Inside the Market’s roundup of some of today’s key analyst actions
With earnings season set to commence on Tuesday, Canaccord Genuity analyst Scott Chan expects Canadian banks to report “strong” fourth-quarter financial results.
“We believe the banks are well positioned to surpass expectations due to: (1) historical track record of EPS [earnings per share] beats; (2) our FQ4 bottom-line growth forecast of 4 per cent year-over-year; (3) strong Canadian lending growth in mortgages and commercial; (4) outpacing Non-domestic NI traction (e.g. U.S. Regional bank Q3 EPS of more than 9 per cent year-over-year); (5) Asset / Wealth management and Capital Markets franchises supported by higher equity markets; (6) consistent historical dividend raises; (7) majority of banks guiding to positive operating leverage for F19; and (8) elevated valuations, driven by strong business growth,” said Mr. Chan in a research note released Monday.
“Excess capital deployment is geared towards organic growth, dividend raises, and buybacks. M&A activity is likely to be muted amidst near-term market uncertainty.”
After its shares have “notably rallied” over the past six months, Mr. Chan lowered his rating for Canadian Western Bank (CWB-T) to “hold" from “buy,” seeing limited upside.
“Oil price fluctuations have driven a large part of near-term share price movement despite efforts on diversifying outside Western Canada,” the analyst said.
He did raise his target to $36 from $34 after eliminating his 5-per-cent target multiple discount to its peers. The average target on the Street is currently $34.85, according to Bloomberg data.
“This is attributable to the bank’s strong growth across the board and sound execution of its Balanced Growth strategy,” he said.
Mr. Chan also raised his target price for shares of four banks, pointing to “strong C&I loan growth, solid capital position and stable credit." They are:
Bank of Nova Scotia (BNS-T, “hold”) to $77 from $74. Average: $78.93.
Canadian Imperial Bank of Commerce (CM-T, “hold”) to $112.50 from $111. Average: $114.39.
National Bank of Canada (NA-T, “hold") to $68.50 from $66. Average: $67.96.
Royal Bank of Canada (RY-T, “hold") to $106 from $104. Average: $111.71.
“Since FQ3 reporting (Aug 29), Cdn. banks’ total return performance has been very strong with the Big 6 up 11.4 per cent on average (materially higher than the TSX at 4.2 per cent),” he said. "CWB and NA have significantly outperformed the TSX and the Bank Group. YTD, the Big-6 have modestly underperformed the TSX.
“Currently, the Big-6 banks trade at 10.4 times our NTM [next 12-month] EPS (3-per-cent discount to historical avg. of 10.7 times). Banks trading at the widest historical discount margin include CWB (negative 10 per cent), BNS (negative 9 per cent), BMO (negative 8 per cent), and CM (negative 5 per cent). We believe BMO shares still have room to relatively outperform due to: (1) valuation discount to historical average and year-to-date relative underperformance vs. the TSX; (2) looking for FQ4 earnings beat; (3) track record of strong FQ4 EPS surprise (5-per-cent average over past 15 years); (4) high single-digit EPS growth potential in F20; (5) market-leading C&I loan growth on both sides of the border; (6) stable credit quality could provide additional upside; and (7) sound capital position with FQ3 CET1 ratio at 11.4 per cent.”
Following a “soft” third-quarter earnings season for Canadian energy services and diversified energy companies, Industrial Alliance Securities analyst Elias Foscolos further lowered his U.S. drilling outlook on Monday.
“U.S. field activity experienced a steep decline through the quarter, with land rigs averaging 894 (down 8 per cent quarter-over-quarter, down 13 per cent year-over-year) and exiting the quarter at 836 (currently 781),” he said. "This number has continued to decline as US E&Ps have scaled back on capital spending and are prioritizing returning cash to shareholders.
“We had previously forecasted that U.S. rig counts would bottom out in the low-800s and gradually increase through 2020, averaging 851 in the coming year. As the rig count has continued to decline and commentary is not generally supportive of an increase in industry spending levels, we are now forecasting US land rigs to bottom in the mid-700s late this year before stabilizing and gradually increasing through 2020. Our revised US rig projections call for Q4/19 and 2020 rigs to average 790 (down 25 per cent year-over-year, down 5 per cent from our previous estimate.) and 807 (down 12 per cent year-over-year down 5 per cent from our previous estimate), respectively. In Canada, we are maintaining our outlook for 2020 drilling, but have reduced our Q4/19 estimate to 130 rigs (down 26 per cent year-over-year, down 6 per cent from our previous estimate.) to reflect the current trend through the quarter.”
With that change, Mr. Foscolos reduced his financial estimates for Pason Systems Inc. (PSI-T), despite the release of largely in-line quarterly results.
