Inside the Market’s roundup of some of today’s key analyst actions
National Bank Financial analyst Cameron Doerksen is confident the financial results from Bombardier Inc. (BBD.B-T) will continue to improve over the next several years, pointing to its “solid backlog, positive margin trends and decreasing leverage.”
However, he warns the near-term upside for its shares may be limited given “some business jet metrics [are] slowing (utilization rates down year-over-year, increase in used inventory for sale, albeit modest) as well as growing macroeconomic uncertainty.”
“As a result, we keep our Sector Perform rating, but would be adding to positions on share price weakness,” he said.
On Thursday, shares of the Montreal-based luxury jet manufacturer jumped 2.8 per cent after it boosted its financial targets ahead of its investor day meeting with analysts.
Bombardier is now aiming to generate at least US$900-million in annual free cash flow by 2025, up 80 per cent from its initial projection of US$500-million. Revenue is expected to exceed US$9-billion in the two years, rising 20 per cent from its initial target of US$7.5-billion, while adjusted earnings before interest, taxes, depreciation and amortization should reach US$1.625-billion, up from a previous target of US$1.5-billion.
“Management indicates that this solid free cash flow generation could be used to pay down additional debt, for potential M&A (more likely tuck-ins), or to fund an all-new aircraft program,” said Mr. Doerksen. “We note, however, that management does not see a need to launch a new aircraft until sometime after 2025.”
“The company expects that it can triple its defence revenues in the second half of the decade and is targeting revenues from the defence segment in excess of $1.0 billion beyond 2025, with the majority coming from incremental aircraft deliveries and the remainder coming from engineering services and modification work. Over the next 10 years, Bombardier Defence expects 375 industry deliveries in identified markets.”
After marginal changes to his forecast, Mr. Doerksen increased his target to $79 from $72. The average target on the Street is $75.75, according to Refinitiv data.
“If Bombardier can achieve its new 2025 targets, we see a path to a C$100.00+ share price over the longer term,” he concluded.
Other analysts making target changes include:
* RBC’s Walter Spracklin to a Street-high of $100 from $89 with an “outperform” rating.
“Investor Day 2023 caps off a number of key positives to the BBD investment thesis, including: strong execution since the initial targets were set in 2021; material raise to guidance, well above expectations; significantly lowered investment risk profile; and indications of more to come,” said Mr. Spracklin. “Adding this together and comparing it to the current valuation yields what investors search for: a fundamentally mispriced security. Our price target goes to $100, but we point to what we view as a reasonable upside scenario of $200. BBD is and remains our top investment idea today.”
* Desjardins Securities’ Benoit Poirier to $99 from $97 with a “buy” rating.
“We are pleased by the updated targets given the stronger-than-expected FCF, revenue, delivery targets and the absence of a plan to develop a clean-sheet design before the balance sheet has fully recovered (less capital-intensive, more favourable to creditors and less risky),” he said. “We remain bullish and recommend investors revisit the story.”
* Scotia’s Konark Gupta to $83 from $80 with a “sector outperform” rating.
“We came away from BBD’s investor day incrementally positive on an impressive turnaround story with our 2025E improving on better-than-expected guidance raise, which drives our target to $83 (was $80),” said Mr. Gupta. “We have baked in some conservatism in our estimates relative to a “potentially conservative” guidance, reflecting our cautious macro view in light of the ongoing uncertainties. While the double layer of cushion implies downside risk to our outlook should be relatively limited in a dire macro scenario, the upside risk could be quite significant for the stock if 2025 targets do come to fruition. Assuming a reasonable 8x-10x EV/EBITDA multiple for a nearly investment-grade-rated business, BBD’s 2025 targets (at low-end) would imply an equity valuation of $130 (at 8 times) to $175 (at 10 times) per share, a significant 105-175-per-cent potential return over the next two years. We believe 2025 may not be the end game as there could be earnings upside, shareholder returns or even strategic actions beyond 2025. Thus, we think the risk/reward is highly attractive for investors with a longer-term horizon.”
