Inside the Market’s roundup of some of today’s key analyst actions
North American railway stocks had a volatile Thursday after the Wall Street Journal quoted an unnamed source as saying the Biden administration will push regulators to confront consolidation and perceived anticompetitive pricing in the ocean shipping and railroad industries as part of a broad effort to blunt the power of big business to dominate industries.
The Journal said the administration would introduce a sweeping Executive Order this week asking the Federal Maritime Commission and the Surface Transportation Board to combat what it calls a pattern of consolidation and aggressive pricing.
Kansas City Southern (KSU-N) shares tumbled 7.73% on that news. Its shareholders will vote on the US$33.6-billion takeover offer from Canadian National Railway (CNR-T) next month. Canadian Pacific Railway (CP-T) fell 5.7% even as Canadian National Railway was close to unchanged.
This morning, the White House released its Fact Sheet on the Executive Order, and analysts are downplaying the impact on the railways now that more details are known.
“In summary, what appeared in the media report yesterday to be a much more concerted effort to influence freight rates and consolation in the rail sector, seems to be far more benign in the Fact Sheet, and part of an overall push to limit the impact of large corporations across a host of industries to exert undue influence (with some reference to allowing better access to passenger rail service),” RBC analyst Walter Spracklin said in a note before markets open this morning.
“It is our view therefore that based on our initial review of the Fact Sheet, the impact on the railroads appears as though it will be far less impactful than originally feared and therefore we expect the sector to rally on the back of these details. That said, it is possible that the Fact Sheet did not get into the details of how the White House intends to proceed specifically with respect to the rail sector and we will continue to monitor the news flow accordingly.”
In the order, freight railroads that own the tracks can privilege their own freight traffic—making it harder for passenger trains to have on-time service—and can overcharge other companies’ freight cars.
The RBC analyst made no changes to price targets or ratings to the railways.
Credit Suisse analyst Thomas Wadewitz had some similar thoughts.
“We believe the 6% - 7% pullback in CSX Corp (CSX-Q) and Norfolk Southern Corp (NSC-N) was likely overdone (vs the S&P 500 -1%) given our expectation that even if there is an eventual implementation, a switching rule would likely be narrow. We also note reciprocal switching has been in place for decades in Canada and revenue growth & margin performance has been favorable for the Canadian rails. Nevertheless, uncertainty could linger even after the publication of the anticipated EO and concerns about a potential future impact to pricing could also take time to diminish,” Mr. Wadewitz said.
Norfolk Southern saw a couple analyst actions this morning: Evercore ISI upgraded the stock to “outperform” from “in line”, while Wells Fargo raised its price target to US$318 from US$315.
Several analysts initiated coverage on Verticalscope Holdings (FORA-T), an operator of niche digital communities that went public in June. Overall, they’re a bullish lot.
National Bank of Canada started coverage with an “outperform” rating and C$36 price target. RBC assigned it an “outperform” rating and $31 price target. And Canaccord Genuity gave it a “buy” rating and $29 target.
“The topic-focused and predominantly product-oriented nature of these online communities lends itself to a compelling business model, comprising both targeted digital advertising and eCommerce on a revenue share basis,” commented Canaccord analyst Aravinda Galappatthige. “This, together with the largely user-generated nature of its content and almost entirely organic traffic (negligible paid traffic) has facilitated a compelling near-50% EBITDA margin.
“VerticalScope offers direct exposure to the high-growth digital advertising sector, a space that remains notably under-represented in the TSX. On top of this, the growing eCommerce element of the business model enjoys additional tailwinds from the recent acceleration in adoption,” she added.
Some analysts moved up their price targets on Descartes Systems Group Inc. (DSGX-Q, DSG-T) after it announced Thursday the acquisition of GreenMile, a cloud-based mobile route execution solutions provider, for US$30-million.
Laurentian Bank Securities raised its price target to US$79 from US$71 and Scotiabank bumped up its target to US$72 from US$69.
“Truck drivers with the GreenMile Driver suite get access to real-time traffic data and updated route plans, which helps improve efficiency. GreenMile also enables digital proof-of-delivery, customer notification and tracking driver performance. Management can assess driver performance metrics and monitor real-time delivery status. We believe the solution combines well with Descartes’ advanced route optimization and shipment tracking tools,” said Canaccord Genuity analyst Robert Young. He maintained a US$74 target a “buy” rating.
Credit Suisse raised its price target on Bed Bath & Beyond Inc (BBBY-Q) to US$30 from US$19 after recent price appreciation. But the bank thinks investors should stay on the sidelines for now.
“We see potential for upside to revised sales guidance and are encouraged by management’s optimism in being able to hit prior EBIT margin goals despite elevated costs,” Credit Suisse analysts said in a note. “We like the transformation path set by the new management, focusing on core categories (that have been outperforming the chain) along with the rollout of owned brands that should help drive more differentiation and market share gains.”
“However, this already seems embedded in the stock, up 60% YTD and currently trading at a premium to its pre-pandemic relative valuation (35% discount to market on FY2 PE currently vs. about 50% discount over the past five years). In our view, while a case could be made for further multiple expansion as the company recaptures market share following years of underperformance, we have yet to see sustained signs of that which keeps us at Neutral.”
BMO analyst Andrew Strelzik initiated coverage on SunOpta Inc. (STKL-Q, SOY-T), which makes healthy food and beverages, with an “outperform” rating and US$15 price target.
“SunOpta is an attractive multi-year opportunity as it is well positioned to realize above-average sales/EBITDA growth into the future, can further enhance its growth/margin profile through portfolio optimization efforts, and is an underappreciated ESG story that could lead to multiple expansion,” the analyst said.
“SunOpta is a more focused, less volatile business after the divestiture of its Global Ingredients segment and the 25-30% pullback in shares creates an attractive entry point, in our view,” he said.
In other analyst actions:
* General Motors Co (GM-N): Wedbush initiates coverage with outperform rating; price target US$85
* Costco Wholesale Corp (COST-Q): MKM Partners raises fair value to US$385 from US$336. Oppenheimer also raises target price to $450 from $425
* Home Capital Group Inc (HCG-T): TD Securities raises target price to C$48 from C$43
* Dye & Durham Ltd (DND-T): Canaccord Genuity cuts target price to C$60 from C$65 but maintains “buy” rating.
With a file from Reuters
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