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

Believing a “pivot toward growth is underway,” Citi analyst Christian Wetherbee raised his financial expectations and target price for share for Canadian Pacific Railway Ltd. (CP-T, CP-N) after coming away from its Investor Day event in Calgary on Thursday “impressed with the current pace of growth.”

“Beyond the numbers ... a key takeaway we left the investor day with was how good of a management team/bench CEO Keith Creel has built,” said Mr. Wetherbee. “Hunter Harrison’s legacy of performance and accountability is fully alive at CP and the players in management inspire a sense of confident competitiveness. While culture is not a metric we typically measure, in today’s rail market with multiple companies attempting to push operating ratios to new records, mostly through PSR [Precision Scheduled Railroading], we think it’s clear that success is underpinned by a sharp change in culture which is clear at CP. The PSR model definitely works, but we left Calgary believing that people are as important as the model, which may lessen our confidence in other rails.”

Though he called CP’s expectations “elevated,” Mr. Wetherbee feels the railway was successful in exceeding expectations by setting targets that yield $20 of earnings per share in 2020.

“In contrast to CP’s 2014 investor day, highlighted by double-digit revenue largely dependent on energy, the company’s new guidance for mid-single digit RTM [revenue ton mile] growth and double-digit EPS growth seems very achievable given the pace of economic growth (approximately 3 per cent), strong pricing growth (3-4 per cent) and market share rebalance opportunities ($100-million-plus per year). Coupled with robust operating leverage, which should yield a high 50-per-cent OR [operating ratio], we see the potential for 22-per-cent and 15-per-cent EPS growth in 2019 & 2020. Importantly, guidance excludes crude opportunities, which could be a double from CP’s current run rate. So $20 of EPS in 2020 seems a manageable bogey.”

Citing improved growth and a progression toward a 58-per-cent OR, Mr. Wetherbee increased his 2018, 2019 and 2020 EPS projections to $13.98, $17.05, $19.55, respectively, from $13.45, $15.50 and $17.10.

Keeping a “buy” rating for CP shares, he increased his target price to US$260 from US$242. The average target on the Street is currently US$208.02, according to Thomson Reuters Eikon data.

Elsewhere, RBC Dominion Securities' Walter Spracklin raised his target to $329 (Canadian) from $320, keeping an “outperform” rating.

Mr. Spracklin said: “CP management delivered a powerful message at its 2018 Investor Day, driven by strong, sustainable volume growth and EPS targets that exceeded expectations. With the ‘engine rebuilt’ the company is now delivering a superior service offering that is translating into attractive returns. [We] reiterate CP as our preferred name in railroads today.”


The Canadian energy sector currently “finds itself in a time of pause and reset” after a"turbulent and revolutionary" period, according to CIBC World Markets analyst Jon Morrison, who initiated coverage of large-cap exploration and production and integrated companies in a research note released Friday.

“Given our positive outlook for the global crude markets, we naturally have a fairly constructive outlook for these companies,” said Mr. Morrison. “And while over a medium-term time horizon the subsector may face some fund flow and rotation pressures (should the crude price continue to ascend and the market get more comfortable in increasing its weightings in higher beta names), we believe this will only create minimal drag for the majority of these entities. In addition, we also believe that ongoing improvements in the macro markets should drive a general dialing up in energy weightings across portfolios and not necessarily a rotation out of the Large-cap names. Specifically, most of these stocks remain favoured investment vehicles for exposure to energy across a large number of asset managers. In addition, given the ongoing pipeline access issues out of the Western Canadian Sedimentary Basin (WCSB) and what we believe will be emerging noise and price dislocation from the International Maritime Organization’s 2020 sulphur regulation (IMO 2020), there will be a strong rationale for a continued high level of exposure to the Integrateds and refiners over the next several years.”

Mr. Morrison initiated coverage of Suncor Energy Inc. (SU-T, SU-N) with an “outperformer” rating, called the Calgary-based company its “Top Pick” among Canadian large caps. It set a $64 target, which exceeds the consensus of $60.81.

He said: “Suncor operates one of the lowest declining and most enduring upstream asset bases globally. The company is also in the enviable position of being able to produce steady and stable recurring cash flow, even under modest commodity price assumptions. And under a more constructive macro backdrop, like the one that we believe is on the horizon, we view Suncor as set to produce upperquartile FCF and will have significant excess capital as a result. This naturally provides a world of optionality for future value creation, including continued dividend increases, ongoing share buybacks and/or the optionality to continue to execute on strategic M&A. Suncor’s downstream operations also provide a solid hedge to widening heavy oil differentials and will represent a strong tailwind as the IMO 2020 maritime shipping regulations take hold. Given all of the above and where the equity is screening for valuation across a number of metrics, we view the stock as set up to continue to outperform its peers and believe investors should remain overweight the name.”

The firm also initiated coverage of the following stocks:

- Canadian Natural Resources Ltd. (CNQ-T, CNQ-N) with an “outperformer” rating and $55 target. Consensus is $57.88.

