Inside the Market’s roundup of some of today’s key analyst actions
Analysts tweaked their price targets on Canada’s biggest bank following an earnings report Thursday that mildly beat Street expectations overall but still left reason for caution.
No rating changes have been spotted so far for Royal Bank of Canada (RY-T) and changes to price targets were mostly to the downside.
Canaccord Genuity raised its price target to C$134 from C$131.50; Credit Suisse cut its target price to C$152 from C$153; TD Securities cut its target price to C$145 from C$150; Desjardins cut its target price to C$147 from C$150; and BMO cut its target to C$140 from C$142.
The average price target is now C$144.30, according to Refinitiv data, down from $149.55 a month ago.
In the fiscal second quarter, RBC earned $4.25-billion or $2.96 a share, compared with $4-billion or $2.76 in the same period last year. The bank raised its quarterly dividend by eight cents a share, or 7 per cent, to $1.28 - the highest dividend hike among the big banks for the quarter.
Provision for credit losses, which are the funds banks set aside to cover loans that could default, played a large role in RBC’s rising earnings. The bank had a net recovery of $342-million in provisions in the second quarter, whereas analysts had estimated it would add $223-million to reserves, according to Refinitiv.
The bank’s revenue fell 3 per cent to $11.22-billion in the quarter, while expenses increased 1 per cent to $6.43-billion.
“We believe RY’s 7% dividend increase signals confidence in their near-term outlook, particularly within U.S. and Canadian retail,” commented Canaccord analyst Scott Chan.
He noted that on the analyst call, management said that they expect a slowdown in residential mortgages in the second half of 2022, but that incremental growth in commercial and credit cards should act as an offset.
Desjardins Securities analyst Doug Young said RBC’s adjusted pre-tax, pre-provision earnings were 3% below his forecast, with all operating divisions except wealth management falling short of estimates. “That said, RY has a strong CET1 ratio, holds up better in tougher market environments, is positioned to benefit from higher interest rates and has a good track record on expenses,” he said in a note.
Credit Suisse analyst Joo Ho Kim termed the quarterly results “as somewhat mixed, as strength in Canadian P&C and the solid outlook for margin expansion was offset by softer than expected (to us) results from Capital Markets.”
“The key positive we see from the results is the continued strength in RY’s capital position and the conservative approach to management in light of the elevated macroeconomic uncertainties. The strong level of capital should also help the bank remain opportunistic once we get more clarity on the outlook,” the Credit Suisse analyst said.
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Analysts also expressed mild enthusiasm for Toronto-Dominion Bank’s (TD-T) latest quarter, with most - but not all - raising price targets.
National Bank of Canada raised its price target to C$102 from C$100; Canaccord Genuity raised its target price to C$99 from C$95; Credit Suisse hiked its target price to C$103 from C$102; Barclays raised its target by C$3 to C$105, but Desjardins Securities lowered its target price to C$107 from C$110.
The average price target is now C$103.44, which is still down from $107.90 a month ago.
TD reported its second-quarter net income totalled $3.81 billion or $2.07 a share, up 3 per cent from the year prior. However, the bank’s total profit included a one-time boost of $224-million stemming from a lawsuit settlement. After adjusting for one-time items, TD’s earnings amounted to $2.02 a share, down slightly from a year ago, but beating analyst estimates of $1.93. Unlike the other banks, TD did not hike its dividend.
“Q2 was a generally positive quarter for TD, with the bank benefitting from the benign credit environment and solid domestic loan growth,” commented Credit Suisse analyst Joo Ho Kim in a note. “We believe rising rates remain a key catalyst for TD, given the bank’s elevated rate sensitivity. Furthermore, we continue to expect the bank to execute on cost discipline as we look through to F2023. Lastly, although the CET1 ratio was below what we anticipated, the bank introduced 2% discount on DRIP, which we view as prudent in current environment. Overall, we believe the relative valuation reflects much of the positives.”
Barclays analyst John Aiken expressed comfort with TD’s latest results. “We do not believe that a lack of a dividend increase in the quarter is a concern of the market, with TD now firmly entrenched in its annual dividend increase,” he said. “Further, capital remains strong and should be more than adequate pro forma the pending close of the First Horizon acquisition. We believe that TD’s underlying momentum is sustainable and will translate into future earnings growth.”
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Analyst reaction was also somewhat mixed to Canadian Imperial Bank of Commerce’s (CM-T) latest results.
Credit Suisse cut its price target to C$80 from C$81; Canaccord Genuity raised its target to C$83 from C$80; Desjardins Securities cut its target to C$77.00 from C$81.50; Barclays raised its target by $3 to $74.
The average price target is now C$80.92, down from $86.95 a month ago.
After adjusting for special items, including costs related to CIBC’s acquisition of retailer Costco’s credit card portfolio, CIBC said it earned $1.77 a share. On average, analysts expected adjusted earnings of $1.80. The bank raised its quarterly dividend by 2.5 cents a share to 83 cents.
“Adjusted pre-tax, pre provision (PTPP) earnings were 1% below our estimate albeit up 7% yoy, so not all bad. Management is executing and driving strong top-line growth, which has helped offset higher investment spend. The lingering question is: if revenue growth slows, can it rein in expense growth? Management believes it can,” commented Desjardins analyst Doug Young.
Credit Suisse analyst Joo Ho Kim was sounding a little more upbeat about the results. “We believe CM’s Q2 results showcased the underlying strength across many of the bank’s earnings drivers,” the analyst said, pointing to “very strong” commercial loan growth across both sides of the border and a strong position in credit cards that is positive for margins.
“While expenses were in focus and inflationary pressure is an issue facing the entire sector, in our view, the bank’s current strategic spending should bolster growth profile ahead. As well, we continue to believe CM (and its peers) have the levers necessary to dial down expenses if needed,” he added.
