Inside the Market’s roundup of some of today’s key analyst actions
National Bank Financial analyst Cameron Doerksen thinks the outlook for the aerospace industry “remains positive,” which he expects will lead to a period of multiyear growth for Bombardier Inc. (BBD.B-T), CAE Inc. (CAE-T) and Héroux-Devtek Inc. (HRX-T).
In a research report released Tuesday, he reaffirmed the three companies as “top ideas” in his coverage universe.
“Demand for air travel is the primary driver for the broader commercial aerospace industry, and according to the latest numbers from IATA, global passenger traffic has fully recovered to 2019 levels for the first time with February data coming in 5.7 per cent above 2019 on 5.8 per cent higher capacity,” said Mr. Doerksen. “A recovery in global air traffic is positive for CAE’s pilot training business while also being supportive of higher aircraft production rates, which is positive for both CAE and HRX.”
“Business aircraft flying activity in both the U.S. and Europe so far this year has been roughly consistent with last year and remains well ahead of 2019 levels. On a global basis, business aviation data provider, WingX, reports that business jet flights so far this year (through March) are slightly ahead of last year (up 0.3 per cent year-over-year) and are notably up 32.2 per cent compared to the same period in 2019. Solid OEM jet backlogs support higher business jet deliveries this year and in 2025, which is particularly positive for Bombardier, but also for HRX and CAE.”
The analyst also thinks the outlook for the defence end market “remains supportive for 2024 and beyond as global military spending to address growing threats continues to increase.”
“CAE and HRX will both benefit from increased defence spending with roughly 45 per cent of CAE’s revenue being generated from its Defence & Security segment while for HRX, Defence makes up almost 70 per cent of revenue,” he noted.
Maintaining his “outperform” recommendation for shares of all three companies, Mr. Doerksen adjusted his target prices. They are now:
* Bombardier Inc. to $95 from $94. The average on the Street is $76.
Analyst: “We maintain our Outperform rating on Bombardier shares ahead of Q1 results scheduled for release on April 25th . Stable trends in the broader business jet market and Bombardier’s solid backlog that provides for good visibility through 2025 give us confidence the company can achieve or at least come close to its financial targets for 2025. Bombardier will hold an investor day on May 1st at which we expect the company to provide an update on its financial targets including possibly providing some thoughts around the post-2025 period. We also expect some additional thoughts around capital allocation post-2025 as target leverage is achieved.”
* CAE Inc. to $32 from $34. Average: $33.
Analyst: “CAE will report its fiscal Q4 results (ended March) later in May. Our Outperform rating is primarily a function of what we see as a multiyear period of growth for the company’s Civil segment ahead, noting that even when/if Defence segment margins return to 10 per cent, Civil will still make up 75 per cent of overall company operating profits. Although we are confident that Defence margins will ultimately show improvement, we acknowledge the stock may remain under pressure if CAE does not make progress on margins, which represents a key risk to our investment thesis. Earlier this month, CAE announced changes to its Defence leadership including the departure of Group President Dan Gelston. A search for a new Defence head is underway and investors will likely want to see a new President with a background in operations and program execution.”
* Héroux-Devtek Inc. to $25 from $23. Average: $23.90.
Analyst: “We maintain our Outperform rating on Héroux-Devtek ahead of fiscal Q4 results (ended March) that will be released later in May. Although some challenges remain in the aerospace supply chain, HRX’s Q3 results showed a solid improvement in throughput as well as the margin benefits from re-pricing of contracts. Management indicates that it sees a continued upward trend in sales volumes and a path to margins that can exceed margins the company has generated in the past (past normalized EBITDA margin range of 15-16 per cent). With demand in both the Defence and Civil segments remaining strong over a multiyear period, we see a sustained run of revenue growth and margin expansion ahead for the company.”
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When Restaurant Brands International Inc. (QSR-N, QSR-T) reports its first-quarter financial results on April 30, Citi’s Jon Tower expects the company to continue to point to “ongoing strength” in its core Tim Hortons business in Canada.
However, while he’s also anticipates signs of progress on its Burger King turnaround in the United States, “an emerging profit unlock” at its U.S. Popeyes Louisiana Kitchen locations through kitchen remodels and “a slowly improving” cadence on net restaurant openings, the analyst thinks the tone on demand will likely remain muted like its global peers.
“We believe questions regarding the outlook in China and concerns about how BK U.S. would fare in a more value-driven environment will make multiple expansion from here difficult in the near-term,” he added.
