Inside the Market’s roundup of some of today’s key analyst actions
With Citi forecasting another 75 basis point rate hike from the U.S. Fed next month, equity analyst P.J. Juvekar expects deteriorating conditions for North American commodity chemical companies after outperforming the broader market for much of 2022.
“These hikes are likely to lead to slower economic activity, in turn implying slower construction/housing and consumer spending,” he said in a research note released Friday. “Chemical companies historically have run their plants hard as long as there was demand, but didn’t slow down quickly enough when demand faltered, leading to excess inventories (think 2001/02 and 2008/09). These stocks were down this week after the Fed move, but there could be more downside if the economy slows.”
Following a trip to Europe this week, Mr. Juvekar said it was “clear the European consumer is already slowing,” pointing to this week’s reduced outlook for Akzo Nobel N.V.. He sees North American “not far behind” following warnings from retail giants Walmart Inc. and Target Corp.
“Chemical companies tend to lag the consumer by 6 months given the length of the supply chain, and we expect companies to guide 2H22 lower despite a reasonably strong 2Q22,” he said. “In terms of other end markets, the construction project pipeline for this summer is already full, but the rate hikes may impact new construction by end of 2022 and into 2023. Auto OEM cycle seems different this time as we wrote in our PPG note this week. Dealer inventories are at an all-time low and the OEMs may use slower periods to rebuild auto inventories. That said, we don’t see a snapback in autos but a gradual recovery. Housing and construction activity accounts for nearly 30 per cent of all chemicals (paints, insulation, adhesives, packaging, carpets, and furnishings). PVC seems most vulnerable as the upstream chlorine molecule tends lead the economy through construction. PE is used mostly in packaging and goes into a variety of consumer goods, which tend to be more stable due to their non-durable applications. But if consumers slow down, we could see a reverse of the pandemic situation where consumers spent significant part of their savings into buying ‘things.’ Plus, bans on plastic bags, like the recent one in New Jersey, may crimp PE growth incrementally.”
With that view, he downgraded four companies in his coverage universe to “neutral” from “buy” recommendations:
- CF Industries Holdings Inc. (CF-N) to US$99 from US$123. The average on the Street is US$111.83.
- Dow Inc. (DOW-N) with a US$60 target, down from US$82. Average: US$72.
- Olin Corp. (OLN-N) with a US$55 target, down from US$74. Average: US$75.
- Westlake Corp. (WLK-N) with a US$114 target, down from US$160. Average: US$145.20.
Maintaining a “buy” rating for shares of Saskatoon-based Nutrien Ltd. (NTR-N, NTR-T), Mr. Juvekar cut his target for its shares to US$99 from US$126. The average is US$118.28.
“We lower FY22 and FY23 EPS less than 1 per cent and 9 per cent, respectively, on higher potash prices more than offset by a weaker margin outlook for nitrogen and retail,” he said. “We lower 2023 EBITDA estimates from $14.6-billion to $13.0-billion. On 2023, we apply a 5 times EV/EBITDA multiple (vs. 5.5 times previously) due to near-peak potash price expectations, resulting in a target price of $99.”
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Though he now sees the prices for wood products, including lumber, finishing above his projections in the second quarter, Scotia Capital analyst Benoit Laprade expects a decline through the remainder of the year and into 2023.
“Q2/22 lumber prices above expectations,” he said. “However, by the end of the quarter growing economic headwinds have taken a significant toll on lumber prices (and lumber equities alike). As expected, lumber prices have dropped significantly from unusually high levels and Q2/22 prices are now expected to average $805 and $680 respectively for W.SPF and SYP (up from the previously expected $625 and $650, respectively). However, high(er) mortgage rates combined with inflation running at decades-high levels have created growing uncertainty, leading to extremely cautious lumber buying patterns. With SPF prices now estimated to be at, or very close to, breakeven for the average B.C. producer and with stumpage rates expected to increase on July 1, we expect prices to stabilize soon as buyers likely have to resume purchases to meet ongoing customers’ needs.”
