Inside the Market’s roundup of some of today’s key analyst actions
Following Enbridge Inc.’s (ENB-T) release of largely in-line fourth-quarter 2023 results and a reiteration of its 2024 financial guidance, RBC Dominion Securities analyst Robert Kwan thinks investor focus remains squarely on the closing of its US$9.4-billion acquisition of three utilities from Dominion Energy Inc. and the steps needs to address the notable gap in funding remaining for the deal.
“Various options remain on the table with the DRIP being of ‘least interest’ to management,” he said. “Enbridge has pre-funded approximately $10 billion of the $12.8 billion (US$9.4 billion) cash consideration for the Dominion utilities acquisition. We like the proactive steps taken so far including the hybrid issuances as well as the sale of Alliance and Aux Sable. Although further asset sales, the issuance of hybrids, and the initiation of a DRIP and/or at-the-market (ATM) equity program were highlighted as funding options, we believe many investors have a preference for Enbridge to minimize the amount of additional common equity funding.”
On Friday, the Calgary-based company reported adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for its final quarter of fiscal 2023 of $4.107-billion, narrowly below Mr. Kwan’s $4.147-billion estimate but above the Street’s $4.082-billion expectation. Earnings per share of 63 cents was five cents below the analyst’s projection due to higher-than-forecast interest expense and income taxes.
“[Enbridge’s] base business is showing continued strength, evidenced by the successful open seasons,” said Mr. Kwan. “Enbridge announced that it concluded a fully-subscribed open season for 110,000 barrels per day of capacity on its Flanagan South Pipeline (FSP), which now results in about 90 per cent of the pipeline’s 720,000 b/d capacity being contracted. We expect the increased contracting should help pull volumes down the Mainline given the take-or-pay nature of the new FSP contracts. Enbridge also noted that it concluded an oversubscribed binding open season for 165,000 b/d of capacity becoming available on July 1, 2025 for its Southern Lights condensate pipeline.”
“Looking ahead to the March 6 Investor Day, we expect the company to reiterate its low-risk business model, the strategic positioning of its existing asset base (as evidenced by successful open seasons announced with the Q4/23 results), numerous growth prospects across all of its business lines, and its approach to capital allocation, including keeping debt/EBITDA in a range of 4.5-5.0 times,” he added.
With an increase to his forecast for interest and income tax expenses Mr. Kwan reduced his EPS estimates for 2024 and 2025 to $2.82 and $2.94, respectively (down from $2.90 and $3.03, respectively. That led him to cut his target for Enbridge shares by $1 to $54, keeping an “outperform” recommendation. The average target on the Street is $53.52.
Elsewhere, other analysts making adjustments include:
* National Bank’s Patrick Kenny to $51 from $52 with a “sector perform” rating.
“Combined with a modest funding gap remaining on its $19-billion utilities acquisition, we maintain our Sector Perform rating while recommending longer-term, income-oriented investors look to accumulate a position on any further weakness below $45,” said Mr. Kenny.
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While Desjardins Securities analyst Benoit Poirier thinks 2024 “looks to be another challenging year” for TFI International Inc. (TFII-T), he expects investor enthusiasm to continue, pointing to two “exciting new wrinkles.”
“Despite stronger-than-expected 4Q results, after listening to the conference call, we still firmly believe that EPS guidance will likely be US$7.00‒7.50. This was reinforced by the fact that 1Q is off to a bad start, by continued U.S. LTL [less-than truckload] operating issues, and by fewer buybacks (removed from our numbers). We are not surprised at the overly constructive share price response to the lack of guidance as investor enthusiasm is being driven by the plethora of upcoming value-creation catalysts at TFII’s disposal.”
On Thursday, the Quebec-based transport and logistics company reported stronger-than-expected fourth-quarter results, including total revenue of US$1.969-billion and adjusted fully diluted earnings per share of US$1.71. Both exceeding Mr. Poirier’s estimates ($1.894-billion and $1.57) and the Street’s forecasts (US$1.956-billion and US$1.67).
