A survey of North American equities heading in both directions
On the rise
Stantec Inc. (STN-T), an Edmonton-based engineering firm, was up 1.9 per cent with the premarket release of its 2024-2026 Strategic Plan, including its three-year financial targets and guidance for the next fiscal year.
“While margins for 2024 are slightly below consensus, we believe the strong mid- to high-single-digit organic growth target (driven by the U.S. and global regions and above our 4.1-per-cent estimate for WSP in 2024) should be more than enough to offset investor concerns,” said Desjardins Securities analyst Benoit Poirier. “For 2026, the $7.5-billion revenue target is driven by more than 7-per-cent organic growth (we calculate less than 7-per-cent acquisitive growth as $7.5-billion implies a CAGR [compound annual growth rate] of 14.1 per cent based on 2023 consensus of $5.1-billion). This level of long-term organic growth is impressive and is above our initial estimate of 4.7 per cent. The three-year EPS CAGR of 15–18 per cent is also above the 14.5 per cent we calculated in our recent STN scenario analysis for a transformative acquisition, and the top end of the range is above the 17.1 per cent in our high-single-digit organic growth scenario.
“Bottom line, while expectations were high, we are pleased with the 2024–26 strategic plan, which should be well-received by investors. We will be looking for more details around key assumptions such as organic growth, M&A, margin expansion and FCF generation.”
CVS Health (CVS-N) gained 3.7 per cent after it forecast 2024 revenue above market estimates and said it would shift to fixed rates for reimbursements from pharmacy benefit managers and insurers, to boost transparency amid scrutiny on high drug prices.
Out-of-pocket drug prices in the U.S. are decided by a complex, multi-tiered network including insurers, drugmakers, pharmacies and pharmacy benefit managers (PBMs), resulting in ambiguity around fees and markups to the original cost of the drug.
The new CVS model, called CostVantage, will have a fixed markup and fees to define drug cost and related reimbursement with contracted insurers and PBMs, the company said.
PBMs like CVS’ Caremark, which work as middlemen between insurers and drugmakers, have faced scrutiny over their role in surging healthcare costs, with the U.S. Federal Trade Commission also investigating their practices.
CVS’ new drug reimbursement model looks similar to that of Mark Cuban Cost Plus Drug Company, an online pharmacy launched by the billionaire which aims to drive down the cost of drugs broadly by selling them at a 15-per-cent markup over its cost, plus pharmacy fees.
Rhode Island-based CVS also said it would bring its portfolio of health services such as doctors clinics and pharmacies under an umbrella brand called CVS Healthspire.
The rebranding encompasses businesses the company built over the last few years such as the biosimilar unit, Cordavis, as well as recently acquired healthcare services firms Signify Health and Oak Street Health.
The company, which last month tempered its 2024 profit forecast for the third time, said it was counting on CostVantage, better margins under its government-supported Medicare Advantage insurance plans for older adults and other healthcare services to boost its earnings.
Evercore analyst Elizabeth Anderson said the forecast underscores the management’s confidence in the stability of medical costs and the company’s ability to offset challenges in 2024.
It forecast revenue of at least US$366-billion, ahead of analysts’ average estimate of US$345.81-billion, according to LSEG data.
On the decline
Shares of AltaGas Ltd. (ALA-T) gave back early gains and closed narrowly lower on Tuesday after it announced a dividend raise and expectation for earnings growth next year, helped by its core operations.
The energy infrastructure company says it will pay a quarterly dividend of 29.75 cents per share starting with its March payment to shareholders, up from 28 cents per share.
In its outlook, AltaGas says it expects its normalized earnings per share for 2024 to total between $2.05 and $2.25. The consensus projection on the Street is currently $2.14.
The result would mean year-over-year growth of about 10 per cent, based on the midpoint of its guidance for both years.
The company says its capital spending plan for 2024 is expected to be $1.2 billion, excluding asset retirement obligations.