Mr. Morrison: “In our view, the company is more focused on running high-quality and enduring business than chasing growth for growth’s sake and we view it as borderline impossible to do any degree of credible analysis on Canadian Natural and not come to the conclusion that it’s a great oil and gas company. The biggest question is always what is the stock discounting and are there better places to have capital allocated? Given where the equity is screening for valuation across a number of metrics, the company’s strong market access and the tailwinds of recent M&A, we view the stock is set up to continue to outperform its peers and believe investors should remain overweight the name.”

- Husky Energy Inc. (HSE-T) with a “neutral” rating and $24 target. Consensus is $23.59.

Mr. Morrison: “Husky offers unique exposure to a globally diversified asset base that has one of the best integrated business models in Canada. The platform also benefits from exposure to a diverse set of global pricing hubs, including Asian natural gas prices and Brent-linked crude prices. With that said, we would highlight that we are not overly constructive on the MEG transaction given the fact that the deal will be increasing the company’s net exposure to WCS pricing risk. Further, given that the vast majority of Husky’s organic growth is still a few years away and that a number of the factors that have led to the company realizing a below average valuation will take time in turning around, we believe there are better places to have capital allocated at this juncture. With that said, better days are on the horizon.”

- Imperial Oil Ltd. (IMO-T, IMO-N) with an “underperformer” rating and $39 target. Consensus is $45.10.

Mr. Morrison: “While we view Imperial as having a top-tier downstream and marketing platform, we believe that much of the company’s operational headwinds experienced across its upstream platform have largely been glazed over and are not reflected in the stock’s current valuation. And when one juxtaposes how Kearl has performed against Suncor’s Fort Hills project, we believe that it’s hard to argue that Imperial can continue to be viewed as a top-tier operator at this point in time. While we are constructive on the operational improvement initiatives that are underway at Kearl (as well as Syncrude), we struggle with the bull case on the stock over the next 12-18 months and believe there are better places to have capital allocated at this juncture. This comes despite our bullish view on the company’s downstream operations and the tailwind that the IMO 2020 sulphur regulation will have on refining cash flows over the coming years.”

- MEG Energy Corp. (MEG-T) with a “neutral” and $12 target. Consensus is $11.72.

Mr. Morrison: “The near-term investment thesis on MEG is naturally very clouded by the Husky takeout offer. The reality is while the stock is trading through the offer price, the open bid provides downside protection in the equity for the coming months. The potential for a higher bid also provides decent risk-adjusted upside potential over a short-term time horizon. With that said, the current share price is above where we believe the stock would be trading on pure fundamentals. And had there been no offer in the market at the time of initiating, we would view $9.00 per share as representing a logical risk-adjusted 12-18 months price target without awarding any change of control/takeover premium at this juncture. As such, should a transaction not be solidified in the coming months and Husky’s offer be turned down, there is marked downside risk in the share price on pure fundamentals. Further, it would take a number of years of solid execution from MEG and a very supportive macro market to overcome the downside pressure if that bid went away.”

- Cenovus Energy Inc. (CVE-T, CVE-N) with an “outperformer” rating and $17 target. Consensus is $16.58.

Mr. Morrison: “Cenovus is currently beaten down and trying to recover from the largest acquisition in its history, which the market clearly viewed as a strategic misstep. With that said, the scar tissue from that transaction does not handicap all of the upside from here and we believe the company is on a journey to a better place. And when we benchmark the valuation, risk, growth and cyclical leverage against alternative investment vehicles, we believe it screens well. We do however believe the following risk caveat applies: 1) the company’s higher leverage ratios, which obviously amplify outcomes and polarize stock performance; and 2) the fact that Cenovus has less downstream protection than some of its integrated peers.”

- Encana Corp. (ECA-N, ECA-T) with a “neutral” rating and US$15 target. Consensus is US$17.57.

Mr. Morrison: “We like a lot of things about Encana. We believe the company has done an excellent job at taking a large and somewhat unfocused collection of properties and rationalizing them into a concentrated and high-quality portfolio. We believe Encana’s hedge book indicates either great foresight on where diffs were going or a healthy respect for downside risk; either of which is enviable. Lastly, despite production declines over the past six years, we believe the company is well positioned to return to growth for the foreseeable future. What we don’t like about the company is that by laying out an aggressive multi-year growth plan, the stock is going to be largely judged on whether the company is trending above or below that trajectory, rather than many other factors that also matter. Execution on the plan doesn’t leave a huge margin for error in terms of excess capital and/or the ability to react to changing market conditions, which will inevitably unfold. As such, the valuation isn’t cheap enough to ignore these risks and we view there to be better places to have capital allocated at this juncture.”


A “strong” second quarter shows “it’s all coming together” for Aritzia Inc. (ATZ-T), said Canaccord Genuity analyst Camilo Lyon.

On Thursday, the Vancouver-based fashion retailer reported quarterly adjusted earnings per share of 16 cents, exceeding both Mr. Lyon’s 13-cent estimate and the consensus on the Street of 12 cents. Comparable same store sales and gross margin growth of 11.5 per cent and 1.08 per cent, respectively, also beat his projections (9 per cent and 0.51 per cent).