“Declining rig counts in North America should be partially offset by modest international growth, strong and potentially increasing market power, and continued adoption of peripheral products that support PSI’s core revenue,” he said. "The Company is a strong FCF generator and has been using excess cash to make investments outside of drilling. Short term, we do not see any accretion from these investments, as they represent longer-term plays to diversify into higher-growth markets.
“Following the quarterly release, consensus EBITDA estimates for 2020 were revised downward 10 per cent. We currently forecast 2020 EBITDA of $127-million, which is based on an average North American land rig count of 953 (down 9 per cent year-over-year).”
Maintaining a “hold” rating for Pason shares, he lowered his target by a loonie to $16.50. The average is currently $18.58.
“We expect that Canadian drilling in H1/20 will be similar to H1/19, but we see potential for an uptick in the second half of the year," said Mr. Foscolos. "Internationally, we see double-digit growth in drilling. Growth in PSI’s peripheral product adoption is also likely to partially offset a decline in core U.S. drilling revenue, and there is also potential for PSI to gain market share.”
Canaccord Genuity analyst Raveel Afzaal thinks Xebec Adsorption Inc.'s (XBC-X) current share price offers long-term investors an “attractive entry point,” given the growth potential for the Renewable Natural Gas industry.
Accordingly, he initiated coverage of the Blainville, Que.-based biogas purification company, with a “speculative buy” rating.
“We believe some of the anticipated growth is already factored into Xebec’s current share price and near-term performance could be lumpy due to project delays,” said Mr. Afzaal. “We would view any resulting share price weakness as offering an excellent entry point.”
In justifying his bullishness, Mr. Afzaal pointed to the company’s “profitable and fast growing” Clean Tech division, which he estimates to be on track for revenue growth of 150 per cent year-over-year. He thinks it’s “well positioned with strong IP, references and geographical diversity.”
“We believe strong IP and reference sites serve as two key competitive advantages as global demand for RNG continues to grow,” he said. "For background, RNG is generated through the filtration of biogas, which is a by-product of the decomposition of organic waste in landfills, of municipal wastewater, and of anaerobic digestors that process agricultural or municipal organic wastes. RNG is comparable to pipeline-quality conventional natural gas but is considered carbonneutral.
“We have seen a growing percentage of renewable content on the electricity grids and believe we are in the early innings of a similar shift within the natural gas pipeline network. In our view, such a shift is necessary to avoid the possibility of an increasing portion of natural gas infrastructure becoming stranded assets as the demand for fossil fuels declines due to climate change initiatives.”
Mr. Afzaal set a target price of $2.50 per share. The average on the Street is $2.87.
Though he sees net positive funds flow if the company enters the S&P 400 index, Mr. Bouvier warned its inclusion isn’t guaranteed. If that does not occur, he said a net sale of almost 50 million shares could result.
He lowered his target for U.S.-listed Encana shares to US$5.50 from US$7, falling short of the US$6.41 average.
Citing cash flow concerns and believing it offers “growth at an unreasonable price," Wells Fargo Securities analyst Steven Cahall lowered Netflix Inc. (NFLX-Q) to “underperform” from “market perform.”
He does not expect the video steaming company to be profitable per subscriber until 2022, emphasizing its subscriber acquisitions costs, including cost of content, has not shown “meaningful cash operating leverage,” and pointing to the fact that it is still losing around US$2 per subscriber each month.
Mr. Cahall cut his target to US$265 from US$308. The average is currently US$360.59.
In other analyst actions:
* Expecting its rollout of fresh food offerings from its Holiday Stationstores acquisitions to boost same-store sales, BMO Nesbitt Burns analyst Peter Sklar upgraded Alimentation Couche-Tard Inc. (ATD.B-T) to “outperform” from “market perform” with a $49 target, rising from $42. The average is currently $46.18.
“Based on our analysis, we believe U.S. merchandise same- store sales could reaccelereate by up to 400 basis points," said Mr. Sklar.
* Seeing an overhang from the acquisition of Kinder Morgan Canada and the Cochin pipeline, UBC analyst Shneur Gershuni initiated coverage of Pembina Pipeline Corp. (PPL-T) with a “neutral” rating and $50 target. The average is $55.46.
* TD Securities analyst Josie Ho raised ARC Resources Ltd. (ARX-T) to “action list buy” from “buy” with a $9.50 target. (unchanged). The average is $9.50.
* UBS raised Enbridge Inc. (ENB-T) to “buy” from “neutral” with a $54 target, which falls short of $55.16 average.
* Barclays analyst Adrienne Yih initiated coverage of Lululemon Athletica Inc. (LULU-Q) with an “overweight” rating and US$257 target. The average on the Street is currently US$215.17.
With files from Reuters and Bloomberg