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Inside the Market’s roundup of some of today’s key analyst actions

Raymond James analyst Steve Hansen expects a weaker-than-expected start to the year for Canadian railroad companies, pointing to “stiff weather, volume and cost-related headwinds that demonstrably blunted their 1Q22 performance.”

In a research report released Monday, he said “many of these same challenges have already faded with spring’s arrival,” however he warned of the presence of “a bevvy of slowing economic indicators is beginning to cloud the 2H22/2023 traffic.”

“We expect both Canadian railroads faced stiff volume and cost-related headwinds through 1Q22 that will blunt their upcoming prints and potentially impact full year guides,” said Mr. Hansen. “On the volume front specifically, CN and CP reported 1Q22 RTM [revenue ton mile] growth of down 7.5 per cent year-over-year and down 14.2 per cent year-over-year respectively, presumably deeper drawdowns than both expected. To be fair, extended periods of acute weather in Jan/Feb presented a Herculean operating challenge that curbed fluidity and ultimately slowed traffic. Sustained headwinds in Canadian Grain (drought-impacted harvest) and lingering supply-chain congestion (i.e. Auto, Intn’l Intermodal) only exacerbated these challenges, as did CP’s short 2-day strike. Hefty cost headwinds will also feature prominently, in our view, including a stiff fuel-price headwind, elevated purchased services, and preemptive hiring costs in anticipation of a 2H22 recovery.”

Based on macro call, Mr. Hansen downgraded Canadian National Railway Co. (CNR-T) to “market perform” from “outperform” with a target price of $175, falling from $180 but above the consensus on the Street of $162.75.

“We do believe the company’s newly appointed CEO (Tracy Robinson) will likely want to level-set the company’s 2022 guidance after a slow start, likely pushing out the firm’s targeted 57.0 operating ratio,” he said. “Despite these anticipated revisions, we’re mindful that CN’s traffic continues to outperform by a wide margin, benefiting from robust tailwinds in Coal (i.e. Teck deal, new BC mines), PetChem, and increasingly Auto (lapping easy comps), with traffic noticeably inching back into positive territory in recent weeks.”

Mr. Hansen maintained a “market perform” rating for Canadian Pacific Railway Ltd. (CP-T) with a $100 target, down from $105 and below the $107.44 average.

“Our neutral position on CP continues to reflect our valuation-based downgrade back on March 9,” he said. “While the stock has retreated modestly since, we still feel it prudent to remain on the sideline until traffic shows more definitive signs of recovery and/or a more attractive entry point emerges.”


Despite facing the “significant” obstacles stemming from labour shortages and related vendor product shortages, Scotia Capital analyst Patricia Baker called Metro Inc.’s (MRU-T) second-quarter financial results “solid,” emphasizing its “steady” performance amid industry turmoil.

Shares of the Montreal-based retailer slid 2.6 per cent on Thursday following the premarket earnings release, which included adjusted earnings per share rising 7.7 per cent year-over-year to 84 cents, exceeding both Ms. Baker’s 82-cent forecast and the consensus on the Street of 83 cents.

Metro says food basket inflation hit 5 per cent in second quarter; CEO warns of more price pain to com

“MRU highlighted the challenges facing the grocery industry currently: rapidly rising inflation and ongoing labour shortages,” she said in a research report. “These challenges are likely to persist. As per usual, MRU has done a good job managing the business against this backdrop and, as noted above, delivered a steady Q2 performance. With trading conditions returning to more normalized pre-COVID-19 patterns, MRU noted higher year-over-year traffic in Q2 and a lower basket size, but still healthy relative to the pre-COVID basket.

“The current level of food inflation is challenging for the industry, as the full impact of vendor cost increases cannot be passed through to consumers if a grocer wants to remain competitive. MRU’s food basket in Q2 rose 5 per cent, from 3.5 per cent in Q1. Meat and grocery are the main categories driving the inflation. The concern for the industry in general will be effective management of higher inflation to maintain stable margins. Product shortages reflecting primarily the labour shortage for vendors continue to impact the supply chain. However, MRU noted absenteeism caused by COVID in its own stores and DCs is now under control and the situation is manageable. MRU’s investment in automated DCs will prove critical in managing structural labour shortages in the future. In addition, the accelerated rollout of self-checkouts (at 380 stores) and electronic shelf labels (218 stores) are effective tools to manage labour.”

With both food and pharmacy posted positive same-store sales growth for the quarter, Ms. Baker thinks Metro “continues to execute well, delivering a 4.5-per-cent improvement in EBITDA, driving a 9.7-per-cent EBITDA margin.”

