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A look at North American equities heading in both directions

On the rise

Suncor Energy Inc. (SU-T) was up 3.4 per cent on Thursday after agreeing to acquire French energy major TotalEnergies’ carbon-heavy Canadian oil sands operations in a deal worth up to $6.1-billion.

Under the deal, Suncor will pay $5.5-billion in cash, plus up to an additional $600-million that is conditional on Western Canadian Select benchmark oil pricing and certain production targets.

“This transaction represents a major step in securing long-term bitumen supply to our base plant upgraders at a competitive supply cost,” Suncor chief executive Rich Kruger said in statement.

“These are valuable oilsands assets that are a strategic fit for us and add long-term shareholder value.”

TotalEnergies EP Canada Ltd. holds a 31.23-per-cent working interest in the Fort Hills oilsands project and a 50-per-cent working interest in the Surmont in situ asset.

The agreement means that Suncor will own 100 per cent of Fort Hills.

Surmont is operated by ConocoPhillips Canada which holds the other 50-per-cent stake. Under the terms of the Surmont joint venture arrangements ConocoPhillips Canada has certain pre-emptive rights including a right of first refusal on the 50 per cent Surmont working interest.

TotalEnergies had announced last year it planned to exit the Canadian oilsands by spinning off TotalEnergies EP Canada, but said it decided to sell the operations instead after receiving several unsolicited offers including the one by Suncor.

Suncor said the deal will add 135,000 barrels per day of net bitumen production capacity and 2.1 billion barrels of proven and probable reserves to Suncor’s oilsands portfolio.

The Calgary-based company said once the deal closes it intends to increase its quarterly dividend by about 10 per cent.

Shares of Canadian Pacific Kansas City Ltd. (CP-T) erased early losses and finished 0.3 per cent higher after reporting first-quarter financial results after the bell on Wednesday, including a new income increase of 35 per cent from the same period a year ago.

Fresh from a historic merger, president and CEO Keith Creel says the company is focused on a disciplined integration into a railway network that he believes will become “the most relevant in North America.”

“We’re not going to get ahead of our skis. We’re going to be methodical about this,” he said on a conference call with analysts Wednesday.

“We uniquely and only and solely bring three nations together. It has never been done before. I would suggest it will never be done again,” he said.

CPKC reported its income and revenue rose in the first quarter of 2023. It was the last earnings report for the company’s operations before the merger of Canadian Pacific Railway and Kansas City Southern Railway kicked in April 14.

“Our strong bulk franchise, fuelled by a robust Canadian grain harvest, plus competitive service offerings in intermodal helped produce these results providing momentum as we begin our journey as CPKC,” said Mr. Creel in a press release.

CP’s purchase of KCS, the continent’s first major railway merger in more than two decades, created the only railway stretching from Canada through to the U.S. and Mexico. The U.S. rail regulator approved the US$31-billion deal in March.

Mr. Creel said on the call with analysts that despite strong demand, CPKC won’t allow its network to be oversold as it integrates the two companies.

“We’re going to make this thing right and we’re not going to fail by letting our ... aggressiveness and our want for revenue oversubscribe our ability to execute,” he said.

“We’ve got to make sure the network can handle the business to be able to execute our operating model and that’s exactly what we’re going to do.”

Executive vice-president and chief marketing officer John Brooks said that customers are compelled by the capacity that CPKC can offer with its network.

“It has been a tough couple of years of railroading for the industry. And a lot of these customers are ready for a differentiator,” he said.

CPKC’s net income for the first quarter of 2023 was $800-million, up more than 35 per cent from $590-million a year earlier, the company said Wednesday.

The Calgary-based railway company said diluted earnings per share were 86 cents, up more than 36 per cent from 63 cents the same quarter last year.

Rail traffic has been slowing in the short term as the economic outlook for the year is uncertain, with container traffic in Canada dropping almost 12 per cent in March compared with a year ago, according to the National Bank of Canada.

Mr. Brooks said CPKC isn’t immune to the fact that volume in ports across North America are down, but he said the company has been aggressive and able to grow despite this.

“There are self-help initiatives that are helping keep us afloat a little better,” he said.

CPKC declared a quarterly dividend of 19 cents earlier Wednesday.

