com
Fraser Phillips, P.Eng. (Analyst)
(416) 842-7859; fraser.phillips@rbccm.com
Andrew D. Wong (Analyst)
(416) 842-7830; andrew.d.wong@rbccm.com
Nathan Piper (Analyst)
+44 131 222 3649; nathan.piper@rbccm.com
RBC International E&P Daily
Al Stanton (Analyst)
+44 131 222 3638; al.stanton@rbccm.com
PXT.TO: Revised 2015 Capex; Growth Maintained; Iraq Allowed to Sue Kurds Over
Texas Oil Tanker in U.S.; Week Ahead; Circle Oil Receives $15m from Egyptian
Government
Haydn Rodgers, CA (Associate)
+44 131 222 4911; haydn.rodgers@rbccm.com
PXT; CNE; GPX; PMO; TLW
10
Victoria McCulloch, CA (Analyst)
+44 131 222 4909; victoria.mcculloch@rbccm.com
All values in USD unless otherwise noted.
John Barnes (Analyst)
(804) 782-4020; john.barnes@rbccm.com
The Weekly Haul
Mike Fountaine (Associate)
(804) 782-4013; mike.fountaine@rbccm.com
• In this week's Feature Commentary, we take one final look back at 2014.
• Takeaways from the news include:
• Key macro data points for the week ahead include MDI & OHD on Monday, Small
Business Optimism on Tuesday, Retail Sales, Business Inventories & Beige Book
on Wednesday, PPI on Thursday, and CPI & Industrial Production on Friday.
• Our 4Q/14 earnings season kicks off on Tuesday with results from CSX.
Todd Maiden (Associate)
(804) 782-4014; todd.maiden@rbccm.com
All values in USD unless otherwise noted.
Airfreight & Surface Transportation
Quantitative Research
Chad McAlpine, CFA (Analyst)
(416) 842-7869; chad.mcalpine@rbccm.com
Attributions
Bish Koziol (Associate)
(416) 842-7866; bish.koziol@rbccm.com
• The S&P/TSX Composite ended 2014 by declining 112 points in December.
However, the index did advance 1,011 points during the year (Exhibit 1).
• Financials was by far the top-performing sector in 2014 as it advanced 46% and
contributed 469 points to the composite. In December, Consumer Staples was
the top-performing group as it advanced 35%.
• Materials and Energy were the only two sectors of the S&P/TSX Composite which
realized negative returns in 2014. Every company of the worst 15 contributors to
the index originated from the resource segment of the market (Exhibit 4).
December 2014
Technical Research
Robert Sluymer, CFA (Analyst)
(212) 858-7066; robert.sluymer@rbccm.com
Anna Drotman (Associate)
(212) 858-7065; anna.drotman@rbccm.com
Does the first trading day, week or month have any year-end
'predictive value'?
• With the Dow closing positive on the first trading day and first week* of the
year, we have been asked to review the ‘predictive value’ of these metrics for
the balance of the year.
• How an investor would employ this data remains questionable to us; however,
the ‘fun-facts/data-mining’ results are summarized below with supporting data
on the following pages.
• “They've done studies, you know. 60% of the time, it works every time.”– Brian
Fantana from Anchorman
Data mining January’s trading for the Dow Jones Industrial Index
1st day of trading
• Since 1901, 1st day predicted the year’s direction 61% of the time
• Since 1946, 1st day predicted the year’s direction 61% of the time
• Last 15 years, 1st day predicted the year’s direction 80% of the time
Direction of 1st week* of trading
• Since 1901, 1st week predicted the year’s direction 63% of the time
• Since 1946, 1st week predicted the year’s direction 70% of the time
• Last 15 years, 1st week predicted the year’s direction 60% of the time
Direction of 1st month of trading
• Since 1901, January predicted the year’s direction 73% of the time
• Since 1946, predicted the direction of the year 80% of the time
11
• Last 15 years, predicted the direction of the year 67% of the time
For reference, since 1901 the Dow has finished the year up 65% of the time.