* BMO’s Fadi Chamoun to $85 from $80 with an “outperform” rating.
“In early 2021, BBD management launched a 5-year transformation plan aimed at improving profitability, lowering financial leverage, and putting the franchise on a more sustainable growth path,” said Mr. Chamoun. “With only two years into this plan, the company has meaningfully exceeded its financial targets on the strength of demand recovery and, more importantly, strong execution. As we expected, today’s Investor Day outlines a new/upgraded set of financial targets for F2025, which we believe have the potential to support more than doubling in the share price by F2025.”
* CIBC’s Kevin Chiang to $69 from $65 with a “neutral” rating.
=====
After higher-than-expected fourth-quarter 2023 financial results marked “the end strong to a strong year” for BRP Inc. (DOO-T), Stifel analyst Martin Landry thinks the recreational vehicle manufacturer’s “strong capex pipeline bodes well for the future.”
“Over the last three years, BRP’s EPS has more than tripled driven by rapid market share gains and structural improvement in the company’s margins profile, an impressive performance,” he said. “FY24 guidance suggests continued growth, but macroeconomic headwinds remains top of mind for investors, explaining [Thursday’s] share price reaction. In our view, BRP’s strong track record, having reached or exceeded its initial guidance 9 years in a row, gives us confidence in management’s ability to achieve its target. Current valuation at 7.5 times forward EPS, 40 per cent below historical levels, creates a buffer for a potential industry slowdown and offers investors with a long-term horizon a good entry point into a high quality business.”
Shares of the Valcourt, Que.-based company slid 4.6 per cent despite the premarket release of results that beat the Street’s forecast. Earnings per share rose 28 per cent year-over-year to $3.85, topping both Mr. Landry’s $3.65 estimate and the consensus projection of $3.76 as “sell-through metrics were strong with market share gains in every product line.”
“In FY23, BRP gained 5 percentage points of market share to roughly 35 per cent and became the #1 OEM in North America in the category it is involved,” the analyst said. “In recent years, BRP has accelerated its investments in R&D and CAPEX, spending $1.9-billion over the last 2 years, almost double the $1-billion spent in the previous two years. These investments resulted in a rapid roll-out of new products, strong innovation and meaningful increases in production capacity. In FY24, BRP’s CAPEX spending should continue to accelerate to reach $750-million suggesting a healthy product pipeline. The company’s ROIC [return on invested capital] stood at 43 per cent in FY23, or 31 per cent since FY16, reassuring us that BRP’s CAPEX spending is generating appealing returns.”
“FY24 guidance is calling for revenues to increase by 9 per cent to 12 per cent year-over-year. BRP expects to maintain its 17-per-cent EBITDA margins, in-line with FY23 levels. EBITDA margins have increased 350 basis points from the 13.5 per cent realized in FY20, an impressive performance driven by structural improvements including (1) the wind down of the Envinrude outboard engine business, (2) increased manufacturing footprint in Mexico and (3) scale benefits resulting in OPEX leverage. FY24 guidance for Adj. EPS of $12.25 to $12.75, up 2 per cent to 6 per cent year-over-year is lower than revenue growth as higher depreciation and interest expense create a $1.35 per share headwind.”
Raising his revenue estimates by 6 per cent “offset by higher interest expenses, reflecting the rise in interest rates,” Mr. Landry increased his target for BRP shares by $5 to $150. The average target is $136.83.
Keeping a “buy” rating, he touted its “track record of operational excellence” and “long growth runway.”
“BRP’s valuation contracted significantly from its high in July 2020,” he noted. “BRP trades at 7.5 times our FY25 EPS estimate, which is below the average forward P/E of 13 times since it became public. We see limited downside risk from current valuation levels and believe that over time the company’s valuation multiple will return to historical levels, providing investors with a strong tailwind.”