She added: We believe that continued strong merchandising execution at MRU, good expense contro, and return of cash to shareholders will continue to support MRU’s premium multiple.”

Maintaining a “sector outperform” rating, Ms. Baker raised her target for Metro shares to $76 from $74. The average target on the Street is $72.50, according to Refinitiv data.

“We continue to view MRU shares favourably and note its strong merchandising programs and solid execution should see the company continue to grow market share. MRU is also committed to return cash to shareholders, and we see its growing dividend and ongoing share repurchases supporting the stock price,” she said.

Other analysts making changes include:

* CIBC’s Mark Petrie to $73 from $68 with a “neutral” rating.

* TD Securities’ Michael Van Aelst to $75 from $72 with a “hold rating.

* Desjardins Securities’ Chris Li to $70 from $66 with a “hold” rating.


CIBC World Markets analyst Robert Bek made a series of rating changes to telecom and cable companies in his coverage universe on Friday.

He raised his rating for Cogeco Inc. (CGO-T) to “outperformer” from “neutral” with a $106 target, up from $101. The average is $118.

Conversely, he lowered Telus Corp. (T-T) to “neutral” from “outperformer” with a target of $34, rising from $33.5 and above the $33.93 average.

Mr. Bek moved Shaw Communications Inc. (SJR.B-T) to “tender” from “outperformer” with a $40.50 target, above the $40.36 average.

He also made these target changes:

  • Cogeco Communications Inc. (CCA-T, “outperformer”) to $126 from $120. Average: $128.10.
  • Quebecor Inc. (QBR.B-T, “outperformer”) to $39 from $40. Average: $35.42.


Scotia Capital analyst Michael Doumet thinks been a long time since the backdrop from TSX-listed equipment dealers has “been this good.”

Seeing them benefiting from “favorable demand trends, lean inventories, and strong pricing,” he thinks Finning International Inc. (FTT-T) Toromont Industries Ltd. (TIH-T) and Wajax Corp. (WJX-T) are all set up for upside earnings surprises in the first quarter.

“Unlike several other industrial sub-sectors, the dealers should be net beneficiaries of supply chain tightness (i.e., pricing) and inflationary pressures (i.e., a benefit to its mining customers),” he said. “The non-res construction, mining, and oil & gas cycle also look increasingly favorable. For 1Q22, our EPS forecast is above consensus for each FTT (11 per cent), TIH (9 per cent), and WJX (2 per cent). In terms of share price performance, FTT is leading the pack, up 23 per cent year-to-date, although we would argue it is still being valued “cautiously” as its multiple does not reflect an extended cycle. The main opportunity with FTT shares, in our view, is that in addition to positive surprises, a positive re-rate fuels more gains. WJX shares lagged following its 4Q21 miss, but we expect a strong sequential earnings rebound in 1Q22. In the middle, but more recently outperforming, TIH brings a combination of quality and M&A optionality.”

For Finning, he’s raised his target by $1 to $46, above the $44.78 average, with a “sector outperform” rating.

“With FTT executing on margins (it beat expectations in the last three quarters) in what increasingly looks to be shaping up as a multi-year cycle, we believe investors are (still) being too cautious on how they value the shares,” the analyst said. “Macro-wise, 2022 may be as good as it’s been for FTT since 2012-2014. We forecast product support growth of 10 per cent in 2022 (highest since 2013) on higher mining and construction activity (and share gains). In the oil sands, we expect more spend as customers shift their focus to fleet uptime from cost containment. On a consolidated basis, its product support growth accelerated from down 5 per cent year-over-year in 1Q21 to up 12 per cent year-over-year in 4Q21 – and we think mining and energy markets will sustain the favorable momentum into 2022. Demand for equipment should continue to outstrip supply. As FTT is well positioned with its inventories (best of the dealers, in our view), we expect the dynamic to remain a net positive (i.e., favorable margin implications).”

Mr. Doumet also bumped up his Toromont target to $125 from $122 with a “sector outperform” rating. The average is $124.56.

“Of the three dealers, TIH’s inventories appear tightest (compared with our forward sales expectations),” he said. “We think that speaks to the strength of its end-markets (as reflected by its record backlog). Management commented that the company experienced further tightening of equipment supply relative to demand in 4Q21 versus 3Q21, which caused incremental slippage into 2022. While we expect the equipment supply/demand imbalance to at least persist (if not tighten further) in the 1H22, we believe the dynamic remains a net positive for TIH as it will drive favorable mix and higher utilization in its rental and product support business. We expect its Equipment Group to continue to produce record margins through the 1H22, until equipment deliveries ramp through the 2H22.”

