Inside the Market’s roundup of some of today’s key analyst actions
Though he deemed its fourth-quarter results as “good,” RBC Dominion Securities analyst Darko Mihelic expects Bank of Montreal (BMO-T) to see its revenue growth slow compared to its peers.
“BMO had very strong revenue growth of 9.7 per cent in 2021, above the peer average of 5.6 per cent, but we believe revenue growth will slow relative to peers in 2022,” he said in a research note released Monday. “We believe it will be tough for BMO to put out strong revenue growth relative to peers in 2022 given the sale of its EMEA business (which is expected to strip out 2 per cent of revenues), BMO will need very constructive markets to repeat which we do not assume, and interest rate sensitivity is higher at competitor banks. We forecast revenue growth to slow to 2.6 per cent in 2022 compared to our average forecast of 5.5 per cent for peers.”
Before the bell on Friday, BMO reported adjusted earnings per share of $3.33, exceeding the Street’s forecast of $3.21 but missing Mr. Mihelic’s estimate by 5 cents.
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“Lower than expected adjusted EPS mainly reflected lower than forecast pre-tax preprovision earnings (PTPPE) partly offset by lower forecast credit losses,” he said. “On a segmented basis, U.S. P&C, Wealth Management and Corporate came in below our forecast, partly offset by better than forecast results in Canada P&C.”
Raising his core EPS estimate for 2022 to $14.05 from $13.96 in 2022 and keeping a $14.68 projection for 2023, Mr. Mihelic increased his target price for shares of BMO to $154 from $146, maintaining a “sector perform” rating. The average on the Street is $151.86, according to Refinitiv data.
“We roll forward our valuation to our 2023 core EPS estimate and we maintain our forward target P/E multiple of 10.5 times,” said Mr. Mihelic. “Changes to our model reflect Q4/21 actual results, and adjustments to our Wealth forecasts to remove the EMEA Asset Management business. We lower our impaired provisions for credit losses (PCL) forecasts in 2022 for U.S. P&C, Capital Markets, and Canada P&C but increase our impaired PCL forecasts in 2023 for Canada P&C. We adjust our efficiency forecasts for Capital Markets to assume lower expenses. We also make other tweaks to our non-interest income growth forecasts and loan growth assumptions.”
Elsewhere, others making target changes include:
* Scotia Capital’s Meny Grauman to $162 from $161 with a “sector outperform” rating.
“Yes, BMO’s beat this quarter was driven by credit as PTPP earnings missed both us and the Street,” he said. “That said, when you put it all together we believe that once again this bank put up the best results of the earnings season. Performance highlights include peer-leading PTPP growth of 11 per cent year-over-year and operating leverage of up 2.2 per cent year-over-year. We also highlight the best Canadian P&C results of the group, and 14-per-cent year-over-year PTPP growth in the US P&C segment despite further margin pressure (down 3 basis points quarter-over-quarter). On top of that we note the largest dividend increase of the group at 25 per cent, and the largest NCIB at 3.5 per cent (and we see potential for upside here). Overall, BMO remains our favourite name in the space given best-in-class operational performance and strong forward guidance that is still not being fully rewarded by the market. BMO is guiding to flat expense growth in F2022, and we believe that they will deliver that without shortchanging investment. Although we do expect revenue growth to slow in 2022 due to capital markets headwinds, we see upside to those numbers and in any event model more impressive growth in F2023.”
* Desjardins Securities’ Doug Young to $150 from $146 with a “buy” rating.
“PTPP earnings were 2 per cent below our estimate, mainly due to higher non-interest expenses (NIX),” said Mr. Young. “However, management is confident it can keep NIX flat for FY22. The outlook for loan growth remains positive and management expects that as supply chain and labour issues begin to fade in 2022, it can drive higher commercial loan growth. We increased our estimates and our target price.”
* Canaccord Genuity’s Scott Chan to $160 from $152 with a “buy” rating.
