Inside the Market’s roundup of some of today’s key analyst actions
Pointing to “modest” expectations for its Canadian Personal and Commercial Banking segment, RBC Dominion Securities analyst Darko Mihelic said he’s staying “on the sidelines” on Canadian Imperial Bank of Commerce (CM-T).
On Thursday, CIBC reported adjusted earnings per share for the quarter of $2.84, falling short of Mr. Mihelic's $3.07 estimate and the consensus projection on the Street of $3.06.
“Total Canada P&C earnings (incl. Wealth) were $910-million, below our $996-million forecast and down 9.3 per cent year-over-year,” the analyst said. "Excluding wealth, adjusted earnings of $766-million were down almost 11 per cent quarter-over-quarter and year-over-year, the softest performance of the large Canadian banks in Q4/19.
"Lower earnings were driven by higher provisions for credit losses (PCLs) which came in at $334-million, up 50 per cent quarter-over-quarter and 69 per cent year-over-year. This included one fraud-related impairment that amounted to $52-million in the Canadian Commercial Bank. For the full year 2019, Canada P&C earnings were down 2.8 per cent compared to growth of 2.6 per cent for the group."
With the results, Mr. Mihelic increased his assumed PCL estimates across all of CIBC’s segments. He’s now projected a PCL ratio increase of 2 basis points in 2020 from 2019. He also shrunk his assumed non-interest income growth in Canada P&C to “better align with the historical run-rate” and lowered his net interest margin (NIM) assumptions for its U.S. segment, pointing the recent decline in the quarter.
Accordingly, his 2020 and 2021 core earnings per share estimates fell to $12.36 and $13, respectively, from $12.79 and$13.42.
“We are expecting 2020 EPS growth of 3.7 per cent, relatively in line with management’s guidance of low single-digit growth,” he said.
Maintaining a “sector perform” rating for CIBC shares, Mr. Mihelic lowered his target to $121 from $124, noting its valuation continues to lag peers. The average on the Street is $112.50, according to Thomson Reuters Eikon data.
“CM is trading at 8.8 times our 2020 core EPS estimate versus 10.3 times on average for the large Canadian banks under our coverage,” he said. “On a P/B [price-to-book] basis the stock is trading at 1.36 times versus a peer average of 1.68 times.”
Elsewhere, Canaccord Genuity analyst Scott Chan lowered his target to $108 from $112.50 with a “hold” rating (unchanged).
Mr. Chan said: “CM reported a disappointing quarter with earnings mainly impacted by Canadian credit. This represented the company’s fourth EPS miss out of the past five quarters.”
On the heels of a “slight” fourth-quarter earnings per share miss, Canaccord Genuity analyst Scott Chan lowered his target price for Canadian Western Bank shares (CWB-T), pointing to “tempered” growth guidance.
On Thursday before the bell, the bank reported adjusted EPS of 78 cents, up 1 per cent year-over-year but below the 81-cent estimate of both Mr. Chan and the Street.
“Results were positively impacted by a less than 1-cent from the cut in Alberta’s corporate income tax rates,” he said. “Total revenues (up 6 per cent year-over-year) were modestly lower, mainly reflecting reduced NII [net interest income]. Expenses were worse than expected, up 9 per cent year-over-year. PCLs [provisions for credit losses] were much lower, with stable credit quality in the underlying book. CWB has tempered F20 EPS growth expectations to mid-single digits, having accomplished material organic growth. Nevertheless, we view results as resilient in a tough market environment (particularly Western Canada).”
Noting management “softened” its guidance one on loan book expansion, geographic diversification and EPS growth, Mr. Chan lowered his fiscal 2020 EPS estimate by 3 per cent to $3.32 (from $3.44). He also introduced a 2021 projection of $3.50.
