Inside the Market’s roundup of some of today’s key analyst actions
RBC Dominion Securities analyst Walter Spracklin thinks the second quarter will represent a low point for North American railway companies with improvement toward the end of the year and a recovery in 2021.
“We have seen sequential improvement in the U.S. carload data from April lows, especially in the intermodal and automotive segments. We note that while Canadian volumes are still trending at April lows they did not experience declines to the same degree as the U.S. peers and that Canadian volumes are still trending above U.S. levels year-over-year. Overall, we continue to model for a recovery in H2 as the economy re-opens and expect 2021 volumes to be in line (to slightly below) 2019 levels. Finally, we note that although yield is expected to be affected by mix and fuel surcharges, our view is that core pricing will remain above inflation and that the rails with PSR [precision scheduled railroading] operating models will perform best during near term volatility.”
In a research report released Friday previewing second-quarter earnings season, Mr. Spracklin called Canadian Pacific Railway Ltd. (CP-T, CP-N) a “standout” in the sector. It remains his favourite name among rail companies.
“We continue to like CP reflecting expected volume outperformance, its operations focused management, and attractive valuation,” he said. “We believe that CP’s bulk franchise, which represents 40 per cent of volumes, will protect volumes in 2020 as grain and potash continue to outperform due to the essential nature of these products. Furthermore, we believe that core pricing will remain in the 3-4-per-cent range due to positive industry fundamentals and that CP’s operating resiliency will allow it to adjust its cost structure as volumes fluctuate. We also view CP’s long-term growth story as intact. In particular, we believe the CMQ acquisition, which gives CP access to the Atlantic coast, is a key driver of intermodal growth long term. We highlight that CP’s route from Saint John into Montreal/Toronto/Midwest is 200 miles shorter than competitive routes from Halifax, which we believe will act as a key competitive advantage.
“While shares have admittedly outperformed year-to-date, we note that CP trades at 20.3 times 2020 estimated EPS, which is 0.7 points below the peer average. We believe that shares should trade at premium reflecting CP’s superior volume outlook and operating performance. We therefore are positive on the shares at current levels and reiterate that CP is our preferred name in rail.”
Mr. Spracklin maintained an “outperform” rating and $401 target for CP shares. The average on the Street is $350.49.
“Contrary to all other rails, we are revising upward our Q2 estimate to $3.97 (from $3.51) as margins are expanding despite lower (in-line) volumes,” he said. “In fact, we see possibility that CP may revise guidance upwards on the back of these trends. Our estimates are at the high end of consensus. Our full-year EPS goes to $17.21 (from $16.42).”
At the same time, Mr. Spracklin trimmed his target for Canadian National Railway Co. (CNR-T, CNI-N) to $125 from $128 with a “sector perform” rating. The average is $116.73.
“We are taking down our Q2 EPS to $1.26 (from $1.33) - consensus $1.26,” he said. “This is on the back of lower than expected volumes (mainly crude). Our full-year EPS goes to $5.29 (from $5.37).”
The analyst also made these changes:
- Norfolk Southern Corp. (NSC-N, “underperform”) to US$172 from US$178. Average: US$190.23.
- Union Pacific Corp. (UNP-N, “outperform”) to US$194 to US$202. Average: US$172.77.
He maintained a “sector perform” rating and US$73 target for CSX Corp. (CSX-Q). The average is US$72.87.
=====
Desjardins Securities analyst Chris Li expects Empire Company Ltd.‘s (EMP.A-T) focus to start to “shift back to longer-term growth drivers,” seeing the grocer “well-positioned” to grow its margins through sales productivity and cost improvement initiatives despite challenging market conditions.
“EMP’s business mix (strong full-service format/limited pharmacy) positions it favourably in the near term to grow sales vs peers amid the pandemic,” he said. “This is evident by its strong 4Q sales. As sales and costs normalize, the focus is shifting back to EMP’s ability to build on its Project Sunrise success in removing more than $550-million of costs and improving EBITDA margin by greater than 160 basis points in the past three years.
“EMP will provide its next three-year plan (Sunrise 2.0) in July, with a focus on narrowing the margin gap versus Loblaw and Metro through sales productivity and cost improvement, which could be a catalyst. However, it is not clear if EMP will quantify the expected benefits as it did with Sunrise 1.0. While EMP has many growth initiatives (Ocado, Farm Boy, FreshCo expansion, private label, etc), we expect investors to take a wait-and-see approach as they will take time to execute.”
On Thursday before the bell, the parent company of Sobeys and Safeway reported adjusted earnings per share for the fourth quarter of 67 cents, exceeding the 62-cent projection of both Mr. Li and the Street. Same-store sales growth of 18 per cent also topped the analyst’s expectation (17.4 per cent).
With Empire now set to begin a rollout of its online home delivery service through an agreement with Ocado Group PLC, Mr. Li thinks a strong consumer reception could be a catalyst. However, he did note investors are “generally uncertain how well the Ocado CFC model will be received in North America.”
“Voilà rollout starting in June will be 5-cent dilutive to EPS over the next few quarters,” he said. “The majority of the expense in the 5-cent EPS dilution consisted of associates hired in the facility, vans and trucks for the delivery fleets and accelerated hiring of drivers. Other costs include amortization of building/infrastructure, fees paid to Ocado to manage the facility and marketing spend. Voilà sales are expected to ramp up faster than anticipated due to higher demand; hence, in the early days, EMP does not expect heavy marketing spending. In the early days of the launch, Voilà will carry a reduced assortment to ensure there are no product shortages and the assortment will be slowly ramped up in the following months.”