However, the release drew a muted response from investors on Friday with shares rising just 0.6 per cent after the company did not release guidance for the current fiscal year.
“TFII pointed to uncertainty surrounding 1Q (bad weather), LTL peers also not providing guidance and that it will soon be in a better position to determine whether the DSKE acquisition will be 2024 EPS–neutral or not,” said Mr. Poirier. “Management clarified that it should be able to provide guidance alongside 1Q results at the end of April and that EPS guidance will likely start with a ‘7′ and not a ‘6′. We have decided to maintain our conservative stance for 2024 and now forecast EPS of US$7.18 (was US$7.30). "
“Management opens the door to a P&C sale and the potential for the TL spin-off to include other specialized TL players. Following the spinoff, TFII will be left with LTL, logistics and P&C—but with the P&C segment being Canada-only, the smallest out of the three and facing restricted growth, it does not seem to fit. UPS and FedEx would be the most likely buyers given the attractive profitability, ROIC and density in Canada. We do not see it selling the business for under 11‒12 times FY2 EBITDA (we calculate a sale would generate US$1.8‒1.9-billion of cash for TFII, nearly wiping out the whole of its post-DSKE debt).”
Reaffirming TFI as his “favourite transportation name,” Mr. Poirier increased his target for its shares to $216 from $208 with a “buy” rating. The average is $190.22.
“We continue to like the name as we see sizeable potential opportunities for value creation with a plethora of catalysts on the horizon (eg TL spin-off, P&C sale, LTL & logistics M&A, ample room for operational streamlining, dividends and buybacks),” he said.
Elsewhere, other analysts making changes include:
* National Bank’s Cameron Doerksen to $209 from $183 with a “sector perform” rating
“We believe a better freight market backdrop could materialize in the second half of 2024, and we also see earnings growth tailwinds for the company in 2024 driven by margin improvement in the U.S. LTL segment,” said Mr. Doerksen. “Incremental earnings growth should materialize in 2025 as TFII integrates the pending acquisition of Daseke. Nevertheless, we maintain our relatively neutral stance for now.”
* Scotia’s Konark Gupta to $225 from $215 with a “sector outperform” recommendation.
“TFII confirmed our thesis that growth would resume this year, driven by organic growth in LTL and integration of recent acquisitions, which could drive double-digit EPS growth this year and potentially stronger growth in 2025,” said Mr. Gupta. “In addition, the company remains focused on M&A (including a larger transaction) and committed to unlocking value by spinning off TL. We believe this combination of strong earnings CAGR and value creation, along with continued solid FCF generation, will drive shares to new highs over the next few years. We have made minor tweaks to our forecasts, particularly to Q1 estimates due to challenging weather.”
* BMO’s Fadi Chamoun to US$140 from US$130 with a “market perform” rating.
“With pandemic tailwinds behind us and it being almost three years since the acquisition of UPS Freight, TFII’s focus is increasingly turning to operational execution of its U.S. LTL network,” said Mr. Chamoun. “We expect this to remain the largest focus for investors and to a smaller degree the eventual spinoff of its specialized trucking operations. We make minor changes to our estimates and reiterate our Market Perform rating.”
* Cormark Securities’ David Ocampo to $200 from $180 with a “market perform” rating.
* TD Cowen’s Jason Seidl to US$178 from US$170 with an “outperform” rating.
* CIBC’s Kevin Chiang to US$167 from US$158 with an “outperformer” rating.
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Seeing Magna International Inc.’s (MGA-N, MG-T) “FCF inflection and margin expansion stories pushed out a bit,” Citi analyst Itay Michaeli expects its shares to remain range-bound over the near term.
However, following Friday’s quarterly release, he sees “some potential” for sentiment to improve in the second half of 2024 “with margins expected to expand and with peak capex coming into better view.”
“Our 2024/2025 estimates are reduced to align with the company’s latest outlook, which was modestly shy of our model at the midpoint,” he said. “Our new 2026 margin estimate is at the lower end of Magna’s 2026 guide, as we regard the mid/high end of the range as somewhat aggressive given recent trends (we model incrementals at 18-19 per cent, more in line with the ‘24 guide).”
