Monday’s analyst upgrades and downgrades

Inside the Market’s roundup of some of today’s key analyst actions

National Bank Financial analyst Vishal Shreedhar sees “significant” upside potential for Maple Leaf Foods Inc. (MFI-T), but he warns “the path could be volatile” and calls it “a show-me stock which will take several quarters of sustained strong execution to inspire investor confidence.”

“We consider MFI to be a company with meaningful turnaround potential,” he said. “MFI currently generates an adjusted EBITDA margin in its Meat Protein Group (10.5 per cent in Q4/23) that is below target (14–16 per cent) due to a challenged pork market (pressured EBITDA margin by 250 basis points), a weak consumer backdrop (pressured EBITDA margin by 100 bps) and remaining anticipated benefits from facility improvements (60 bps), amongst other factors. The company expects to achieve its target once pork market conditions normalize and benefits from its investments fully materialize, in addition to other factors. If MFI is able to achieve the low end of its target by 2025, we estimate over 10-per-cent upside to our 2025 EPS. For reference, our model contemplates MFI achieving the low end of its target in 2027.”

In a research report released Monday titled Not too chicken for this meaty turnaround, Mr. Shreedhar initiated coverage of Maple Leaf with an “outperform” recommendation, touting a “favourable risk/reward” with an “attractive valuation and expectations of improving performance.”

However, he acknowledges the company has “a lacklustre track record against achieving prior ambitions”, which he thinks is weighing on investor sentiment. He also points to “operational underperformance and poor capital allocation” that have led to a “lacklustre” 2023 return on invested capital of 4.5 per cent, which sits at the bottom of his coverage universe.

“MFI currently trades at 8.4 times our NTM [next 12-month] EBITDA, a 12-per-cent discount to the five-year average of 9.5 times,” he said. “Our upside/downside review suggests opportunity. In an optimistic scenario, using normalized multiples and assuming the top end of MFI’s meat protein target by 2025, we calculate a stock price of $46 today (upside of 95 per cent). Conversely, assuming the five-year historical low valuation and a 2025 EBITDA margin rate equal to 2023, we calculate a stock price of $16 today (downside of 33 per cent).

“We view the key risks to be MFI’s failure to execute against an ambitious revitalization agenda, as well as commodities volatility.”

Mr. Shreedhar set a target price of $29 per share. The average on the Street is $30.50, according to LSEG data.

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RBC Dominion Securities analyst Paul Treiber expects few surprises from first-quarter earnings season in Canada’s technology sector, predicting most companies will match the Street’s expectations and reiterated their annual guidance.

“Similarly, our U.S. Software team expects largely in-line March quarter results, but sees an upward bias to estimates through 2024 on stabilizing macros,” he said in a report released Monday. “For stocks in our coverage that are dependent on consumer spending, we believe consumer spending remained healthy through March. For those dependent on enterprise spending, we believe the environment remains similar to previous quarters, with sustained elongated sales cycles as a headwind to near-term growth.

“Canadian tech stocks have slightly underperformed broader markets Q1 (S&P/TSX Info Tech up 5 per cent Q1 vs. S&P/TSX Composite up 6 per cent and S&P 500 Info Tech up 12.5 per cent). While increasing interest rates are a headwind to valuation multiples, a large number of Canadian tech stocks trade below historical averages and at larger than historical discounts to peers. We believe improving growth and profitability through 2024 would help sustain valuation multiple expansion.”

Mr. Treiber sees three stocks as “best positioned” for the first quarter. They are:

* Celestica Inc. (CLS-N, CLS-T) with an “outperform” rating and US$47 target, rising from US$38. The average on the Street is US$43.88.

Analyst: “Celestica may deliver another beat and raise on hyperscaler data centre build out. We believe Celestica is likely to report solid Q1 results, as hyperscalers continue to rapidly build out data centers to address strong AI demand. Since hyperscalers account for 35 per cent of Celestica’s revenue, hyperscaler strength, in our view, is likely to offset the slowdown in electrical vehicles (EVs), which represents less than 10 per cent of Celestica’s revenue. Similar to last year, we believe that Celestica is likely to raise FY24 guidance.”

* Constellation Software Inc. (CSU-T) with an “outperform” rating and $4,300 target (unchanged). Average: $4,010.