*Week = First 5 trading days
Robert Sluymer, CFA (Analyst)
(212) 858-7066; robert.sluymer@rbccm.com
Anna Drotman (Associate)
(212) 858-7065; anna.drotman@rbccm.com
Macro Technical Update – Waiting for Small-caps to ‘break-out’
EQUITIES
• After stalling at resistance at year-end, US indexes staged rebounds from support
near the December lows and 100-dma. Although the intermediate- and shortterm indicators are effectively neutral providing little guidance, we continue to
focus on the small-cap indexes to provide the next important directional move.
• Specifically, small-cap relative performance versus the S&P 500 began to reverse
its 2014 downtrend several weeks ago, however a move above the December
2014 highs would be needed to constitute a 12-month ‘break-out’ suggesting
further upside in 2015. Conversely, a move below the December lows (RTY 1134)
would suggest a retest and possible break of the October lows (RTY 1040).
• EAFE – Relative performance remains weak with real price beginning to break a
long-term uptrend that began in 2009.
• US Sectors – Please click here for today’s US sector themes and stock ideas.
Robert Sluymer, CFA (Analyst)
(212) 858-7066; robert.sluymer@rbccm.com
US Sector Review – Consumer, Healthcare and Technology Ideas
In Focus
Anna Drotman (Associate)
(212) 858-7065; anna.drotman@rbccm.com
OVERVIEW
• Our relative performance sector table, tracking the percentage of stocks within
in each sector with positive intermediate-term relative performance trends,
continues to highlight established leadership in Healthcare and Technology, with
Discretionary, Financials and select Staples reaccelerating.
• Today’s note highlights attractive accelerating and/or emerging relative
performance profiles within those sectors.
US EQUITY SECTOR THEMES AND STOCK IDEAS
• Accelerating leadership/momentum ideas: Consumer (STZ, CMG, PII), Healthcare
(GILD), Technology (AAPL, GPN, CDW).
• Stocks reversing their 2014 relative performance downtrends: Consumer (ENR,
CAKE, BC), Healthcare (ENDP, BSX, ALGN), Technology (TSS, FSL, MRVL, FEYE).
• Housing related stocks reversing 2-year relative performance downtrends: MAS,
LEN, PHM, DHI.
• Relative performance laggards beginning to reverse established downtrends:
WMT, KRFT, FEYE
Please click here for today’s Macro Technical Update – Waiting for Small-caps to
‘breakout’.
12
Required disclosures
Non-U.S. analyst disclosure
Nathan Piper;Al Stanton;Haydn Rodgers;Victoria McCulloch;Chad McAlpine;Bish Koziol;Douglas Miehm;Fred Garcia;Haran
Posner;Drew McReynolds;Dan Rollins;Mark Mihaljevic;Irene Nattel;Martin Gravel;Alex Carette;Stephen D. Walker;Sam
Crittenden;Fraser Phillips;Andrew D. Wong;Shailender Randhawa;Keith Mackey;Steve Bristo;Thomas Klein;Melissa
Oliphant;Jonathan Guy;Richard Hatch (i) are not registered/qualified as research analysts with the NYSE and/or FINRA and (ii)
may not be associated persons of the RBC Capital Markets, LLC and therefore may not be subject to FINRA Rule 2711 and NYSE
Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research
analyst account.
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RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7.
Please note that current conflicts disclosures may differ from those as of the publication date on, and as set forth in, this report.
The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including
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by investment banking activities of the member companies of RBC Capital Markets and its affiliates.
Distribution of ratings
For the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories
- Buy, Hold/Neutral, or Sell - regardless of a firm's own rating categories. Although RBC Capital Markets' ratings of Top Pick(TP)/
Outperform (O), Sector Perform (SP), and Underperform (U) most closely correspond to Buy, Hold/Neutral and Sell, respectively,
the meanings are not the same because our ratings are determined on a relative basis (as described below).
Distribution of ratings
RBC Capital Markets, Equity Research
As of 31-Dec-2014
Rating
BUY [Top Pick & Outperform]
HOLD [Sector Perform]
SELL [Underperform]
Count
897
686
112
Percent
52.92
40.47
6.61
Investment Banking
Serv./Past 12 Mos.
Count
Percent
290
32.33
137
19.97
6
5.36
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To access our current policy, clients should refer to
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14
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15