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

Though he lowered his earnings projections for Canadian Imperial Bank of Commerce (CM-T) in response to the release of quarterly results that fell short of expectations, RBC Dominion Securities analyst Darko Mihelic said he now has “a little more confidence in them.”

On Thursday before the bell, CIBC reported adjusted earnings per share of $3.10, missing Mr. Mihelic’s estimate by 7 cents. He attributes 4 cents of the miss to a reserve build for stage 1 and 2 (performing) loans, which he admits he had not expected.

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“On a segmented basis, lower results versus our forecast were largely driven by the Capital Markets business mostly as a result of higher than assumed provisions for credit losses (PCLs),” he said. “Lower than expected results in Capital Markets were partly offset by better than expected earnings in Canadian Personal and Small Business Banking.”

With the results, Mr. Mihelic lowered his 2019 EPS estimate to $12.22 from $12.26 and his 2020 projection to $12.70 from $12.97, pointing to lower assumed net interest margins and slightly higher assumed PCLs

"We continue to believe there are enough question marks on the CM thesis to warrant a low multiple but we also concede that there are some signs of progress in the Canada P&C segment and that we could see an improvement in CM’s relative valuation over time should results continue to improve," he said. "We have lowered our net interest margin (NIM) forecast for Canada P&C and U.S. Commercial and Wealth Management based on management’s commentary on the conference call – we now assume core banking NIM to decline 2 basis points in 2020 (vs. our previous assumption of modest NIM expansion of 3 bps). We have also increased our PCL estimates in Canadian Personal and Small Business Banking by assuming a gradual increase in the total PCL ratio in 2020 to 40 bps by 2021 (vs. a stable PCL ratio of 35 bps previously). These impacts were partly offset by a lower efficiency ratio assumption of 55.5 per cent on a teb basis (was 55.9 per cent) closer to management’s 2019 target of 55 per cent but still not quite there. Furthermore, we now assume a negative 15 bps impact to CM’s CET 1 capital ratio in Q1/20 related to the adoption of IFRS 16 and changes to securitization and counterparty credit risk based on management’s guidance. Although our figures have moved lower, to a large extent we view them as reasonable and our confidence in these estimates is slightly higher as it seems as though CM may have turned the corner on mortgage growth (originations)."

Maintaining a "sector perform" rating for CIBC shares, Mr. Mihelic lowered his target to $124 from $128. The average on the Street is $111.33.

“Valuations remain attractive and the stock is becoming a better candidate for a potential re-rating in our view, but uncertainty in the market remains elevated and NIM pressures may be mounting,” he said. “CM is trading at 8.0 times our 2020 core EPS estimate vs. 9.3 times on average for the other large Canadian banks. On a P/B basis the stock is trading at 1.29 times vs. a peer average of 1.51 times.”

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Ahead of the release of its first-quarter 2020 financial results on Sept. 4, Desjardins Securities analyst Keith Howlett upgraded his rating for Alimentation Couche-Tard Inc. (ATD.B-T), despite lowering his earnings per share expectation for the period.

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Pointing to recent share price weakness and "the continued prospect for long-term growth," Mr. Howlett moved the stock to "buy" from "hold."

"We are reducing our 1Q FY20 adjusted EPS forecast to 95 US cents from US$1.05 to reflect what we expect to be weak fuel margins in Canada and Europe, compounded by poor spring weather and weak currencies in those markets," he said. "U.S. fuel margins are expected to be strong, but had already been built into our forecast. Looking forward, we expect ongoing internal growth supplemented by acquisitions."

"We do note that the acquisition environment has become more competitive. This ebbs and flows. EG Group is a major new entrant in the U.S. and in other markets of interest to Couche-Tard (eg Germany, Australia). EG Group is rapidly growing by acquisition in the US (eg Cumberland Farms; convenience stores of Kroger). It remains to be seen how successful it will be as operator of multiple chains in multiple regions."

Mr. Howlett raised his target for the stock to $88 from $87. The average on the Street is $92.60.

“Couche-Tard has proven itself a patient, disciplined acquirer over the last 40 years," the analyst said. "The company’s other major long-term advantage is the uncommon ability to successfully operate convenience and fuel retail stores, being one of the most challenging segments of retailing. Couche-Tard has acquired a number of consolidators (CST Brands, Pantry) who failed to replicate its success.”