Mr. Doumet maintained a “sector outperform” rating and $28 target for shares of Wajax, exceeding the $26.75 average.

“WJX has solid EPS growth prospects in 2022 (we forecast up 11 per cent year-over-year),” he said. “Meanwhile, WJX’s shares are down 17 per cent year-to-date. While its product support sales have so far been the slowest (of the three dealers) to recover to pre-pandemic levels, we think its direct/indirect exposure to the oil & gas and mining end-markets will drive mid-single digit product support growth in 2022. WJX continues to work with its suppliers, particularly those in construction, forestry, material handling, and power systems to secure additional equipment. In our view, its transition to sourcing equipment from Hitachi (instead of the Deere/Hitachi JV) may limit deliveries in the N-T, but will prove meaningfully positive as the company will be able to manage its supply chain and expand its aftermarket share, longer-term. In the near-term, we are most bullish on its ERS and Industrial Parts growth prospects, which recorded organic growth of 12 per cent in 4Q21 and, we think, will sustain high-single digit growth in 2022. In our view, WJX’s significant discounted valuation is unwarranted.”

Elsewhere, CIBC’s Jacob Bout increased his Toromont target to $123 from $118.


With $93-million acquisition of Rolling Hills Energy Ltd., National Bank Financial analyst Dan Payne emphasized Tamarack Valley Energy Ltd. (TVE-T) taking a “proactive approach” to consolidation of the Clearwater heavy oil play in Alberta, see it “positioning it as the absolute standout value player in the project and serving to augment visibility to corporate return of capital initiatives.”

Before the bell on Thursday, the Calgary-based company announced the deal for the privately held pure play oil producer. It also announced an increase to its monthly dividend by 20 per cent to 1 cent per share.

“The acquired assets serve to complete the consolidation of the southern Clearwater fairway (working interest and operatorship now 100 per cent) where it is the dominant operator and expects to realize material opportunities for synergies and optimization of development to maximize returns,” he said in a note. “Notably, these assets should serve to drive material FCF ($41-million) per annum to complement its return of capital strategy.

“In addition, the company announced a further 41 sections of land additions in the Greater Peavine area of the Clearwater (15 section agreement on the Peavine Metis Settlement and 26 sections through land acquisition) where it now holds 71 sections, which will see exploration commence in H2/22.”

Mr. Payne said Tamarack’s value proposition is set on the foundation of the Clearwater, “where it has an expansive land position (almost 600 sections) with exposure to all core development areas.”

“TVE has one of the most significant positions in the highest return project in the entire Basin, which should underpin massive scalability, free cash capability and value potential,” he said.

Maintaining an “outperform” rating for its shares, Mr. Payne increased his target to $8.50 from $8. The average is $7.81.

“TVE is poised for a 51-per-cent return profile (vs. peers 42 per cent) on leverage of 0.2 times (vs. peers 0.5 times), while trading at 2.3 times 2023 estimated EV/DACF [enterprise value to debt-adjusted cash flow] (vs. peers 2.1 times,” he said.

Others making target changes include:

* ATB Capital Markets’ Patrick O’Rourke to $6.75 from $6.50 with an “outperform” rating.

“The deal continues to position TVE as the dominant operator at the Jarvie Clearwater play,” he said. “Given the strong results being achieved in many parts of the Clearwater, we believe investors continue to view the play in a highly positive light, and positioning itself as a pragmatic consolidator and strong operator is likely to be a strategy that gains traction for TVE over the next few years, alongside a return of capital framework that will begin to distribute FCF to shareholders through special dividends and buybacks in Q3/22.”

* Raymond James’ Jeremy McCrea to $7.50 from $7 with a “strong buy” rating.

“With yet another purchase in the Clearwater, TVE continues to build scale in what we believe to be the most exciting play in the basin,” he said. “With Rolling Hills, TVE is picking up current production at 1.5 times FFO and 54 net locations booked across just 1/3rd of the land base. This provides significant exploration optionality as the Company looks to ramp up activity in the region. The attractive purchase price paid allows the Company to simultaneously announce an acceleration of its share return framework highlighted by a 20-per-cent increase to the base dividend. The industrial logic of today’s transaction in combination with the accelerating return of capital at TVE underscore the reasons why we grant the shares a Strong Buy rating.”