In a research note released Tuesday, he added: “What the Data Says — (1) BK U.S. saw modest sequential improvement in year-over-year footfall vs. 4Q, though weather played a negative factor early in 1Q24. (2) BK U.S. year-to-date share of big 3 burger chain footfall slipped vs. prior year, though we attribute much of this to aggressive promotional activity at [Wendys Co.] in March.”
Based on “slightly” lower comparable same-store sales expectations and foreign exchange considerations, Mr. Tower cut his earnings per share projections for 2024 and 2025 to US$3.29 and US$3.71, respectively, from US$3.37 and US$3.80.
“Key Topics/Questions for the call ... (1) Has visibility improved into the company reaching 5-per-cent net unit growth by year end? Outside of China, have there been any major shifts in key markets? (2) Updates on the U.S. Popeye’s ‘easy to run’ tests and plans for broader adoption across the franchisee base. Given our expectation for relatively low cost/operational disruption, how quickly can this be deployed across the store base? (3) Trends for key growth levers for Tims Canada (PM food, cold beverage, speed of service) and what has the brand done to drive even higher loyalty adoption (5 million members/30-per-cent spend in 4Q) as well as greater frequency from this cohort (45 per cent already visit the stores 2 times per day)? (4) How is QSR working with its master franchisee for BK China to spur a reacceleration of unit growth? (5) Updates on the TAST acquisition and thoughts on potential synergies emerging post deal,” he noted.
Reaffirming his “neutral” rating on Restaurant Brands shares, Mr. Tower lowered his target to US$78 from US$81 to reflect those lower expectations. The average target on the Street is US$84.88.
“The company has demonstrated an ability to improve franchisee profitability in core home markets across the portfolio and we expect this broadly continues, along with strong unit growth for Burger King International, ramping of PLK brand globally and solid comp growth at TH Canada,” he concluded. “However, limited visibility into the economics of nascent businesses outside core markets (e.g., PLK INTL, TH INTL, FHS) means its difficult to underwrite NRG (new restaurant growth) returning to more than 5 per cent and layering this into valuation. At the same time, we see above average room for near- to medium-term estimate volatility related to the Burger King US brand repositioning/reinvestment (including the integration of the TAST business) particularly as the competitive set struggles to drive traffic.”
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Heading into first-quarter earnings season for Canadian trucking and diversified industrial companies, RBC Dominion Securities analyst Walter Spracklin sees a “weak” environment, citing volume indications from U.S. transports and Canadian rail carload data.
However, while also noting “soft” truck pricing, he is “seeing evidence the market is steadying” and “would view an inflection in rates as a key catalyst for transports.”
“Transportation and diversified industrial share prices were mixed in the quarter with most companies underperforming the index,” said Mr. Spracklin. “TFII outperformed the S&P TSX, while AND, MTL, SJ, CJT, and WTE all underperformed. TFII performed best, up 20 per cent, following strong share price performance among US LTL peers. AND, MTL, and CJT all underperformed the index due to uncertainty surrounding the freight environment. SJ and WTE also underperformed due to near-term pole headwinds driven by budget constraints at utility customers and margin headwinds from labour and potash construction, respectively.”
“TFII and WTE are trading toward the high-end of their historical ranges – TFII reflecting the potential separation of the company into two separate publicly traded entities (TL and LTL/P&C/Logistics) and WTE due to strong thermal coal demand and ongoing potash terminal conversation. SJ is trading mid-range of its historical range resulting from infrastructure spending partly offset by peak pricing concerns. On the other hand, AND and MTL are toward the bottom of their historical valuation ranges due to recessionary headwinds and the potential negative impact on freight volumes. Finally, CJT is also trading toward the bottom of its historical valuation but off recent lows due to an upcoming FCF inflection expected in the immediate term in our view.”
While he reduced his quarterly expectations for TFI International Inc. (TFII-N, TFII-T), Mr. Spracklin raised his target for its shares to US$173 from US$155 with an “outperform” rating. The average is US$168.45.