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Citing a “favorable upside/downside skew” and urging investors to “buy the dip,” BMO Nesbitt Burns analyst Sohrab Movahedi raised Canadian Western Bank (CWB-T) to “outperform” from “market perform” following better-than-anticipated fourth-quarter results.
Shares of the bank fell 4.4 per cent on Friday despite announcing cash earnings per share of $1.03, exceeding both Mr. Movahedi’s 83-cent estimate and the consensus projection of 86 cents.
“The beat to us was largely on lower credit (total PCL of (12)bps vs. our forecast of 23bps) and lower expenses, partly offset by lower revenue (NII hurt by 4bps lower-than-expected NIM). CET1 (standardized) solid at 8.8 per cent; DPS increased 3 per cent,” he said.
Mr. Movahedi has a $43 target for its shares. The average on the Street is $43.27.
“The current price offers undemanding valuation, trading at 8.5 times our 2023 estimated EPS or 1 times our 2022E BVPS,” he said.
Others making target changes include:
* Scotia Capital’s Meny Grauman to $45 from $48 with a “sector outperform” rating.
“Despite delivering a 20-per-cent beat to consensus, CWB shares sold off sharply on reporting day,” said Mr. Grauman. “This performance reflects the fact that the beat this quarter was driven by a very large PCL reversal, as PTPP earnings missed by a wide margin. In addition, guidance for F2022 was disappointing as elevated expense growth is likely to constrain PTPP growth despite double-digit loan growth. And yet we believe that the sell-off on earnings day was overdone and creates an attractive buying opportunity for the shares. Not only is there upside to pre-provision earnings growth in 2022 if rate hikes come sooner than expected, but more importantly growth in 2023 should actually be at the top of the peer group (we forecast PTPP growth of 14 per cent) as expense growth moderates and the benefit of rate hikes are likely to have a bigger impact in that out year. F2023 is likely to also benefit from the bank’s transition to AIRB, although the exact timing remains somewhat uncertain for the time being.”
* Desjardins Securities analyst Doug Young to $43 from $45 with a “buy” rating.
“Adjusted pre-tax, pre-provision (PTPP) earnings were 4 per cent below our estimates due to lower NIMs and a higher noninterest expense (NIX) ratio,” he said. “It guided to PTPP earnings growth in the mid- to high single digits for FY22, driven by loan growth, stable NIMs and despite higher expenses, with possible upside if rates rise earlier than anticipated. We updated our estimates, lowered our target.”
* TD Securities’ Mario Mendonca to $43 from $44 with a “buy” rating.
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Desjardins Securities analyst Jerome Dubreuil expects Canadian telecommunications companies to see a further recovery from pandemic lows.
“While Canadian telecoms have withstood the impact of the pandemic with relative resilience (we expect Canadian telecom industry revenue in 2021 to be 3 per cent higher than in 2019), we believe there is potential for reopening catch-up in 2022,” he said. “Certain areas such as roaming fees, B2B, media, as well as improved demographics, offer a strong recovery runway. We expect these factors should help adjusted EBITDA in the sector to grow 5.3 per cent and 3.4 per cent in 2022 and 2023, respectively.”
However, in a research report previewing 2022 for the sector, he warned investors that “reopening growth is not as valuable,” noting: “During 2022, it will be important for investors to differentiate between growth originating from the pandemic catch-up and from industry fundamentals and competitive advantages. We believe the former is not as repeatable as the latter. For example, we expect RCI to generate the strongest EBITDA growth in the sector in 2022, which could be harder to achieve the following year.”
Mr. Dubreuil said Telus Corp. (T-T) remains his preferred stock heading into the new year, raising his target by $1 to $33 with a “buy” recommendation. The average on the Street is $31.50.
“We estimate that T’s pure telecom operations trade at a lower multiple than BCE’s, which provides an attractive entry point for T given the company’s advanced fibre deployment,” he said. “The major improvements to margin and FCF we foresee for T in 2023 are also attractive in our view as we understand that the valuation of T by several sell-side analysts is not yet based on 2023 estimates.”