Elsewhere, others making changes include:
* National Bank’s Cameron Doerksen to $143 from $139 with an “outperform” rating.
“We continue to expect some softening of retail demand for powersports in the coming quarters, but also still expect BRP to outperform the industry supported by ongoing market share gains and tailwinds from new product introductions,” he said.
* Desjardins Securities’ Benoit Poirier to a new Street-high of $170 from $156 with a “buy” rating.
“BRP once again outperformed expectations by delivering better-than-expected results and introducing stronger FY24 guidance than peers,” he said. “We view the market reaction and pessimism around the powersports industry as a buying opportunity, especially given BRP’s unjustified 1.9 times EV/FY2 EBITDA discount to Polaris. We expect management to continue to leverage the balance sheet to strategically return capital to shareholders via buybacks and the increased dividend. We maintain our bullish stance.”
* Scotia Capital’s Jonathan Goldman to $149 from $143 with a “sector outperform” rating.
“F2024 guidance came in 5 per cent ahead of consensus – yet shares finished down 4 per cent, on top of what we viewed as already depressed levels,” said Mr. Goldman. “The market continues to place more weight on near-term uncertainty than the (sizeable) medium-term opportunity. Yes, there are risks, but we believe they are overly discounted in the shares. At the current EV, using an 8.0 times multiple (read: conservative), the market is implying a more than 20-per-cent year-over-year decline in EBITDA whereas guidance calls for 9-per-cent to 13-per-cent growth. The company has a track record of delivering against targets, having surpassed its own guidance every year since 2015. Beyond the attractive valuation – shares are trading at 6.0 times on the midpoint of F2024 guidance and 5.4 times BRP’s F2025 targets – we forecast significant FCF generation in F2024 (we estimate $900 million inclusive of a $400 million w/c inflow per management) and capital optionality (more than $1-billion of dry powder) as catalysts.”
* Citi’s James Hardiman to $117 from $123 with a “neutral” rating.
“There is a great deal to like about the BRP story, as its powersports portfolio features both defensible leadership positions and substantial market share opportunities,” he said. “However, there remain questions about the competing drivers in DOO and PII guidance which both call for a flat industry and share gains for themselves. In BRP’s case, its long track record of high-quality products and consistent innovation should (in our view) allow it to gain share for the foreseeable future, even if the market itself is difficult to handicap.”
=====
After a first quarter that saw North American railroad companies underperform the S&P 500, RBC Dominion Securities analyst Walter Spracklin thinks shares of Canadian Pacific Railway Ltd. (CP-T) “represent an attractive investment opportunity,” despite an elevated valuation compared to peers.
“We have a highly positive view on the CP-KCS combination and believe the merits of the deal are extensive,” he said. “We view the network advantage as the most compelling factor, and also view positively the increased diversification on a business and geographic basis. Finally, we view the $1-billion in announced synergies as conservative, and therefore see upside to consensus expectations.”
In a research report released Friday previewing first-quarter earnings for the sector, Mr. Spracklin noted the valuation gap between Canadian and U.S. rail companies persisted early in 2023, which he thinks reflects “volume outperformance as well as due to indication that CNR is operating fluidly through Q1 and the STB’s approval of the CP-KCS combination.”
“The Canadian rails should be the clear standouts in Q1, with volumes expected to come in up 5 per cent at CNR and up 10 per cent at CP versus the U.S. rails, all of which we expect to come in lower year-over-year,” he said. “Volumes are expected to come in below our expectations across the group, except at CN. RTMs [revenue ton miles] at the Canadian rails benefitted from robust Grain demand and the US rails saw volume come in lower driven by decreased Intermodal carloads.”
“We decrease our target multiples to reflect cost inflation and intermodal volume headwinds. However, our multiple at CP remains unchanged following the STB’s approval of the KCS acquisition as well as reflecting a better long-term growth outlook in our view relative to peers. Key focus into the quarter however will be on macro, and the outlook for intermodal, which is trending down meaningfully year-over-year in recent weeks.”
