A survey of North American equities heading in both directions
On the rise
Shares of Enbridge Inc. (ENB-T) rose 1.2 per centon Wednesday after it forecast higher core earnings and raised its dividend for 2024 as the pipeline operator bets on higher demand to lift volumes transported across its network.
Profits at Canadian oil and gas transportation have been buoyed by low U.S. inventory levels and increased exports as buyers sought alternatives to Russian oil since Moscow’s invasion of Ukraine last year.
Meanwhile, industry experts have forecast that Canadian oil and gas producers will drill 8 per cent more wells in 2024 to take advantage of greater access to pipelines.
Enbridge said it expects $9.3-billion in core profit from its liquids pipelines business, the company’s main unit, helped by strong system utilization.
The upbeat forecast from Enbridge, which operates the Mainline oil pipeline system that ships the bulk of Canada’s crude exports to the U.S., follows peer TC Energy (TRP-T) estimating higher adjusted core earnings for 2024 on Tuesday.
Calgary-based Enbridge expects to deploy about $6-billion of capital in 2024, including maintenance.
The company forecast adjusted core earnings to be between $16.6-billion and $17.2-billion next year, higher than its 2023 expectations of $15.9-billion to $16.5-billion.
The company raised its 2024 dividend by 3.1 per cent.
Enbridge, which made a US$9.4-billion bid to buy three utilities from Dominion Energy in September, said it had secured funding for over 75 per cent of the total purchase price. The deal, expected to close in 2024, would double the company’s gas distribution business and also create North America’s largest natural gas provider.
Open Text Corp. (OTEX-T) increased 1 per cent in the wake of making a rare divestiture, selling off a mainframe-computer business it acquired earlier this year in its US$5.8-billion purchase of British technology stalwart Micro Focus International PLC.
The Waterloo, Ont., information management software company said Tuesday it would sell Micro Focus’s application modernization and connectivity unit for US$2.275-billion in cash before taxes and fees to Rocket Software Inc., which is owned by private equity giant Bain Capital. The deal value amounts to 4.6 times the unit’s 2023 revenue and 8.3 times its adjusted operating earnings – roughly in line with the valuation of Open Text’s stock.
Open Text said it would use the proceeds to improve its financial position and focus on its cloud and artificial intelligence businesses. “This divestiture will better position us to move with more speed in higher organic growth areas such as cloud capabilities and AI, strengthens our balance sheet to achieve our deleveraging targets ahead of schedule and returns the company to capital flexibility,” Open Text chief executive and chief technology officer Mark Barrenechea said in a statement.
The 750-employee unit being sold is not increasing revenue but is highly profitable, with an operating profit margin of 55 per cent of revenue, compared with the high 30s for Open Text overall. Mr. Barrenechea said the mainframe business was seen as a non-core part of its overall business, which has a longer-term goal to increase revenue from existing operations by 2 per cent to 4 per cent annually.
On a conference call with analysts, Mr. Barrenechea said the company had not intended to sell the mainframe business but decided to pursue a deal after receiving an inbound inquiry from Bain. He said Open Text is not looking to divest any other parts of Micro Focus.
Open Text said the deal, expected to bring in US$2-billion in net proceeds, wouldn’t affect its 2024 financial targets, and that it anticipated the deal would close in its fiscal fourth quarter ending next June 30. With the debt paydown from the proceeds, Open Text will cut its annual interest costs to about US$400-million from about US$550-million.
In a note titled Breathing Room from Leverage, National Bank analyst Richard Tse said: “While the benefits of this divestiture include allowing OpenText to focus on recurring cloud revenue, we believe the most notable takeaway is that it deleverages OpenText’s balance sheet meaningfully following closing of the transaction – in our view, that combination of focus and accelerated delevering should accrue in an upward valuation re-rating for investors. We estimate the consolidated net leverage ratio will be around 2.5x within 90 days post-close from 3.6 times today. The transaction is expected to close at the end of FQ4′24 (June 30, 2024). We believe it will offer OpenText some breathing room to pursue future acquisitions sooner. We’d note that despite the Company’s recent focus on organic growth, it’s our expectation that acquisitions will continue to be the main driver of growth”
- Sean Silcoff
Quisitive Technology Solutions Inc. (QUIS-X), a Toronto-based Microsoft solutions provider and payments solutions provider, turned higher and closed up 3.3 per cent after announcing a deal to sell its LedgerPay Inc. (“PayiQ”) subsidiary to Fulcrum IT Partners for US$27-million of preferred shares in the private holding company.