* CIBC’s Jamie Kubik to $7.50 from $7 with an “outperformer” rating.

* RBC’s Luke Davis to $7.50 from $7 with an “outperform” rating.


While Transcontinental Inc.’s (TCL.A-T) flyer business faces a significant threat following a Quebec Superior Court ruling this week, National Bank Financial Adam Shine thinks the share price reaction has been “grossly overdone.”

On Wednesday, the Montreal-based packaging and printing company said it plans to appeal a ruling that denied its motion to overturn a Mirabel byline requiring consumer to request its flyers, referred to Publisac. If maintained, it said it would lead to the end of the distribution, citing a “unprecedented rise in prices.”

“Retail flyer distribution revenues across Quebec are less than $100-million with an EBITDA margin in high single digits,” said Mr. Payne. “Montreal accounts for 20-25 per cent of total, so the revenue hit isn’t big and profit impact is immaterial. That said, TCL wouldn’t want to see collateral implications for retail distribution and flyer printing elsewhere in its footprint. Using a 5-times multiple for Printing, the 2022E value of the flyer business is $6.20 per share. More municipalities may follow Mirabel & Montreal, but the whole operation isn’t likely to be abandoned in short order and not without efforts to continue printing the flyer and exploring alternative distribution strategies (Canada Post 3 times more expensive than Publisac) while also considering material job losses.”

After reducing his discount applied to the flyer business, Mr. Payne cut his target for Transcontinental shares to $23 from $24.50 with an “outperform” rating. The average is $23.08.

“Our target is based on our fiscal 2023 estimated NAV (fiscal 2022 estimate $18.64) with implied EV/EBITDA of 6.6 times fiscal 2022 estimates and 5.9 times fiscal 2023,” he said. “If we wiped away the flyer business, our NAVs would drop to $15.50 & $20. This is excessive. Extrapolating TCL’s share price to fiscal 2023 estimates implies no value for flyers and a sub-2-times multiple on Printing which makes no sense. TCL’s story doesn’t hinge on flyers, but rather the scaling of Packaging and growth areas in Printing.”

Elsewhere, CIBC’s Hamir Patel reduced his target to $19 from $26 with a “neutral” rating.


In other analyst actions:

* In reaction to a “weaker” stock performance versus its peers, Laurentian Bank Securities analyst Troy Sun sees an opportunity for investors with Russel Metals Inc. (RUS-T), believing its relative valuation is “getting compelling for this high-quality commodity trade.”

He raised his target to $45 from $40, keeping a “buy” rating. The average is $40.14.

“As the market-imputed EV/EBITDA multiples continue to trade around the long-term median, we believe the market is underappreciating a transformed business model (with less energy exposure but more value-added products),” said Mr. Sun. “In addition, we are also of the view that the demand environment is not fully priced in (as forward consensus numbers continue to impute a declining pricing dynamic, but that is only half of the equation). An auto industry rebound, non-residential construction super cycle, and commodities are all tangible tailwinds that could benefit RUS’ business prospects over the coming 24 month.”

* JP Morgan’s Ryan Brinkman cut his Magna International Inc. (MGA-N, MG-T) target to US$92 from US$97, remaining above the US$89.78 average on the Street, with an “overweight” rating.

* National Bank Financial’s Rupert Merer cut his target for GFL Environmental Inc. (GFL-T, GFL-N) to $53 from $55 with an “outperform” rating, while Raymond James’ Patrick Brown raised his target to US$42 from US$41 with an “outperform” rating. The average is $47.77.

* Mr. Brown also raised his Waste Connections Inc. (WCN-N, WCN-T) target to US$160 from US$145, keeping a “strong buy” rating. The average is US$149.36.

* CIBC’s Paul Holden cut his Great-West Lifeco Inc. (GWO-T, “neutral”) target by $1 to $41 and Sun Life Financial Inc. (SLF-T, “outperformer”) to $78 from $81. The averages are $41.11 and $76.96, respectively.

* TD Securities’ Arun Lamba cut his Marathon Gold Corp. (MOZ-T) target to $4 from $4.75 with a “speculative buy” rating. The average is $3.91.

* RBC’s Walter Spracklin raised his target for Mullen Group Ltd. (MTL-T) to $15 from $14 with an “outperform” rating, while CIBC’s Kevin Chiang bumped up his target to $14 from $13.50 with a “neutral” rating and TD Securities’ Aaron MacNeil increased his target to $16.50 from $16 with a “buy” rating. The average is $15.05.

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