Inside the Market’s roundup of some of today’s key analyst actions
National Bank Financial analyst Gabriel Dechaine said a spike in loan losses marred an “otherwise strong” third quarter for Canadian Imperial Bank of Commerce (CM-T).
Shares of CIBC slid 3.2 per cent on Thursday after it reported core cash earnings per share of $1.52, falling below the Street’s expectation of $1.68 as higher-than-expected provisions for credit losses ($736-million versus a $444-million consensus projection) weighed on results. That miss overshadowed a quarterly revenue beat ($5.850-billion versus $5.777-billion).
“PCLs that deviated nearly 70 per cent from consensus was a big surprise this quarter, emanating from two sources,” said Mr. Dechaine in a research note. “An impaired loss rate of 35 basis points was above CM’s full-year guidance range of 25-30 bps (though year-to-date of 28 bps is within the range). A nearly $300-million CRE impairment resulted in $152-million of provisions, or more than 30 per cent of the quarterly total. Management indicates that similarly-sized losses could be reported over the next few quarters. Separately, CM booked $258-million of performing provisions, of which 75 per cent was tied to consumer loans. On one hand, we believe the move is conservative. On the other, it is hard to reconcile this quarter’s result with the prior two that included releases from the same provision category. We expect more modest performing provisions in upcoming periods,”
The analyst emphasized net interest margin expansion of 2 basis points quarter-over-quarter came on both sides of the border, falling in line with the bank’s guidance and “stronger” than the peer average.
A breakdown of the big banks’ third-quarter earnings so far
“Both the Canadian P&C (up 7 basis points quarter-over-quarter excl. one-timers) and U.S. banking (+2bps) helped support this performance,” he said. “We expect flatter NIM in the upcoming quarter, as one-time items that boosted spreads fade. The bank’s NIM outlook has a positive slant, maintaining its all-bank NIM guidance range of 165-170bps (i.e., 167bps this quarter).”
“Another positive aspect of CM’s quarter was the delivery of mid-single digit expense growth. Comparatively, peers averaged double-digit cost inflation, prompting at least two banks (BMO & RY) to incur severance charges that have weighed on earnings. Given that CM’s heavy investment phase has passed, and that overall cost discipline is the mantra of the day, we believe the bank can maintain its current expense growth run-rate.”
Adjusting his forecast to account for higher PCLs, Mr. Dechaine trimmed his target for CIBC shares to $62 from $64, reiterating a “sector perform” rating. The average target is $61.72, according to Refinitiv data.
Other analysts making changes include:
* RBC Dominion Securities’ Darko Mihelic to $67 from $72 with a “sector perform” rating.
“Weaker-than-expected results this quarter were primarily reflective of a larger than expected build in performing PCLs coupled with continued losses from U.S. CRE,” he said. “Expense control was good relative to the group, but we believe that impaired PCLs may remain modestly elevated or could even increase further if interest rates remain high. We do not believe PCLs are high enough to be concerned about CM’s capital position and eventually expect CRE losses to subside. Nevertheless, shorter term, we expect its valuation to remain constrained on a relative basis.”
* Credit Suisse’s Joo Ho Kim to $56 from $57 with a “neutral” rating.
“CM’s Q3 results were impacted by higher-than-expected performing PCLs, the bulk of which reflected adverse changes to the bank’s forward-looking indicators (Canadian consumer leverage in particular),” said Mr. Kim. “While we acknowledge that such builds are not the worst thing given the macro challenges ahead, it does make us question whether the underlying assumptions tied to the bank’s allowances were sufficiently conservative to begin with. In our view, the bigger (and more near) concern on the credit front comes from elevated CRE (office) losses, especially given CM’s expectation for further similar impact in the next few quarters. The narrative on credit dominated our discussions on the earnings day and overshadowed the arguably better underlying performance. Moving forward, although earnings expectations at CM have been more muted for some time now, we find ourselves increasing our PCL estimates again on the back of these results, reflecting our expectation for elevated CRE losses.”
* BMO’s Sohrab Movahedi to $65 from $69 with an “outperform” rating.
“We see CM as a ‘self-help’ story over the next year given its focus on maximizing returns from organic operations. The total return potential is driven by momentum in domestic operations and lower inorganic growth focus; valuation offers downside protection,” said Mr. Movahedi.
* Barclays’ John Aiken to $57 from $58 with an “equal weight” rating.
“Higher than forecast provisions generated an earnings miss, but operational improvements and a higher regulatory capital ratio attempt to balance out the ledge,” he said.
* TD Securities’ Mario Mendonca to $57 from $60 with a “hold” rating.
* Cormark Securities’ Lemar Persaud to $61 from $62 with a “market perform” rating.
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After its third-quarter results disappointed, Credit Suisse analyst Joo Ho Kim is looking for further clarity on Laurentian Bank of Canada’s (LB-T) strategic review.
