Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Lululemon Athletica Inc. (LULU-Q) had a tough trading day on Thursday, but BofA Securities analyst Lorraine Hutchinson considers it the firm’s top high-quality growth idea among the North American retail stocks they cover,
“Remains highest quality growth story in our coverage. We are forecasting 2Q EPS of $2.51, in line with consensus and guidance, but we see potential upside to both sales and margins. Our 2Q forecast includes sales growth of 15.7 per cent, gross margin expansion of 220 basis points and 220 bp of SG&A deleverage. We expect a continuation of balanced growth across products, gender, and channels will drive confidence that the playbook of diversified growth remains intact… Our $450 PO [price objective] is based on 19 times EV/EBITDA (F24E) compared to 16 times today. Over the past 8 years, LULU has traded at a 6 times premium (on P/E) to Nike; this currently sits at 2.5 times. As the company continues to track above its medium terms sales algo and deliver on margin expansion, we expect the multiple will continue to rerate higher…”
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Citi analyst Ravi Ephrem is cautious on most commodity prices,
“Even if China were to step up incremental policy support meaningfully now, there would still be a time lag for their effects to manifest. Further, suppose there is a modest pickup in China’s growth, it still might not be sufficient to counterbalance DM [developed market] growth headwinds. ‘Higher for longer’ interest rates could damp economic activity in many parts of the world. A hard landing somewhere remains a risk. Given these potential developments, we stay cautious on most commodities, most notably industrial metals over the next 6-9 months, especially nickel, and lean towards fading the recent iron ore rally.
“Citi’s economists estimate global GDP growth to be 2.4 per cent for this year, below the 3-per-cent estimated trend, but with downside risks. Despite the desynchronized nature of global growth so far, with the US and EM ex-Asia still stable, China and Europe could weaken further. In fact, Citi’s economists cut their China GDP growth forecast to 4.7 per cent year-over-year for 2023 (from 5.0 per cent year-over-year), which is notably below Beijing’s growth target for this year.
“For energy, the market should not look to China for price support, as its appetite for crude oil and LNG in 2H23 looks likely to moderate compared with 1H23, partly due to high prices, weak domestic macro and the possibility of a mild El Niño winter”
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BMO economist Erik Johnson previewed a longer column that will be available later today on the BMO Economics website, detailing profit margins for domestic market sectors,
“In Friday’s Focus Feature, we take a look at how Canadian businesses are faring amid the dual stresses of high inflation and interest rates. On that point, the latest quarterly financial statistics from StatsCan highlight that despite slowing consumer spending, profit margins remain elevated across a number of sectors compared to their typical range since 2010—one sign that a resilient economy is supporting corporate profits”
The accompanying chart (posted on social media here) shows above-trend margins for finance and insurance, oil and gas extraction, retail trade, wholesale trade, transportation and warehousing. Weaker margins are found in real estate rental and leasing.
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