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A look at North American equities heading in both directions

On the rise

Shares of Canadian Imperial Bank of Commerce (CM-T) was higher by 2.7 per cent after it trounced first-quarter profit estimates on Friday, as growth in the lender’s capital markets division boosted revenue and more than offset a decline in other units.

CIBC profit falls but tops forecasts on trading gains, lower loan-loss provisions

The Toronto-based lender kicked off the first-quarter earnings season for major Canadian banks. Profit in capital markets jumped 13 per cent to $612-million in the reported quarter and drove an 8-per-cent rise in CBIC’s overall revenue to $5.93-billion.

That helped the bank earn $1.94 a share on an adjusted basis, comfortably above an estimate of $1.70, according to data from Refinitiv.

Still, CIBC’s profit took a hit after it set aside $295-million in provisions for credit losses in the reported quarter, up $220-million from a year-ago period, as it braces for increased odds of more loan defaults in a rising interest rate environment.

Canada’s central bank over the past 11 months has lifted interest rates at a record pace to 4.5 per cent to tame inflation, which was 6.3% in December, still well above the bank’s 2-per-cent target. Last month, the Bank of Canada said it would hold off on further moves to let the effects of past rate hikes sink in.

CIBC’s overall net profit saw a 77-per-cent slump to $432-million, or 39 cents per share, from a year-ago levels.

Rivals Bank of Montreal (BMO-T) and Bank of Nova Scotia (BNS-T) will report on Tuesday while Royal Bank of Canada (RY-T) and National Bank of Canada (NA-T) will post their earnings on Wednesday.

CIBC’s profit was also dragged lower after the company recorded a pretax charge of $1.17-billion, representing $855-million of damages and interest through Jan. 31 in connection with a lawsuit tied to the 2008 global financial crisis.

Last week, the Toronto-based company said it would pay $770-million to a vehicle controlled by private-equity firm Cerberus Capital Management to resolve the lawsuit.

The dispute stemmed from a complex 2008 transaction in which CIBC made payments to a Cerberus entity in exchange for a loan to reduce the bank’s exposure to U.S. residential real estate.

In a research note, Credit Suisse analyst Joo Ho Kim said: “CIBC’s Q1 results benefitted from very strong Capital Markets results, particularly trading (rates and FX) and DFS (revenue up 38 per cent year-over-year) which more than offset the slump in underwriting activities. Capital results were good in our view, but the guide path remains important especially in light of OSFI’s new DSB range. Net interest margins were also a good news story this quarter, with sequential NIM improvement seen across Canada and the U.S., and also at the all bank level (ex. trading). Some of that shine was taken off by higher expenses (vs. us) and negative operating leverage. Finally CM built a much more modest level of performing provisions this quarter, partly reflecting a release from Canadian P&BB segment which reflected a shift in the forward looking indicators and scenario weights.”

See also: Loan demand from business borrowers expected to boost Big Six profits in first quarter

Toronto-Dominion Bank (TD-T) rose 0.8 per cent after announcing before the bell it has received all regulatory approvals to complete its US$1.3-billion acquisition of New York-based boutique investment bank Cowen Inc. (COWN-Q).

The deal is expected to close on March 1, they said.

TD announced the buyout in August, building on its strategy to expand in the United States. Last February, the Canadian lender had signed a US$13.4-billion deal to buy U.S.-based First Horizon Corp.

The First Horizon deal is now expected to close on May 27, three months later than the deadline the companies had set.

Cowen provides investment banking, research, sales and trading and prime brokerage services.

Last week, Cowen reported an 82-per-cent drop in fourth-quarter net income as investment banking took a hit.

Asset manager Onex Corp. (ONEX-T) reversed an early decline and gained 4.1 per cent after it outperformed public markets in 2022, earning a 3-per-cent return on its private equity portfolio in a year when the benchmark S&P 500 index declined by 18 per cent.

On Friday, Toronto-based Onex reported a US$235-million profit in 2022, down from US$1.4-billion the previous year. In the final three months of the year, Onex earned US$435-million, compared to a US$235-million profit in the same period a year ago. In a press release, founder and chief executive Gerry Schwartz said: “Onex made good progress in a very challenging year for the capital markets.”

Over the past decade, Onex expanded from its roots in private equity into credit markets and managing money for wealthy individuals. The company now has US$34.1-billion of assets under management, up 3 per cent from 2021. Last year, Onex raised US$2.6- billion for its credit and private equity funds.

