Inside the Market’s roundup of some of today’s key analyst actions
Desjardins Securities’ John Sclodnick and Jonathan Egilo expect gold equities to “awaken” in 2024 with the price of the precious metal “surging.”
In a research report previewing the year ahead titled ‘Golden Slumbers,’ the analysts emphasized the “strong price environment” is likely to create opportunities for investors.
“The general expectation for 2024 is that the Fed will cut rates, so we look at how gold performs after the first rate cut following a hiking cycle — when rates were cut in July 2019, the gold price was 11 per cent higher six months after; in the prior cycle, which concluded with a rate cut in September 2007, gold was 29 per cebt higher six months after,” they said. “The S&P 500 to gold price ratio has been challenged to remain above 2.3 over the past year; after touching that level in late November, the gold price now appears set for outperformance with the ratio trending back down. Looking at gold ETF buying, the tide could be turning—after six consecutive quarters of net outflows, holdings may have bottomed out in late October and the SPDR Gold Shares saw net inflows of more than US$1-billion in November, the highest level since March 2022.
“Based on consensus P/NAV estimates, senior gold producers are trading 4 per cent above their two-year midpoint, intermediates 11 per cent above and juniors at their midpoint, while gold developers are 17 per cent below and near the bottom of their two-year range. Gold is trading near all-time highs, and we believe that NAVs are not currently reflecting the surge in the gold price, so we expect P/NAV multiples to fall further with updated estimates and view current trading levels as highly attractive entry points generally, particularly for the developers. We expect FCF-generating producers to deploy their growing cash balances on acquisitions in 2024, certainly more so than in 2023.”
The analysts revealed a trio of top picks for 2024. They are:
Producer: OceanaGold Corp. (OGC-T) with a “buy” rating and $3.50 target. The average on the Street is $4.03.
“OGC is one of our top producer picks, specifically for its internally funded organic, near-term growth, in conjunction with its very attractive FCF yield,” they said. “OGC production could reach 600koz [thousand ounces] by 2025 from 475koz in 2023. This is primarily driven by increased production from Haile, specifically driven by the high-grade underground deposit which recently had its first stopes mined. In 2024, we model production of 571koz Au [gold] at AISC [all-in sustaining costs] of US$1,376/oz Au. This represents year-over-year production growth of 23 per cent, driving EBITDA growth of 23 per cent and FCF lifting from US$9-million in 2023 to US$140-million in 2024.”
Developer: Skeena Resources Ltd. (SKE-T) with a “buy” rating and $18.25 target. Average: $15.28.
“SKE recently announced strong results from its Eskay Creek DFS study, and we expect the project to be further enhanced via ongoing exploration and the inclusion of the nearby Snip project,” they said.
Explorer: Atex Resources Inc. (ATX-X) with a “buy” rating and $2.20 target. Average: $2.42.
“In our view, ATX remains a standout among peers due to its prospectivity to substantial and near-term resource growth—driven by management’s aggressive approach to designing drill programs that are solely focused on determining the limits of the newly discovered and high-grade Valeriano porphyry system,” they said. “At the time of writing, ATX had just commenced its Phase 4 drilling program at the Valeriano project, which is targeting 15,000‒20,000 metres and is fully funded. It seeks to further define extensions of the Central and Western high-grade trends—both of which are open along strike. An early goal of the program is to test the Central and Western trends to the south, where the last holes of the last drill program suggested the two trends could possibly be coalescing. We expect initial visual results could be imminent and expect first assays in January.”
For investors seeking gold exposure, the analysts recommend Aya Gold & Silver Inc. (AYA-T) as their “preferred name,” citing “a number of key catalysts in 1H24 including first silver pour from the Zgounder expansion and a resource estimate at Boumadine.” They have a “buy” rating and $13.25 target, below the $13.75 average, for its shares.
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Interest rates are likely to continue to dictate the performance of real estate investment trusts through 2024, according to Desjardins Securities analyst Kyle Stanley and Lorne Kalmar, recommending investors get their “tickets to the pivot party.”