Newmont Corp. (NGT-T) rose 2.1 per cent after it beat Wall Street expectations for first-quarter profit on Thursday, as the world’s largest gold miner benefited from higher prices of the yellow metal.

Average prices of gold, considered as a safe-haven asset, rose 7.8 per cent and peaked over the $2,000-mark during the reported quarter on fears over the stability of the financial system after a banking crisis and a potential recession.

Newmont’s average realized gold prices stood at US$1,906 per ounce, higher than US$1,892 per ounce a year earlier.

Gold’s all-in sustaining costs (AISC), a key industry metric that reflects total expenses associated with production, rose to US$1,376 per ounce from US$1,156 per ounce.

Denver, Colorado-based Newmont, however, said attributable gold production for the first quarter fell to 1.27 million ounces from 1.34 million ounces a year earlier.

On an adjusted basis, the company posted a net income of 40 US cents per share for the quarter ended March 31, compared with analysts’ average estimate of 33 US cents per share, according to Refinitiv data.

In a note, Citi analyst Alexander Hacking said: “NEM reported adjusted EBITDA of $990m vs Citi estimate $924m and EPS of $0.40/sh vs Citi $0.31/sh as higher gold prices provided tailwinds to performance. FCF turned slightly negative for the quarter due to inventory build and timing of concentrate sales at Penasquito, coupled with sustaining capital increasing to $526m (up 20 per cent year-over-year). Lower production ounces (22% of 2023 guidance) pushed cash costs higher than expected to $1,025/oz (+9% YoY). In 2Q, NEM expects to produce 24% of 2023 full year guidance (~1.5koz attributable) with strong performance from Australian and African operations being slightly offset by lower production at Penasquito. We expect the stock to have a neutral reaction with headline EPS beat potentially offset by negative FCF and lackluster results from acquisition-target NCM”

Meta Platforms Inc.’s (META-Q) shares jumped 13.9 per cent on Thursday after the Facebook owner dazzled Wall Street with an earnings report that showed progress towards the “year of efficiency” and a return to growth, thanks to AI-powered content recommendations.

The company is set to add nearly US$60-billion to its market valuation, if premarket gains hold. The rally also lifted other tech companies from Snap Inc. (SNAP-N) and Pinterest Inc. (PINS-N) to Amazon Inc. (AMZN-Q).

“If you want to be treated and valued like a growth stock, you need growth! And this is precisely what Meta delivered returning to growth... just as questions around a potential recession get louder,” Bernstein analyst Mark Shmulik said in a note.

Mr. Shmulik was among the 27 analysts who raised their price targets on Meta, pushing the median view to US$260, which represents an upside of nearly 25 per cent to a stock that has already risen over 70 per cent this year to lead gains among Big Tech companies.

Meta beat expectations for first-quarter profit and revenue, which rose for the first time in nearly a year, the latest sign that American tech giants were digging themselves out of a slump that has sparked tens of thousands of layoffs.

The results also underscored the rising importance of AI, with CEO Mark Zuckerberg saying the tech was helping to boost traffic to Facebook and Instagram and earn more in ad sales.

“We believe AI has played a crucial role in shifting Meta from showing a more limited set of friends, family, and followed content to an almost unlimited set of recommended content now available in Reels and Feed,” J.P. Morgan analysts said.

Mr. Zuckerberg also said the company, which has carried out several expensive overhauls to bolster its core business, was no longer behind in building out its AI infrastructure.

“Year of efficiency (now) paves the way to AI offense,” Roth MKM’s Rohit Kulkarni said.

EBay Inc. (EBAY-Q) on Wednesday forecast current-quarter revenue above Wall Street projections after beating March-quarter earnings estimates, as it benefits from its strategy of focusing on product categories including sneakers and watches.

A selective push from the ecommerce firm also on items like collectibles and refurbished products is helping it drive sales at a time when consumer spending has moderated due to high inflation.

“There remains a dynamic and uncertain macro economic environment across the globe with inflation and rising interest rates and pressured consumer confidence ... but our focus categories remain relatively resilient,” Chief Executive Jamie Iannone said in an interview.

The upbeat results soothed investor sentiment, which was hit after eBay earlier this year said that demand weakness will persist in the first half of 2023. The company’s shares rose 5.1 per cent in Thursday trading.