In order of preference, the rest of his pecking order is:
* Quebecor Inc. (QBR.B-T) with a “buy” rating and $38 target, down from $39.50. Average: $38.13.
“We have changed our risk rating on QBR to Above-average from Average,” he said. “Nonetheless, the stock is #2 in our pecking order given its elevated 38-per-cent expected total return, 12-per-cent 2023 FCF yield and the attractive optionality management has in relation to an out-of Quebec expansion.”
“We believe the company’s results and current operations have taken a back seat in the minds of investors as the market is trying to assess the value and risk related to management’s ambition to launch a wireless service outside of Québec (OOQ). QBR has the luxury of waiting to learn of the exact conditions (on MVNO and on Freedom) under which it could potentially expand its wireless service OOQ before committing additional capital. We believe this reduces risk and creates attractive optionality that the market has yet to appreciate.”
* Shaw Communications Inc. (SJR.B-T) with a “buy” rating and $40.50 target (unchanged). Average: $40.25.
“We estimate that SJR’s current share price implies a 75–77-per-cent chance that the deal will close at the expected price and within the expected timeframe. This is lower than the 90 per cent we estimate, which we believe creates an attractive entry point, although we recognize that the gap between our view and the market’s view of the odds has narrowed in the last few months. We do not anticipate milestones regarding the potential transaction will be communicated publicly before the final announcement on the transaction is made. While the underlying value of SJR shares is affected by interest rate movements, we believe there should be no impact on the value of the stock from the evolution of COVID-19 variants and, therefore, the stock provides an attractive hedge against the pandemic,” he said.
* Rogers Communications Inc. (RCI.B-T) with a “hold” rating and $70 target, up from $68. Average: $69.29.
“We believe it is possible the recent turmoil at the management level has made it more complicated for RCI to realize significant progress on certain matters related to the SJR merger. However, we also believe it still has plenty of time to reach the necessary agreements to close the transaction in 1H22, which is the timeline set when the deal was initially announced. While we anticipate the merger will eventually be approved, we believe there is a more than 50-per-cent chance that RCI will not be allowed to maintain all of SJR’s assets. We estimate the transaction would nonetheless generate FCF/share accretion of 25–30 per cent and increase the company’s EV/pro forma EBITDA by approximately 0.4 times, which is relatively small given the strategic importance of the acquisition, especially in terms of having a wireline presence in the western Canadian provinces. We will also monitor possible deleveraging events, such as the potential sale/monetization of the Blue Jays,” he said.
* Cogeco Communications Inc. (CCA-T) with a “hold” rating and $119 target, falling from $125. Average: $129.60.
“CCA is not as exposed to the pandemic recovery as its peers given its relatively low exposure to B2B and its lack of a wireless service. Hence, we believe it is possible that near-term results could look underwhelming vs what we expect to be reported by peers. We would note that an upsurge in pandemic-related concerns should have the opposite effect,” he said.
* BCE Inc. (BCE-T) with a “hold” rating and $67 target, up from $66. Average: $65.63.
“In the short term, we believe the return-to-office trend should help BCE’s results more than its peers’ as the company has a higher exposure to business clients. However, the longer-term transition to cloud services we foresee in B2B should have a more substantial effect on BCE’s results than its peers,” he said.
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Ahead of Wednesday’s release of its annual business plan and capital update, Raymond James analyst Andrew Bradford upgraded Mullen Group Ltd. (MTL-T) to “outperform” from “market perform.”
“Trucking & Logistics fundamentals plus a constructive macro backdrop for the industrial services segment underpin reasonable expectations for steady-state growth into 2022 and 2023,” he said. “We expect this strong backdrop will set a tone for the release, notwithstanding the shortterm volatility that the BC flooding may put on Mullen’s operations in the province. Mullen will almost certainly address the Omicron variant and the risks this poses to its outlook.