Last year, Onex announced succession plans, with Mr. Schwartz expected to hand the CEO role to president Bobby Le Blanc at the company’s annual meeting in May, while Mr. Schwartz becomes executive chair of the company. The transition is contingent on Onex shareholders approving a five-year extension to a multiple voting share agreement that allows Mr. Schwartz to control the company. The share structure was originally set to expire when Mr. Schwartz stepped down as CEO.

On Friday, Mr. Schwartz said: “We have more work ahead to deliver on our strategic goals, and the proposal to appoint Bobby Le Blanc as CEO will accelerate these plans.”

- Andrew Willis

Enerplus Corp. (ERF-T) turned positive and closed up 0.7 per cent following the late Thursday release of its fourth-quarter results, including in-line oil and liquids productions and free cash flow generation.

Total production, including both crude and natural gas, came in at 65,356 barrels per day, up 1 per cent from the third quarter. Funds from operations per share rose by a penny to $1.36.

Calling it his “favourite intermediate producer given its capable leadership team, solid execution, strong balance sheet and rising shareholder returns” and reaffirming its place on the firm’s “Global Energy Best Ideas” list, RBC Dominion Securities analyst Greg Pardy said: “Enerplus Corporation delivered solid fourth-quarter results amid in-line oil & liquids production of 65,356 bbl/d and free cash flow generation of $229 million (before working capital movements, excluding A&D). The company repurchased $169 million (9.8 million at $17.24 per share) of its shares in the fourth-quarter, ending with net debt of $221.5 million.

“What caught our eye in Enerplus’ release was the signal that it would accelerate a portion of its second-half 2023 free cash flow into its return of capital plans during the first-half. The company reaffirmed its commitment to distribute at least 60 per cent of free cash flow in 2023 (with an accent on share buybacks), and looks upon a SIB as a tool it is ready and willing to use should market conditions warrant. Enerplus has 6.5 million shares remaining for repurchase under its NCIB (10% of public float, or up to 23.1 million shares), which can be renewed in August 2023. Our outlook for Enerplus factors in share repurchases of $400 million in 2023.”

Beyond Meat Inc. (BYND-Q) on Thursday forecast annual revenue slightly above estimates and doubled down on cost controls at a time when persistently high inflation was slowing demand for its faux meat products, sending its shares up 10.2 per cent.

The company struck a more sobering note on a post-earnings call, saying steep inflation, a slowing economy, increased competition and consumers trading down to cheaper products were hurting growth.

The plant-based meat maker forecast full-year revenue to be in the range of US$375-million to US$415-million, the midpoint of which is just above analysts’ average estimate of US$394.2-million, according to Refinitiv data.

“While the outlook for 2023 is encouraging, it is worth noting the company has had to lower its guidance several times over the past few years,” said Arun Sundaram, senior equity analyst at CFRA Research.

“Nonetheless, investors may be optimistic that 2022 marked the low point for the company,” he added.

The company expects operating expenses to slide 22 per cent this year, compared with a 9-per-cent rise in 2022. “Total operating expense is expected to be approximately US$250-million for the full year 2023, weighted slightly more heavily towards the front half of the year as we expect to invest disproportionately more behind marketing activities,” said finance chief Lubi Kutua on a post-earnings call.

Beyond Meat beat quarterly expectations for the first time since June 2021. The company’s net revenue fell 21 per cent to US$79.9-million in the quarter ended Dec. 31 from a year earlier, but still beat analysts expectations of US$75.7-million.

Net loss for Beyond Meat narrowed to US$66.9-million, or US$1.05 per share, in the fourth quarter. Analysts had estimated a loss of US$1.18 per share.

In October, Beyond Meat had said it was targeting cash flow positive operations within the second half of 2023

On the decline

Despite reporting a 49-per-cent year-over-year increase in revenue in the fourth quarter, Jamieson Wellness Inc. (JWEL-T) was down 7.8 per cent after warning 2023 EBITDA margins are expected to decline by 175 basis points due to “the margin profile” of the recently acquired businesses, including U.S.-based Nutrawise Health & Beauty Corp., and “proportionate revenue growth within strategic partners.”