Given those changes, Mr. Michaeli trimmed his price target to US$57 from US$60, reaffirming a “neutral” recommendation. The average is US$65.50.
“For now, we see a balanced risk/reward,” he concluded.
Other changes include:
* Scotia’s Jonathan Goldman to US$59 from US$62 with a “sector perform” rating.
“We think 2024 guidance could be conservative, but obviously the megatrend miss is more topical,” said Mr. Goldman. “To us, the lower megatrend sales guidance and extended timeline to profitability was not overly surprising given the magnitude of OEMs’ announced EV volume reductions so far. Also, the company seems able to at least partially scale capex to match the cadence of the EV/ADAS growth curve. While management noted that 90 per cent of megatrend sales are booked for 2026, we think that does not little to assure investors who have seen the payoff from investments pushed out even further against what has become a more volatile backdrop (both secular and cyclical).
“To be clear, we believe investing for future growth is the right move for the company. We view EVs (and higher level ADAS) as a matter of ‘when’ not ‘if’ and Magna’s leadership position on early generation platforms will eventually pay dividends. But, with shares trading at 5.5 times EV/EBITDA on our lowered 2024E in line with historicals of 5.6 times, and reduced visibility around the timing/amount of megatrend payoff, we prefer to wait on the sidelines.”
* BMO’s Tamy Chen to US$65 from US$67 with an “outperform” rating.
“We assumed much of the recent negative EV developments were largely in the stock but the 6.5-per-cent decline on Friday indicates otherwise,” said Ms. Chen. “Admittedly, our thesis on the auto suppliers, including MGA, has so far been premature. We remain Outperform (see thesis below), but for now our pecking order continues to prefer BYD and MFI followed by discretionary names MGA and CTC.”
* RBC’s Tom Narayan to US$60 from US$61 with a “sector perform” rating.
“Magna attributed its below consensus 2024 guidance to two one-off items in Seating and CV. Megatrend investment breakeven is also now only to occur in 2026 (previously 2025) in part due to the EV slowdown. Its robust 2026 outlook calls for significant margin expansion and Veoneer positively contributing to profitability,” he said.
* CIBC’s Krista Friesen to US$61 from US$63 with a “neutral” rating.
“It has been a challenging start to 2024 for the auto industry with continuing concerns around slowing EV growth, as well as weakening production forecasts. We continue to believe that MGA’s commitment and exposure to EVs will receive little credit in this market. We maintain our Neutral rating as MGA’s revenue and profitability related to its megatrend investments are delayed,” she said.
* Raymond James’ Michael Glen to US$60 from US$62 with a “market perform” rating.
* JP Morgan’s Ryan Brinkman to US$69 from US$77 with an “overweight” rating.
* Wells Fargo’s Colin Langan to US$54 from US$60 with an “equal-weight” rating.
* TD Securities’ Brian Morrison to US$69 from US$73 with a “buy” rating.
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Truist Securities analyst Terry Tillman expects Shopify Inc. (SHOP-N, SHOP-T) to release a “strong” quarterly report on Tuesday, seeing upside to the Street’s expectations for its gross merchandise volume results.
“Along with earlier in quarter constructive Cyber Week update and our own primary research on continued online and offline commerce share gains, Truist card data points to potentially a strong 4Q finish/upside for GMV,” he said. “Such an outcome would likely drive upside across both subscription and merchant solutions revenue along with non-GAAP operating profit.”
Mr. Tillman said the firm’s data analysis points to GMV for the Ottawa-based company’s fourth quarter of 2023 of US$74.3-million, which is 3 per cent higher than the Street’s projection of US$72.1-billion as well as his previous estimate of US$70.3-billion.
“The implied GMV level per the card sales would reflect roughly 32-per-cent quarter-over-quarter growth in 4Q23,” he said. “This would represent in-line performance to 4Q22 q/q GMV growth and modest acceleration from 29-per-cent q/q GMV growth in 4Q21.”
Given that view, the analyst hiked his target for Shopify shares to US$90 from US$65 with a “hold” rating. The average is US$77.51.