EBay is expanding listings under refurbished electronics, luxury bags and watches, and the collectibles category. The company bought trading cards marketplace TCGplayer last year.

San Jose, California-based eBay now expects June-quarter revenue in the range US$2.47-billion to US$2.54-billion, higher than analysts’ projection of US$2.43-billion, according to Refinitiv.

Revenue in the most recent March quarter grew 1 per cent to US$2.51-billion, also beating analysts’ estimate of US$2.48-billion. Adjusted earnings per share of US$1.11 also came in higher than estimate of US$1.07.

Gross merchandise volume, a key industry gauge that denotes the total value of goods and services sold on the marketplace, however, fell 5 per cent to US$18.4-billion.

“EBay seems to be gaining its original innovative mojo with improved payment, marketing, storage, user interface, and authentication,” said Michael Ashley Schulman, chief investment officer at Running Point Capital Advisors.

“Yet their potential earnings growth and turnaround capabilities don’t seem to be baked into the stock price.”

Eli Lilly and Co. (LLY-N) increased 3.7 per cent as it raised its annual revenue and profit forecasts after topping first-quarter sales estimates on demand for its closely watched diabetes drug Mounjaro, ahead of a decision on its use as a treatment for obesity.

The company separately said it planned to complete rolling submission to the U.S. Food and Drug Administration for use of the drug, commonly known as tirzepatide, in obesity patients in the coming weeks, following positive data from a second late-stage study.

Data from the study showed that a high dose helped people with type 2 diabetes who were also obese or overweight to lose nearly 16% of their body weight.

Lilly said it expects regulatory action for use of the drug in obesity as early as late 2023.

Lilly has been leaning on Mounjaro, approved last May for diabetes, to soften the hit to sales from price cuts for its insulin products and competition for cancer therapy Alimta.

Investors are focused on demand and reimbursement for the potentially blockbuster drug, which clocked sales of US$568.5-million for the quarter, compared with estimates of US$422.5-million.

Lilly now expects adjusted 2023 earnings of US$8.65 to US$8.85 per share, compared with its prior forecast of US$8.35 to US$8.55. Analysts were expecting an annual profit of US$8.45 per share, according to Refinitiv estimates.

The company also raised its annual revenue forecast to a range of US$31.2-billion to US$31.7-billion, compared with its prior range of US$30.3-billion to US$30.8-billion.

Excluding items, Lilly earned US$1.62 per share in the quarter ended March 31, missing expectations of US$1.73.

The company reported overall revenue of US$6.96-billion, topping estimates of US$6.86-billion.

Mastercard Inc. (MA-N) beat estimates for quarterly profit as consumer spending surged against a turbulent economy, but the card company’s disclosure of a probe by the U.S. Justice Department unnerved investors.

The regulator has demanded that Mastercard provide documents tied to its U.S. debit program and competition with other payments networks, the card company said. Visa reported a similar probe in January.

Shares of Mastercard pared gains but closed 1.9 per cent higher after the company forecast strong growth in the face of inflation.

Mastercard bet on resilient consumer spending through the year, as rising interest rates and stubborn inflation have had little impact on wealthier consumers who continue to spend on travel and entertainment.

“Consumer spending has remained remarkably resilient, and that despite continued economic uncertainty,” said CEO Michael Miebach on an analyst call, adding that while there are signs of inflation cooling, the banking sector has come under pressure.

Pent-up demand from consumers also helped Mastercard, driving a 35% surge in cross-border volumes - a gauge of travel demand that tracks spending on cards beyond the country of its issue.

Gross dollar volumes, a metric that represents the total dollar value of all transactions processed, rose 15 per cent on a local currency basis to US$2.1-trillion.

The results capped a mixed quarter for the biggest U.S. card firms. Earlier this week, Visa (V-N) beat profit estimates, while American Express (AXP-N) missed estimates last week, on bigger provisions.

Mastercard said it expects second-quarter revenue in high-end of low double-digits, roughly in line with Street expectations.

“We see guidance as leaving enough flexibility to manage uncertain macro effectively,” said Wolfe Research analyst Darrin Peller.

On an adjusted basis, Mastercard earned US$2.80 in the quarter, beating estimates of US$2.72 per share, according to Refinitiv data.

