Inside the Market's roundup of some of today's key analyst actions. This file will be updated often during the trading day so check back for new details.
The markets are "heavily discounting" the credit cycle related to oil and housing concerns, said Credit Suisse analyst Kevin Choquette, who said it is a "perfect storm for investors to buy the Canadian banks."
"We believe the market is discounting on headline news and not fully factoring in the fact that Canada has a more balanced economy than just oil and that its major trading partner the U.S. (76 per cent of exports) is in an economic recovery," he said. "The market seems to be aggressively discounting the cyclical aspects but ignoring structural shifts, including revenue and loan mix, balance sheet strength, profitability, and sound mortgage market/structure, which reduces the risk during the expected housing slowdown."
Mr. Choquette upgraded National Bank of Canada (NA-T) to "outperform" from "neutral" based on "significant underperformance and valuation decline to one standard deviations below the mean on a [price-to-earnings] basis."
He increased his price targets for the following stocks:
National Bank (NA-T) to $52 from $50. Consensus is $49.54.
Bank of Montreal (BMO-T) to $93 from $92. Consensus is $79.40.
Toronto-Dominion Bank (TD-T) to $64 from $62. Consensus is $57.94.
Canadian Imperial Bank of Commerce (CM-T) to $115 from $110. Consensus is $102.44.
Laurentian Bank of Canada (LB-T) to $55 from $52. Consensus is $51.33.
He did not change his targets for Royal Bank of Canada (RY-T) at $95, compared to a consensus of $82.19, and Canadian Western Bank (CWB-T) at $27, versus a consensus of $27.38. He reduced his target for Bank of Nova Scotia (BNS-T) to $71 from $74 with a consensus of $67.25.
He noted bank share prices are down 5 per cent on the year to date though earnings growth is up 6 per cent and dividend increases of 8 per cent. Calling valuations "compelling and equities and bonds," he said the price-to-book ratio is the second lowest in the last 20 years, trailing only the financial crisis.
"We expect higher credit costs from higher unemployment and low economic growth, with the impact expected to be modest/manageable," said Mr. Choquette. "The fact that the U.S. is in a recovery should mute the severity of the pending credit cycle (mini cycle). In addition, bank loan exposure to energy is only 2.1 per cent of loans, unsecured consumer 7.2 per cent, mortgage [loan-to-value] 57 per cent, bank leverage to credit is one-third of historical levels and 33 per cent of the portfolio is non-CAD/outside Canada. Also, based on Liberal platform of fiscal deficits and infrastructure investment, this may further mute the credit cycle."
He added: "In terms of the credit cycle, bank stocks have outperformed in the past four credit cycles (trough to peak). Excluding Financial Crisis which was not led by traditional credit, managing to record positive absolute and relative returns in the face of rising credit losses, which is counterintuitive. The credit cycle in 2009 was the exception in terms of absolute performance as it was non Canadian centric and related to toxic assets and the Financial Crisis mainly in the U.S. that was exported globally (valuation contagion). We believe that bank shares can outperform during the current pending credit cycle with peak PCLs likely 2017. We expect outperformance due to level of profitability, capital levels, and lower leverage to credit, lower loan and single name concentration, positive loan mix shift, US economic recovery and compelling/depressed valuations that has not recovered from the Financial Crisis."
Canadian Solar Inc (CSIQ-Q) is experiencing a tightening supply/demand in its module business during the "bullish" end-of-year adoption cycle, said Canaccord Genuity analyst Jed Dorsheimer.
Ahead of the release of its third-quarter results on Nov. 11, the company increased its third-quarter revenue guidance to $805-$815-million from $570-620-million guidance. It also said its gross margins will reach or beat prior guidance of 12-14 per cent.
"This is mainly a result of stronger than expected module ASPs," said Mr. Dorsheimer. "We believe that, if momentum continues, the company is poised to beat its 2015 revenue guidance of $2.8-3.0-billion and have modeled as such. We are also taking this opportunity to lower our [2016 fiscal year] revenue estimate to reflect a lower portion of sold assets as the company transitions to a build-to-hold model."
He added: "We are updating our model to reflect the company's increased Q3 guidance, but our thesis remains unchanged: we believe the near-term, fundamental PV growth story is intact with potential upside to the company's FY15 guidance. We continue to believe that quarterly earnings should have minimal impact on CSIQ shares until investors have ample details on the impending YieldCo."
Mr. Dorsheimer said he feels the market is "heavily discounting" the company's ability to launch a Yieldco "with valuation primarily based on its core module business." He expects that will remain a "key overhang" affecting the share's upside in the near term.
Accordingly, while maintaining his "buy" rating, he lowered his price target for the stock to $29 (U.S.) from $40 "to reflect current sentiment around asset sales/a potential YieldCo." Consensus is $36.34.