“Despite historically being positively correlated, the [S&P/TSX Capped REIT Index] has trended in near-perfect negative correlation with bond yields in 2023, effectively frontrunning a recession, in our view,” they said. “We are increasingly confident that several rate cuts are likely in 2024 and that a soft landing can be achieved. This should set the stage for a recovery in REIT valuations in 2024. Since October 3, the 10-year GoC yield has declined 90 basis points while the SPRTRE has generated a total return of 8.8 per cent (7.6 per cent for SPTSX), providing a sneak preview of how we expect 2024 to play out.”
“We expect rate cuts and a corresponding decline at the short end of the curve to drive funds flows out of money market instruments and back into yield equities, including REITs. We also anticipate that increased visibility around rates and the economy will result in a pickup in transaction volumes, which should provide much-needed support for REIT valuations.”
The analysts say they are “taking a top-down approach” heading into 2024 They are now expecting total returns of 10-20 per cent in 2024, which is predicated on “(1) interest rate cuts; (2) funds flows out of money market instruments; (3) a soft landing/mild recession; (4) the relationship between REIT performance and 10-year Government of Canada yields this rate hiking cycle; and (5) a pickup in transaction activity.”
“Assuming Canada avoids a severe recession and inflation remains under control, we are optimistic that REITs should perform well in 2024,” they said.
“What else to look out for in 2024. Immigration continues to be an important tailwind for multifamily, retail and self-storage fundamentals. We believe REIT balance sheets within our coverage universe are generally well-positioned to withstand the impact of slowing economic growth, while strong top-line growth should absorb the impact of higher rates on refinancing. After several cuts/suspensions in 2023, the list of candidates for distribution cuts in the year ahead is very thin.”
In a report released Friday, the analysts said their sector pecking order is: “(1) multifamily; (2) retail; (3) industrial; and (4) office.”
Their “best ideas” are:
- InterRent REIT (IIP.UN-T) with a “buy” rating and $16 target. The average on the Street is $14.23.
- Killam Apartment REIT (KMP.UN-T) with a “buy” rating and $22 target. Average: $21.08.
- Primaris REIT (PMZ.UN-T) with a “buy” rating and $16.50 target. Average: $16.84.
- RioCan REIT (REI.UN-T) with a “buy” rating and $22 target. Average: $21.30.
Mr. Kalmar and Mr. Stanley explained: “IIP — with its concentration in key urban markets that have benefited from healthy market rent growth, IIP is poised to deliver sector-leading FFOPU growth in 2024. KMP — top-line growth should accelerate in 2024 which, in light of its deeply discounted relative valuation and healthy FFOPU outlook, offers an attractive entry point. PMZ — as our top pick in the retail space, we believe PMZ should continue to outperform in 2024 with its sector-leading balance sheet and the ongoing recovery of Canadian malls. REI — following relative underperformance in 2023, we believe REI is poised for a bounce-back year, particularly given our expectation for an increase in funds flows to the retail REITs.”
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After a “solid” third-quarter beat, “strong start” to the fourth quarter and seeing its 2024 guidance as “conservative,” the risk-reward proposition for Lululemon Athletica Inc. (LULU-Q) is “favourable,” according to Citi’s Paul Lejuez.
He was one of several equity analysts on the Street to raise their forecast for the Vancouver-based activewear company following the late Thursday release of a better-than-expected financial report. That included earnings per share of US$2.53, exceeding Mr. Lejuez’s US$2.32 estimate as well as the consensus forecast of US$2.28 and the company’s own guidance of US$2.23 to US$2.38. Total sales of 19 per cent topped the Street’s projection by 1 per cent.
“3Q sales/EPS were better than consensus and in-line with market expectations.” he said. “U.S. sales up 12 per cent were in-line with 2Q and impressive in a tough retail backdrop. Management is pleased with 4Q quarter-to-date trends (no specifics given) and said markdowns are running in-line with last year, underscoring the strength/health of the brand in the U.S. International sales up 49 per cent (vs 40 per cent in 2Q) with China growing 53 per cent, an impressive performance in a volatile macro environment.”
While Lululemon’s fourth-quarter guidance of EPS of US$4.85-US$4.93 and growth of 13-14 per cent was narrowly below the consensus projections (US$4.94 and 15 per cent), Mr. Lejuez thinks “conservatism is baked in.”