Analyst: “Constellation’s solid YTD [year-to-date] M&A to sustain the positive investment narrative. We expect Constellation to report solid Q1 results, with adj. EBITDA up 30 per cent year-over-year, which is slightly faster growth than Constellation’s 5-year average (26 per cent). Our forecast assumes organic growth normalizes to historical averages as Constellation laps CPI-based price increases. YTD M&A has been strong, though reported Q1 capital deployed on acquisitions is likely to be down from Q4 due to the acquisitions of businesses from Nokia and Conduent closing Q2.”

* Shopify Inc. (SHOP-N, SHOP-T) with an “outperform” rating and US$100 target (unchanged). Average: US$82.70.

Analyst: “Shopify is likely to report solid Q1 results and guide Q2 above consensus, in our view. Multiple data sources indicate strong uptake of Shopify Plus and POS. Additionally, U.S. Census and other data sources indicate healthy consumer e-commerce spending Q1. With likely strong Q1 revenue, we believe Q1 margins could also surprise to the upside. We believe Shopify is likely to sustain a premium valuation, given solid growth, improved profitability, and strong product execution.”

Conversely, Mr. Treiber warns the quarter could not be a catalyst for Kinaxis Inc. (KXS-T, “outperform” and $200 target) and Open Text Corp. (OTEX-Q/OTEX-T, “outperform” and US$53 target).

“For Kinaxis, we believe SaaS growth is likely to slow Q1, and Q1 total revenue may be slightly short of consensus,” he said. “However, we expect Kinaxis to reiterate FY24 guidance and we see growth re-accelerating through FY24. For OpenText, March is typically a seasonally soft quarter for the company. We expect OpenText to reiterate annual guidance. On both stocks, we see the June quarter as a more likely catalyst, as Kinaxis is likely to see stronger SaaS growth, while OpenText’s June quarter is seasonally strong, and we expect the company to provide healthy FY25 guidance and may announce a dividend increase and the commencement of share buybacks.”

Elsewhere, BMO’s Thanos Moschopoulos hiked his Celestica target to US$48 from US$37 with an “outperform” recommendation.

“We remain Outperform on CLS and have raised our estimates and target price ahead of Q1/24 results — as we believe that CLS will continue to benefit, both in the nearterm and longer-term, from the large AI-driven capex investments being made by its hyperscaler customers,” he said. “We believe the stock’s valuation doesn’t adequately reflect its market position and exposure with respect to this opportunity, nor the fact that Street estimates (and our own) are likely conservative.”

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Seeing a “a more muted return to the current share price following the recent strength in the stock,” CIBC World Markets analyst Jamie Kubik downgraded PrairieSky Royalty Ltd. (PSK-T) to “neutral” from “outperformer” on Monday with a $31 target, rising from $27.50 and exceeding the $27.19 average on the Street.

“We continue to like the organic growth in the business being demonstrated on the oil side, and consider the company a very high-quality investment,” he said.

Ahead of earnings season in the energy sector, Mr. Kubik and colleagues Dennis Fong and Christopher Thompson also made these target adjustments:

• Advantage Energy Ltd. (AAV-T, “neutral”) to $11 from $10.50. The average is $13.
• Arc Resources Ltd. (ARX-T, “outperformer”) to $30 from $26. Average: $28.13.
• Baytex Energy Corp. (BTE-T, “neutral”) to $6.50 from $6. Average: $6.27.
• Canadian Natural Resources Ltd. (CNQ-T, “outperformer”) to $115 from $105. Average: $109.57.
• Cardinal Energy Ltd. (CJ-T, “neutral”) to $8.50 from $8. Average: $8.
• Cenovus Energy Inc. (CVE-T, “outperformer”) to $35 from $31. Average: $32.92.
• Crescent Point Energy Corp. (CPG-T, “outperformer”) to $15 from $14. Average: $13.89.
• Enerflex Ltd. (EFX-T, “neutral”) to $9 from $8. Average: $11.
• Ensign Energy Services Inc. (ESI-T, “neutral”) to $3.75 from $3.25. Average: $3.71.
• Imperial Oil Ltd. (IMO-T, “neutral”) to $105 from $90. Average: $95.08.
• Kelt Exploration Ltd. (KEL-T, “outperformer”) to $8.50 from $8. Average: $8.43.
• Lucero Energy Corp. (LOU-X, “neutral”) to 75 cents from 70 cents. Average: 83 cents.
• Meg Energy Corp. (MEG-T, “neutral”) to $34 from $30. Average: $34.23.
• NuVista Energy Ltd. (NVA-T, “outperformer”) to $16.50 from $15.50. Average: $15.60.
• Paramount Resources Ltd. (POU-T, “neutral”) to $35 from $30. Average: $35.95.
• Precision Drilling Corp. (PD-T, “outperformer”) to $130 from $110. Average: $127.49.
• Secure Energy Services Inc. (SES-T, “neutral”) to $12 from $11. Average: $12.92.
• Spartan Delta Corp. (SDE-T, “neutral”) to $4 from $3.75. Average: $4.83.
• Strathcona Resources Ltd. (SCR-T, “outperformer”) to $40 from $35. Average: $34.50.
• Suncor Energy Inc. (SU-T, “outperformer”) to $65 from $60. Average: $54.53.
• Tamarack Valley Energy Ltd. (TVE-T, “outperformer”) to $5.25 from $4.50. Average: $4.92.
• Topaz Energy Corp. (TPZ-T, “outperformer”) to $26 from $24. Average: $27.18.
• Tourmaline Oil Corp. (TOU-T, “outperformer”) to $77.50 from $72.50. Average: $76.63.
• Whitecap Resources Inc. (WCP-T, “outperformer”) to $15 from $14. Average: $12.83.

“We saw heavy oil basis narrow towards the end of Q1 and SCO return to a premium vs. WTI as egress concerns moderated,” they said. “A combination of geopolitical risk and the potential for a soft landing contributed to oil price strength, but headwinds on differentials (and crack spreads) put pressure on Q1/24 revenues and earnings. A mild winter has left natural gas storage inventories seasonably loose and likely to keep a ceiling on NYMEX for the near term. We hold a stronger bias for liquids over natural gas and our top ideas include ARX, SU, and CVE for large-cap E&Ps and CPG, KEL, and LGN for small-cap E&Ps.”

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Eight Capital analysts Ralph Profiti, Puneet Singh and Felix Shafigullin see improving sentiment across the precious metals space heading into earnings season.

In a research report released Monday, they raised their target multiples for both copper and gold stocks based on that view and increased price assumptions for both metals.

“ We believe expectations of higher copper prices are justified and in line with our view of moderate-to-severe price spikes over the next 3-5 years following nearly a decade of underinvestment in copper supply and copper prices that still remain below incentive prices,” they said. “While medium- to long-term structural shortages in copper are likely inevitable, it’s the unexpected supply and demand shocks that will likely create a more volatile market compared to the last several years, as evidenced by recent record-low spot treatment charges.

“Similarly, we have increased our target multiples for gold-exposed names in our coverage by 0.1-0.2 times on P/NAV and 1.0-1.5 times on EV/EBITDA based on prices increasingly responding to geopolitical shocks and systematic factors and gold’s outperformance vs. our long-term price assumption of US$1,700/oz. We believe well-capitalized, growth-oriented, mid-tier gold producers represent the most compelling risk: reward valuation tradeoff given leverage to higher gold prices, upside to reserves life, exploration catalysts, and M&A re-rating potential. We estimate a 10-per-cent change in our copper and gold price decks will increase our NAVPS by an average of 27 per cent and 25 per cent for copper and gold equities, respectively.”

Mr. Profiti did downgrade his rating for Lundin Mining Corp. (LUN-T) to “neutral” from “buy” previously, citing “(1) implied share price returns relative to our revised target price; (2) a premium valuation vs. the copper peer group with growth optionality fairly priced-in; and (3) caution ahead of Josemaria Capex update and project de-risking catalysts (fiscal terms, financing package, JV partnerships).”

However, his target for its shares rose to $16 from $13. The average on the Street is $15.05.