“Canadian economy continues to plug along nicely, with a boost from the energy industry. Mullen’s trucking and logistics segments are driven primarily by the health of the consumer. All the economic indicators that support consumer demand in Mullen’s key geographies - employment, retail sales, wholesale trade, manufacturing sales, and housing starts – have fully recovered to their pre-pandemic levels or surpassed them.”
He maintained a $14.50 target. The current average is $15.73.
“Our target price methodology is to ascribe an 8-times multiple to consolidated 2022 estimated EBITDA plus value for its equity investments in unconsolidated businesses. The 8x target is consistent with Mullen’s trading pattern over the last 2-1/2 years - we don’t want to look back further than 2019 as the market had been ascribing a very high 10-plus-times multiple based on the presumption that Mullen’s oilfield-oriented businesses would ultimately recover to their pre-2015 levels. The air has been let out of this presumption, and Mullen’s multiple consequently gravitated back to around 8x.
“Mullen’s stock has reversed most of 2021′s gains over the last month and is now priced at an unusually low 6.8 times. An 8.0-times multiple on 2022 implies a $14.50 target, which informs our Outperform rating.”
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Rivian Automotive Inc. (RIVN-Q) is an “EV stalwart in the making,” according to Wedbush’s Dan Ives.
He was one of several equity analysts on the Street to initiate coverage of the Michigan-based vehicle maker on Monday after coming off research restriction following its highly anticipated initial public offering last month.
“With current EV demand and a $5 trillion market emerging over the next decade, the widespread shift to electric vehicles has put many EV startups in the spotlight with Rivian leading the way,” said Mr. Ives. “With over $10 billion in funding before going public and Amazon as a 20-per-cent owner, a vertically integrated process, 48,000 pre-orders for the R1 platform and a stable 100,000 unit delivery partnership with Amazon on the commercial front, we believe Rivian has the potential to become one of the leaders in the electric vehicle industry over the next decade.
“With the popularity and consumer demand for EVs on the trucking/SUV market, we believe Rivian is in the catbird’s seat to take considerable market share in this EV arms race under its visionary CEO and founder RJ Scaringe.”
Mr. Ives sees Rivian “primed” to benefit from the “massive” current and future demand for electric vehicles, seeing it capitalizing on a “unique” global total addressable market.
“We believe the current climate is very favorable for Rivia at this point as we are in the first inning of a $5 trillion market opportunity over the next decade for the EV sector as the auto industry is going through one of the biggest transformations not seen since the 1950s,” the analyst said. “Coupling Rivian’s unique business strategy and efforts in the commercial space, the company has a unique opportunity to unlock a massive total addressable market. We believe the company will be a leader and major player in both the consumer luxury and commercial front.
“As one of the world’s first luxury EV pickup/SUV manufacturers, the company expects to sell more than 742,000 units cumulatively over the next five years, and its 2 flagship models, the R1S and R1T, have already collectively received 48,000 reservations. We believe Rivian is set to create a new category in the EV space with its game-changing debuts, a massive Normal, Illinois factory footprint, and create a major brand within the EV market over the next decade.”
Though he warned that its current valuation is “lofty,” Mr. Ives said it is “all about playing the green tidal wave,” leading him
“We view the Rivian story as a game changer for the EV market with investors debating if Rivian currently deserves the lofty valuation it has received by the Street out of the gates since its November IPO,” he said. “To this point, we believe $2.5 trillion of market share is up for grabs over the next decade in the EV market, with Tesla owning roughly half of our $5 trillion market estimate. We believe Rivian has strong potential to be a clear leader in this market and should be valued on a fully scaled unit number into 2025.”
Mr. Ives set a target of US$130 for Rivian shares, approximately 25 per cent higher than its Friday close of US$104.67.
Our $130 price target represents roughly 5 times our 2025 revenue estimate which is appropriate and in-line with its broader disruptive EV technology peer group,” he said.
Elsewhere, RBC Dominion Securities’ Joseph Spak gave Rivian an “outperform” rating and Street-high US$165 target.