For Canadian National Railway Co. (CNR-T), Mr. Spracklin raised his quarterly estimates above the consensus on the Street, but he lowered his target for its shares to $161 from $170 with a “sector perform” rating. The average is $158.71.
“Our Q1 estimate increases into the quarter due to higher Grain and Metals & Minerals RTMs versus our prior expectations,” he said. “Quarter-to-date volumes are trending at up 8 per cent; however, we expect volume to trend lower during the remainder of the quarter resulting from tough compares in week 12 and week 13. We also highlight tailwinds from USD appreciation. We also had a chance to catch up with management this week who noted that while winter was much milder versus last year, CN still had tier restrictions 45-50 per cent of operating days QTD (compared to 85 per cent last year). Taken together, our Q1 EPS estimate increases to $1.72, from $1.62, a touch ahead of consensus $1.69. Our 2023 estimate remains unchanged at $8.15, or up 9 per cent year-over-year, and ahead of consensus $7.85 (up 5 per cent year-over-year) as well as guidance for EPS up low-single digit. We believe CN has avenue to take up guidance but that it will not quite yet due to uncertainty around the second half of the year as well as reflecting an ongoing negotiation with the TCRC.”
For CP, he maintained a $122 target, above the $116.55 average, with an “outperform” rating.
“Our Q1 estimate is higher due to increased yield driven by changes in mix,” said Mr. Spracklin. “We also expect USD appreciation to act as a tailwind in the quarter, offset however by higher stock-based compensation. Our Q1 estimate therefore increases to $0.94 (from $0.92), below consensus $0.96. Moreover, we do not expect management to provide 2023 guidance due to the KCS acquisition and expect them to save additional detail for the upcoming Investor Day. Our 2023 estimate remains unchanged at $4.56, slightly above consensus $4.51 and our 2024 estimate also remains unchanged at $5.50, ahead of consensus $5.23 as we expect CP to realize previously communicated synergy targets. Our target multiple remains at 19.5x (on 2025E EPS), well ahead of peers reflecting the long-term growth opportunity resulting from the KCS merger. ... In our view the quarter is likely a non-event, with key focus to remain on commentary surrounding the merger to the extent it is provided.”
=====
While he predicts Lululemon Athletica Inc. (LULU-Q) will report in-line fourth-quarter financial results, Citi analyst Paul Lejuez opened a “30-day positive Catalyst Watch” for its shares on Friday, seeing modest expectations from investors ahead of the March 28 release.
“Citi’s trading desk has not seen a lot of flow in LULU recently, other than some trimming from long-onlys and some short covering by hedge funds,” he said. “Our conversations indicate LULU is well-owned by hedge funds ahead of the print, though investors are nervous around how management will guide. Given the company missed GM guidance the last two quarters, investors are hoping management has received the message and guides gross margin conservatively in F23, given inventory levels will still be high exiting 4Q. We believe a scenario where management guides F23 top line in-line with their long-term goals and stays conservative on F23 gross margin will be viewed positively by investors.”
Mr. Lejuez expects few surprises from the quarterly results given the Vancouver-based apparel maker pre-released revenue and earnings expectations in early January. He’s projecting earnings per share of US$4.27, up from US$4.25 previously, a penny higher than the consensus estimate on the Street and falling in the range of management’s guidance of US$4.20-$4.30. He’s forecasting comparable sales growth of 24.3 per cent, narrowly higher than the 23.7-per-cent consensus.
Instead, he thinks focus will be largely on the company’s guidance.
