Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Scotiabank analyst Robert Hope provided his top picks in the utilities and energy infrastructure sector,
“Overall, our estimates are below consensus (approximately 2 per cent on average) as we see weather, generation, and higher corporate costs weighing on results. We have made some minor tweaks to our models heading into the quarter, but nothing too notable. We are particularly below consensus for: 1) CPX (11 per cent) due to soft power pricing and lower utilization, 2) EMA (5 per cent) due to weather and regulatory lag, and 3) AQN (10 per cent) due to weak renewable generation and higher costs. We are 2 per cent ahead of consensus for KEY given our expectation of another strong marketing quarter … in the coming months we expect to see a number of asset sale, project, and contracting announcements that could be well-received by the market. Of the sub-sectors we follow, we note that investor sentiment is most positive for the mid-sized gas midstream names. We share this view and believe the group has room for continued positive estimate revisions. Overall, we like the midstream group over the utility group at this point. Our favourite names are AltaGas, Brookfield Renewable, and Gibson Energy … Investor sentiment on the mid-sized gas-focused midstream names (KEY, PPL, and ALA’s asset exposure) continues to turn positive given the expectation of medium-term volume growth associated with LNG Canada ramping up through 2025. We favour these names given they also have reasonable leverage and payout ratios, and can equity self-fund their growth”
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The demand for data centre capacity is very very real according to BMO analyst Ari Klein,
“AI aspirations driving demand and supporting pricing. Results from GOOGL, MSFT, and META have illustrated the unprecedented magnitude of investment hyperscalers are making in developing their AI capabilities. Capex commentary from all three companies pointed to a multi-year investment cycle as the industry lays the groundwork to capitalize on AI monetization opportunities. We estimate hyperscale capex (excludes AWS) will now grow 42 per cent in 2024 and 13 per cent in 2025 to $200-billion. In addition, cloud growth was also stronger than expected in Q1, with Azure revenues up 31 per cent and Google Cloud up 28 per cent year-over-year with increasing contributions from AI. Given the sheer level of demand, power availability constraints, dwindling vacancy rates, higher costs, and with more local markets scrutinizing data center development, the backdrop for higher pricing remains very supportive. Record leasing continues to push vacancy rates to at or near all-time lows across multiple markets, including NoVA at 0.7 per cent (up 20 basis points quarter-over-quarter), 1.3 per cent in Dallas (down 50 bps), 1.6 per cent in Phoenix (down 50 bps), and 2.8 per cent in Chicago (down 130 bps) … We believe the strong pricing dynamics support ongoing strength in same-store growth and could drive upside relative to expectations, as well as the potential emergence of a growing mark-to-market, particularly on larger deals, that should benefit DLR [Digital Realty Trust]”
See also “This off-the-radar power stock has tremendous upside thanks to AI” – Investing Ideas (Newsletter)
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CIBC economist Avery Shenfeld tackles the argument that the Canadian economy is over-invested in housing,
“The idea being bandied about is the attraction of real estate investments has put a squeeze on the available pool of savings that might otherwise have flowed to productivity-enhancing machinery and equipment investment. But Canada is not a closed economy with a fixed pool of domestic investable savings. If there were solid returns available to M&E, technology or non-residential construction investments, they would draw in funds from abroad … There’s no negative correlation between one or five year growth rates in total factor productivity in Canada and real spending on residential investment … True, rapidly rising house prices, as we’ve seen in Canada in recent decades, are a barrier to attracting workers, and can also incent a lot of less-productive activity in flipping existing houses back and forth. But the cure for house price inflation isn’t to defer investments elsewhere, but the opposite. We’ll only rein in housing costs by adding to supply, which entails more, not less investment in residential construction”
“Are we too well-housed for our own good?” – CIBC Economics
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Diversion: “This song achieved THREE BILLION YouTube views in just a MONTH. You’ll never guess what it is. In fact, don’t even try” – A Journal of Musical Things
Scott Barlow