Gibson Energy Inc. (GEI-T) closed down 0.5 per cent, suffering a late session swoon, after revealing it is targeting a 2024 growth capital budget of $150-million, which was narrowly higher than the Street’s expectation of $140-million, as well as approval of between $40-$45-million in replacement capital expenditures.
The Calgary-based company said it’s fully funded and “expects to remain within its Financial Governing Principles with the benefit of growing stable Infrastructure cash flows throughout 2024, which will include a full year of cash flows from the recently acquired Gateway terminal in Ingleside, Texas.”
“The growth program is primarily focused on the legacy business (Hardisty, Edmonton, and Moose Jaw) at around $125-million of sanctioned growth, while the last $25-million (unsanctioned) is to be directed toward the recently acquired South Texas Gateway Terminal (STGT),” said ATB Capital Markets analyst Nate Heywood in a research note. “The capital program is expected to be funded by internally generated cash flows. GEI remains in a strong financial position as of Q3/23 with a net debt to Adjusted EBITDA leverage multiple of 3.1 times on a TTM [trailing 12-month] basis (adjusted for 12-month STGT contribution), which is in line with management’s target range of 3.0-3.5 times. We also expect the dividend (7.5-per-cent yield) to remain fully funded on a stable infrastructure cash flow basis with a TTM payout ratio of 61 per cent (target: 70-80 per cent).”
Kinder Morgan (KMI-N) declined 2 per cent after it forecast higher 2024 earnings as the U.S. pipeline operator bets on growth in its natural gas pipelines and energy transition ventures.
Net income attributable to Kinder Morgan for 2024 is expected to be US$1.21 per share, up 11 per cent from its forecast of US$1.09 per share for 2023, the company said.
“We expect to continue benefiting from strong natural gas market fundamentals driving growth on our existing natural gas transportation, storage, and gathering and processing assets as well as expansion opportunities,” Kim Dang, chief executive officer of Kinder Morgan, said in a statement.
The pipeline operator also anticipates to benefit from increased rates in refined products businesses, demand for renewable diesel and renewable diesel feedstocks, and demand for renewable natural gas.
The company said it expects to get a boost from contract rate escalations in its products pipelines and terminals business units.
Profits for oil and gas transportation have been helped by strong demand due to low U.S. inventory levels and increased exports, as buyers sought alternatives to Russian oil since Moscow’s invasion of Ukraine last year.
Kinder Morgan is one of the largest energy infrastructure companies in North America and operates about 82,000 miles of pipelines.
Kinder Morgan expects to generate US$8-billion of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2024, up 5 per cent from the 2023 forecast of US$7.6-billion.
The company added that it expects to invest US$2.3-billion in discretionary capital expenditures, including expansion projects and contributions to joint ventures.
Johnson & Johnson (JNJ-T) dipped 0.2 per cent after it forecast revenue growth of 5-6 per cent for the next year, as it banks on strong demand for cancer treatments Darzalex and Carvykti and resilient sales of blockbuster drug Stelara.
The company has narrowed its focus on its drugs and medical devices business since it hived off its consumer health unit earlier this year.
Sales of blockbuster psoriasis treatment Stelara in Europe are expected to come under pressure as early as next year as a key patent on the drug expires. It is also expected to face competition in the United States beginning in 2025.
“We think we’re very well positioned, even in spite of what will be the beginning of some biosimilar entrants to Stelara outside the US in mid to second half of 2024,” Chief Financial Officer Joseph Wolk told Reuters.
Sales of the drug largely come from its use as a treatment for inflammatory bowel diseases (IBD), Wolk said.
“And when you have a successful treatment for an IBD patient, neither the patient nor the physicians really wants to change that dramatically,” he added.
Ahead of a meeting of investors scheduled later on Tuesday, J&J said it was expecting sales in its pharmaceutical unit to grow at a compounded annual rate of 5-7 per cent between 2025 and 2030.
J&J, which plans to launch at least 20 new therapies by 2030, said over 10 of its products had the potential to generate more than $5 billion in peak year sales - including newer cancer treatments Talvey and Tecvayli.