“Stepping back, 3Q highlights LULU’s position as a market share winner despite a choppy macro backdrop,” he said. “With the brand healthy in the U.S. and China a ‘coiled spring’ with several years of outsized growth ahead, we believe LULU’s long-term growth story remains attractive.”
He raised his full-year 2023 and 2024 EPS estimates to US$12.56 and US$14.71, respectively, from US$12.35 and US$14.54 previously.
Mr. Lejuez maintained a “buy” rating and US$520 target for Lululemon shares. The average target on the Street is US$474.70.
“Investment highlights that support our Buy rating include: (1) inventory to sales gap narrowed (with limited markdown pressure); (2) U.S. is positioned to grow low double digits-plus in F23, underscoring LULU’s brand strength/momentum in its largest market; (3) China is poised to rapidly grow in F23 and become a much more meaningful long-term growth driver (just 8 per cent of sales in F22 going to 22 per cent by F27); and (4) we model 20-per-cent-plus EPS growth annually through F27 as LULU unlocks its global growth potential (and it is not ‘over-earning’ despite doubling sales from 2019 to 2022),” he concluded.
Analysts making target adjustments include:
* Stifel’s Jim Duffy to US$529 from US$463 with a “buy” rating.
“FY3Q results showed balanced strength, solid execution, and acceleration in North America. Despite commentary of strong trends, shares are under-pressure in response to a slightly below consensus 4Q guide. We note more difficult compares, a cloudy macro picture, and remaining important selling weeks. With still 2/3 of the quarter ahead, we view the 4Q outlook as conservative and encourage investors to use any weakness in shares as a buying opportunity. Considering the growing contribution of International (outside North America now 22 per cent of revenue) and impressive growth trajectory, we think the market is underappreciating the growth contribution and potential. We remain constructive on LULU shares and, with both higher estimates and expanding contribution from international markets, we are raising the 12 month target price.”
* BMO’s Simeon Siegel to US$408 from US$376 with a “market perform” rating.
“LULU reported slight top-line beat with better adjusted GMs [gross margins] driving healthy adjusted EPS beat and guided 4Q revenue/EPS just below Street at the high end ... There is no question LULU continues to post among the best growth in retail; however, at current levels, we believe the margin of error is too tight and upside appears challenging (though, to be fair, we said this 10 per cent lower too),” he said.
* Wedbush’s Tom Nikic to US$503 from US$420 with an “outperform” rating.
“We remain bullish on LULU, following yet another strong beat-and-raise quarter. Importantly, Q4 guidance looks conservative, and management was bullish on quarter-to-date performance (including Black Friday week), leaving room for further upside to numbers this year,” he said.
* Wells Fargo’s Ike Boruchow to US$450 from US$445 with an “equal-weight” rating.
“We believe the premium to athletic peers (high-teens) is justified given LULU’s global momentum, share gains and elevated margin structure vs. peers,” he said.
* KeyBanc’s Noah Zatzkin to US$500 from US$450 with an “overweight” rating.
“Ongoing strength remains broad based across product categories and geographies, and reinforces our view that increasing brand awareness and product newness are enabling LULU to navigate the ongoing challenging macro environment and take market share. LT, we continue to see meaningful opportunity via innovation, mens, and international, and remain confident in management’s ability to execute on its Power of Three x 2 plan,” said Mr. Zatzkin.
* Piper Sandler’s Abbie Zvejnieks to US$495 from US$455 with an “overweight” rating.
“3Q results were solid and underpin LULU’s ability to gain share in a challenging environment. Results were in line with investor expectations for a slight beat and raise,” she said. “Management had positive commentary on Thanksgiving weekend and quarter-to-date trends, and while LULU did pull forward some Black Friday volume, there is no anticipated impact to margins in 4Q. We think there could be further room for an increase in LULU’s 2023 outlook at the ICR conference if current consumer demand trends continue. We think LULU is a winner amongst the more selective consumer due to the company’s strong newness pipeline and engaged community. We are highly encouraged by some of the newest product launches such as Soft Jersey but also iterations of current franchises such as Brushed Softstreme Ribbed Half Zip (great gift for her).”
* Roth’s Brian Nagel to US$540 from US$450 with an “outperform” rating.