On Thursday, shares of the bank dropped 3.6 per cent after it reported core cash earnings per share of $1.22, exceeding both Mr. Kim’s $1.18 estimate and the consensus forecast of $1.16 as provisions for credit losses came in better than expected (a gain of 16 cents) while both expenses and revenue missed his projections (9 cents and 3 cents, respectively). He emphasized the omission of both a capital markets-related restructuring charge ($5.5-million) and a charge related to the strategic review ($2,7-million). Overall, pre-tax, pre-provision earnings missed his expectation by 7 per cent.
Concurrently, Canada’s ninth-largest lender also said Thursday that its strategic review process, including exploring a sale, is still under way and that it does not plan on providing further details until it is complete.
“LB’s results underwhelmed our more optimistic PTPP earnings forecast this quarter, reflecting the sequential decline in loans and higher expenses (operating leverage was negative 2 per cent), which more than offset the continued strength in margin performance,” said Mr. Kim. “The bank’s results benefitted from the release of Stage 1 PCLs which was driven by the seasonal decline in inventory financing (which is expected to increase in Q4 per the bank). In terms of the forecast outlook, LB is guiding for NIMs to remain relatively stable in Q4, and for the efficiency ratio to remain slightly elevated, reflecting topline pressure from both NII and capital markets, as well as higher expenses tied to the client migration in the bank’s credit cards business.
“Looking beyond the quarterly results, we continue to believe that the near-term share price movements will closely depend on the progress of the bank’s strategic review.”
After trimming his core cash EPS estimates for 2023 to $4.74 from $4.77 and 2024 to $4.86 from $5 to reflect lower loan growth, Mr. Kim reduced his target for Laurentian shares to $39 from $41 with a “neutral” rating. The average target is $43.23.
Elsewhere, RBC Dominion Securities’ Darko Mihelic downgraded Laurentian to “sector perform” from “outperform” with a $39 target, falling from $55.
Analysts making target changes include:
National Bank Financial’s Gabriel Dechaine cut his target to $45 from $51 with an “outperform” rating.
“With the Q3/23 results, the bank stated that it would not comment on the strategic review process, as it was ongoing. That statement leaves us with two options to consider: 1) the strategic review could culminate as a “business as usual” announcement, whereby we would expect the stock to drop back to the low-$30s; or 2) the sales process is more complicated than anticipated, though could still offer upside,” said Mr. Dechaine. “We are leaning towards the second option, as LB was never a straightforward acquisition candidate. For starters, the bank’s fastest growing segment is Northpoint Financial, which we believe could represent over 30 per cent of the bank’s earnings. As it happens, Northpoint is an awkward fit for ‘natural’ buyers in Canada, as it is an Inventory Finance business, largely in the Southern U.S. As such, we believe the sales process could potentially involve several buyers. One could be interested in running/integrating Northpoint, while the other would be more interested in the potential cost synergies that would come from acquiring the domestic banking platform.”
* Barclays’ John Aiken to $42 from $44 with an “equal weight” rating.
“While LB managed to post a Q3 beat, highlighted by strong margins and better than expected credit losses, a challenging macro environment tempers our outlook over the near term, along with the ongoing uncertainty of the bank’s strategic review,” he said.
* TD Securities’ Marcel Mclean to $45 from $48 with a “buy” rating.
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Several equity analysts on the Street hiked their financial forecast and target price for shares of Lululemon Athletica Inc. (LULU-Q) after it released better-than-expected second-quarter financial results and provided an optimistic view of the current quarter.
After the bell on Thursday, the Vancouver-based activewear company reported earnings per share of US$2.68, exceeding the Street’s expectation of US$2.54 as well as its own guidance of US$2.47-$2.52. Total sales jumped 18 per cent, topping the 16-per-cent expectation of analysts, while gross margins improved by 2.3 per cent (versus a 2.1-per-cent projection).
Lululemon also said it was “off to a solid start” in the third quarter as the North American retail landscape improves. It is now expecting full-year 2023 revenue between US$9.51-billion and US$9.57-billion, up from its previous estimate of US$9.44-billion to US$9.51-billion. Its annual profit projection also rose to between US$12.02 and US$12.17 per share from an earlier forecast of US$11.74 to US$11.94.
“2Q sales/EPS were better than cons and in-line with market expectations,” said Citi analyst Paul Lejuez in a note. “U.S. sales up 12 per cent, a deceleration vs 17 per cent in 1Q but still very strong overall. Management said NAM [North American] trends have accelerated 3Q quarter-to-date, underscoring the strength/health of the brand in the US. International sales grew 40 per cent (vs 60 per cent in 1Q) driven by 61-per-cent Greater China growth, a deceleration from 79 per cent in 1Q, but still impressive in a volatile macro environment. And management guided 3Q sales/EPS above consensus. Stepping back, 2Q highlights LULU’s position as a market share winner even as the broader athletic environment is weak. With the brand healthy in the U.S. and China a ‘coiled spring’ with several years of outsized growth ahead, we believe LULU is one of the most compelling growth stories in retail.”