The company expects full-year adjusted operational profit of US$10.55 to US$10.75 per share in 2024, including a 15-cent impact from its recent acquisition of private medical device maker Laminar.
Rockstar Games lined up its much-awaited Grand Theft Auto VI for a 2025 launch in the first trailer for the videogame, disappointing many investors who expected the latest installment of the best-selling franchise to release sooner.
Shares of parent Take-Two Interactive Software (TTWO-Q), which have rallied nearly 50 per cent this year, fell in trading on Tuesday.
The trailer featured a “Bonnie and Clyde”-like duo blitzing their way through a fictional version of Miami, Florida, called “Vice City.” It was released on Monday, ahead of its planned early Tuesday reveal after a version leaked on social media.
“As typical first trailers go, it does not show much other than setting the scene, incredible graphic fidelity and hinting at the game play,” said Jefferies analyst Andrew Uerkwitz.
“There is still no exact release date, so fears of a delay into holiday 2025 ... will immediately ensue.”
Take-Two’s financial year runs from April to March and a delay beyond that period could push the sales of the games to fiscal 2026.
“A February/March 2025 release date could indeed deliver Take-Two’s guidance of about $8 billion in bookings in financial year 2025 and growth in 2026,” Uerkwitz said.
The GTA VI trailer has been viewed nearly 60 million times on YouTube in 10 hours since its launch and the game will be available on Sony’s PlayStation 5 and Microsoft’s Xbox Series X and S consoles.
GTA VI is likely to be an instant hit. The previous installment is among the most successful games ever with around US$7.68-billion in sales since it was first launched in 2013.
Analysts expect more on GTA VI, including pricing and its potential online multiplayer version, to be revealed in 2024.
Trucking company XPO Inc. (XPO-N) lost 4.3 per cent after it won a bid to buy 28 service centers of bankrupt Yellow Corp for US$870-million in a closely watched auction of the nearly 100-year-old firm’s assets.
Yellow, formerly known as YRC, filed for Chapter 11 bankruptcy protection in August after blaming the International Brotherhood of Teamsters union for its demise.
The company was one of the nation’s largest so-called less-than-truckload carriers in the U.S. and owned about 12,000 trucks and 35,000 trailers and its customers included Walmart and Home Depot.
XPO expects the deal, which is subject to court approval, to add to core profit in 2024 and adjusted profit per share from continuing operations from 2025, according to a filing on Tuesday.
The company has also entered into an US$870-million credit agreement which it may use to finance a deal it said would help optimize routes for its less-than-truckload transportation in North America.
XPO’s successful bid was part of a court-supervised auction that saw nearly two dozen companies, including Estes Express Lines and Knight-Swift Transportation Holdings, win rights to purchase Yellow’s assets for US$1.88-billion, as per a court filing on Monday.
Yellow’s bankruptcy process was closely watched after its demise potentially saddled U.S. taxpayers with losses stemming from a government rescue.
Shares of U.S.-listed Chinese firms including PDD Holdings (PDD-Q), JD.com (JD-Q) and Baidu (BIDU-Q) fell after ratings agency Moody’s cut its outlook on China’s government credit ratings to negative from stable, citing lower medium-term economic growth and risks from a major correction in the country’s vast property sector.
The downgrade reflects growing evidence that authorities will have to provide financial support for debt-laden local governments and state firms, posing broad risks to China’s fiscal, economic and institutional strength, Moody’s said in a statement.
“The outlook change also reflects the increased risks related to structurally and persistently lower medium-term economic growth and the ongoing downsizing of the property sector,” Moody’s said.
The move by Moody’s was its first change on its China view since it cut its rating by one notch to A1 in 2017, also citing expectations of slowing growth and rising debt.
While Moody’s affirmed China’s A1 long-term local and foreign-currency issuer ratings on Tuesday, it said it expects the country’s annual GDP growth to slow to 4.0 per cent in 2024 and 2025, and to average 3.8 per cent from 2026 to 2030.
Most analysts believe the economy is on track to hit the government’s annual growth target of around 5% this year, but activity is highly uneven.
With files from staff and wires