“Rivian has category defining vehicles with a focus on the key truck segment that should allow for 50-per-cent revenue CAGR [compound annual growth rate] through end-of-decade. A clean-sheet approach and strong tech will allow RIVN to eventually use the vehicle as a platform for higher-margin software & services,” said Mr. Spak.
Piper Sandler’s Alexander Potter initiated coverage with an “overweight” rating and US$148 target
“Lots of companies say they intend to replicate Tesla’s success, but in our view, most of these companies will fail,” said Mr. Potter. “This is because they rely too heavily on supply chain partners, and they lack the expertise (and the courage) to develop their own software, semiconductors, batteries, charging networks, and direct-to-consumer business models. Rivian’s management team understands this, and as a result, has chosen to exploit the advantages of vertical integration. Until the supply chain matures, we think companies using this strategy will have the upper hand.”
Other firms initiated coverage include: Goldman Sachs with a “neutral” rating and US$94 target; JP Morgan with a “neutral” rating and US$104 target; Wells Fargo with an “equal-weight” rating and US$110 target; Deutsche Bank with a “buy” rating and US$130 target; Mizuho Securities with a “buy” rating and US$145 target; Morgan Stanley with an “overweight” rating and US$147 target and Baird rating with an “outperform” and US$150 target.
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Believing it can “meaningfully” expand production capacity at its Shanghai facility as well as its yet to be brought online Texas and Germany plants, RBC Dominion Securities analyst Joseph Spak hiked his delivery forecast for Tesla Inc. (TSLA-Q) on Monday.
Concurrent with his updated view on global battery electric vehicle (BEV) market, he’s now projecting total deliveries for 2023, 2024 and 2025 of 1.46 million, 1.73 million and 2.2 million units, respectively, rising from 1.44 million, 1.58 million and 1.8 million.
“Expanded production is one thing, but it doesn’t mean anything without demand,” Mr. Spak said. “We believe there will be solid demand for Tesla vehicles as the world shifts to electric vehicles. ... For the first time we explicitly put the ‘Model 2′ aka Tesla’s $25k car (though we model this with a higher ASP) in our forecast beginning in 2024 and more earnestly in 2025.
“In 2025, we believe Tesla will now have Model S/X, Model 3/Y, Cybertruck and Model 2 (as well as Semi). We note that while the portfolio is expanding, we expect it to be more limited versus other manufacturers’ offerings which could be a risk as historically in auto, the consumer has preferred choice and differentiation. In our view, Tesla’s strategy relies more on a view that consumer choice for BEVs will look more like smartphones or other consumer electronics.”
With his expectation for higher deliveries, Mr. Spak increased his revenue and earnings projections, leading him to hike his target for Tesla shares to US$950 from US$800, keeping a “sector perform” recommendation. The average on the Street is US$841.01.
“Ultimately, our Sector Perform rating on TSLA is also valuation-based, as we believe the current valuation assumes high growth assumptions and strong execution,” he said.
Separately, Mr. Spak raised his Ford Motor Co. (F-N) target to US$21 from US$17, exceeding the US$18.37 average, with an “outperform” rating.
“We continue to see some upside to Ford and if the company continues to execute and market conditions are favorable, we do see further upside to the name. That said, we do see some greater upside at other OEMs,” he said.
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With its shares “under pressure” since the early November release of its quarterly results, Citi analyst Jason Bazinet now sees a “favourable” risk-reward proposition for Electronic Arts Inc. (EA-Q), viewing its “recent weakness as a buying opportunity.”
That led him to raise his rating to “buy” from a “neutral” recommendation.
“We attribute most of the recent declines in the equity to concerns surrounding the company’s release of Battlefield 2042, as the title has been met with (mostly) negative reviews since the mid-November release,” said Mr. Bazinet. “However, we believe concerns surrounding the company’s dispute with FIFA over its license renewal, potential IDFA headwinds, and concerns over a tougher Chinese regulatory environment may also be weighing on the equity. For our part, we considered bear, bull, and base case scenarios to determine if EA’s risk/reward is attractive at current levels.”