Admitting downgrading Dr Pepper Snapple Group Inc. (DPS-N) late last year was a mistake, RBC Dominion Securities analyst Nik Modi upgraded the stock to "sector perform" from "underperform."
"Late last year, we downgraded DPS to underperform on the heels of the stock's significant run, its seemingly lofty valuation, our concerns over upside to [Rapid Continuous Improvement] benefits, ongoing pressure on its core portfolio and stepped up promotional activity from [Coca-Cola Co.] on flavored carbonated soft drinks. Since that call, DPS has continued to generate solid RCI savings, KO found renewed discipline on pricing, the core biz has improved and DPS' allied brand strategy likely provides upside to volume growth. We got this one wrong."
Though Mr. Modi said the stock is currently one of the most expensive in the consumer staples sector and he struggles to see it rallying from the current level, he raised his target to $90 (U.S.) from $68. Consensus is $90.72.
"DPS has a few initiatives that are working in its favour that could provide upside to earnings: 1) its position as the preferred distribution partner for up and coming beverage brands, 2) cost of goods sold deflation (packaging/apple juice etc) which could provide further margin benefits; 3) continued strong pricing realization, which doesn't show any signs of slowing any time soon given [Coca-Cola] and [Pepsi's] FX headwinds are likely to carry over into 2016; and 4) execution on marketing initiatives, which are targeting growing demographics."
The strong momentum exhibited by Alimentation Couche-Tard Inc. (ATD.B-T) will be aided by fuel margins, according to Canaccord Genuity analyst Derek Dley.
Ahead of the release of its second-quarter 2016 results in late November, Mr. Dley said he's projecting earnings before interest, taxes, depreciation and amortization of $658-million, up from $510-million a year ago. His earnings per share estimate of 70 cents is an increase of 15 cents from the same point in the 2015 fiscal year and also above the 55-cent consensus. He attributes the projection to strong same-store sales growth and a "record high" fuel margin assumption.
"We are forecasting merchandise same-store sales growth of 3.5 per cent in the U.S., 2.3 per cent in Canada and 2.0 per cent Europe, as we expect the strong same-store sales momentum generated over the previous two quarters to continue during Q2/F16," he said. "Meanwhile, our weighted average fuel margin calculator suggests strong year-over-year fuel margins of 27.0 cents/gallon during the quarter, as the oil price resumed its decline during Q2/F16. While this is a transitory phenomenon, it will help support material earnings growth during the quarter, while increasing Couche-Tard's war chest as it relates to potential acquisitions."
Maintaining his "buy" rating, he raised his price target for the stock to $67 (Canadian) from $64. The analyst consensus target price is $65.11, according to Thomson Reuters.
"Couche-Tard's balance sheet remains healthy, with adjusted net debt/EBITDAR of 2.2x, well below Couche-Tard's 3.0x acquisition threshold, leaving management with [approximately] $2.8-billion of capital to put to use towards acquisitions," the analyst said. "We believe the company will continue to search for accretive acquisition opportunities both in North American and Europe. We continue to believe Couche-Tard has a robust pipeline for acquisitive growth as the integrated oil and gas producers in Europe begin to shed their downstream assets, in a similar fashion to what we have witnessed in the U.S. over the last ten years."
Cara Operations Ltd. (CAO-T) has a "very open playing field" going forward as it aims to expand through a "long menu of acquisition opportunities," said CIBC World Markets analyst Perry Caicco.
He initiated coverage of the company with a "sector performer" rating.
"Cara specifically is about 88-per-cent franchised," said Mr. Caicco. "The company is very levered to Ontario (about 70 per cent of sales), where the economy is currently the strongest in Canada. The company has pretty much cleaned up its cost base and worked closely to maximize revenues, although there is still room to raise franchise fees as contracts roll over. But from here on, Cara's future is tied largely to its own ability to execute weekly promotions, the acquisition of new chains, and the health of the overall industry.
"Acquisitions are of course the key to adding value since there are substantial synergies available and plenty of complementary geographies, venues, dayparts and sub-categories where Cara currently is under-represented. In a highly fragmented industry, there are numerous opportunities to add banners that would fill in geographies, or fill in sub-segments, or offer rapid growth. We would see the most desirable acquisitions as primarily outside of Ontario and focusing on segments such as Italian, Mexican, Middle Eastern or sushi."
Cara now operates under 10 different brands, including Harvey's, Montana's and Milestones, but Mr. Caicco called Swiss Chalet and its 215 stores "the star of the show." The chicken chain accounts for almost a third of the company's total sales.
