Monday’s analyst upgrades and downgrades

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

Citi analyst Itay Michaeli thinks investors’ harsh reaction to Magna International Inc.’s (MGA-N, MG-T) fourth-quarter 2022 results and guidance for 2023 through 2025 was ”understandable” and expects its shares to “stay rangebound until margin visibility improves into the second half of the year with production and cost/inflation recoveries.”

The Aurora, Ont.-based auto parts manufacturers plummeted over 17 per cent on Friday following the premarket release, which included a warning about a slower-than-anticipated recovery for the industry.

“The soft 2023 guide wasn’t the main surprise to us (post our recent read-across from other suppliers), but rather the higher go-forward capex combined with the soft Q1 outlook suggested: 1) that 2023 guidance might still be at risk, particularly with Europe LVP assumed up 4 per cent; and 2) that the FCF story/share buyback story is pushed out to 2024-25, and even then, with less annual out-year FCF than previously expected,” said Mr. Michaeli.

The analyst reduced his forecast in response to the news with his earnings per share estimates for 2023, 2024 and 2025 falling to US$4.50, US$6.62 and US$8.16, respectively, from US$5.93, US$7.32 and US$8.94. Magna earned US$4.11 in 2022.

That led Mr. Michaeli to cut his target for Magna shares to US$53 from US$66, keeping a “neutral” recommendation. The average target on the Street is currently US$60.

“A stronger 2023 margin exit rate and recent new business progress could emerge as positives for the story later this year post this current reset, but for now we think risk/reward seems balanced,” he said.

Others making adjustments include:

* Raymond James’ Michael Glen to US$56 from US$62 with a “market perform” rating.

“Magna is guiding to a net income of $1.1-1.4-billion, which would imply an EPS range of $3.84-$4.89,” said Mr. Glen.” Looking at our new estimates, we are now at $4.46 for 2023, but our estimate includes dilution from Veoneer. We would say at the outset that the company’s initial guide appears extremely conservative, particularly with respect to getting a 1Q23 EPS figure that is below 4Q22 (as indicated on the conference call). All that said, we remain quite cautious on the stock overall. Our expectation on Friday was for quite a large move lower into the $50 range, and while the stock closed at $54.14 (down 16.2 per cent), we still see that range as a potential outcome.”

* BMO’s Peter Sklar to US$65 from US$74 with an “outperform” rating.

“Although the stock will be volatile over the coming days and Q1/23 results will likely be similar to Q4/22, we see value in the stock and maintain our Outperform rating,” said Mr. Sklar.

* CIBC’s Krista Friesen to US$70 from US$72 with an “outperformer” rating.

* TD Securities’ Brian Morrison to US$62 from US$69 with a “hold” rating.

* Wells Fargo’s Colin Langan to US$51 from US$62 with an “equal weight” rating.

* RBC’s Tom Narayan to US$58 from US$65 with an “outperform” rating.

* JP Morgan’s Ryan Brinkman to US$64 from US$72 with an “overweight” rating.

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While National Bank Financial’s Vishal Shreedhar saw the third-quarter 2023 results from Saputo Inc. (SAP-T) as “strong,” he removed his “top pick” designation from its shares in response to recent “significant” share price appreciation.

The Montreal-based company has jumped almost 30 per cent since the analyst upgraded its shares to its current “buy” recommendation on Feb. 11, 2022, outpacing both the S&P TSX Staples sector (up 12 per cent) and the broader index (down 1 per cent).

“There still remains significant opportunity ahead (numerous improvement initiatives; Q4 expected to be solid); however, risk/reward, while still attractive, has since moderated,” he said. “We have increased our estimates, although we still do not reflect SAP achieving its $2.125-billion EBITDA target by F2025 (NBF is $1.943-billion).”

The dairy processor jumped 5.3 per cent on Friday after it reported adjusted earnings per share for the quarter of 53 cents, up from 33 cents during the same period a year ago and exceeding both Mr. Shreedhar’s 44-cent estimate and the 47-cent consensus on the Street. Revenue rose to $4.587-billion from $3.901-billion and also topped the analyst’s expectation ($4.557-billion).