“Why Not a Buy Rating? In hindsight, our January 2023 Shopify update that included becoming incrementally more constructive on important up-market enterprise segment could have been a more aggressive call including an upgrade,” he said. “At the time of this update on January 17 2023, Shopify shares traded at roughly $40 level. We clearly missed a substantial move higher in the stock and significant multiple expansion as the company executed on strong normalized growth while materially improving profitability. Now SHOP shares trade at 13.5 times EV/’24E sales and 93 times FCF and returned nearly 50 per cnet in the last three months alone. For us to get incrementally constructive on risk/reward at these levels we need to do a deeper dive on various catalysts for growth (including just announced Shopify Plus price increase) currently in process and their implications on long-term model growth and FCF generation.
“In the meantime, we recommend other quality ways to play eCommerce and omni-channel tech dynamics. This includes Manhattan Associates (MANH, Buy), which offers one of the strongest balances of growth and profits in our coverage and trades at half the valuation on FCF basis as SHOP; in addition, we recommend Klaviyo (KVYO, Buy), which provides direct exposure to Shopify ecosystem success, and deep value name Riskified (RSKD, Buy), which trades at rare lowly 1 times sales level.”
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National Bank Financial analyst Jaeme Gloyn thinks the “messaging was strong” from Trisura Group Ltd. (TSU-T) following the release of its results from the fourth quarter of 2023, which he thinks will “mark the trough” for its U.S. business.
“While an element of ‘see it to believe it’ will remain, we believe management provided enough context on the conference call to confirm a solid 2024 is in the making,” he said. “Combined with sustained strength in the Canadian business and no new risks emerging, we expect the shares will continue to tick higher in the near term.”
On Thursday after the bell, the Toronto-based insurance provider reported adjusted diluted earnings per share of 54 cents for the quarter, up 7 per cent year-over-year and 14 cents above Mr. Gloyn’s estimate.
“Trisura delivered a fronting operational ratio of 106 per cent in Q4-23, well above the run-rate target 80 per cent,” he said. “Management attributed the result to two nonrecurring items: i) increased conservatism in provisioning against reinsurance recoverable; and ii) finalizing programs that were non-renewed in 2021/2022 which generated losses in Q4-23. Management also highlighted a gross loss ratio (the loss ratio passed onto their reinsurance partners) of 65-70 per cent for the Q4 and full year 2022/2023. This gives management confidence that with the restructuring of the U.S. business in 2023 complete, the 2024 outlook will return to more normal profitability levels in line with target.
“Management highlighted the recent investments in their U.S. Surety and Corporate Insurance platforms. Following the integration of the Sovereign acquisition and investments in talent, infrastructure and broker relationships, management expects the U.S. businesses to grow to the size of their Canadian counterparts in the medium term. Canadian Fronting operations exceeded management’s expectations on growth and profitability. TSU noted there is significant demand for Canadian business from global reinsurance players. Positively, TSU has the infrastructure to meet this demand, and it sees a runway for high teens to low-20s growth in the near term.”
Citing its “strong” quarter in Canada, Mr. Gloyn raised his financial forecast for Trisura with his adjusted diluted earnings per share projection increasing to $2.75 in 2024 (from $2.63) and $3.29 in 2025 (from $3.20).
Maintaining an “outperform” recommendation, he bumped his target for the company’s shares to $65 from $64. The average target is $52.57.
“Our Street-high $65 price target (was $64) is based on an unchanged 20 times P/E multiple on our 2025 estimate, in line with specialty insurance peers that traded at 21 times,” said Mr. Gloyn. “Trading at 14 times P/E suggests significant upside.”
Others making changes include:
* RBC’s Scott Heleniak to $44 from $40 with an “outperform” rating.
“Trisura’s Q4 results were led by the Canadian unit, which continues to perform well both from a top and bottom-line standpoint,” said Mr. Heleniak. “The U.S. segment reported some deceleration in premium growth while profitability was impacted by a few notable items. Potential impacts from the large program put into runoff a year ago are largely over. We think the growth outlook for Trisura remains healthy across their businesses in 2024. Investment income remains a significant earnings driver. Capital and debt ratios remain well above required ranges.”