"The presence of ten different brands could lead to an automatic conclusion of efficient diversification, but this is not quite the case at Cara," he said. "Not only are there some gaps to be filled across different segments, but there is also some overlap among the brands. Management has conceded as much, noting that the Casey's brand is to be phased out, either by switching to another banner (Kelsey's or Prime Pubs), or allowing Casey's franchisees to go it alone and operate without Cara's support. And although there are different price points among the banners, an unbiased observer would probably note that there still could be more, as most of the brands operate in the casual dining or upscale-casual dining sector. Though the brand count is high, diversification is relatively low."
Calling the new management team has "integral" to the company's turnaround, he called the goal of 2.5-4-per-cent annual growth in same-store sales attainable. He said further avenues to growth include: a focus on high-performing restaurants; acquisitions; home delivery; gift cards and the non-restaurant sector (like dipping sauces in supermarkets).
He set a price target of $35. The analyst consensus is $39.29.
"The valuations assume that Cara will simply operate its restaurants and pay down debt," Mr. Caicco said. "But Cara is not just in the business of operating restaurants, it is in the business of acquiring restaurants. Assuming the company can make acquisitions with post-synergy multiples that are below Cara's own multiple, then there is a good possibility for accretion … Few restaurants will be selling for multiples below that of Cara, so immediate synergies are critical. Cara should be able to quickly collapse and integrate the head office of a new chain, and put it on a better cost-of-goods platform. But even if we give Cara a $2-$3 premium for some unknown acquisition, the stock does not seem wrongly or undervalued."
In other analyst actions:
Barclays initiated coverage on Silver Wheaton Corp (SLW-N) with an "overweight" rating and a price target of $18 (U.S.).
Macquarie upgraded Columbia Sportswear Co (COLM-Q) from "underperform" to "neutral."
Macquarie downgraded TripAdvisor Inc (TRIP-Q) from "outperform" to "neutral" with a price target of $84 (U.S.) from $56.
Mizuho Securities upgraded Valeant Pharmaceuticals International Inc. (VRX-N) from "neutral" to "buy" with a price target of $155 (U.S.), citing limited downside.
Alacer Gold Corp (ASR-T) was downgraded to "underperform" from "neutral" at Macquarie by equity analyst Michael Gray. The 12-month target price is $2.42 (Canadian) per share.
BCE Inc (BCE-T) was downgraded to "underperform" from "neutral" at Macquarie by equity analyst Greg Macdonald. The 12-month target price is $55 (Canadian) per share.
Broadcom Corp (BRCM-Q) was downgraded to "neutral" from "buy" at B. Riley by equity analyst Craig Ellis. The 12-month target price is $55 (U.S.) per share.
Community Health Systems Inc (CYH-N) was downgraded to "market perform" from "outperform" at Leerink Partners by equity analyst Ana Gupte. The 12-month target price is $33 (U.S.) per share.
DSW Inc (DSW-N) was downgraded to "neutral" from "buy" at Sterne Agee CRT by equity analyst Sam Poser. The 12-month target price is $39 (U.S.) per share.
Duke Energy Corp (DUK-N) was raised to "buy" from "hold" at Edward Jones by equity analyst Andrew Smith.
Energy Transfer Equity LP (ETE-N) was rated new "buy" at Evercore ISI by equity analyst Timm Schneider. The 12-month target price is $29 (U.S.) per share.
Energy Transfer Partners LP (ETP-N) was rated new "buy" at Evercore ISI by equity analyst Timm Schneider. The 12-month target price is $50 (U.S.) per share.
Knowles Corp (KN-N) was downgraded to "underperform" from "market perform" at FBR Capital Markets by equity analyst Christopher Rolland. The 12- month target price is $15 (U.S.) per share.
Mondelez International Inc (MDLZ-Q) was rated new "positive" at Susquehanna by equity analyst Pablo Zuanic. The 12-month target price is $60 (U.S.) per share.
Marvell Technology Group Ltd (MRVL-Q) was downgraded to "neutral" from "buy" at MKM Partners by equity analyst Ian Ing. The 12-month target price is $0 (U.S.) per share. It was downgraded to "sell" from "neutral" at B. Riley by equity analyst Craig Ellis. The 12-month target price is $7 (U.S.) per share.
PMC-Sierra Inc (PMCS-Q) was downgraded to "neutral" from "positive" at Susquehanna by equity analyst Mehdi Hosseini. The 12-month target price is $11 (U.S.) per share.
VMware Inc (VMW-N) was raised to "buy" from "hold" at Drexel Hamilton by equity analyst Brian White. The 12-month target price is $73 (U.S.) per share.
Weatherford International PLC (WFT-N) was raised to "positive" from "neutral" at Susquehanna by equity analyst Charles Minervino. The 12-month target price is $12 (U.S.) per share.
With files from Bloomberg News