“We expect management to guide F23 EPS to a range around our F23 estimate of $11.22 (vs consensus $11.32),” said Mr. Lejuez. “While investors are bracing for weaker sales guidance, we believe management will guide sales in-line with their long-term algorithm of +mid-teens (we estimate F23 sales up 13 per cent) and take a more conservative approach on gross margins in 1H23 as they work down inventory (management guided 4Q inventory up 60 per cent). While we believe the U.S. is a healthy market overall, we expect F23 U.S. comps to slow to mid single digits (vs F21 up 38 per cent, F22E up 25 per cent) with strong growth from int’l, particularly China (we model F23 overall comps up 9 per cent). With investors anticipating conservative F23 guidance and shares trading at 16.5 times F23 EV/EBITDA (well below NKE at 25 times), we believe the setup into the print is favorable.”
For fiscal 2023, he trimmed his full-year EPS projection to US$11.22 from US$11.60 based on lower sales and gross margins, below the Street’s estimate of US$11.32.
Mr. Lejuez reiterated a US$350 target and “neutral” rating for Lululemon shares. The current average is US$374.21.
“Comp momentum has been among the best in retail and margins have expanded significantly over the years,” he said. “Product innovation continues to drive strong results in seemingly developed categories such as women’s pants, the men’s business is a big opportunity, and the customer has given LULU license to broaden into new categories. However, with the LULU being valued as one of the most expensive specialty retail concepts ever, we believe the risk/reward is fairly balanced.”
Elsewhere, TD Cowen’s John Kernan cut his target to US$470 from US$488 with an “outperform” rating.
=====
In other analyst actions:
* Canaccord Genuity’s Mark Rothschild cut his Canadian Net REIT (NET.UN-X) target to $7 from $7.50, below the $7.70 average, with a “buy” rating. Others making changes include: Echelon Partners’ David Chrystal to $7 from $8 with a “buy” rating and Desjardins Securities’ Kyle Stanley to $7 from $7.75 also with a “buy” recommendation.
“NET reported in-line 4Q22 results,” said Mr. Stanley. “We are trimming our target ... reflecting updated NAV work and a contracted multiple in light of ongoing macro uncertainty. Our 2023–24 FFOPU outlook declined 2 per cent and calls for essentially no growth over our forecast period. The bulk of the REIT’s cash flow growth has historically been driven by acquisitions; however, within the current environment, we do not expect transaction activity to ramp materially in the near term.”
* BMO’s Thanos Moschopoulos cut his Copperleaf Technologies Inc. (CPLF-T) target to $6.50, below the $6.68 average, from $7 with an “outperform” rating, while RBC’s Maxim Matushansky reduced his target to $7 from $8 also with an “outperform” rating.
“Q4 revenue was below RBC/consensus on lower services and perpetual license revenue, but subscription revenue was a beat with ARR growth of 26 per cent year-over-year,” said Mr. Matushanksy. “Copperleaf expects headcount to remain flat over the next year, with the nowonboarded salesforce helping deliver growth in FY23E. Copperleaf is continuing to see deals slip into FY23, although the growing pipeline and expansion into new verticals and geographies should translate into ARR growth in H2/23.”
* CIBC’s Scott Fletcher trimmed his target for Dentalcorp Holdings Ltd. (DNTL-T) to $13 from $13.50 with an “outperformer” rating, while BMO’s Stephen MacLeod lowered his target to $13 from $14 with an “outperform” recommendation. The average is $14.35.
“While the outcome of the strategic review is likely to be the main driver of dentalcorp’s stock price in the near term (review remains ongoing), Q4/22 results and the Q1/23E outlook reflect solid underlying fundamentals,” said Mr. MacLeod. “Absent a transaction materializing, we continue to appreciate the recurring and essential characteristics of the Canadian dental market as well as dentalcorp’s multi-year opportunity to grow its market-leading network of dental clinics (market is 93-per-cent unconsolidated). We believe dentalcorp is well-positioned to drive double-digit earnings growth while reducing leverage.”
* BMO’s Michael Markidis cut his Invesque Inc. (IVQ.U-T) target to US$1 from US$1.25 with a “market perform” rating. The average is US$1.46.