“SAP has now delivered accelerating year-over-year EBITDA performance for a third consecutive quarter (Q3/F23 EBITDA grew by 38 per cent y/y vs. 30 per cent y/y in Q2/F23, and 20 per cent y/y in Q1/F23),” he said.

“We consider the results to be strong given an EBITDA/EPS beat. Relative to NBF, SAP had stronger than anticipated results in the USA, Canada, and International sectors; Europe was largely in line.”

Mr. Shreedhar also emphasized a shift in Saputo’s strategy and sees M&A activity “increasingly in focus.”

“SAP has incrementally shifted focus away from volume growth towards value and efficiency, which is understandable given ongoing market volatility,” he said. “Execution against the Global Strategic Plan remains management’s priority; however, SAP continues to evaluate M&A opportunities, albeit with tightened deal criteria (e.g. no turnarounds).

“Our preference is for SAP to allocate eventual excess capital towards share repurchases given complexity related to the turnaround.”

With his “outperform” rating, Mr. Shreedhar bumped his target to $43 from $42 with his increased 2023 and 2024 estimates. The average is $40.88.

Other changes include:

* Desjardins Securities’ Chris Li to $43 from $39 with a “buy” rating.

“SAP’s third straight quarter of better-than-expected results (EBITDA exceeded our estimate by 8 per cent) not only shows that it is on track for a strong recovery in FY23 but also increases our confidence that 15-per-cent-plus EBITDA growth in FY24 is achievable,” he said. “While longterm earnings visibility is limited by uncontrollable dairy commodities, our positive view is based on relatively attractive earnings momentum among stocks in our coverage and potential funds flow.”

* Scotia Capital’s George Doumet to $39 from $38 with a “sector perform” rating.

“SAP’s Q3 represented the fourth consecutive beat – and while expectations were elevated (given a resurgence in commodity markets), SAP still delivered a material beat (further aided by pricing and an uptick in throughput),” said Mr. Doumet. “The momentum continued across all platforms, with the US driving the biggest outsized beat vs. expectations. Canada’s margin trajectory is impressive, but should slow in the coming quarters, in our view. The focus now shifts towards the timing/magnitude of the incremental Network Optimization benefits (above and beyond the $200-million originally slated). All in all, with shares trading largely in line with historical averages (and peers), we see risk/reward as fairly balanced and prefer food processors that are closer to trough margins/with compressed valuations.”

* CIBC’s Mark Petrie to $43 from $39 with an “outperformer” rating.

* TD Securities’ Michael Van Aelst to $46 from $44 with a “buy” rating.

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Barclays analyst John Aiken is expecting a “steady” first quarter of fiscal 2023 for Canadian banks.

“After a challenging 2022, a renewed risk-on sentiment has fueled an early FY23 outperformance for the banks,” he said in an earnings preview released on Monday. “The slew of BoC rate hikes remains supportive for margins, and a seasonally strong Q1 could see CMRev surprise to the upside. And, while credit should continue to normalize, expenses should ebb from a ‘kitchen sink.’”

Mr. Aiken made a series of target changes to stocks in the sector. They are:

• Bank of Montreal (BMO-T, “overweight) to $146 from $147. The average on the Street is $142.63.
• Bank of Nova Scotia (BNS-T, “equalweight”) to $84 from $85. Average: $77.72.
• Canadian Imperial Bank of Commerce (CM-T, “equalweight”) to $63 from $66. Average: $64.25.
• Canadian Western Bank (CWB-T, “overweight”) to $30 from $28. Average: $31.07.
• Definity Financial Corp. (DFY-T, “overweight”) to $44 from $43. Average: $43.05.
• IGM Financial Corp. (IGM-T, “underweight”) to $39 from $38. Average: $45.50.
• Laurentian Bank of Commerce (LB-T, “equalweight”) to $36 from $37. Average: $40.54.
• Royal Bank of Canada (RY-T, “overweight”) to $150 from $151. Average: $141.71.