Mr. Laprade adjusted his second-quarter estimates to account for “meaningfully higher than expected prices for virtually all grades of wood products, of communication papers and of market pulp and a slightly weaker than expected CAD. Containerboard prices were in line with expectations.”
However, he reduced his target prices of group of forest and wood product companies in his coverage universe on Friday after introducing his projections for fiscal 2024 based on his expectation for price declines.
His changes include:
- Canfor Corp. (CFP-T, “sector outperform”) to $42 from $45. The average on the Street is $41.67.
- Cascades Inc. (CAS-T, “sector outperform”) to $17 from $17.50. Average: $13.71.
- Interfor Corp. (IFP-T, “sector outperform”) to $43 from $50. Average: $48.
- West Fraser Timber Co. Ltd. (WFG-T, “sector outperform”) to $143 from $157. Average: $121.93.
- Western Forest Products Inc. (WEF-T, “sector perform”) to $2.50 from $2.75. Average: $2.65.
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Raymond James analyst Steve Hansen thinks the long-term potential for Cubicfarm Systems Corp. (CUB-T), however he warns near-term challenges are “biting.”
Following the Vancouver-based agricultural technology company’s virtual Investor Day event on Thursday, he lowered his recommendation for its shares to “market perform” from “outperform.”
“It outlined: 1) the status of current/ongoing installations from its backlog; 2) new data surrounding the size/breadth of its pipeline for both key segments; and 3) the functionality of its proprietary new CEA operating system software,” he said. “While we were encouraged by several aspects of the event, most notably the size of the consolidated pipeline, we also felt it was lacking in a few key areas, namely: new firm orders & expense control. The project updates also led us to push some near-term revenues further to the right in our model.”
Mr. Hansen trimmed his target for Cubic shares to $1 from $1.10, which falls below the $1.39 average.
“While our enthusiasm for Cubic’s opportunity set remains stronger-than-ever, we think it is prudent to step to the sideline until we see better (faster) conversion of backlog, more consistent order in-take, and stricter cost controls. We will continue to monitor accordingly,” he said.
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National Bank Financial’s Vishal Shreedhar expects to see improvement from Alimentation Couche-Tard Inc.’s (ATD-T) fourth-quarter financial results on June 28, however he warns the “backdrop remains challenging.”
Th equity analyst is projecting earnings per share of 53 cents, which is 4 cents above the consensus forecast on the Street and up a penny from the same period a year ago.
“Our forecasts reflect elevated fuel margins in North America, year-over-year fuel volume growth and share repurchases, partly offset by higher SG&A growth, higher interest expense and unfavourable aggregate FX,” he said.
Mr. Shreedhar emphasized Vehicle Miles Travelled (VMT) data suggests U.S. fuel trends point to an improvement year-over-year of approximately 7-8 per cent even with a “a weakening cadence through the quarter.” In Canada, he forecasts growth due to the gradual lifting of COVID-19 restrictions.
He also sees fuel margins remaining “strong” and said Couche-Tard has “recently outperformed.”
“OPIS data suggests U.S. national average fuel margins of about 37 cents per gallon during ATD’s Q4/F22 (our estimate reflects 39 c/g),” he said. “We highlight that beyond the quarter, OPIS fuel margins moderated (though remain above the long-term trends), averaging about 24 c/g for the first 6 weeks of Q1/F23. We highlight that since Q1/F21, ATD’s U.S. fuel margins have outperformed OPIS data by 6.7 c/g (on average); this compares to quarterly outperformance of about 1.27 c/g over the past 5 years (on average). Our understanding is that ATD has benefitted from growing scale, improved logistics and the Circle-K fuel rebranding.”
Mr. Shreedhar made modest increases to his financial forecasts with his earnings per share estimate rising to $2.59 from $2.51 for 2022 and sliding by 1 cent to $2.50 in 2023.
Maintaining an “outperform” rating for Couche-Tard shares, he bumped his target to $58 from $57. The average on the Street is $62.22.
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National Bank Financial analyst Jaeme Gloyn sees no obstacles to Telus Corp.’s (T-T) $2.9-billion acquisition of LifeWorks Inc. (LWRK-T), calling the terms of the deal “favourable.”