“We think this announcement is positive because it enhances focus on the core revenue-generating businesses and materially increases near-term profitability,” said Eight Capital analyst Christian Sgro in a note.
“It is difficult to comment on valuation expectations for PayiQ. We believe the public markets were not assigning much value to the PayiQ opportunity and we expect the cashburn has had a negative impact on the market value of shares. We think this will also appease dissident shareholders, whom we suspect would have encouraged such a divestment.”
General Motors (GM-N) said on Wednesday its new labour deals following a lengthy U.S. strike will cost it US$9.3-billion over the life of the agreement, even as it outlined US$10-billion in share buybacks, a 33-per-cent dividend increase and reduced spending at its robotaxi unit Cruise.
The Detroit automaker, whose shares rose 9.4 per cent, also lowered 2023 profit expectations after the strike by the United Auto Workers (UAW).
The US$9.3-billion in additional costs through 2028 is for deals with the UAW as well as Canadian union Unifor, and translates to about US$575 per vehicle over the life of the deals.
GM has struggled to boost its stock price as it dealt this year with the UAW strike, problems at its Cruise self-driving vehicle unit and with the rollout of its new electric vehicles.
GM’s new guidance reduced expected net income attributable to stockholders for 2023 to a range of US$9.1-billion to US$9.7-billion, compared to the previous outlook of US$9.3-billion to US$10.7-billion.
That includes an estimated US$1.1-billion EBIT-adjusted impact from the UAW strike, which lasted just over six weeks, primarily from lost production. The total impact in 2023 is US$1.3-billion including the higher wages and benefits in the deal.
“Now that we have a ratified contract and a clear path forward that includes greater operating investment efficiencies, we can resume returning capital to shareholders per our plan,” GM CEO Mary Barra said on an investor conference call, during which officials set out the largest U.S. automaker’s updated targets.
However, she also acknowledged how GM’s stock price was “disappointing to everyone,” pointing to how shares at about US$28 were 15 per cent below GM’s 2010 initial public offering price.
GM said earlier this year it would cut fixed costs by US$2-billion by the end of 2024 and then followed up in July with plans for another US$1-billion in cost reductions. In April, GM said about 5,000 salaried workers had taken buyouts and agreed to leave the company.
GM said it would cut costs at Cruise, which has suspended all U.S. testing after a crash in California last month prompted that state’s regulators to bar the company from testing driverless vehicles. Cruise, which is cutting jobs, lost more than US$700-million in the third quarter and more than US$8-billion since 2016.
“We expect the pace of Cruise’s expansion to be more deliberate when operations resume, resulting in substantially lower spending in 2024 than in 2023,” Ms. Barra said.
GM Chief Financial Officer Paul Jacobson said spending on Cruise in 2024 will be down “hundreds of millions of dollars.”
GM now faces higher costs under a new contract with the UAW. The company said it was finalizing its budget for next year “that will fully offset the incremental costs of our new labor agreements and the long-term plan we are executing.”
GM’s accelerated share repurchase program will advance US$10-billion to executing banks, and the company will immediately receive and retire US$6.8-billion worth of GM common stock.
“Our cash balance, which is well above our target, is a function of our recent record profits and our prudent management of resources through the pandemic, supply chain disruptions and labor negotiations,” Ms. Barra said.
GM had approximately 1.37 billion shares of common stock outstanding prior to the buyback program, the company said. The program is expected to end in late 2024 and will be executed by Bank of America, Goldman Sachs, Barclays and Citibank.
It also expects to increase its common stock dividend by 3 US cents per quarter to 12 US cents a share beginning in 2024.
Foot Locker Inc. (FL-N) on Wednesday forecast annual profit above Wall Street estimates and a smaller-than-expected drop in annual revenue, as steep discounts helped kick off strong holiday sales at the retailer.
The company’s stock, which has lost about 40 per cent of its value this year, was up 16.1 per cent after it also forecast a smaller than-expected decline in holiday-quarter comparable sales.
Steep discounts helped the footwear retailer rope in budget-conscious shoppers looking for deals on styles from Nike (NKE-N) and Adidas.
However, markdowns as deep as 30 per cent to 60 per cent on top brands continued to pressure margins, which were down 470 basis points in the third quarter ended Oct. 28.
Foot Locker’s bet on a robust holiday season comes after recent data showed more than 200 million people dug into deals during the five-day Thanksgiving shopping weekend, defying fears of a softness in the holiday period as consumers battle sticky inflation.
CEO Mary Dillon said the company saw “strong results” over the Thanksgiving week period, helping it tighten its annual targets for sales and profit.