“As we have long opined, in our view, LULU represents an increasingly established, yet still up and coming, omni-channel enabled, merchandising-lead disruptor within athleisure, and apparel broadly. Better than expected Q3 (Oct.) results reported yesterday (Thurs., Dec. 7th) showcase persistent underlying growth potential and economic resiliency of LULU. Looking closer into 2024, we are now even more upbeat upon nearer-term fundamental prospects for LULU, particularly as macro pressures continue to abate, and the likelihood of investors to award shares a higher multiple, more reflective of the company’s superior fundamental prowess. LULU remains a top pick within our Consumer Growth & eCommerce coverage,” said Mr. Nagel.
* Truist’s Joseph Civello to US$527 from US$500 with a “buy” rating.
“Given the company’s momentum we believe the outlook looks fairly conservative, especially given LULU’s (1) strong international growth profile, (2) its loyal/higher income customer base, and (3) its robust innovation pipeline, which continue to insulate the company from broader macro pressures. We remain buyers,” he said.
* Bernstein’s Aneesha Sherman to US$400 from US$366 with a “market perform” rating.
* JP Morgan’s Matthew Boss to US$500 from US$489 with an “overweight” rating.
* Oppenheimer’s Brian Nagel to US$540 from US$450 with an “outperform” rating.
* TD Cowen’s John Kernan to US$546 from US$545 with an “outperform” rating.
* Barclays’ Adrienne Yih to US$530 from US$480 with an “overweight” rating.
* Needham’s Anna Andreeva to US$525 from US$470 with a “buy” rating.
* Morgan Stanley’s Alex Straton to US$493 from US$437 with an “overweight” rating.
* BoA Global Research’s Lorraine Hutchinson to US$520 from US$450 with a “buy” rating.
* Telsey Advisory’s Dana Telsey to US$520 from US$450 with a “buy” rating.
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Following a weaker-than-anticipated quarterly release, Scotia Capital analyst Meny Grauman said he will “remain on the sidelines” on Laurentian Bank of Canada (LB-T) “until we get a clearer picture of the way forward, and more confidence in the company’s ability to execute.”
“A key focus for us in particular is the ability of the bank to drive its adjusted ROE above the mid-to-high single digits,” he added.
The Montreal-based bank dropped 4.1 per cent on Thursday after it reported its net income slid 45 per cent to $30.6-million for the quarter ended Oct. 31 due to charges tied to a September system outage that led to the ousting of its chief executive officer. This year, the stock has tumbled 19 per cent, making it the worst-performing bank stock on the S&P TSX Composite Index.
“Although a major systems’ outage in September reduced Q4 adjusted EPS by $0.09, the impact on the bank’s balance sheet was less than feared as both loans and deposit volumes held in quite well and certainly did not point to any mass exodus of customers,” said Mr. Grauman. “And yet, the reality is that Laurentian Bank’s problems go deeper than that tech issue as evidenced by a canceled sale process and a Management reshuffle that extended to the company’s board chair as well. The new CEO, Eric Provost, highlighted a revamped strategic plan with a renewed focus on expense control in particular among other key priorities. Full details of the bank’s new strategic direction will only be revealed in the spring, but for the time being expectations for Q1 and for F2024 as a whole remain very modest and include sluggish loan growth, stable margins from Q4′s step-down, and a PCL ratio in the high-teens to low-20s basis points.”
The analyst cut his 2024 core cash earnings per share estimate fell by 5 per cent to $4.53 (after flat EPS growth in 2023), while his 2025 projected slid by 4 per cent to $4.56.
“The downward revisions reflect stable margins from current levels and very slow loan growth partially offset by some expense savings,” he said. “We continue to value the shares at 6.2 times 2025 which translates to a 35-per-cent discount to the group, and as a result our price target falls by $1 to $28.”
With a “sector perform” rating, Mr. Grauman’s new $28 target is below the $30.18 average on the Street.
Other analysts making changes include:
* Raymond James’ Stephen Boland to $32 from $29 with a “market perform” rating.