* CIBC’s Nik Priebe to $55 from $50 with an “outperformer” rating.
“After cleaning up a few legacy/run-off programs in Q4 and adopting a more conservative stance towards provisioning, Trisura appears poised for a cleaner set of results in the year ahead. We believe the company will make further inroads on the expansion of Surety and Corporate Insurance lines into the U.S. on a primary basis, and see potential for AM Best to revise its negative outlook back to stable in 2024,” said Mr. Priebe.
* Cormark Securities’ Jeff Fenwick to $52 from $51 with a “buy” rating.
* Raymond James’ Stephen Boland to $64 from $54 with an “outperform” rating.
* BMO’s Tom MacKinnon to $52 from $49 with an “outperform” rating.
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In other analyst actions:
* TD Securities’ Sean Steuart upgraded Interfor Corp. (IFP-T) to “buy” from “hold” with a $25 target, down from $27. Elsewhere, CIBC’s Hamir Patel cut his target to $25 from $30 with an “outperformer” rating. The average is $29.17.
“While we are cautiously optimistic on demand prospects for the spring selling season (getting underway in the U.S. in early February), much stronger lumber prices still seem to be a 2025 story given the ongoing presence of European imports,” said Mr. Patel.
* In a note titled Vegas odds stacked in favour of continued outperformance prior to kickoff at Attachie, Desjardins Securities’ Chris MacCulloch bumped his Arc Resources Ltd. (ARX-T) target to $29.50 from $29 with a “buy” rating. The average is $26.47.
“We continue to highlight the stock as our top pick in the large-cap natural gas space,” he said.
* Piper Sandler’s Michael Lavery lowered his target for Canopy Growth Corp. (CGC-Q, WEED-T) to US$3 from US$5 with an “underweight” recommendation. The average is US$4.27.
* Canaccord Genuity’s Robert Young cut his Dye & Durham Ltd. (DND-T) target to $25 from $30 with a “buy” rating. The average is $21.42.
* TD Securities’ Cherilyn Radbourne raised her Finning International Inc. (FTT-T) target by $1 to $41 with a “hold” rating. The average is $47.
* BMO’s Ben Pham moved his Fortis Inc. (FTS-T) target to $58 from $58.50 with a “market perform” rating. The average is $58.07.
“Q4/23 EPS results illustrate that earnings growth is coming back to the FTS story (12 per cent for 2023) and risk to recent growth projects can be made up given the company’s diverse footprint and local business model,” he said. “Unfortunately, FFO/debt is still not in the sweet zone and S&P recently moved the goalposts from 10.5 per cent to 12 per cent making it difficult to build as much cushion as we previously expected. We believe opportunistic asset sales and ATM issuance could provide a catch-up.”
* RBC’s Nelson Ng cut his Innergex Renewable Energy Inc. (INE-T) target to $11 from $13 with a “sector perform” rating. The average is $13.72.
“We believe the time is right for Innergex to reset its capital allocation strategy and significantly cut its dividend when it reports Q4/23 results on February 21, which may already be mostly priced into the shares,” he said. “The payout ratio has been at or above 100 per cent (including prospective project expense) for the past five years, and we believe a much lower payout is appropriate for a growth company. We are reducing our price target ... as we believe there could be a period of shareholder transition.”
* TD Securities’ Derek Lessard cut his Premium Brands Holdings Corp. (PBH-T) target to $130 from $135 with a “buy” rating. The average is $114.20.
* Scotia’s Michael Doumet hiked his Russel Metals Inc. (RUS-T) target to $50 from $46.50 with a “sector perform” rating. The average is $49.88.
“RUS is increasingly breaking away from its correlation with metal prices and WTI,” said Mr. Doumet. “This shift, we think, is due to its successful capital allocation (in the last three years) and its runway for additional accretive investments: a clean balance sheet provides RUS with room to capitalize on opportunities (i.e., M&A, buybacks) when metal prices are soft and optimize profits when the backdrop is favourable (i.e., higher growth capex, WC investments). Further, we believe management’s desire to maintain a conservative balance sheet (through the cycle) reinforces this shift in investor psychology. Over time, continued success is likely to lead to (further) multiple expansion.