With its Lace Up program, Foot Locker is attempting to put its own banners under focus and reduce reliance on apparel makers like Nike, which currently supplies about 65 per cent of its merchandise.
The company also said it was on track to end the year with inventory level flat to slightly down year-over-year.
It now expects comparable sales to be down 8.5 per cent to 9 per cent, as against its previous forecast of comparable sales down 9 per cent to 10 per cent year-on-year.
Foot Locker expects fourth-quarter comparable sales to decline between 7 per cent and 9 per cent, compared with analysts’ average expectation of a fall of 10.51%, as per LSEG data.
The company also tightened its annual profit target to US$1.30 to US$1.40 per share, the mid-point of which was above analysts’ expectation of a profit of US$1.28 per share.
Retail traders powered a 25-per-cent jump in GameStop (GME-N) shares to a two-month high in regular trading on Wednesday, extending a rally ahead of the company’s quarterly results next week and underscoring a return in appetite for risk.
“Speculation is back ... and GameStop is ground zero for speculation,” Steve Sosnick, chief strategist at Interactive Brokers, said.
AMC Entertainment (AMC-N) and Cathie Wood’s ARK Innovation ETF (ARKK-A) - other favourites among retail traders - were up 7 per cent and 0.4 per cent, respectively.
The recovery in meme stocks comes as the S&P 500 closes in on its highest level for 2023 on hopes U.S. interest rates have peaked, breathing life into speculative trading that has struggled this year.
GameStop closed about 13 per cent higher on Tuesday. Individual investors purchased US$1.92-million worth of the company’s shares on a net basis on Tuesday, their highest since Aug. 6, data from Vanda Research showed.
Both stocks were among the most discussed by traders on social media site stocktwits.com on Wednesday.
GameStop is set to post third-quarter results on Dec. 6, with analysts expecting its net loss to narrow to US$25.6-million from US$93.4-million a year earlier.
About 21.6 per cent of GameStop’s shares were sold short, according to data and analytics firm Ortex, and bearish investors stand to lose about US$200-million on Tuesday and Wednesday combined.
“Some short sellers may be concerned both by this price move but also that GameStop will release better-than-expected earnings next week,” said Peter Hillerberg, co-founder of Ortex.
Dollar Tree (DLTR-Q) trimmed its annual sales forecast on Wednesday after missing third-quarter estimates and said it was reviewing its Family Dollar business, as the retailer grapples with customers paring back on discretionary spending.
Shares were higher by 4.4 per cent after sustaining steep premarket declines as the company also tightened its full-year profit outlook.
CEO Richard Dreiling said customers at its Family Dollar stores have been especially pressured given higher food prices and borrowing costs. Lower-income customers notably pulled back spending on higher-margin discretionary categories, he added.
Several U.S. retailers including Walmart (WMT-N), Best Buy (BBY-N) and Lowe’s (LOW-N) have also sounded caution in recent weeks about spending during the crucial holiday season.
“There’s probably some more incremental pressure with the Family Dollar business,” said Telsey Advisory Group’s Joseph Feldman, adding there is more work to do at that banner given it has multiple price points in comparison to the core Dollar Tree business.
For the quarter, Family Dollar posted same-store sales of 2 per cent, compared with expectations of 4.07 per cent. In contrast, the Dollar Tree banner posted a 5.4-per-cent growth.
Dollar Tree’s gross margins were down 20 basis points at 29.7 per cent as it saw higher wages and raw material expenses. It has also been struggling with elevated retail shrink, where inventory is either lost, damaged or stolen.
The company now expects fiscal 2023 consolidated net sales to be between US$30.5-billion and US$30.7-billion, compared with a prior estimate of US$30.6-billion to US$30.9-billion.
It also expects annual profit to be between US$5.81 and US$6.01 per share, compared with its prior outlook of between US$5.78 and US$6.08. Analysts expect a profit of US$5.97 per share.
Shares of German sandal maker Birkenstock (BIRK-N) extended their gains on Wednesday, hitting the initial public offering price for the first time, following a buoyant holiday shopping season.
Strong spending by U.S. shoppers during the Thanksgiving holiday as well as Black Friday and Cyber Monday propelled retail sales to a record this year, potentially benefiting luxury brands such as Birkenstock.
The company’s shares opened at US$41 on Oct. 11 and have traded below the IPO price of US$46 and dropped to as low as US$35.83 just days after listing. On Tuesday, the stock jumped more than 9 per cent and continued its rally on Wednesday.