“CWB stands to gain over the medium term from (1) strong loan growth outlook albeit decelerating; (2) stable credit quality; (3) capital significantly enhanced on transition to AIRB (supports profitability and organic growth); and (4) digital strategy (e.g. Temenos partnership),” the analyst said. “However, we remain cautious near term and on the sidelines, due to expected moderation of organic growth, further challenged by potential macroeconomic headwinds.”
Keeping a “hold” rating, he reduced his target for CWB shares to $34 from $36. The average is $35.17.
Elsewhere, Desjardins Securities analyst Doug Young also lowered his 2020 expectations, but he maintained a "hold" rating and $36 target.
Mr. Young said: “Cash EPS missed by a few pennies; however, the mood around the Big 6 Canadian banks’ results likely also dragged the stock down. There are some interesting catalysts starting in FY21 (eg conversion to AIRB for RWA, a new digital front end); however, near-term NIM pressures might weigh on the stock through the beginning of FY20.”
In a separate research note, Mr. Chan lowered his target for Toronto-Dominion Bank (TD-T) shares following an EPS miss, expecting its sustained pressure on its U.S. retail segment.
“We expect U.S. retail to be challenged mainly from: (1) NIM pressure (although TD’s margin should hold in better than peers due to their larger proportion of retail assets); (2) normalization of credit within U.S. commercial; (3) new IDA agreement on AMTD closing will lower TD’s net service fees by 10 basis points to 15 bps; and (4) last full contribution from AMTD that does reflect the fee cuts implemented,” he said. “Looking out to 2021, the IDA sweep deposit balance should commence (up to US$10-billion per annum towards a floor of US$50-billion). Beyond F21, TD (through their equity contribution of 13.4 per cent of SCHW) targets slight EPS accretion.”
Maintaining a "hold" rating, his target slid to $79, which is the current consensus, from $81.
“The primary driver is lowering our target premium to 7 per cent (from 10 per cent) to reflect more moderate growth next year,” said Mr. Chan. “In F20, we now forecast EPS of $6.90 (down 1 per cent from prior) reflecting growth of 3 per cent year-over-year, while introducing fiscal 2021 EPS of $7.30 (up 6 per cent year-to-date). TD has the excess capital flexibility to improve growth and at some point add further U.S. scale.”
Ahead of the release of its third-quarter results on Dec. 11, RBC Dominion Securities analyst Kate Fitzsimons raised her financial expectations for lulumeon athletica inc. (LULU-Q), pointing to strength in its men’s products, women’s bottoms and a “steady flow of new product.”
“With its strong, consistent traffic levels (including 2Q’s stores/ digital traffic up high single-digits/more than 30 per cent), lulu is clearly leveraging its sweet spot between product innovation and customer engagement,” said Mr. Fitzsimons. "Recall 2Q’s 17-per-cent comp embedded an 11-per-cent stores comp, which was an impressive 700-basis points accel on a two-year stack in stores. Looking out, a key focus is the 3Q comp composition given a 7-per-cent store comp comparison versus 2Q’s 11 per cent (suggesting a mid-teens stores comp on a 2-YR stack). Our revised 15-per-cent total comp assumes an 11-per-cent store comp and 25-per-cent digital gains (26 per cent of sales).
"On margins, recall 2019's $4.63-$4.70 guide embeds $0.03-$0.04 impact evenly in 2H19 from tariffs and higher air freight expense, with the latter meant to avoid port congestion and ensure on-time product arrival. Our margin build embeds 90-basis points gross margin impact in 3Q from those factors. As such, we expect the pace of 2H gross margin expansion to be directionally less vs. 2Q's 23-basis points, including 10-basis points of GM gains in 3Q."
For the third quarter, Ms. Fitzsimons raised her earnings per share estimate by 1 US cent to 94 US cents, stemming from 15-per-cent comps. That’s up 93 US cents and 14 cents and above the consensus on the Street of 93 US cents and 13.8 per cent.