“IVQ’s Q4/22 results were ahead of our forecast, mainly due to lower-than-anticipated G&A. The recently announced conditional sale of the Symcare portfolio for US$125-million should have a positive impact on credit risk within the NNN portfolio and provide funds or debt repayment. That said, pro forma leverage and near-term financing risk are still elevated while visibility with respect to NOI expansion within the SHOP portfolio remains limited,” he said.
* In a research report titled All the right pieces in all the right places for long-term value, Stifel’s Stephen Soock resumed coverage of i-80 Gold Corp. (IAU-T) with a “buy” rating and $5 target. The average on the Street is $5.04.
“i-80 has a massive resource base across multiple assets in Nevada,” he said. “The combination of high grade ounces plus other bulk tonnage deposits gives the company near-term margin and long-term optionality. i-80 is the only junior company with an autoclave, giving it the ability to process the high grade refractory ore in its portfolio. Inside five years, we expect the company’s processing infrastructure to be able to handle any kind of ore available. Since acquiring the Ruby Hill property in 2021, the company has made multiple new discoveries — expanding the high grade gold endowment and discovering a major new polymetallic CRD deposit. i-80 continues to drill aggressively to expand on these new discoveries and de-risk other known deposits. We expect the company to be a 270koz AuEq/yr producer by 2027.”
* Eight Capital’s Adhir Kadve raised his Mogo Inc. (MOGO-T’) target to $3 from $2.50, keeping a “buy” rating, while Raymond James’ Steven Li cut his target to $1.50 from $2.25 with an “outperform” rating. The average is $2.25.
“[Thursday], Mogo reported results which came in ahead of consensus with a top-line beat and adj. EBITDA that was stronger,” Mr. Kadve said. “Importantly, the company posted positive adj. EBITDA full year prior to previous expectations. In our view, this displays the significant levers at Mogo’s disposal and management’s ability to successfully execute its restructuring program. Further, we think this bodes well for Mogo’s goal to enhance profitability while also pursuing growth opportunities, with an aim to achieve the “Rule of 40″. In our view, execution towards this goal will potentially lead to a re-rating of Mogo’s shares fromcurrent levels.”
* Following a “stable performance” in the fourth quarter of 2022 and seeing a “positive” leasing trajectory for this year, National Bank Financial’s Matt Kornack trimmed his PRO Real Estate Investment Trust (PRV.UN-T) target to $6.25 from $6.75 with a “sector perform” rating, pointing to a macro environment that “drives [a] higher risk premium.” Elsewhere, others making changes include: Raymond James’ Brad Sturges to $6.75 from $7 with a “market perform” rating and Scotia’s Himanshu Gupta to $7.25 from $7.50 with a “sector perform” rating. The average on the Street is $7.14.
“Pro’s quarter was in line with expectations as the industrial portfolio continued to put up solid growth with leasing spreads pointing to another strong year in 2023,” said Mr. Kornack. “Retail results were stable, whereas office was a tale of two stories in the quarter as y/y figures (on a cash NOI basis) were down but occupancy improved, which speaks to an expected rebound this year, although we look through this transitory volatility. Pro’s debt maturity profile is staggered with limited material maturities until 2026; aggregate leverage has trended lower while industrial content has trended higher. The setup is for positive FFO/unit growth going forward. In time, we expect this to translate into better equity trading performance but the current macro environment remains challenging with investors demanding a higher risk premium on top of rising government bond yields; this is particularly acute for less liquid entities.”
* RBC’s James McGarragle assumed coverage of Stelco Holdings Inc. (STLC-T) with a “sector perform” rating and $52 target. The average is $54.44.
“We believe current valuation appropriately reflects the company’s 1) leverage to the steel market / solid steel outlook; 2) industry leading margin profile, as well as 3) valuation impediments, including ESG concerns and single-asset risk. Bottom line is that we view STLC as a well run company with solid FCF; but expect normalizing steel prices to weigh on profitability looking ahead, and view the shares as fully valued at current prices,” he said.