Accordingly, he moved his recommendation for the human-resources firm to “tender” from “sector perform” previously, pointing to the unanimous approval of the arrangement by its board and special committee.
“We believe the offer price is favourable given the EV/EBITDA valuation lands: (1) just shy of the peak valuation multiple of approximately 14.5-times set in January 2020; (2) well above the current valuation of 9-times NTM [next 12-month] consensus EBITDA; and (3) above the one and 10-year EV/EBITDA (NTM) average multiples of 11 times and the five-year average multiple of 12 times,” said Mr. Gloyn. “Closing is expected in Q4 2022 and requires 66 2/3-per-cent shareholder approval (vote at August 5th special meeting) and court/regulatory/competition approvals.”
His target for LifeWorks shares rose to $33 from $24 to reflect the offer. The average is $28.75.
Elsewhere, Scotia’s Phil Hardie raised his target to $33 from $28, maintaining a “sector outperform” rating.
“While there are a number of pending approvals required, we are confident that the deal will be completed. LifeWorks’ product suite will likely complement TELUS with LifeWorks shareholders likely benefiting from the TELUS ownership due to 1) participation in growth potential with strong mix of assets; 2) attractive dividend yield with a proven record of dividend growth; and 3) Investment-grade credit profile underpinned by solid balance sheet,” said Mr. Hardie.
Meanwhile, RBC Dominion Securities’ Drew McReynolds called the deal a “logical fit” for Telus Corp. (T-T) “that is consistent with the TELUS Health playbook for growth and eventual crystallization.”
“We believe this acquisition is consistent with the growth strategy and playbook that has been articulated by TELUS Health and TELUS management over the past few years,” he said. “Specifically, LifeWorks brings to TELUS Health the combination of increased scale and scope (revenues from $500-million-$600-million to $1.6-billion, lives covered from 22 million to over 50 million), a greater geographic presence outside of Canada and a more comprehensive suite of digital-first products and services providing an all-in-one health and wellness solution for employers. We also believe this acquisition firmly puts TELUS Health on a path to an eventual crystallization. The $2.9-billion purchase price represents a 2021 EV/EBITDA multiple of 15 times, or 10 times proforma expected operating synergies.”
He trimmed his target for Telus shares by $1 to $36 with an “outperform” rating. The average is $34.43.
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In other analyst actions:
* TD Securities’ Tim James lowered his target for AirBoss of America Corp. (BOS-T) to $34, below the $37.50 average, from $40 with a “buy” rating.
* Following “mixed” fourth-quarter results that featured better-than-expected sales but lower profit, Acumen Capital’s Nick Corcoran trimmed his Andrew Peller Ltd. (ADW.A-T) target to $9 from $11, keeping a “buy” rating. The average is $9.75.
“Despite significant headwinds from inflationary pressures, we continue to see long-term value in the name from its brand recognition and significant barriers to entry,” he said.
* Pointing to multiple compression in the tech sector, Mr. Corcoran also reduced his Haivision Systems Inc. (HAI-T) target to $7.50 from $10.50, keeping a “buy” rating, following quarterly results that met his expectations. The average is $9.25.
“While headwinds from inflationary pressures will weigh on margins for the remainder of this fiscal year, we remind investors that Management builds products to forecast and top line drives bottom line. This provides a high degree of certainty in future revenues and margins,” he said.
* Emphasizing inflation as a “near-term concern,” Canaccord Genuity’s Yuri Lynk lowered his target for shares of North American Construction Group Ltd. (NOA-T) to $26 from $29 with a “buy” rating after sponsoring recent non-deal roadshow events. The average on the Street is $27.30.
“We continue to view NACG as an undervalued company with excellent growth prospects run by a management team with a demonstrated history of deploying capital accretively,” he said. “The company boasts a wide competitive moat in its ability to self-perform second-life rebuilds for 50 per cent of the cost of new and remanufacture components for 35 per cent of the cost of new. Thus, as a low-cost earthworks provider, NACG is uniquely positioned to benefit from several secular demand drivers such as declining ore grades and rising strip ratios in the oil sands, demand for metals used in EVs, and an increase in climate resiliency projects.”
David Leeder