“On 4Q, we model $2.10 EPS, on a 10-per-cent comp and 15-bps GM expansion (Street $2.13/12 per cent and GM 4-bps)," she said. "Between last year’s 53rd week, Hong Kong challenges (lulu had 6 stores in that market as of 2Q19 and est. 3 in the comp base) and six fewer days this holiday season, 4Q’s revenue outlook is likely to be more conservative, with our expectation for a high single-digit/low double-digit comp guide. While LULU was a clear Black Friday winner as per our checks including strong reception to holiday collections (velvet, shimmer) and outerwear, we’d expect the outlook to still land more conservatively given lots of 4Q revenues yet to be booked and considering LULU’s history of a positive 4Q/ICR update.”
Keeping an “outperform” rating for lululemon shares, she hiked her target to US$250 from US$215. The average on the Street is US$225.15.
“While expectations are not low (stock up 90 per cent year-to-date versus SPX up 24 per cent), we remain long LULU shares given their at least mid- to high-teens earnings algorithm on baseline low-teens sales growth towards $6-billion-plus revenue and $8-9 EPS by 2023,” she said.
GDI Integrated Facility Services Inc.'s (GDI-T) $73.5-million acquisition of ESC Automation Inc. is the latest chapter in its “success story,” said Desjardins Securities’ Frederic Tremblay.
The analyst raised his financial expectations for the Montreal-based company following the deal, which was announced last week. GDI and its wholly-owned subsidiary Ainsworth Inc. are poised to acquire the privately held building automation control solutions company and its U.S.-based subsidiaries Delta Connects Inc. and New Patriot Energy Inc.
“ESC’s expertise in building automation systems nicely complements GDI’s current service offering in western Canada,” said Mr. Tremblay. “We therefore see an opportunity to offer add-ons (eg HVAC services) to ESC’s customer base. Also, in our view, ESC is in a better position to expand more meaningfully into eastern Canada as part of GDI.”
“We believe GDI is paying 6–8 times EBITDA for ESC, a good price considering size (GDI’s largest acquisition in years) and margins (above GDI’s). GDI trades at double-digit valuation multiples.”
Mr. Tremblay raised his 2020 revenue and earnings per share estimates to $1.5-billion and $1.20, respectively, from $1.3-billion and $1.14.
“Although it will fuel significant increases in GDI’s revenue and EBITDA run rates, the acquisition of ESC will not bring leverage to excessive levels,” he said. “Pro forma leverage of approximately 3 times EBITDA is at the lower end of management’s comfort zone of 3.0–3.5 times (4 times would be the maximum for a large strategic acquisition, with a view to quickly reducing leverage with FCF). Given this flexibility, we estimate that GDI has the ammunition (balance sheet and cash flow) to acquire $20-million or more in incremental EBITDA. In the absence of other acquisitions, we forecast leverage of 2.5 times at the end of 2020.”
Keeping a “buy” rating, he increased his target to $41 from $37. The average on the Street is $40.33.
“Solid execution of the business plan continues with the acquisition of ESC,” said Mr. Tremblay. “GDI is well-managed, and has scale, a broad range of facility services and a healthy financial position.”
Canaccord Genuity analyst Carey MacRury raised his rating for Detour Gold Corp. (DGC-T) on Friday, citing the market’s reaction to Kirkland Lake Gold Ltd.'s (KL-T) proposed $4.9-billion acquisition of the Toronto-based miner.
“Kirkland shares fell 17 per cent on the day following the announcement of the transaction, effectively eliminating the acquisition premium,” said Mr. MacRury. “As a result, Detour shares are trading well below the implied $27.50 offer price. And the Kirkland exploration update released earlier this week received a muted reaction from investors.”
“Although DGC shares have rebounded somewhat, feedback from Detour shareholders suggest to us there is a risk Detour shareholders reject the transaction without a sweetener to restore some or all of the premium. As a reminder, the Detour shareholder vote has a 66.7-per-cent approval threshold.”
