Inside the Market’s roundup of some of today’s key analyst actions
Ahead of the start of fourth-quarter earnings season for North American railway companies, Citi analyst Christian Wetherbee sees a “challenging” set-up for Canadian National Railway Co. (CNI-N, CNR-T).
In a research report released before the bell on Monday, Mr. Wetherbee downgraded his rating for CN shares to “neutral” from “buy”
“In our opinion, Canadian National appears the most at risk during the quarter, with our EPS estimate coming in 7 per cent below consensus,” he said. “We believe consensus has yet to fully capture all of the headwinds created by the 8-day Teamsters Canada Rail Conference (TCRC) strike, despite CN calling out a 15-cent EPS impact, and additional headwinds created by weak volume trends before the strike also do not appear to be fully factored into consensus, in our opinion.”
After adjusting his preferences of the six railway companies in his coverage universe, Mr. Wetherbee said CN fell to the bottom, leading him to lower his rating for its stock.
“We believe its slower growth and elevated valuation looks least favorable, particularly when growth is measured excluding the 15-cent impact to 2019 EPS from the 4Q19 Teamsters strike,” he said. “On this measure 2020-2021 average growth falls to 9 per cent and 2021 2-year growth falls to 18 per cent. We believe this multi-year period of weaker growth, which extends back to 2018, coupled with its industry leading capex budget and outlook puts the company’s elevated multiple at risk of derating.”
His target price for New York-listed CN shares remains US$100. The average target on the Street is US$93.63, according to Bloomberg data.
On the sector as a whole, Mr. Wetherbee said: “While rail volumes have remained persistently weak in 2019 and enter the new year on a low trajectory, rail stocks have performed well, posting 34-per-cent stock price returns in 2019," he said. “We believe that solid performance can continue in 2020 even as volume is likely to remain softer than consensus expects for at least 1H20. The key, in our opinion, is the operating leverage accumulating for the ‘new’ PSR stories from very strong cost control, which we believe is largely structural. Therefore, we think the market looks through further estimate reductions in the near-term and remains focused on the potential for better earnings growth in 2H20 and into 2021. In this context, we remain constructive on the group within our broader Transportation coverage, however we are honing in a bit more selectively on the names that generate the best potential growth through 2021 as the winners.”
That view led him to adjust his target for the other five stocks.
In order of preferred stocks, his changes were:
Kansas City Southern (KSU-N, “buy”) to US$180 from US$160. Average: US$158.28.
Union Pacific Corp. (UNP-N, “buy”) to US$210 from US$180. Average: US$182.96.
Canadian Pacific Railway Ltd. (CP-N/CP-T, “buy”) to US$295 from US$255. Average: US$256.89
Analyst: “We are trimming our 4Q19 EPS estimate by 3 per cent to C$4.73, but we remain 2 per cent above consensus for the quarter. In addition, we are reducing our 2020 and 2021 EPS estimates by 0.5 per cent each to C$18.50 and C$20.35, respectively, as we are modestly reducing our 2020 and 2021 revenue estimates and assuming a slightly higher OR [operating ratio] in 2020 (up to 59.0 per cent from 58.9 per cent previously). That said, we are increasing our price target to US$295, which is now based on a 19 times target multiple applied to our 2021 C$ EPS estimate translated to US$ at a 1.3 USD/CAD exchange rate. Our target multiple is up from 18 times 2020 EPS previously and is in line with our target multiple for Canadian National. We are applying a 19 times multiple to both of the Canadian rails due to their elevated volume growth potential over time (compared to the U.S.), historically best in class operating performances and finally the scarcity premium enjoyed by rails in the Canadian market.”
Norfolk Southern Corp. (NSC-N, “buy”) to US$225 from US$210. Average: US$204.35.
CSX Corp. (CSX-Q, “neutral”) to US$81 from US$75. Average: US$76
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Tesla Inc.'s (TSLA-Q) “strong” fourth-quarter delivery results feed the bullish sentiment toward the electric carmaker, said RBC Dominion Securities analyst Joseph Spak.
However, Mr. Spak warned that its stock “already discounts a very favorable future that requires near-perfect execution.”
“That being said, we recognize Tesla is a thematic/ momentum stock whose price can disconnect from fundamentals for periods of time,” the analyst added. “The bull narrative is strong and we see no immediate negative data point.”
On Friday before the bell, Tesla said it delivered 112,000 vehicles in the quarter, exceeding the Street’s expectation of 104,960 as well as Mr. Spak’s 105,600 estimates. For 2019, it shipped out 367,500 vehicles, meeting the low end of its target of 360,000 to 400,000 vehicles.