On the decline

Bombardier Inc. (BBD.B-T) declined 4.9 per cent despite swinging to a first-quarter adjusted profit, helped by increased deliveries of its pricier planes, the business jet maker said on Thursday.

Bombardier also reported improved operating margins and a 17-per-cent rise in quarterly revenue to $1.5-billion on more deliveries of medium and large-cabin corporate jets, and demand for aftermarket services.

However, the Montreal-based company reported negative $247-million in free cash usage, a closely watched metric, partly due to higher working capital needs to deliver more than 138 planes this year, up from 123 in 2022.

Like U.S. rival General Dynamics Corp’s Gulfstream which reported on Wednesday, Bombardier saw a temporary pause in orders around the end of March after a U.S regional banking crisis.

Activity has since returned to normal and demand is stable Chief Executive Eric Martel told analysts. Bombardier’s $14.8-billion backlog is flat since the end of 2022.

“The regional banking crisis had an impact probably for two to three weeks on us,” Martel said.

Earlier, Cessna business jet maker Textron Inc. reported higher profit on stronger pricing.

Business jet makers are planning to deliver more planes this year, despite concerns over supply chain snarls, after a surge in demand to fly private during the COVID-19 pandemic.

But those early gains in private traffic are diminishing compared with 2019, business aviation research consultancy WingX said in a Thursday note, as economic shadows loom.

“We’re ready for it if it happens,” Martel said of the prospect of an economic downturn.

Bombardier reported adjusted earnings per share of $1.06. Analysts on average were expecting an EPS loss of four cents a share, Refinitiv data showed.

Adjusted net income was $113-million, compared with a loss of $69-million a year earlier.

Bombardier delivered 22 business jets during the quarter, up one from a year earlier. However it delivered two more medium-sized and two more large-cabin business jets which command stronger pricing.

In a research note, Citi analyst Stephen Trent said: “Overall, the results seem positive, with EBITDA growth of 28.5 per cent year-over-year, a continually improving balance sheet situation and limited cash burn. Although it seems that a low quality item might have fueled the EPS beat, the company’s EBITDA of $212-million beat consensus of $205-million. All else equal, these results should support Buy-rated Bombardier’s shares on Thursday morning.”

Toronto-based Celestica Inc. (CLS-T) fell 4.6 per cent with the release of better-than-expected first-quarter results.

After the bell on Wednesday, the tech manufacturer reported a 17-per-cent increase in revenue year-over-year to US$1.84-billion, ahead of the Street’s forecast of US$1.8-billion and its own guidance. Adjusted earnings per share jumped to 47 US cents, topping the consensus projection by 3 US cents.

“Adj. EPS growth of 22 per cent year-over-year tracked well against management’s double-digit EPS growth target, with operating margin remaining steady in the 5.2-per-cent range,” said Canaccord Genuity analyst Robert Young. “Celestica also tightened its 2023 guidance range, with revenue of more than $7.6B-billion and adj. OM between 5.0 per cent and 5.5 per cent which is in line with our model. Celestica also introduced Q2 guidance that was roughly in line with our and Street expectations. We believe this is positive given recent semiconductor capex cuts and weakness persisting in memory. HPS [Hardware Platform Solutions] revenue growth of 2.5 per cent in the quarter was lighter than previous quarters, potentially following tough comps and lumpiness in programs. Given that hyperscalers, including Meta and Alphabet, are seeing resilient capex through 2023, we will look for more color around HPS’ growth moderation. Despite the strong quarter and in-line guidance, Celestica trades at a discount to relevant EMS peers at 5.4 times 2024 estimated P/E.”

Andrew Willis: Onex eyes exit on long-held Celestica stake

Southwest Airlines Co. (LUV-N) reported a wider-than-expected first-quarter loss due to a pre-tax charge related to mass cancellations in December and flagged 20 fewer deliveries of the MAX jets this year from Boeing Co.

Shares of the largest U.S. domestic airline dropped 3.3 per cent on Thursday.

However, Southwest forecast “solid profits” in the current quarter on strong summer bookings and joined rivals in allaying fears of a slowdown in travel due to a worsening economic outlook.

“Demand for domestic air travel remains strong, thus far,” said CEO Bob Jordan, at a time cost pressures due to high labor and fuel expenses weigh on the industry.