Mr. MacRury laid out three potential scenarios for the transaction that he believes favour Detour:
* Kirkland restores some or all of the premium in the form of a mix of cash and shares. He said: “We estimate that the pro forma company would have a year-end pro forma net cash position of $850-million and 2020E EBITDA of $1.48- billion which we believe could support a significant cash portion to the proposal and reduce the number of KL shares to issue.”
* Kirkland shareholders reject the deal. Mr. MacRury: “While we believe there could be a short-term negative impact to DGC, we believe Detour is worth more than $27.50 per share in the longer term (our previous target price was $30.00 per share). In our view, Detour is still in the early stages of its turnaround, with additional value to surface from an updated resource model, new mine plan capturing some the of the benefits from the strong block model reconciliation and realized cost improvements. In addition, management had indicated plans to expand mill throughput and the potential to go underground, which we believe is not reflected in Detour’s share price."
* There’s no bump or either set of shareholders reject the deal, adding he expects interest from other producers for Detour at around the $27.50 per share range.
Moving Detour to “buy” from “hold,” Mr. MacRury raised his target to $27.50 from $24. The average on the Street is $25.85.
He maintained a “hold” rating and $55 target for Kirkland Lake. The current average is $60.16.
In reaction to its Investor Day event in Toronto on Thursday, Credit Suisse analyst Andrew Kuske thinks Capital Power Corp. (CPX-T) is “positioned for performance.”
“On balance, we believe CPX’s continued growth should be viewed positively,” he said. “Projects like Whitla Wind 2 help extend the asset base in a cost effective fashion by piggybacking, in part, on existing infrastructure. Improved economic returns and the future dual-fuel capability at all Genesee units. Even with questions around some issues in Alberta’s power market, the overall environment looks to be becoming much more attractive for capital with a window for positive returns. The extent of benefits will partly revolve around dispatch, bidding and volatility. The Alberta story takes a lot of the focus, however, that capital story is aligned with contracted capacity (both thermal and renewable) in other markets that clearly provide a baseline of growth with option upside from Alberta.”
Mr. Kuske reiterated his “buy” rating and $32 target. The average on the Street is $35.10.
“CPX provides core Alberta exposure with high operational capability that is underpinned by a growing base of contracted cash flows in multiple markets,” the analyst said.
Elsewhere, CIBC World Markets analyst Mark Jarvi increased his target to $34 from $32, keeping a "neutral" rating.
Mr. Jarvi said: " Our overall outlook for Capital Power is unchanged following the annual Investor Day, release of new guidance and business update. While 2019 results have exceeded original expectations and existing projects as well as acquisitions are delivering as expected, the growth into 2020 is more muted. Further, prospects for adding more contracted renewables seem to be cooling, driving the company to pursue a merchant wind project in Alberta. Capital Power provides a solid dividend that will grow over the next few years, but absent an acceleration in growth we don’t believe the shares will outperform peers in the next few quarters. A successful re-contracting announcement would be a modest positive but won’t likely be a significant catalyst."
In other analyst actions:
* RBC Dominion Securities analyst Geoffrey Kwan raised CI Financial Corp. (CIX-T) to “sector perform” from “underperform” with a $23 target, up from $21. The average on the Street is $22.06.
* Laurentian Bank Securities analyst Jonathan Tempro initiated coverage of Calgary-based Spartan Delta Corp. (RTN-X), formerly known as Return Energy Inc., with a "speculative buy: rating.
He did not specify a target price.
“We view the new management team favourably and believe that the team can acquire assets at attractive metrics, grow production, and ultimately provide significant shareholder returns,” said Mr. Tempro. “This team has created value through multiple business cycles by providing high-growth oil-focused companies through a strategy of acquiring, exploiting, and monetizing. The strategy of consolidating undervalued light oil assets in western Canada and augmenting the Company’s Canadian business plan with select international assets with existing operations certainly ticks the right boxes for a successful venture.”