Also calling it “a standout in active near and long term,” Mr. Lejuez raised his 2026 EPS projection, maintaining his “buy” rating and US$450 target for Lululemon shares. The average target on the Street is US$428.28.
Analysts making target adjustments include:
* Stifel’s Jim Duffy to US$463 from US$460 with a “buy” rating.
“LULU FY2Q results again showcased positive surprise in revenue, gross margin, EPS and inventory management. China led growth at 61 per cent reported (31 per cent of the revenue increase),” said Mr. Duffy. “Newness continues to drive engagement and the U.S. business has reportedly accelerated quarter-to-date from 11.5-per-cent growth in FY2Q underscoring assortment relevance. FY guidance conservatively assumes deceleration in FY4Q and markdowns flat y/y despite a promotional FY4Q22. Looking to 2H23, we expect an increasingly beneficial revenue and gross margin contribution from China (we expect more than 30 per cent of incremental growth). Mindful of consumer and macro uncertainty, we are raising estimates again but see capacity for further increases as the year unfolds. We remain comfortable with our BUY rating, and continue to view LULU shares as an attractive core holding for large cap growth investors.”
* BMO’s Simeon Siegel to US$376 from US$355 with a “market perform” rating.
“LULU performance remains impressive, in our view, representing among the best in retail. However, at current values, we believe this is largely reflected in shares,” said Mr. Siegel.
* KeyBanc’s Noah Zatzkin to US$450 from US$425 with an “overweight” rating.
“Ongoing strength remains broad based, and reinforces our view that increasing brand awareness and product newness are enabling LULU to execute ahead of its Power of Three x2 plan outlined last year, as well as successfully navigate the ongoing challenging macro environment. LULU remains one of our favorite names this year, and long term, we continue to see meaningful opportunity via product innovation/launches and international expansion,” said Mr. Zatzkin.
* Wells Fargo’s Ike Boruchow to US$445 from US$425 with an “overweight” rating.
“This was a solid ‘check the box’ print for LULU—with a solid rev/EPS beat, above Street 3Q guide and raised full-year plan,” he said. “Notably, GMs again beat (there was some buyside concern heading in) and inventory progress continues (now 14 per cent vs. 20-per-cent plan).”
* Wedbush’s Tom Nikic to US$420 from US$415 with “buy” rating.
“LULU continues to execute at a high level, with well balanced growth across channels, categories, and geographies. Margins are climbing higher (EBIT margin planned up 40-60bps this year) and they have an outstanding balance sheet ($1.1 billion cash, no debt, and inventory growth below revenue growth). We’re raising our FY23/24 EPS forecast,” he said.
* Piper Sandler’s Abbie Zvejnieks to US$455 from US$450 with an “overweight” rating.
“2Q was a solid beat and raise quarter as selective consumers continue to demand LULU product,” she said. “LULU’s product is resonating with both new and existing consumers as both core and new product gain share in the currently more challenging athletic apparel environment. 61-per-cent year-over-year growth in China was a highlight, and we see a significant opportunity for further growth in China as brand awareness increases and store productivity ramps. We are raising our estimates and price target based on increased guidance.”
* Telsey Advisory Group’s Dana Telsey to US$450 from US$430 with a “buy” rating.
* JP Morgan’s Matthew Boss to US$489 from US$487 with an “overweight” rating.
* TD Cowen’s John Kernan to US$535 from US$531 with an “outperform” rating.
* Raymond James’ Rick Patel to US$440 from US$438 with a “strong buy” rating.
* Barclays’ Adrienne Yih to US$480 from US$430 with an “overweight” rating.
* Oppenheimer’s Brian Nagel to US$450 from US$400 with an “outperform” rating.
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After its second-quarter results fell below his expectations, Raymond James analyst Michael Glen lowered his recommendation for Eguana Technologies Inc. (EGT-X) to “market perform” from “outperform,” citing the “continuation of short challenges on residential ESS [energy storage systems].”
“Results were negatively impacted by a theft in the amount of $2.1-million, as well as a consumer environment that is stagnant,” he said. “With this in mind, we are moving our rating ... We continue to anticipate that the primary product of focus with Eguana over the coming years will be the Evolve ESS, a system designed for the North American residential market, that we had hoped would scale and represent the majority of revenue for the business. We thought this would take place as volumes scaled to support the white labeling deal with Duracell + other potential white label partnerships surrounding the launch of the 10kw product. With this agreement, PowerCenter+ had committed to a minimum volume of 10,000 systems over three years, but it would appear current volumes are meaningfully below these targets.