The airline, one of Boeing’s biggest MAX customers, said it expects 70 deliveries of the 737-8 jet this year instead of the planned 90 after the U.S. planemaker disclosed a manufacturing issue with some of the workhorse aircraft.

Delay in MAX deliveries is expected to increase operating costs for airlines and limit their ability to meet travel demand, hitting revenue.

Southwest revised annual capacity growth outlook to between 14 per cent and 15 per cent, from 15 per cent to 16 per cent forecast earlier.

The company expects “solid profits” in the second quarter as well as the full year, but did not provide specific numbers. Analysts polled by Refinitiv expect an adjusted profit per share of US$1.05 for the second quarter and US$2.73 for 2023.

Dallas, Texas-based Southwest also expects revenue per seat flown one mile to fall 8 per cent to 11 per cent in the quarter through June, partly due to a policy change that eliminated expiration dates on qualifying flight credits.

It booked a pre-tax charge of US$380-million and reported a loss of 27 US cents per share for the first quarter, wider than analysts’ average expectation of a loss of 23 US cents per share, as per Refinitiv data.

Heavy machinery maker Caterpillar Inc. (CAT-N) topped Wall Street expectations with a 31-per-cent rise in profit on Thursday but a flat order backlog left analysts thinking demand may have peaked and the shares tumbled 0.9 per cent.

Profit in the first quarter was lifted by a boost in U.S. infrastructure spending which kept order books full and the company was able to raise prices to soften the hit from higher costs.

But the shares fell as much as 4.7 per cent in morning trading after the company noted an increase in dealer inventories. An unchanged order backlog compared to the previous quarters may be an indicator of a slowdown in equipment purchases, analysts said.

“At a high level these are really strong results -- the initial stock reaction reflects some degree of ‘is this the best and have we peaked out,” said Kristen Owen, executive director at Oppenheimer & Co Inc.

Company executives attempted to reassure shareholders that dealer inventories are within the typical three to four month range and said they remain optimistic about sales in the coming quarters.

“I think this is a little bit misunderstood by the market, we are not in a situation where we are expecting, or allowing dealer inventories to become a headwind,” CFO Andrew Bonfield told analysts on a conference call.

The Biden administration’s infrastructure legislation has encouraged spending in the construction sector, spurring demand for the machinery maker’s excavators, bulldozers and trucks.

Caterpillar’s construction division recorded a 10-per-cent rise in total sales. Its energy customers also placed more orders for parts and engines as drilling activities surged with higher oil and gas prices.

The Texas-based company’s resources and mining division profit rose 112 per cent while sales in the company’s energy and transportation segment saw a 24-per-cent increase year-on-year.

The company reported adjusted profit of US$4.91 per share, beating Refinitiv analysts consensus forecast of US$3.78 per share.

Drugmaker Merck & Co Inc. (MRK-N) posted better-than-expected results for the first quarter on the strength of its blockbuster cancer immunotherapy Keytruda and human papillomavirus (HPV) vaccine Gardasil.

Shares of the company decreased 1.5 per cent after the drugmaker raised its full-year forecasts for sales and earnings, citing strong global demand for its drugs.

The company’s revenue fell year-over-year due to a sharp, but expected, drop in sales from COVID pill molnupiravir, and rose more than 10 per cent excluding that drug.

Merck’s first-quarter sales fell to US$14.5-billion from US$15.9-billion last year. Analysts, on average, had expected sales of US$13.8-billion, according to Refinitiv data.

Excluding items, Merck earned US$1.40 per share, compared with estimates of US$1.32 per share.

It forecast 2023 sales of US$57.7-billion to US$58.9-billion, up from its previous forecast of US$57.2-billion to US$58.7-billion. It now expects to earn US$6.88 to US$7 a share, from US$6.80 to US$6.95 per share previously.

Earlier this month, Merck agreed to buy Prometheus Biosciences Inc for about US$10.8-billion, picking up a promising experimental treatment for ulcerative colitis and Crohn’s disease and building up its presence in immunology.

Merck has been looking for deals to protect itself from eventual revenue loss as patents on Keytruda begin to expire toward the end of the decade. The company reported nearly US$21-billion in Keytruda sales last year.

With files from staff and wires

Follow David Leeder on Twitter: @daveleederOpens in a new window

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