“Our Q1 EPS estimate moves lower to $1.34 [U.S.] (from $1.52), below consensus $1.40, to reflect indications that truck pricing in Q1 came in below our prior expectations,” he said. “Our 2024 estimate decreases to $7.15 (from $7.35), below consensus $7.36, driven by weaker than expected pricing that we expect to negatively impact results in the first half of 2024. Our 2025 estimate remains at $9.00 (cons. $9.37), however, as we expect trucking conditions to normalize into 2025 and for TFII to benefit from the Daseke integration. Our price target increases ... on our higher multiple of 16.5 times (from 14.5 times), which we flag is in line to below U.S. peers. We expect focus into the quarter to be on the Daseke acquisition, impact from the Yellow shutdown, especially as Yellow terminals begin to be brought back on line following an auction last year.”
He added: “In our view, TFII is uniquely positioned to outperform, reflecting its strong FCF generation and focus on margin improvement, on which it has been successfully executing. Our view is predicated on TFII’s: 1) strong management team; 2) transcontinental network reach; and 3) significant scale. Furthermore, we are confident that management has the skills and expertise required to prudently acquire and integrate assets so as to increase market share. Moreover, we believe that efficiency initiatives should lead to margin enhancement that provides upside torque as volumes rise.”
Mr. Spracklin sees Cargojet Inc. (CJT-T) as the “best-positioned” stock in his coverage universe going into first-quarter reporting, maintaining an “outperform” recommendation and Street-high $184 target, which is 69.02 per cent above its Monday closing price. The average is $147.42.
“Our Q1 EBITDA estimate remains unchanged at $78-million slightly above consensus $76-million due to strong January trends that suggest upside to current consensus,” he said “Our 2024 estimate is also unchanged at $327-million, in line to slightly ahead of consensus $325-million. Our 2025 estimate stands at $368-million, ahead of consensus $344-million, on what we see as increasing eCommerce penetration and better margins driven by improving capacity utilization. We expect focus in Q1 to be on macro and volume trends given solid trends in January as well as on shareholder returns reflecting an imminent inflection in FCF in our view. Target multiple unchanged at 10 times and price target remains at $184.”
“We see meaningful opportunity continuing into 2026. CJT has several growth opportunities into 2026 that we expect to result in meaningful EBITDA growth. Ultimately, we see CJT benefiting from these trends out to at least 2025.”
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Previewing their quarterly results, Desjardins Securities analyst Doug Young sees both Intact Financial Corp. (IFC-T) and Definity Financial Inc. (DFY-T) “well-positioned to grow organically and inorganically,” noting both have been acquisitive lately.
“We expect benign weather in Canada to benefit 1Q24 results for both companies in the form of lower CAT and non-CAT weather losses,” he said in a note released Tuesday.
Mr. Young raised his first-quarter and full-year 2024 expectations for both companies, expecting “P&C insurance market conditions to remain favourable for the most part and for inflation to moderate sequentially, specifically in personal auto.”
“2023 was a tough comp year vs 2022 and especially 2021 on an underwriting basis as economies reopened, inflationary pressures persisted and the frequency of CAT events increased,” he said. “Higher investment income (due to higher interest rates) was a nice offset, but will this continue in 2024? We are expecting a material increase in operating EPS for both companies in 2024 (mostly due to elevated CAT losses in 2023 that we do not expect to persist in 2024).
“CAT losses for both companies should be in line with expectations, as neither company preannounced a CAT loss estimate. We expect higher CAT losses in the UK (relevant to IFC) to be offset by lower CAT losses in Canada; in the UK, there were a couple of storms earlier in the year, for which we believe the impact was primarily felt in personal lines (flows through exited lines). In Canada, aside from a deep freeze event that impacted the western prairies, there were no significant CAT events.”
Maintaining a “buy” recommendation for Intact shares, Mr. Young raised his target to $238 from $235. The average on the Street is $235.25.
Mr. Young said: “In terms of specific themes for IFC: (1) A few items worth mentioning on the UK&I business. First, any new colour on how the recent DLG acquisition (see note) performed? Second, recall that on December 7, IFC completed its strategic review of its UK personal lines business. Results for the run-off business are reported within exited lines. How long will losses at its exited lines persist? (2) Any new updates from the integration of RSA? (3) Canadian personal auto remains a hot topic. Anything to change its sub-95-per-cent seasonally adjusted combined ratio target? (4) A higher frequency of CAT losses has been an issue for its personal property division over the last few quarters; however, results this quarter should benefit from lower CAT losses and benign weather in Canada. We are forecasting a combined ratio of 84.9 per cent for 1Q24. (5) We expect decent results at its U.S. division, with an estimated combined ratio of 92.0 per cent.”
With a “hold” rating for Definity, his target increased by $1 to $45, below the $47.27 average.