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Streaming and royalty companies continue to perform “well” following a largely in-line second-quarter earnings season, said Canaccord Genuity analyst Carey MacRury.

"The precious metal royalty companies are up 36 per cent on average year-to-date, slightly below precious metal producers, up 43 per cent on average and the S&P/TSX Gold index gain of 41 per cent," he said.

In a research note released Friday, Mr. MacRury said he expects the second half of the year to "shine" on higher previous metals prices.

“The gold price averaged $1,300/oz in H1/19; our forward-curve derived price deck is for $1,425/oz in H2, which represents a 9-per-cent increase over H1 (using spot for the balance of the year equates to a gold price of $1,486/oz),” he said. “Based on our gold price deck and higher GEO forecasts in H2, we estimate a 70-per-cent increase in EPS and a 23-per-cent increase in operating cash flow on average in the back half of the year. Best positioned in H2 with cash flow growth more than 25 per cent are Franco-Nevada with strong GEO [gold-equivalent ounce] growth as Cobre Panama shipments ramp-up and Osisko Gold Royalties as royalty payments from the Eagle Gold project begin.”

Mr. MacRury raised his target price for several stocks in his coverage universe. They are:

Franco-Nevada Corp. (FNV-T, “buy”) to $136 from $132. Average: $125.93.

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Osisko Gold Royalties Ltd. (OR-T, “buy”) to $19 from $18.50. Average: $17.45.

Royal Gold Inc. (RGLD-Q, “hold”) to US$118 from US$111. Average: US$114.69.

Wheaton Precious Metals Corp. (WPM-T, “buy”) to $44 from $43. Average: $41.25.

He maintained his targets for these companies:

Altius Minerals Corp. (ALS-T, “buy”) at $18. Average: $17.67.

Sandstorm Gold Ltd. (SSL-T, “buy”) at $10.50. Average: $9.16.

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“Our top picks in the royalty/streaming space are Wheaton Precious Metals and Altius Minerals,” the analyst said. “Wheaton has a strong growth profile over the next 5 years, the most torque to precious metals among the royalty names, an improving balance sheet, an inexpensive valuation relative to its senior gold royalty peers in our view Altius is the only North American listed diversified mining royalty company, and we see the company as a lower-risk investment alternative to base metal or diversified mining companies. Altius has a relatively stable royalty revenue outlook anchored by a strong potash market. The company also trades at a significant discount to its precious metal royalty peers and has an 9-per-cent FCF yield vs. 5.6 per cent for the precious metal royalties.”

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Raymond James analyst Frederic Bastien is “lowering the bar” for Horizon North Logistics Inc. (HNL-T) following a “quarter to forget.”

“For those who missed it, a perfect storm caused Horizon North to badly miss consensus expectations for 2Q19,” he said. “Declining drilling activity in key regions had an adverse impact on camp utilization and catering demand, while project delays discombobulated HNL’s expanded manufacturing capacity.”

“We have cut our near-term expectations for Industrial Solutions to more accurately reflect the reduced spending intentions of HNL’s E&P customers in the Montney and Duvernay basins. Offsetting this to some extent, in our view, will be gradually improving occupancy rates at the Crossroads Lodge and along the Coastal Gas Link pipeline. We also welcome the newly-minted contract for 80 construction office complexes in Kitimat favourably, as it provides greater visibility into the segment’s future performance in the region. We are reasonably confident camp utilization can bounce back to 50 per cent by year-end, and build from that level after that.”

Keeping an “outperform” rating for HNL shares, he lowered his target to $1.75 from $2.50. The average on the Street is $2.25.

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“Our (arguably very stale) modeling expectations on Horizon North Logistics are being reset lower post-2Q19 results,” he said. “Specifically, we see softer-than-anticipated activity levels in the oil sands and liquid-rich Montney and Duvernay formations, combined with manufacturing ramp-up challenges, acting as a drag on the company’s short-term results. Notwithstanding these headwinds, we feel there are sufficient positives to still warrant an Outperform rating on HNL. These include the firm’s first-mover advantage in the social and affordable housing space, its growing momentum in Kitimat, and a rock-bottom valuation."

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