“Our scenario analysis suggests most of the downside risk may be priced into the equity at current levels. As such, we view EA’s risk/reward as compelling and upgrade our rating from Neutral to Buy with a $150 target price (previously $160). In addition, the company’s strong balance sheet provides it with the financial flexibility to complete incremental accretive M&A and/or opportunistically pursue share repurchases, which we believe could act as further positive tailwinds for the equity.”
Though he touted “the strength of the company’s core franchises and growing live services business,” Mr. Bazinet’s lower target price of US$150 remains below the average on the Street of US$174.20.
“We have made slight downward revisions to our estimates to account for some anticipated weakness in Battlefield 2042 sales and have slightly lowered our target multiple to align with EA’s average price/NTM [next 12-month] earnings multiple in 2019 of 21 times,” he said.
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Calling it “a low-risk way to play the biopharmaceutical space,” Canaccord Genuity analyst Tania Gonsalves initiated coverage of DRI Healthcare Trust (DHT.UN-T) with a “buy” recommendation, seeing it as “cash flow risk but royally overlooked.”
“DHT is managed by DRI Capital, one of the oldest biopharmaceutical royalty monetization companies in the world,” she said. “After 15 years utilizing the private fund model, this year DHT completed an IPO. The evergreen nature of a public company provides for an attractive cost structure and allows DHT to reinvest cash flow into building out its royalty portfolio. We believe the stock has been overlooked due to concerns around the seed assets’ declining royalties; however, DHT has already announced up to $135.5-million in new royalty deals. It is targeting the deployment of $650-750-million over five years. We are confident that it can meet (or exceed) these objectives given the historic cadence of capital deployment.”
Ms. Gonsalves set a target of $15.50 for units of the Toronto-based trust. The current average on the Street is $17.76.
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Analysts at CIBC World Markets made a series of target price changes to mining stocks in their coverage universe on Monday.
Bryce Adams’s adjustments include:
- Copper Mountain Mining Corp. (CMMC-T, “outperformer”) to $5 from $5.50. Average: $5.10.
- Ero Copper Corp. (ERO-T, “neutral”) to $27 from $32. Average: $29.55.
- First Quantum Minerals Ltd. (FM-T, “outperformer”) to $37 from $38.50. Average: $33.72.
- Hudbay Minerals Inc. (HBM-T, “outperformer”) to $14 from $15. Average: $12.99.
- Lundin Mining Corp. (LUN-T, “neutral”) to $11 from $12. Average: $11.93.
- Teck Resources Ltd. (TECK.B-T, “neutral”) to $42 from $40. Average: $42.41.
Anita Soni’s adjustments were:
- Centerra Gold Inc. (CG-T, “neutral”) to $11.25 from $11.75. The average on the Street is $11.13.
- New Gold Inc. (NGD-N/NGD-T, “neutral”) to US$2.20 from US$2.20. Average: $1.81.
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In other analyst actions:
* Canaccord Genuity analyst Dalton Baretto initiated coverage of Arizona Sonoran Copper Co. (ASCU-T) with a “speculative buy” rating and $2.75 target.
“We view ASCU as a compelling investment for investors looking for lower-risk, economically compelling copper projects, particularly those in safe and proven jurisdictions with exploration and development upside,” he said. “In addition, we believe the company’s land package offers the opportunity to unlock significant incremental resources, both near mine and regionally. That said, in the near term, low trading liquidity and relatively high PE ownership could deter institutional buying. Further, in our view, the Cactus project as currently defined is fully reflected in the current share price, although we believe the value of the project itself will grow as it is de-risked over the next 24 months.”
* Pointing to the “success” of its ongoing 2021 resource definition drill program at its 100-per-cent-owned Dixie project, Canaccord Genuity analyst Kevin MacKenzie raised his Great Bear Resources Ltd. (GBR-X) target to $27 from $23.50 with a “speculative buy” rating. The average is $26.97.
David Leeder