The analysts’ other changes include:

• Agnico Eagle Mines Ltd. (AEM-T, “buy”) to $105 from $92. The average is $94.16.
• Barrick Gold Corp. (ABX-T, “buy”) to $36 from $32. Average: $29
• B2Gold Corp. (BTO-T, “buy”) to $7 from $7.25. Average: $5.96.
• Capstone Copper Corp. (CS-T, “buy”) to $11 from $9. Average: $9.48.
• Ero Copper Corp. (ERO-T, “neutral”) to $30 from $23.50. Average: $28.48.
• First Quantum Minerals Ltd. (FM-T, “neutral”) to $17 from $16. Average: $17.10.
• Franco-Nevada Corp. (FNV-T, “buy”) to $200 from $190. Average: $193.62.
• Hudbay Minerals Inc. (HBM-T, “buy”) to $14.50 from $12. Average: $11.48.
• Kinross Gold Corp. (K-T, “buy”) to $11 from $10. Average: $10.46.
• Teck Resources Ltd. (TECK.B-T, “buy”) to $72 from $65. Average: $66.95.
• Wesdome Gold Mines Ltd. (WDO-T, “neutral”) to $12 from $10.50. Average: $11.42.
• Wheaton Precious Metals Corp. (WPM-T, “buy”) to $85 from $82.50. Average: $79.05.

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Precious metals equity analysts at Jefferies raised his targets for a group of Canadian miners on Monday. Changes include:

• Agnico Eagle Mines Ltd. (AEM-N/AEM-T, “hold”) to US$57 from US$54. The average is US$71.70.
• Alamos Gold Inc. (AGI-N/AGI-T, “buy”) to US$18 from US$14. Average: $22.74 (Canadian)
• Calibre Mining Corp. (CXB-T, “buy”) to $2.25 from $2. Average: $2.49.
• Franco-Nevada Corp. (FNV-N/FNV-T, “hold”) to US$129 from US$117. Average: US$141.84.
• G Mining Ventures Corp. (GMIN-T, “hold”) to $2.25 from $2. Average: $2.68.
• Kinross Gold Corp. (KGC-N/K-T, “hold”) to US$6 from US$5. Average: US$7.49.
• Lundin Gold Corp. (LUG-T, “buy”) to $23 from $19. Average: $22.40.
• OceanaGold Corp. (OGC-T, “buy”) to $4 from $3.50. Average: $4.16.
• Osisko Gold Royalties Ltd. (OR-N/OR-T, “hold”) to US$19 from US$15. Average: US$16.32.
• Pan American Silver Corp. (PAAS-N/PAAS-T, “hold”) to US$17 from US$14. Average: US$22.06.
• Triple Flag Precious Metals Corp. (TFPM-N/TFPM-T, “buy”) to US$18 from US$14. Average: US$17.
• Wheaton Precious Metals Corp. (WPM-N/WPM-T, “buy”) to US$61 from US$52. Average: US$59.37.

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Scotia Capital analysts Andrew Weisel and Robert Hope see investor sentiment toward North America’s utility and power sectors as “indifferent or apathetic” as valuations continue to be hurt by “stubbornly high” interest rates as “robust economic data pushes out the expectations for rate cuts, driving 10-year bond yields higher.”

In a research report released Monday, the firm lowered its target prices for stocks in the group by an average of 6 per cent to reflect the valuation changes.

“The stocks look cheap on P/E but expensive on dividend yields,” they said. “We view both groups as undervalued but see more potential upside for Canadian utility stocks following their steady underperformance vs. U.S. peers since January. Fundamentally, we remain bullish on the group’s long-term earnings outlook given the numerous tailwinds driving strong rate base growth, including electrification, renewables, increasing data center load (link), and an expected pickup in manufacturing activity. Still, investors don’t seem to care. Our top U.S. picks remain CMS, WEC, and DTE, followed by SO, NEE, LNT, and AEP. In Canada, we recommend ALA-CA and EMA-CA.”

Mr. Hope’s changes to Canadian companies are:

• Algonquin Power & Utilities Corp. (AQN-N/AQN-T, “sector perform”) to US$6.50 from US$7.50. The average is US$7.43.
• Atco Ltd. (ACO.X-T, “sector outperform”) to $41 from $43. Average: $45.71.
• Canadian Utilities Ltd. (CU-T, “sector perform”) to $33 from $35. Average: $34.67.
• Emera Inc. (EMA-T, “sector outperform”) to $52 from $56. Average: $53.18.
• Fortis Inc. (FTS-T, “sector perform”) to $56 from $60. Average: $57.61.
• Hydro One Ltd. (H-T, “sector perform”) to $38 from $40. Average: $40.36.