“With that said, we see a few factors, internal and external, that may lead to a more muted company performance in the near-term as the residential energy storage environment goes through its current trough.”
Mr. Glen dropped his target for shares of the Calgary-based manufacturer of residential and commercial energy storage systems to 10 cents from 40 cents. The average is 20 cents.
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In other analyst actions:
* TD Securities’ Vince Valentini downgraded BCE Inc. (BCE-T) to “hold” from “buy” with a $58 target, down from $61 and below the $61.94 average on the Street.
* Following Thursday’s announcement of a US$59.5-million investment into into The Shipyard, an Ohio-based integrated marketing agency, National Bank Financial’s Zachary Evershed increased his target for Alaris Equity Partners Income Trust (AD.UN-T) to $24.50 from $23, exceeding the $21.21 average on the Street, with an “outperform” rating.
* With its $650-million acquisition of natural gas assets from Tidewater Midstream and Infrastructure Ltd. (TWM-T), ATB Capital Markets’ Nate Heywood raised his target for AltaGas Ltd. (ALA-T) to $35 from $34 maintaining an “outperform” rating, while RBC’s Robert Kwan bumped his target to $32 from $31 with an “outperform” rating. The average is $31.47.
“Overall, the transaction should continue to support ALA’s integrated midstream value chain focused on leveraging its unique LPG export position off the West Coast,” said Mr. Heywood. “Consideration for the asset package is $650-million, split between $325-million in cash and $325-million in equity. The assets have the potential to increase EBITDA by $140-million annually through the long term (including synergies and Pipestone Phase II), implying a transaction multiple of 7.2 times. The transaction multiple is accretive to ALA’s 2024 and 2025 multiples near 9.0 times and provides a 0.1-times leverage multiple reduction. We have modeled a $63-million contribution for 2024, which we expect to ramp up in 2025e+ with synergy realization and the Phase II expansion commissioning (modeled to contribute after 2025e).”
* Meanwhile, Scotia Capital’s Robert Hope raised his Tidewater target to $1.50 from $1.30 with a “sector outperform” rating, while Stifel’s Cole Pereira bumped his target to $1.25 from $1.15. The average is $1.34.
“We have a favourable view of this transaction given it crystalizes the value of assets Tidewater developed and expansion opportunities that we do not believe were reflected in its share price,” said Mr. Hope. “It also meaningfully reduces its leverage position, which is another positive. Our target increases ... to reflect the monetization of these assets at a value higher than what we were carrying them at. We see considerable valuation expansion potential in the shares ahead as the renewable diesel project ramps up to full utilization (very near term) and the company further moves down leverage. If the shares do not re-rate higher over the next year, we believe Tidewater will look to other actions to surface value such as further asset sales or a simplification of its corporate structure.”
* RBC’s Geoffrey Kwan cut his Intact Financial Corp. (IFC-T) target to $227 from $230 with an “outperform” rating. The average is $217.34.
“Intact’s announcement regarding Q3/23-to-date catastrophe losses was much worse than our forecast but not entirely surprising given the scale and number of wildfires this quarter (e.g., B.C.), Ottawa hailstorm, Atlantic Canada storms, etc. While catastrophe losses this year are elevated, we think the impact on IFC’s share price should be relatively limited given the nature of P&C insurance and insurers’ ability to reprice reasonably quickly to adjust to changing market conditions,” said Mr. Kwan.
* Piper Sandler’s Charles Neivert lowered his target for Lithium Americas Corp. (LAC-N, LAC-T) to US$29 from US$33, keeping an “overweight” rating. The average is US$34.04.
* Desjardins Securities’ Jerome Dubreuil trimmed his Think Research Corp. (THNK-X) target to 60 cents from 65 cents, keeping a “hold” recommendation. The average is 72 cents.
“THNK reported results that were in line with expectations,” he said. “Encouragingly, Software and Data Solutions revenue growth continued to accelerate during the quarter. Expected dilution and high leverage keep us on the sidelines for now, but we see potential sources of relief through a better concentration of THNK’s assets.”
* After a late Thursday announcement of a 26-per-cent increase to its monthly dividend (to 6.08 cents per share) and the expectation it will reach its $1.3-million net debt target by Sept. 30, Stifel’s Cody Kwong increased his Whitecap Resources Inc. (WCP-T) target to $14.75, above the $13.58 average, from $13.75 with a “buy” rating.
“With this achievement WCP is committed to returning 75 per cent of free funds flow to shareholders, with buybacks and/or special distributions in addition to its already impressive base dividend,” said Mr. Kwong. “In addition to its dividend increase announcement WCP has as well extended its Weyburn CO2 purchase and sale agreement until the end of 2024. We have made minor reductions to our 2024 production estimates with this update. Due to an optimistic commodity price outlook and WCP’s demonstrated commitment to returning capital to shareholders we have increased our target.”
David Leeder