“We have liked what RUS was doing for some time. We liked its most recent acquisition and its increased growth capex and buybacks. However, with RUS shares having done well in the LTM [last 12 months], we missed the opportunity to get more positive.”
* Scotia’s George Doumet increased his Saputo Inc. (SAP-T) target to $32.50 from $31.50 with a “sector outperform” rating. Other changes include: CIBC’s Mark Petrie to $35 from $36 with an “outperformer” rating and TD Securities’ Michael Van Aelst to $36 from $40 with a “buy” rating and . The average is $32.95.
“Q3 results were noisy (Australian write-down, Argentinian devaluation, and inventory flush in Europe) and missed Street expectations by 3 per cent (in line with us),” Mr. Doumet said. “While these results triggered downward revisions to estimates (5 per cent on our Q4E and 2 per cent on our F25E), we would take advantage of the weakness in the shares. All in all, we like the set-up (‘trough-ish’ U.S., International, and Europe margins against a 10-year trough valuation). FCF is set to inflect over the NTM (lower capex), implying a F25 FCF yield of 8.3 per cent (one of the highest in our coverage), paving the way for significant deleveraging (and, we hope, increased capital returns to shareholders in the near to medium term).”
* Canaccord Genuity’s Dalton Baretto raised his Silvercorp Metals Inc. (SVM-T) target to $4.75 from $4.50 with a “buy” rating. The average is $6.09.
* JP Morgan’s Sebastiano Petti raised his Telus Corp. (T-T) target to $27 from $26 with a “neutral” rating, . Other changes include: BMO’s Tim Casey to $26 from $27 with an “outperform” rating an Scotia’s Maher Yaghi to $28 from $27 with a “sector outperform” rating.. The average is $26.74.
“With total wireline and wireless RGU growth of 5 per cent and 4 per cent year-over-year respectively, coupled with significant focus on operating costs, TELUS continues to generate industry leading organic EBITDA growth,” said Mr. Yaghi. “With TIXT seeing improvement in earnings coupled with a gain in momentum at TELUS Health, we expect 2024 to be a better year for the stock vs 2023. While FCF is on the mend, we believe investors need to keep an eye on earnings as well as it continues to be good indicator of how profitable capital is deployed. Another reason we maintain our SO rating on TELUS is the asset mix rich in wireless and broadband, the two services that are continuing to see overall revenue growth in Canada.”
* Mr. Petti also increased his target for Telus International Inc. (TIXT-N, TIXT-T) to US$10 from US$8 with a “neutral” rating. Others making changes include: TD Securities’ Daniel Chan to US$11.50 from US$10.50 with a “buy” rating, BMO’s Keith Bachman to US$10.50 from US$8 with a “market perform” rating, Citi’s Ryan Potter to US$10 from US$9 with a “neutral” rating and Canaccord Genuity’s Aravinda Galappatthige to US$16.50 from US$14.50 with a “buy” rating. The average is US$12.
“TELUS International reported relatively in-line results that showed a return to sequential and organic top-line growth,” said Mr. Potter. “The majority of performance was driven by its two largest clients (slightly offset by continued declines in its large social media client) – client concentration risks remain an area to monitor. Margin and cash flow performance was solid in the quarter and is expected to continue into 2024 despite some incremental growth investments. The change in reporting for adjusted metrics does add some unnecessary noise, though, and was a bit perplexing as it reduces comparability vs. peers at a time when a cleaner story/comparison would do better to bring in incremental investor interest. The 2024 outlook does assume some demand recovery in 2H24, so we believe the lower end of the ranges are more appropriate to assume as the company proves out consistent execution in the coming quarters.”
* Canaccord Genuity’s Katie Lachapelle bumped her Uranium Royalty Corp. (URC-T) target to $6.75 from $6.25 with a “speculative buy” rating. The average is $6.38.
David Leeder