The lackluster market debuts of Birkenstock as well as other hotly anticipated offerings from chip designer Arm Holdings (ARM-Q), grocery delivery app Instacart (CART-Q) and marketing automation firm Klaviyo (KVYO-N) have dampened hopes for a U.S. IPO market resurgence.
The median price target of the 17 analysts covering Birkenstock is US$47.21 and the current recommendation is “buy,” according to LSEG data. Birkenstock is heavily shorted, with 5.71 million shares worth roughly US$259-million having short interest, according to data and analytics firm Ortex. About 32.3 million shares were sold on the IPO.
The company is owned by U.S. private equity firm L Catterton, which is backed by French billionaire Bernard Arnault and his luxury goods empire Louis Vuitton Moet Hennessy.
On the decline
Shares of Alimentation Couche-Tard Inc. (ATD-T) slid 3.2 per cent on Wednesday despite the release of stronger-than-expected second-quarter results, as the convenience store and gas station operator continues to benefit from improving U.S. fuel margins.
After the bell on Tuesday, the Montreal-based company reported adjusted earnings per share of 82 cents, flat year-over-year but 3 cents higher than the consensus forecast on the Street. Gasoline margins blew past expectations at 49.56 per gallon, leading to the earnings beat.
However, the Street was concerned about a decline in sales as Alimentation Couche-Tard said same-store merchandise revenues decreased by 0.1 per cent in the U.S. and 0.2 per cent in Europe but rose 1.6 per cent in Canada.
President and CEO Brian Hannasch says the company saw softening in U.S. same-store sales driven by weakness in the cigarette category and compared with a strong second quarter a year earlier.
“The exceptional cost control embedded in ATD’s DNA [was] on full display, with normalized opex growth 1.5 per cent,” said RBC Dominion Securities analyst Irene Nattel in a note. “Underlying results reinforce relative stability of the channel, supportive of our constructive view of this Global Top 30 name. There are many tanks to fill between Q2/F24 and ATD’s F28 $10-billion EBITDA target, but this first quarter post-investor event is a good start.”
Saying the results “reinforce conviction around ATD as a name to own in 2024,” Ms. Nattel added: “FQ2 results [were] emblematic of ATD’s ‘get it done, deliver the numbers’ mindset. Despite tepid SSS [same-store sales] as consumer spending decelerates, fuel margins strong and better than expected across regions, underscoring benefits of ATD’s initiatives around procurement/pricing, inside-store margins solid, and opex tightly contained, all of which should be sustained as we move through F24+.”
First Quantum Minerals (FM-T) sustained further declines after Panama’s president said on Tuesday its lucrative copper mine Cobre Panama would be shut down, hours after the country’s Supreme Court declared its contract unconstitutional.
President Laurentino Cortizo said in a televised address on Tuesday evening that “the orderly and safe closure of the mine” would begin as soon as the Supreme Court’s ruling was formerly published in the official gazette.
Cobre Panama has sparked public anger in the country that has spilled into street protests. The protests began as small, environmental ones against the mine but have morphed into broader demonstrations against the government amid charges the contract was too generous.
First Quantum said on Tuesday it had suspended commercial production at the mine and was putting in into care and maintenance.
The ruling puts the company on the long and unpredictable road of international arbitration, although it has suggested it would seek to avoid the process if possible through pre-arbitration talks with the Panamanian government.
Calgary-based Spartan Delta Corp. (SDE-T) was lower by 2.8 per cent after announcing the completion of a series of asset acquisitions to enter the West Shale Basin Duvernay formation for approximately $25-million and including 137,000 gross acres and production of 400 barrels of oil equivalent per day.
It came alongside the release of Spartan’s preliminary 2024 guidance and announcement CFO Geri Greenall plans to step down at year-end.
“Although the company will attempt to replicate previous success in the oil window of the Montney, which ultimately resulted in the return of $9.50 per share. share of capital earlier this year, the market will likely adopt a more cautious view on its entering the Duvernay given its chequered history of industry results,” said Desjardins Securities analyst Chris MacCulloch.
Las Vegas Sands Corp. (LVS-N) was down on news Miriam Adelson, the widow of casino magnate Sheldon Adelson, is selling US$2-billionin the company’s stock, which is approximately 10 per cent of her holdings, to acquire a majority stake in the National Basketball Association’s Dallas Mavericks from Mark Cuban.
That deal is projected to be in the valuation range of US$3.5-billion and take weeks for the league to process. Mr. Cuban would retain control of basketball operations in the deal.
With files from staff and wires
David Leeder