“Tesla produced 104.9k units, or 8.1k units per week,” the analyst said. “The company had indicated a goal of 10k units per week by year-end 2019 which included 1-2k units per week from Gigafactory Shanghai but that facility is behind schedule as they produced ‘just under 1,000 customer salable cars.’ The company did note that they have demonstrated run-rate capability of more than 3k per week excluding local battery pack production. We don’t doubt that Tesla can achieve that rate, but would caution on timing. Recall, at the beginning of 2019 (w/4Q18 earnings), Tesla indicated that the Fremont M3 production process had demonstrated a 7k per-week rate and they expect to be able to produce that sustainably by year-end, but in 4Q19, we calculate the rate at 6.6k per week.”
In reaction to a change in his Gigafactory Shanghai output assumption as well as a price cut for made-in-China M3s, Mr. Spak increased his 2020 M3 forecast to 373,000 from 333,000, and added: “Note we still have Tesla hitting 1 million units in the 2025 time frame; our ramp is now just not as steep.”
The analyst also raised his 2020 and 2021 earnings per share expectations to US$8.65 and US$12.40, respectively, from US$5.90 and US$10.50.
Keeping an “underperform" rating for Tesla shares, he hiked his target to US$315 from US$290. The average on the Street is US$315.79.
“The focus will now shift to Tesla’s 4Q19 earnings report where investors will be looking at auto gross margins (RBC at 20.6 per cent vs. consensus at 20.3 per cent), FCF (RBC at $456-million vs. consensus at $298-million) and 2020 delivery guidance commentary (RBC at 452k, company-collected consensus has 465k). We expect profitability and cash flow guidance to be similar to recent disclosure (positive going forward w/temporary exceptions),” Mr. Spak said. “The things we considered are some lower demand in countries like the Netherlands given pull-forward, slower growth in more mature markets like the US and some cannibalization as Model Y launches, offset by China and additional capacity to supply some other (European) markets. We do expect a step-back in auto gross margins in 2020 from the 2H19 rate as first China factory weighs and then Model Y launch.”
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Though she cut her rating for shares of Apple Inc. (AAPL-Q) to “buy” from “strong buy” after its share price exceeded her previous target, Needham & Co analyst Laura Martin matched the Street-high target for the tech giant’s stock on Monday, seeing a number of potential tailwinds that could continue to push it higher through 2020.
Ms. Martin said Apple remains on her conviction list for a second consecutive year, pointing to its direct relationships with 900 million of “the wealthiest consumers in the world.” She also said it is “a pure play on the trend toward ’always-on’ mobility.”
Also touting its transition toward a recurring-revenue business model, Ms. Martin raised her target to US$350 from US$280. The average on the Street is currently US$271.81.
Separately, Bernstein’s Toni Sacconaghi raised his target to US$300 from US$250 with a “market perform” rating
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Seeing “significant” upside potential in 2020, RBC Dominion Securities analyst Alex Zukin raised his rating for Salesforce.com Inc. (CRM-N), a San Francisco-based cloud-based software company, to “top pick” from “outperform” on Monday.
“Salesforce has become the trusted vendor for large enterprises in their digital transformation and modernization journeys,” he said. "With the company guiding to 20 per cent-plus revenue growth over the next 4 years (through FY24) and underscoring that this long-term outlook is not predicated on future M&A, the company is bullish on its organic growth prospects. Our numbers are higher than consensus on FCF as we assume margin leverage similar to the company’s op. margin leverage while consensus assumes FCF growth in line with revenue growth (i.e. no margin leverage).
“We view F4Q20 guidance as conservative (especially for cRPO), and with prelim FY21 revenue guidance already issued, we see a looming ‘digestion year’ following a flurry of M&A in FY20 that drives meaningful margin expansion in FY21 as the key catalyst to unlock share appreciation. We model an upside scenario that shows the operating and FCF margin implications in a scenario where ‘Core’ Salesforce margins expand 125-150 bps annually in FY21 and FY22 to 18.8 per cent and 20.4 per cent in FY21/FY22, while maintaining its historical 300 basis points delta between operating and FCF margins yielding $6.0-billion of FCF in FY22.”
Mr. Zukin raised his target for Salesforce shares to US$215 from US$200. The average on the Street is US$190.46.
Concurrently, Mr. Zukin lowered competitor ServiceNow Inc. (NOW-N) to “outperform” from “top pick,” citing “less return potential than other names in our coverage in 2020.”
“We continue to hold the view that the company is a unique asset within software," he said. "NOW occupies a strong market position in its core ITSM [IT service management] market and is seeing success expanding in adjacent markets, while it continues to maintain 30 per cent-plus growth and best-in-class retention metrics with expanding margins. However, given the potential for near-term disruption related to the management transition, as well as recent appreciation in the shares, we see less potential upside in 2020.”