After the bell on Thursday, the Toronto-based company reported revenue of $192.8-million, up from $129.8-million in fiscal 2021 but narrowly below the Street’s expectation of $200.8-million. The increase was driven by “continued consumer demand, higher average retailer inventories in conjunction with a severe cold & flu season, and in-year pricing.” Adjusted earnings per share of 62 cents matched the consensus expectation

“JWEL reported Q4 results that came largely in line with expectations – but issued 2023 guidance that missed Street adj. EBITDA guidance by 6 per cent (and us by 3 per cent),” said Scotia Capital analyst George Doumet. “This was the result of: (i) $4-million to $5-million investment in opex in China to support growth (we modeled $5-million) and (ii) a top line decline at the recently acquired Youtheory business (expected to be down 5 per cent, at midpoint, vs. 2022). JWEL also announced a partnership with DCP Capital to help accelerate growth in China. DCP will invest $101.6-million in prefs and $47.5-million for a 33.3-per-cent stake in JWEL China (5 per cent of total sales).

“We are in the early innings of both an opex investment cycle in China and in the integration at Youtheory. In the context of current valuation (shares trading at 13.5 times our 2023 estimates, or a 3.6-per-cent FCF yield), we need to see improved visibility on the aforementioned before getting more constructive on the name.”

Boeing Co. (BA-N) shares fell 4.8 per cent on Friday after the U.S. planemaker temporarily halted deliveries of its 787 Dreamliner jets over a documentation issue related to a fuselage component.

Boeing, while reviewing certification records, said on Thursday it “discovered an analysis error by our supplier related to the 787 forward pressure bulkhead,” leading to a pause in deliveries months after they were allowed to resume in August.

The component acts as a barrier between the pressurized interior cabin and the radome (or nose cone). It was supplied by Spirit AeroSystems, which said it was too early to assert it made the “analysis error.”

Some analysts said the latest hiccup in 787 deliveries should not result in any design changes and jets in service should continue to fly.

“An unwelcome blast from the past, but hopefully a brief one,” J.P. Morgan analyst Seth Seifman said in a note.

Seifman said the brokerage believes this should not result in additional rework and that Boeing can produce the required documentation fairly quickly.

The current issue is unrelated to a previous quality problem involving gaps around the forward pressure bulkhead, which was discovered by the FAA in 2021 and contributed to a delivery stoppage that lasted until August 2022.

“Our understanding is that the error is a “non-compliance” with FAA documentation requirements and not a “nonconformance” with a manufacturing specification,” Cowen analyst Cai von Rumohr said in a note.

Since the resumption of deliveries, production of the 787 has experienced some disruptions as the planemaker battles supply and labor shortages.

Earlier this month, Spirit said the process of retrofitting stored fuselages for the 787 jets was taking longer than expected.

Warner Bros Discovery Inc. (WBD-Q) was down 1.2 per cent as Wall Street worried it would see more profit pain after losing more than US$2-billion in the fourth quarter as ad market weakness persists.

Executives at the company echoed the tensions shared by other large media and tech firms such as Paramount Global (PARA-Q) and Google-parent Alphabet Inc (GOOGL-Q) about the uncertainty of ad market recovery.

“The biggest unknown continues to be in the ad sales environment,” Gunnar Wiedenfels, chief financial officer of Warner Bros Discovery, told analysts on an earnings call.

The company cut its forecast for 2023 adjusted core earnings, or EBITDA, and now expects it to grow in low- to mid-twenties percentage. This implies a range of US$11-billion to US$11.5-billion, below its prior target of US$12-billion.

“Given secular and cyclical pressures on advertising and distribution revenues, it isn’t clear to us that the company is clearly out of the woods yet,” analysts at MoffettNathanson wrote in a note.

The company’s networks business, which includes channels like HGTV, Discovery Channel and TLC, took a hit as brands cut their advertising budgets, leading to a 14-per-cent decline in fourth-quarter segment revenue from ads. The division’s advertising revenue wasn’t “looking much better in Q1 2023,” it said.

The media giant, formed through the merger of Discovery Inc and AT&T spin-off Warner Media, said it had completed all restructuring related to the merger, with restructuring charges resulting in a wider-than-expected loss in the quarter.

Wolfe Research analyst Peter Supino noted net debt was still very high and raised concerns about the stock’s roughly 66-per-cent gains so far this year and the company’s high pay TV exposure. The company had less U.S. pay TV subscribers in the fourth quarter as more people transitioned to streaming.

“WBD might be set up to take a breather,” Mr. Supino said.

With files from staff and wires

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