Mr. Young said: “In terms of specific themes for DFY: (1) It completed its conversion to a CBCA structure effective January 1, 2024; this increases its debt capacity and prolongs the restriction on its being acquired until November 22, 2025 — so four years vs the initial two-year period post IPO. It has $1.3-billion in excess capital and debt capacity. Any new colour on the M&A landscape? (2) How has management done relative to various targets set out during the IPO process. Recall that with 4Q23 results, it increased the bottom end of its operating ROE target, which is now 10 per cent to below teens (vs high single digits to below teens previously). (3) We are not expecting anything new on Sonnet, but will be watching for any additional management commentary on its performance. It is focused on improving profitability in areas outside of Alberta (ie changing mix and taking rate). Any updates to how a pullback in Alberta or potential changes to its breakeven guidance (end of 2024)? (4) We expect the combined ratio for personal auto to be at the high end of management’s guidance of mid- to upper 90s. Earned rate growth has now surpassed inflationary loss cost trends. Does management see any risks that would cause it to change its target? (5) Lower CAT losses should positively impact results at its personal property division.”
Elsewhere, CIBC’s Paul Holden raised his Definity target to $47 from $46 with an “outperformer” rating.
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While he warns Finning International Inc.’s (FTT-T) first-quarter results could disappoint investors, Scotia Capital analyst Michael Doumet thinks “it gets better from here.”
“We are below consensus (1Q EPS of $0.80 vs. $0.85) due to anticipated pricing/margin normalization trends and transitory softness in UK & Ireland/Canadian construction,” he said. “While we believe such headwinds are not sufficiently reflected in Street estimates, we believe they are well understood by investors. That being said, we do expect 1Q24 to be a negative — as we are looking for (i) a sequential uptick in product support from 4Q23-lows and (ii) a much cleaner result in Argentina (including no additional one-time loss).”
“Our 2024 EPS forecasts has a different shape than that of the Street: we are below for 1Q24, in-line for 2H24, and above for 2025. Our view is that transitory softness in Canada/UK & Ireland construction, customer destocking (on parts), and pricing/gross margin normalization will dampen 1H24 EPS — but largely subside by the 2H24. Given the levers outlined at its Investor Day, we expect FCF to exceed EPS despite a growth re-acceleration; when redeployed towards debt paydown and buybacks, we expect the FCF generation to be $0.60 accretive to EPS by 2025 (on a pro forma basis).”
Believing a earnings re-acceleration in EPS will “improve visibility to EPS of $5.00,” Mr. Doumet bumped his target for Finning shares to $53 from $52, reaffirming a “sector outperform” recommendation. The average on the Street is $47.11.
“To us, FTT’s trough multiple contradicts the backdrop: PMIs rebounded to more than 50, copper prices have risen 20 per cent in L6M [last six months], WTI prices are firm, and the economic outlook remains favourable,” he said. “That is not to say the macro is ‘perfect’ — economic growth slowed in the UK & Ireland and construction in Western Canada may face a two-quarter lull. Regardless, we believe FTT is in a unique situation: it can (i) prove out its EPS resiliency despite customer destocking/softening demand in 1H24 and (ii) re-accelerate EPS growth in the 2H24 (and into 2025) with improving product support momentum and chunky debt paydown/buybacks.
“In the last 20 years, FTT traded at its approximately 10 times P/E trough multiple on four occasions: in 2008, 2015, 2020, and in October 2023. We not only believed the recent trough valuation was unjustified (the three previous occasions were marked by commodity shocks) — we also highlight how its recent multiple expansion lagged its peers. With product support trends firming and an estimated more than $9 per share of FCF in 2024/25, we expect EPS re-acceleration to lead to multiple expansion. Each time FTT bounced off its trough multiple, shares rallied 100 per cent in the next two years.”
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In a research report released Tuesday titled Slow Climb Out Of The Trough, TD Cowen analyst Sean Steuart reiterated his view that view that most lumber-weighted equities are undervalued.
“Despite a plateau setting in for interest rates and resurgent new home construction trends since late-2023, equity valuations in the group have struggled for traction,” he said. “Sawmill capacity closure initiatives are expected to yield better operating rates once the industry works through surplus inventory in the coming months. Lumber-weighted equities are trading at average multiples of 0.6 times P/BV [price-to-book value] and 3.1 times estimated trend EV/EBITDA, well below long-term averages for both metrics despite superior balance-sheet strength versus past cycles. Our top pick is WFG.”