He maintained a $33 target and “sector outperform” recommendation for shares of AltaGas Ltd. (ALA-T). The average is $33.81.

“We expect utilities to remain out of favor for the foreseeable future,” said the analysts. “Investor sentiment appears to be somewhere between apathy and negativity, in our view. Increasing bullishness around the macroeconomy, coupled with a more hawkish sentiment around interest rates, is keeping investors away from this sleepy, yield-sensitive sector. Consensus EPS forecasts for the S&P 500 now call for year-over-year growth of 12 per cent in 2024-2026. By contrast, consensus forecasts for utilities call for 7-8 per cent in all three years — quite strong by historical standards and attractively stable, but notably slower growth than the market overall. Additionally, many income and dividend funds are under pressure due to higher and rising interest rates, lessening the yield appeal of these equities. Moreover, given the severe recent volatility and sizable underperformance in 2023/YTD 2024, the stocks’ defensive appeal probably isn’t what it once was. Many generalists who don’t need to be in the sector are also spooked by wildfire risk and the potential for surprisingly negative regulatory outcomes. In our view, until we see a more meaningful market correction than we’ve seen so far in April, coupled with falling interest rates, investors will likely continue to ignore this sector.”

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In a research report released Monday titled Growing, defensive and a discount to peers, National Bank Financial analyst Rupert Merer reduced his first-quarter projections for GFL Environmental Inc. (GFL-T, GFL-N) to reflect a weaker-than-anticipated Canadian dollar, lower fuel and commodity prices, less contribution from M&A and higher interest rate forecasts.

Ahead of the May 1 release of the Vaughan, Ont.-based company’s results, he’s now projected revenue of $1.798-billion, down 1 per cent from his previous estimate of $1.818-billion but remaining above the consensus forecast of $1.782-bilion. His adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) estimate slid by $5-million to $445-million, exceeding the Street by $4-million.

Moving forward, Mr. Merer sees GFL balancing M&A activity with deleveraging efforts for the remainder of 2024 with organic growth continuing.

“GFL could see $800-million of internal FCF generation in ‘24E, supporting roughly $600-650-million for tuck-in M&A and $250-300-million of investments into sustainability initiatives,” he said. “Its EPR-related investments in 2024E should also add $40-50-million in adj. EBITDA annually. While leverage has been a concern, we do not believe that GFL’s investments should change the trajectory of its deleveraging process, and it should close the gap with its peer group. Including M&A and other growth investments, GFL should finish 2024 with net leverage in the 3.65-3.85 times range.”

“For 2024, GFL is guiding towards $8.00-bilion in revenue (NBF $8.16-billion). This is driven by 6-6.5-per-cent price growth in Solid Waste, 5-5.5-per-cent organic growth in Environmental Services, and contribution from M&A rollover of 4 per cent. In the event of more resilient inflation, costs should be able to be passed through to customers more effectively than other sectors. On the flip side, if the economy weakens, waste has historically been a defensive sector.”

Maintaining an “outperform” rating, Mr. Merer cut his target for GFL shares to $55 from $56 to reflect a rise in bond yields. The average target on the Street is $52.75.

“GFL has lagged its peers over the last few months, and now trades at 12.8 times our 2024 estimates, versus its peers at an average of 16.2 times,” he said. “With a reduction in debt levels and the addition of some high-return investments in EPR and RNG, we believe GFL should converge with its peers.”

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In other analyst actions:

* Canaccord Genuity’s Carey MacRury increased his target for Altius Minerals Corp. (ALS-T) to $24.50 from $24 with a “buy” rating. The average on the Street is $24.25.

“We reiterate our BUY rating on Altius and increase our target price ... following the release of the company’s Q1/24 preliminary revenue which was 8 per cent higher than Q4,” he said. “The uptick in the quarter was largely on renewables, partially offset by thermal coal revenue of nil after the Genesee Mine ceased operations at the end of 2023. We’ve also updated our model to reflect our recently updated commodity price deck (see note here). Our BUY rating is based on Altius’ low-risk exposure to a high-quality royalty portfolio with long-life assets, upcoming potential catalysts, and proven management team.”