Pointing to peer group multiple appreciation, Mr. Zukin moved his target to US$320 from US$286. The average is currently US$302.47
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Raymond James analyst Johann Rodrigues raised his financial expectations for Park Lawn Corp. (PLC-T) following last week’s announcement of its plan to acquire 14 properties in the Nashville area.
“The acquisition of Family Legacy and Harpeth Hills adds 14 businesses to Park Lawn’s existing portfolio while establishing a presence in highly-desirable Nashville (one of the fastest growing cities in North America),” he said. “The acquisition includes four combination (funeral + cemetery) and ten stand-alone (eight funeral, two cemetery) businesses. The acquisition adds 240 acres (127 zoned but undeveloped) to Park Lawn’s portfolio. The acquisition is expected to add year-one revenue of US$22.5-million and EBITDA of US$5.8-million. While not disclosed, we estimate a 9.5-times purchase multiple, implying a US$55-million purchase price.”
In reaction to the deal, Mr. Rodrigues increased his 2020 earnings per share estimate by 3 cents to $1.12. His 2021 projection grew by 6 cents to $1.28.
“Upon closing, D/EBITDA [debt-to-earnings before interest, taxes, depreciation and amortization] will tick up to 2.5 times, at the high-end of their self-imposed limit though well below U.S. peers (4 times),” he said. “Park Lawn can complete a number of small tuck-in deals using cash flow (they generate $8-million in FCF per quarter) but we expect an equity issuance once the next sizable ($30-million-plus) acquisition comes around.”
Keeping an “outperform” rating, the analyst increased his target for Park Lawn shares to $35 from $33, exceeding the current average on the Street of $34.40.
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Canaccord Genuity analyst Aravinda Galappatthige will be keeping a close eye on Corus Entertainment Inc.'s (CJR.B-T) advertising growth when it reports its first-quarter financial results on Friday before the bell.
“As always, we would look for colour on how TV advertising is tracking given the steady trends we have seen over the past year,” said Mr. Galappatthige in research note released Monday.
“At this point we are unclear whether management will continue to provide forward-looking colour. Note that Q2 faces a very tough comp with last year, where TV ads grew 11 per cent. Hence in our mind, even a decline of 5 per cent is not trouble as long as there is some modest growth in the back half of the year. As far as near-term TV ad growth is concerned, the primary factor is whether the recent reassessment of the digital/TV mix by the ad agencies and advertisers is ongoing. If that is the case we may well see a stable year in F2020, with additional Ad-Tech driven tailwinds coming into play during the latter part of the year. On the other hand, it does appear that StackTv (Amazon Prime Channels) is tracking ahead of management expectations. We would look for more metrics in this area on the call. Finally, we would look for an update on cost reduction opportunities, specially as platforms like synch ramp up.”
For the quarter as a whole, he is expected revenue of $460.9-million, which would be a decline of 1 per cent year-over-year. He’s projection a 2-per-cent decline in its radio segment, while estimating flat results in television despite the closure of two small stations.
“While the reported numbers are affected by several non-recurring items, we expect generally steady underlying returns from Corus on the TV front," said Mr. Galappatthige. “In terms of TV ads we expect 0-per-cent growth (ex Telelatino) year-over-year despite the aforementioned closures. Recall management indicated generally stable trends for Q1 during the prior conference call. It appears, though, that there is a fair degree of intra-quarter lumpiness, which makes calling the quarter outcome (even in the middle of it) difficult. Hence we see the possibility of a result ranging from down 2 per cent to up 2 per cent. In sub revenue we expect a 2-per-cent decline, similar to the prior quarter trends, although there could be some tailwinds from the newly renewed BDU agreements (including retroactive adjustments). Finally, we expected some initial growth from the relaunch of Bakugan, although much of the growth will likely be in Q2.”
Mr. Galappatthige made modest increases to both his revenue and EBITDA projections for both 2020 and 20021.
However, he maintained a $9 target for Corus shares with a “buy” rating. The average on the Street is $7.97.
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After a “a “critical foundation year” for Alphabet Inc. (GOOGL-Q) in 2019, Pivotal Research analyst Michael Levine thinks “the narrative continues to improve in 2020 and beyond,” leading him to upgrade its stock to “buy” from “hold.”
Mr. Levine said he’s “encouraged by the durability of revenue growth” and expects its stock to “outperform the other large cap Internet names in 2020 as estimates move higher.”
He also praised new new chief executive officer Sundar Pichai, saying: “This change in the guard offers the most optionality for multiple expansion for the stock we have seen in years.”
His target rose to US$1,650, rising from US$1,445. The current average is US$1455.92.
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With files from Bloomberg News
David Leeder