For the coming earnings season, Mr. Steuart expects below-consensus adjusted EBITDA for four of the nine equities under coverage, noting: “Disappointing results are expected for companies exposed to sluggish U.S. South lumber markets (WFG, which is expected to benefit from surging North American structural panel prices towards the end of the quarter, is an exception).”
“Lumber markets have improved from cyclical lows, but momentum has waned in recent weeks,” he added. “The current Random Lengths Framing Lumber Composite price has improved 5 per cent since mid-February, but prices in most regions are still at, or below, our estimate of cash costs. Given relative price weakness for Southern Yellow Pine (SYP) lumber, we believe that negative operating margins are now the norm across several regions (i.e., this assessment is no longer limited to B.C.). We attribute the abnormal steep SYP price discount to Western SPF to a couple of factors: relative capacity growth in the South and higher SYP exposure to treating/renovation end markets (demand has lagged the new home construction channel).”
In response to commodity price forecast revisions, the analyst reduced his targets for these stocks:
- Cascades Inc. (CAS-T) to $11 from $12. The average on the Street is $12.92.
- Canfor Pulp Products Inc. (CFX-T) to $1.75 from $2. Average: $1.98.
- KP Tissue Inc. (KPT-T) to $9 from $9.50. Average: $9.63.
- Western Forest Products Inc. (WEF-T) to 65 cents from 75 cents. Average: 71 cents.
Conversely, he raised his targets for these stocks:
- Mercer International Inc. (MERC-Q) to US$10.50 from US$10. Average: US$9.75.
- West Fraser Timber Co. Ltd. (WFG-N, WFG-T) to US$118 from US$115. Average: US$104.
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In other analyst actions:
* Seeing it has a “freight recovery beneficiary,” CIBC’s Stephanie Price upgraded Descartes Systems Group Inc. (DGSX-Q, DSG-T) to “outperformer” from “neutral” with a US$101 target, rising from US$96.50. The average target on the Street is US$99.24.
“Roughly 40 per cent of Descartes’ revenue is transaction-based and, with global trade indicators starting to look more healthy, we view Descartes as a low-risk beneficiary of the freight recovery,” she said. “Descartes’ base business has high-single-digit organic growth and solid margins, and we see potential for the freight recovery to move organic growth into the low teens. Descartes is attractively valued at these levels, in our view, trading at 23 times FY2 EBITDA vs. a five-year average of 26 times and we see upside from larger M&A.”
* Citing EV headwinds, Stifel’s Justin Keywood cut his target for ATS Corp. (ATS-T) to $68 from $73 with a “buy” rating. The average is $65.43.
“ATS has lost 1/4 of market cap in three months (vs. S&P/TSX up 4 per cent), following mixed FQ3 results on EV, a negative broker initiation report and secondary sale from the largest shareholder at $46.55,” he said. “ATS now trades at 11 times NTM [next 12-month] EBITDA vs. a three-year low at 10 times, comps at 15 times and a buyback has been activated at $46, 10-per-cent higher.”
* Jefferies’ Anthony Linton moved his Crescent Point Energy Corp. (CPG-T) target to $14, exceeding the $13.54 average, from $12 with a “buy” rating.
* Barclays’ Ian Rossouw increased his target for First Quantum Minerals Ltd. (FM-T) to $16 from $13 with an “equalweight” recommendation. The average is $17.05.
* Eight Capital’s Adhir Kadve raised his Propel Holdings Inc. (PRL-T) target to $29 from $25, exceeding the $23.90 average, with a “buy” rating.
“We had the opportunity to go on the road with Propel CEO Clive Kinross and CFO Sheldon Saidakovsky, and we came away incrementally positive about Propel’s overall prospects moving forward,” he said. “While shares have performed well recently, the company’s catalyst-rich outlook has us believing that there remains potential upside from here coming from 1) execution on the growth opportunity from its core U.S. lending business, 2) conservatism built into the F24 guidance from FORA credit, 3) a key re-rate opportunity from the ramp and scale of the LaaS program throughout F24 and beyond, and 4) strong capital allocation. As such, in our view, any pullback in price represents a compelling buying opportunity.”
* JP Morgan’s Jeremy Tonet cut his TC Energy Corp. (TRP-T) target by $1 to $59 with a “neutral” rating. The average is $55.50.
David Leeder