* RBC’s Douglas Miehm cut his Bausch + Lomb Corp. (BLCO-N, BLCO-T) target to US$18 from US$20 with an “outperform” rating. The average is US$19.25.

“BLCO will report Q1/24 results on May 1,” he said. “We estimate Q1/24 revenue of $1,069-million (cons. $1,063-million) and adj. EBITDA of $178-million (cons. $177-million). Q1/24 will continue to be influenced by FX headwinds (RBCe: $10-million). We expect the focus to be on Xiidra and Miebo and other new launches. IQVIA TRx trends indicate a strong launch for Miebo but continued weak performance for Xiidra. We lower our price target to $18 from $20, largely to reflect the de-rating of comps and to a lesser degree our updated outlook.”

* Raymond James’ Steve Hansen raised his targets for Canadian National Railway Co. (CNR-T) to $190 from $185 and Canadian Pacific Kansas City Ltd. (CP-T) to $130 from $120, keeping “outperform” recommendations for both. The averages on the Street are $180.33 and $124.08, respectively.

“We remain demonstrably upbeat on the outlook for both Canadian railroads,” he said. “While 1Q24 proved volatile from a weather standpoint (extreme Jan. temps, late Mar. snow), we entered 2Q24 even more confident in the traffic recovery that emerged late last year. To illustrate this point, CN and CPKC both exited 1Q24 enjoying brisk (LSD) tailwinds underpinned by multiple categories (details herein). At the same time, we believe these same tailwinds are now poised to accelerate as last year’s comps rapidly fall away. Given this incremental confidence, we have increased our target prices on both carriers.”

* Scotia’s George Doumet lowered his targets for Empire Co. Ltd. (EMP.A-T, “sector outperform”) to $36 from $37 and Metro Inc. (MRU-T, “sector perform”) to $74 from $74.50, while he raised his Loblaw Companies Ltd. (L-T, “sector perform”) target to $148.27 from $146. The averages are $37.88, $76.78 and $156.11, respectively.

“YTD performance in the grocers has been a mixed bag, with EMP.a underperforming (down 10 per cent), MRU holding steady (up 2 per cent) and Loblaw outperforming (up 16 per cent),” said Mr. Doumet. “The difference has largely come down to strong performance in pharmacy (where L is over-indexed), aided by a resurgence in Rx and a front store normalization that wasn’t as severe as expected (driven by strong pricing in health & beauty). ... All in all, we continue to monitor the evolving dynamic between tonnage improvement and lower pricing growth and their net impact on SSSG [same-store sales growth]. In the near-term, we see L as having the highest earnings visibility (especially at Shoppers). For MRU, we expect them to return to 8-per-cent to 10-per-cent EPS CAGR algorithm by F27 to F28. Lastly, given EMP.a (very) depressed valuation, we see them best positioned for a NT bounce if they are able to deliver SSSG in the 2-per-cent range and their 8-per-cent to 11-per-cebt EPS growth target (as soon as F25).”

* Desjardins Securities’ Gary Ho raised his target for shares of Goeasy Ltd. (GSY-T) to $190 from $185 with a “buy” recommendation. The average is $206.11.

“We tweaked our estimates and expect loan book growth and revenue yield to be at the higher end of guidance, with NCO [net charge-offs] at the mid-point,” he said. “We view the federal budget with no rate cap implementation date and no further step-down as a positive. Our EPS estimates are slightly down to factor in increased net charge-offs, reflecting recent unemployment and insolvencies data; we will continue to monitor these.”

“Our investment thesis is predicated on: (1) GSY’s ability to manage in the current challenging macro environment through its robust credit underwriting platform, supported by its creditor insurance program; (2) rate cap has a manageable impact on future revenue yield and profitability; (3) solid loan book growth, particularly on secured products; (4) credible management team; and (5) the business has consistently generated a 20-per-cent-plus ROE.”

* CIBC’s Kevin Chiang lowered his Lion Electric Co. (LEV-N, LEV-T) target to US$1.40 from US$1.70, keeping a “neutral” rating. The average is US$1.98.