Barclays analyst John Aiken said there was “enough in the quarter” to justify his price target hike, even though he too was sounding a note of caution.
“There were several moving parts in the quarter that bring to the surface some questions about near-term profitability. While we believe that CM’s relative volume momentum is sustainable, it will likely take another quarter for the market to become comfortable with the competing and outlying trends exhibited by CM in credit and capital markets,” Aiken said in a note.
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TD Securities analyst Craig Hutchison upgraded Denison Mines Corp. (DML-T) to “speculative buy” from “hold” while maintaining a C$2.50 target price.
While the uranium sector has been on the decline overall in recent weeks, Denison has underperformed most other stocks, and the analyst believes this signals a buying opportunity.
“Spot uranium prices have pulled back ~29% to US$45.50/lb from the multi-year highs of US$63.75/lb set on April 18, largely mirroring the broader market selloff in equities and commodities. The uranium price has now given back nearly all the gains that were driven by Russia’s invasion of Ukraine in late-February. The selloff has been compounded by limited purchases in the spot market by the Sprott Physical Uranium Trust over the last month, as the Trust units have traded at a discount to NAV over that time,” Hutchison said in a note.
“The uranium equities under TD’s equity coverage have largely fallen in line with the uranium pullback, decreasing ~22% as a group since April 18. Denison has underperformed its peers, falling 28% over that time,” he added. “We continue to forecast higher uranium prices over the next several years as utilities grapple with the difficult process of de-risking and repositioning their nuclear fuel supply chains away from Russian supply, in what is already a tightly supplied market. In addition, we believe that Russia’s actions have highlighted energy security, particularly in Europe, further bolstering the case for nuclear power. These underlying macro conditions should benefit developers such as Denison that have projects located in stable jurisdictions.”
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Credit Suisse analyst Susan Roth Katzke downgraded Citigroup Inc (C-N) to “neutral” from “outperform”, citing recent gains in the stock price. Her price target remains US$58.
Citigroup shares are up 15% from recent lows and are near her price target.
“We realize that the downside to C shares may prove more limited given a valuation within reach of prior cyclical troughs; but we believe the upside, relative to peers, will also prove more limited given the long road ahead in Citi’s transformation process,” she said.
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Credit Suisse analyst Andrew M. Kuske downgraded Atco Ltd (ACO-X-T) to “neutral” from “outperform” with an unchanged price target of C$49.
He believes greater clarity on the growth trajectory for Atco’s wholly owned businesses will be required for the stock to see continued positive momentum.
Also in the sector, he cut his price target on Algonquin Power & Utilities Corp (AQN-T) to US$16 from US$18 “after a series of minor changes to the company ‘s financial forecasts.”
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Costco Wholesale Corp (COST-Q) saw a slew of price target cuts in the wake of its quarterly earnings this week that highlighted challenges in maintaining margins in the face of steep inflation.
BofA Global Research cut its price objective to US$605 from US$645; Citigroup cut its price target to $510 from $590; Credit Suisse cut its target price to $550 from $570; Jefferies cut its target price to $560 from $670; JP Morgan cut its target price to $525 from $587; and Telsey Advisory Group cut its target price to $590 from $615
Costco’s third-quarter earnings per share were in-line with consensus at $3.04, up 11% from a year earlier, with same-store sales up 10.8% excluding gas and total sales up 16.2%.
However, gross profit growth slowed to 6.5% compared to 12% in the first half of its fiscal year.
“Unlike Walmart and Target, Costco’s general merchandise sales held up quite well,” commented Credit Suisse analyst Robert Moskow. “Sales growth was ‘broad-based’ with home furnishings, apparel, bakery, deli and tires all outperforming. Liquor, office, sporting goods and hardware underperformed. Management noticed stronger performance in travel-related categories, but did not detect any material evidence of trading down to private label among its members (who tend to be higher income).”
The analyst noted that management acknowledged that they typically raise the fee for customers to shop at Costco every 5.5 years on average “and said that there will be more discussions as they approach the end of that time-frame. If they adhere to that timing again, the chain would raise fees at the end of calendar 2022.”
Citi analyst Paul Lejuez expressed concern with the stock’s price even though there were a number of positives in the quarterly results.
“COST is well positioned for this type of environment with its attractive prices and strong value proposition. We believe strong results should continue, but we still struggle with the multiple, which leaves little room for error,” Lejuez said in a note. He maintains a “neutral” rating.
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Several analysts raised their price targets on Altagas Ltd (ALA-T) following an agreement to sell its utility assets in Alaska for US$800 million in cash to privately-held TriSummit Utilities. Analysts were impressed by the price tag of the deal, which is expected to close no later than the first quarter of 2023
Atb Capital Markets raised its target price to C$35 from C$34; Canaccord Genuity raised its target price to C$36 from C$35; and RBC raised its target price to C$34 from C$33.
“Accounting for modest growth in earnings until the closing of the transaction, we still view the sale as being very attractive given it would be at the high-end of our valuation range,” said RBC analyst Robert Kwan.
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In other analyst actions:
* Suncor Energy Inc (SU-T): Credit Suisse raised its target price to C$58 from C$50 and reaffirmed an “outperform” rating. Credit Suisse primarily cited higher price realizations and strong refining margins for the higher price target
* Pivotree Inc (PVT-X): Canaccord Genuity raises to “speculative buy” from “hold” and maintains a C$5 price target.
* Walt Disney Co (DIS-N): Citigroup cuts price target to $165 from $200.
* WeCommerce Holdings Ltd (WE-V): Canaccord Genuity cuts target price to C$8 from C$10 and TD Securities cuts target price to C$8 from C$16.
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Darcy Keith