Based on the dilution, Mr. Li trimmed his 2021 and 2022 EPS projections to $2.20 and $2.32, respectively, from $2.28 and $2.38.
Keeping a “buy” rating for Empire shares, he raised his target to $36 to $34. The average on the Street is $36.78.
“Our favourable view is predicated on margin growth drivers supported by various sales productivity/efficiency improvement initiatives and EMP’s discounted valuation,” he said.
Elsewhere, Scotia Capital’s Patricia Baker raised her target to $40 from $36.50 with a “sector outperform” rating (unchanged).
Ms. Baker said: “Sobeys executed well in the quarter, and we anticipate continued momentum. Q4 marked the end of the company’s three-year transformation which delivered well on all fronts and sets the company up for a stronger future, particularly in light of its fulsome strategic plan which will position it far better in discount, as well as bringing to market an efficient online delivery platform. Over the last three years EMP.A improved execution quarter after quarter, doing more things better every day, translating to bettered operating performance and solid earnings growth. The improved execution, combined with a solid strategic agenda, sees EMP.A closing the gap with its peers on operational performance. This warrants, in our view, an enhanced valuation.”
=====
Corus Entertainment Inc.‘s (CJR.B-T) financial outlook appears “far better than that feared by the industry and analysts during early April,” said Canaccord Genuity analyst Aravinda Galappatthige.
He expects the Toronto-based media company's third-quarter financial results, scheduled to be released on June 26 before the bell, to be hurt by the impact of COVID-19 pandemic, however the analyst anticipates they will be "meaningfully better than originally feared."
Mr. Galappatthige is projecting revenue to fall 16.8 per cent year-over-year to $381.4-million, hurt by a 15.7-per-cent decline in its television division and a 30-per-cent drop in radio. He's forecasting earnings per share of 12 cents, which is 4 cents lower than the consensus on the Street.
"Note this is the Mar 1 – May 31 quarter, hence it very much bears the brunt of COVID-19," he said. "We can reasonably expect decline rates to moderate going forward. We also note that much of the projected Q3 weakness occurred during mid-March to Mid-April, following which the company experienced some stabilization, particularly in terms of TV ads."
“Based on comments made by management during investor conferences and meetings, we understand that following a precipitous fall in ads (led by cancellations) through mid-March to early April, TV ads started to see some stabilization. Furthermore, it was noted that as some of the cancelled campaigns returned, the month of May even saw some modest growth. This corresponds quite well with what we are hearing from U.S. operators (VIAC, DISCA). In fact, VIAC alluded to steep ad volume growth even in early June. Hence our Q3 estimates are based on an expectation of 20-per-cent ad declines in Q3 (vs our previous estimate of 35 per cent), and a 4-per-cent decline in sub revenues, which may still prove to be too conservative. In terms of cost flexibility, we have reserved much of our cost containment expectations to Q4/20 and Q1/21 given the realities of the programming mix and timing.”
Seeing its television ad trends rebounding, Mr. Galappatthige raised his full-year 2020 EBITDA forecast to $506.6-million from $474.6-million. His EPS projection rose to 69 cents from 58 cents, while his estimate for 2021 jumped to 67 cents from 51 cents.
Believing its dividend is safe, he also increased his target for Corus shares to $6.50 from $6, keeping a “buy” rating. The average on the Street is $4.98.
=====
A pair of equity analysts on the Street downgraded Medipharm Labs Corp. (LABS-T) in the wake of the release of disappointing quarterly results on Thursday.
AltaCorp Capital analyst David Kideckel cut the Barrie, Ont.-based company to “sector perform” from “outperform” with a $2.15 target, down from $4.30. The average on the Street is $3.73.
“·On June 18, 2020, MediPharm Labs announced its Q1/20 results, which were below our and consensus expectations, impacted by an oversupply of bulk oil in the Canadian market,” he said. “Over the near-term, we believe that LABS will continue to face headwinds as most of the Company’s sales come from the private label (bulk oil) segment. Though we maintain a cautious near-term outlook, we are encouraged by LABS’ progress towards international market sales and the Company’s white label (finished products) sales ramp. In the near future, we expect LABS to drive sales from products in the CPG space; over time, we view the Company driving sales mainly from the pharmaceutical space. We believe that LABS has built a global platform that leaves it well-positioned to become an API provider and partner-of-choice to pharmaceutical companies.”
Mackie Research analyst Greg McLeish moved the stock to “hold” from “buy” with a $1.75 target, down from $7.
====
In other analyst actions
* After reporting weaker-than-anticipated fourth-quarter results, Alithya Group Inc. (ALYA-T) was downgraded by Acumen Capital analyst Jim Byrne to “hold” from “buy.” His target for the Montreal-based company’s shares fell by a loonie to $3.50. The average is $4.07.
“We are lowering our rating to HOLD from BUY given the consistently disappointing quarterly results. While we believe the company can deliver better financial results in the future (with higher margin project business) we move to the sidelines until we see better evidence of those efforts,” he said.
* Seeing the supply-demand picture for methanol quite challenging and believing its valuation looks extremely expensive, Tudor Pickering analyst Matthew Blair lowered Methanex Corp. (MEOH-Q, MX-T) to “sell” from “hold” with a US$17 target, down from US$18 and below the US$20.69 average.
* TD Securities analyst Greg Barnes raised Ivanhoe Mines Ltd. (IVN-T) to “buy” from “speculative buy” with a $6.50 target, up from $5. The average is $5.47.
David Leeder