“General guidance on the conference call was provided that the NIM [net interest margins] and the loan book should be stable throughout 2024 which we believe is a positive surprise,” said Mr. Boland. “We have included some very moderate growth in the loan book in 2024. Also, that PCL [provisions for credit losses] levels will remain in the general range for the year. Overall, the tone was better than we expected. We are adjusting our 2024 estimates and introducing our 2025 estimates. We are raising our target slightly as we move to a 2025 valuation
* Desjardins Securities’ Doug Young to $28 from $29 with a “hold” rating
“While this quarter’s results were notably disappointing, we believe the market had largely anticipated these outcomes. With new management at the helm, might we witness a fresh chapter for this franchise? The upcoming spring update will be telling. We tweaked our estimates, reduced our target,” said Mr. Young.
* BMO’s Sohrab Movahedi to $33 from $43 with a “market perform” rating.
“With new leadership and a medium-term strategy in place, FY24 will continue to be a transition year for LB. Expenses are in sight for management, but will likely remain elevated. When combined with more capital-intensive growth, these expenses will weigh on ROE for the foreseeable future. This expense pressure is likely to constrain share price upside to BVPS [book value per share] growth,” he said.
* RBC’s Darko Mihelic to $30 from $33 with an “underperform” rating.
“Q4/23 results were lower than we expected and revenue pressures seem likely to persist,” said Mr. Mihelic. “We reduce our estimates and do not expect dividend increases next year. We modelled lower revenue estimates, which more than offset the $8 million pre-tax in annual cost savings we expect to be realized by 2024. LB has struggled with expenses for a long time, there is a new management team, and we still await a strategic update. Our confidence in our estimates is low.”
* CIBC’s Paul Holden to $32 from $35 with a “neutral” rating.
“LB is trading at deeply discounted multiples with a P/BV of 0.4 times and P/E (2024 estimates) of 6.0 times,” said Mr. Holden. “We see significant upside if management can execute on a profit improvement plan that takes adjusted ROE from 7 per cent (CIBC’s fiscal 2024 estimate) to closer to 10 per cent. However, given the challenging economic environment and bank-specific challenges, we find it hard to argue that buying the stock today is compelling.”
* National Bank’s Gabriel Dechaine to $26 from $27 with an “underperform” rating.
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National Bank Financial analyst Adam Shine raised his target for Canadian telecommunications stocks after a change to his valuation method after extending his valuation period.
“We thought Canadian telecom stocks had for the most part found their 2023 lows when we wrote on Oct. 4 about finding bottoms amid precedent valuations and rising rates,” he said. “Since Oct. 3, Quebecor and the Big 3 rallied an average of 15.3 per cent with Cogeco (CCA) down 4.3 per cent despite 10.8-per-cent appreciation over the past week. While Rogers stood out during 3Q reporting, falling yields served as an important trigger for the resuscitation of the sector as did more muted than expected spending in the 3800 MHz spectrum auction whose results were disclosed after market on Nov. 30.
“On Dec. 4, we updated our forecasts for the 3800 MHz auction, as 20 per cent of the cost of the acquired licences needs to be paid by the companies by Jan. 17 and the other 80 per cent by May 29.”
Mr. Shine said changes to his discounted cash flow valuations on Oct. 5, including an increase to his equity risk premium and reduction to his growth rate, were “too conservative.” While he thinks growth profiles during 2023 are likely to be “sub-optimal due in part to price actions,” he raised his terminal growth rate for all companies, except Cogeco Communications Inc. (CCA-T), believing its EBITDA and free cash flow “remain under greater pressure.”
That led him to make these target changes:
- BCE Inc. (BCE-T, “outperform”) to $58 from $56. The average on the Street is $57.11.
- Quebecor Inc. (QBR.B-T, “outperform”) to $40 from $39. Average: $38.46.
- Rogers Communications Inc. (RCI.B-T, “outperform”) to $78 from $75. Average: $73.18.
- Telus Corp. (T-T, “outperform”) to $27 from $26. Average: $26.76.
He reiterated a $63 target and “sector perform” rating for Cogeco. The average is $38.46.
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JP Morgan analyst John Royall made a pair of rating changes to Canadian energy stocks in his coverage universe on Friday.
He raised Imperial Oil Ltd. (IMO-T) to “neutral” from “underweight” with a $97 target, rising from $95 and above the $86.44 average on the Street.