“Importantly, U.S. sales growth accelerated to 40 per cent from 20.5 per cent in Q1, a clear sign of growing brand awareness that is driving higher traffic and conversion,” said Mr. Lyon. "Furthermore, new store openings (San Diego, Georgetown) and expansions/relocations continue to meet or exceed expectations. With a majority of new store openings in F20 expected to be in the U.S., we expect these positive sales trends and rising brand awareness to persist for the foreseeable future.

“As we previewed, ATZ confirmed that traffic in the first two weeks of Q3 were impacted by warm weather in the East. That said, as the weather normalized, sales have rebounded. Given the sales outperformance in 1H and continued momentum into 2H, management raised F19 sales guidance to mid-teens from low-mid teens. Overall, the strategies around (1) product creation (denim launch is exceeding expectations), (2) infrastructure investments (omni-channel enhancements, seamless opening of the Vancouver DC, data analytics) and (3) consumer experience (digital, social, in store experiential), are all coming together to drive sustainable long term profitable growth.”

Mr. Lyon hiked his fiscal 2019 and 2020 EPS estimates to 82 cents and 93 cents, respectively, from 79 cents and 92 cents.

Keeping a “buy” rating, he raised his target for its shares by a loonie to $21, which is 38 cents lower than the current consensus.


Canaccord Genuity analyst John Bereznicki lowered his target price for shares of Source Energy Services Ltd. (SHLE-T) in reponse to Thursday’s release of weaker-than-anticipated third-quarter sales volumes, which he said highlights both domestic and mine gate weakness.

The Calgary-based producer, supplier and distributor of Northern White frac sand reported volumes for the quarter of 726,000 tons, a decrease of 11 per cent from the previous quarter and below Mr. Bereznicki’s 800,000-ton projection.

“Source’s in-basin volumes declined 4 per cent sequentially in the third quarter, reflecting a softening domestic completion market,” he said. “Source’s (relatively low margin) U.S. mine gate sales declined 59 per cent over this same period amidst a weakening Permian completion market. Management expects third quarter volume softness to continue through the balance of 2018 before refreshed E&P budgets and the company’s recently announced Shell contract drive ‘substantially’ improved results in 2019.”

The analyst lowered his fiscal 2018 and 2019 earnings per share expectations to 30 cents and 57 cents, respectively, from 55 cents and 80 cents.

He kept a “buy” rating for Source shares, but moved his target to $6 from $8. The average on the Street is now $7.84.

“While we believe shares of Source could remain under pressure as the western Canadian pumping market faces 2H18 softness, we nonetheless expect the company to benefit from increased contract visibility and strengthening fundamentals in 2019,” said Mr. Bereznicki.


In a research note released Friday, Raymond James analysts updated their forward commodity price assumption, leading analyst Jeremy McCrea downgraded his rating for Bonterra Energy Corp. (BNE-T) to “outperform” from “sector perform” with a target of $22, down from $22.50 and below the consensus of $21.29.

The firm’s WTI assumption for 2018 rose to US$68.38 a barrel from US$68.17. For 2019, it increased to US$71.50 from $65.24, while its long-term assumption is now US$70, rising from US$65.

For natural gas, its 2018 projection is US$2.83 per thousand cubic feet from US$2.80, while its 2019 assumption rose by a penny to US$2.71.

With those tweaks, the firm made numerous target price changes to stocks in their coverage universe, including:

- Cenovus Energy Inc. (CVE-T/CVE-N, “market perform”) to $17 from $16. Consensus: $16.58.

- Husky Energy Inc. (HSE-T, “outperform”) to $28 from $26. Consensus: $23.59.

- Imperial Oil Ltd. (IMO-T, “underperform”) to $50 from $45. Consensus: $45.10.

- Suncor Energy Inc. (SU-T, “outperform”) to $70 from $69. Consensus: $60.81.

- AltaGas Ltd. (ALA-T, “underperform”) to $22 from $24. Consensus: $27.77.

- Gibson Energy Inc. (GEI-T, “market perform”) to $23 from $18.50. Consensus: $21.45.

- Inter Pipeline Ltd. (IPL-T, “underperform”) to $24 from $25. Consensus: $28.42.

- Keyera Corp. (KEY-T, “outperform”) to $43 from $42. Consensus: $43.27.

- Pembina Pipeline Corp. (PPL-T/PBA-N, “outperform”) to $50 from $49. Consensus is $52.12.


In a separate note previewing third-quarter production and financial forecasts for base metals and uranium companies, Raymond James analysts lowered their near-term zinc and copper forecasts.

That led to several target price changes, including:

- Freeport-McMoRan Inc. (FCX-N, “market perform”) to US$17 from US$18. Consensus: US$18.19.

- First Quantum Minerals Ltd. (FM-T, “outperform”) to $24 from $25. Consensus: $22.87.

- Hudbay Minerals Inc. (HBM-T/HBM-N, “outperform”) to $9 from $10. Consensus: $10.40.

- Teck Resources Ltd. (TECK.B-T, TECK-N, “outperform”) to $44 from $46. Consensus: $42.94.

- Trevali Mining Corp. (TV-T, “outperform”) to $1.25 from $1.50. Consensus: $1.53.

Follow David Leeder on Twitter: @daveleederOpens in a new window

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