Conversely, Mr. Royall lowered MEG Energy Corp. (MEG-T) to “neutral” from “overweight” with a $33 target, up from $31 and exceeding the $31.19 average.
He also made these target adjustments:
- Canadian Natural Resources Ltd. (CNQ-T, “neutral”) to $106 from $114. The average is $98.88.
- Cenovus Energy Inc. (CVE-T, “overweight”) to $35 from $38. Average: $32.88.
- Suncor Energy Inc. (SU-T, “neutral”) to $52 from $59. Average: $54.21.
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BMO Nesbitt Burns analyst Greg Jones initiated coverage of a trio of lithium stocks on Friday.
They are:
* Frontier Lithium Inc. (FL-X) with a “market perform” rating and unspecified target. The average target on the Street is $3.76.
“Frontier is differentiated from peers by its high-grade resource and plans to develop an integrated mine-to-chemicals operation to produce spodumene concentrate and battery grade products in Ontario, Canada,” he said. “However, development capital requirements are significant relative to Frontier’s current scale, which could present challenges in an environment where capital can be scarce for large-scale greenfield projects. As such, we remain on the sidelines, awaiting further clarity on funding plans.”
* Lithium Ionic Corp. (LTH-X) with an “outperform” rating and $5 target. Average: $5.50.
“The company has consolidated the second-largest land holding in Brazil’s ‘Lithium Valley’ and an October 2023 preliminary economic assessment on its Bandeira project outlined an attractive low-capital, low-cost underground operation whose smaller footprint is expected to facilitate an accelerated permitting process and timeline to production (we model Q2/2026),” said Mr. Jones. “We expect the ongoing exploration will grow resources beyond the current 33 Mt and provide the potential to expand production scale and/or extend mine life.”
* Patriot Battery Metals Inc. (PMET-X) with an “outperform” rating and $16 target. Average: $18.50.
“Patriot has quickly advanced from initial discovery to definition of a large-scale +100 Mt resource at its Corvette Project in Québec’s James Bay lithium district,” he said. “Development looks poised to accelerate following a $109-million investment from Albemarle, with several catalysts on the horizon. Our Outperform rating is supported by the project’s world-class scale, its location in a Tier-1 jurisdiction and emerging Québec EV supply chain, and being fully-funded to advance towards a construction decision.”
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In other analyst actions:
* Following the release of its 2024 guidance, Stifel’s Michael Dunn trimmed his Athabasca Oil Corp. (ATH-T) target to $4.75 from $5 with a “buy” rating, citing “attrition” to his free cash flow estimates and recent weakness in oil prices. The average is $4.81.
* After “solid” quarterly results and in-line guidance, RBC’s Geoffrey Kwan raised his EQB Inc. (EQB-T) target to $101 from $100 with an “outperform” rating. The average on the Street is $96.
“We have a neutral view on Q4/23 results,” he said. “Adjusted EPS was ahead of our forecast, but was helped by higher-than-forecast gains on strategic and other investments (net interest income and PCLs were largely in line with our forecast). 2024 guidance was in line with our prior forecast. One interesting disclosure is that 80% of its uninsured residential borrowers had their mortgage originated or renewed in the higher rate environment and are not expected to have a material increase in mortgage payment on renewal (EQB’s non-prime borrowers normally take 1-year mortgage terms unlike prime borrowers who typically take 5-year terms). Despite the uncertainty regarding the near-term outlook for the housing/ mortgage market, we think EQB continues to execute well on its growth strategy. Within our small cap coverage, EQB remains our best idea.”
* In response to the release of 2024 capital budget and production guidance, Stifel’s Cody Kwong lowered his Headwater Exploration Inc. (HWX-T) target to $9 from $9.50 with a “buy” rating, while Desjardins Securities’ Chris MacCulloch raised his target to $10 from $9.25 with a “buy” rating. The average is $9.47.
“Specifically, we were impressed by the company’s ability to maintain modest capital spending which supports an attractive balance of measured growth, exploration/development of new plays and waterflood investments, all while supporting the 10 cents per share quarterly dividend (6.2-per-cent yield),” said Mr. MacCulloch.
David Leeder