He maintained an “overweight” rating and $102 target for Toronto-Dominion Bank (TD-T) shares. The average on the Street is $101.63.

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Ahead of the fourth-quarter earnings season for Canadian base metals producers, National Bank Financial analyst Shane Nagle adjusted his near-term commodity price assumptions to reflect recent movement.

Most notably, his 2023 and 2024 copper price projection rose to US$4 from US$3.80 while his steel-making coal estimate rose to US$325 per ton from US$275 for the same period. Conversely, his nickel and cobalt projections fell to US$12.50 and US$17.50 per pound, respectively, from US$13.75 and US$23.

With production and 2023 guidance “largely pre-released with a few exceptions,” Mr. Nagle is not expecting any significant surprises from the releases. Instead, he’s looking for updates on notable production disruptions and easing cost pressures.

“Alongside Q4 results we await important updates from management related to ongoing protests in Peru (HBM), negotiations with the Panama Government (FM), rebounding from weather related impacts to production in Q4 (TECK/B), ramping up operations following unplanned maintenance and ransomware attack in Q4 (CMMC) and unexpected grade dilution (TKO),” he said. “While 2023 guidance has largely been released, we look for continued evidence of easing cost pressures and logistical constraints after a challenging H2/22 for operators.”

“Q4 production results remain outstanding for: CMMC and HBM, while 2023 guidance is outstanding for: CMMC, HBM, and TKO. Our estimates appear to be ahead of Consensus with respect to CMMC and more cautious on capital expenditures for TKO.”

With his commodity price changes, Mr. Nagle made a series of target price adjustments for his coverage universe. They are: *

* Altius Minerals Corp. (ALS-T, “outperform”) to $26 from $26.50.

* Capstone Copper Corp. (CS-T, “outperform”) to $7.25 from $6.50. Average: $6.98.

“Capstone has pre-released Q4 production and costs as well as 2023 guidance. We await additional details on near-term growth objectives including the ramp-up of Mantos-Blancos mill expansion and development at Mantoverde,” he said.

* Copper Mountain Mining Corp. (CMMC-T, “outperform”) to $2.50 from $2.25. Average: $2.56.

“We expect Q4 throughput was impacted by unscheduled maintenance and a ransomware attack in the quarter. That said, our outlook for 2023 appears more positive than Consensus owing to an improving grade and cost profile and strengthened balance sheet following the sale of Eva (Q4/22) and Note repurchase (Q1/23),” he said.

* Ero Copper Corp. (ERO-T, “sector perform”) to $22 from $21. Average: $23.27.

“ERO pre-released Q4 production and 2023 guidance. We have accounted for elevated capital costs in subsequent years ahead of the company’s five-year outlook anticipated in Q1/23 and await development updates at Tucuma where our capital/development timeline remain conservative relative to Company guidance,” he said.

* First Quantum Minerals Ltd (FM-T, “sector perform”) to $29 from $28. Average: $30.61.

* Hudbay Minerals Inc. (HBM-T, “sector perform”) to $8.75 from $8.50. Average: $9.85.

“We expect Q4 sales were impacted by logistical constraints associated with ongoing protests in Peru. Our 2023 operating estimates remain broadly in line with the company’s previous three-year outlook and Consensus incorporating improved grades at Constancia and ramp-up of mine throughout from Lalor,” he said.

* Lundin Mining Corp. (LUN-T, “underperform”) to $9 from $8.75. Average: $9.58.

* Sherritt International Corp. (S-T, “sector perform”) to 75 cents from 80 cents. Average: 98 cents.

* Taseko Mines Ltd. (TKO-T, “sector perform”) to $2.50 from $2.40. Average: $2.48.

* Teck Resources Ltd. (TECK.B-T, “outperform”) from $70 from $65.00. Average: $60.44.

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Raymond James analyst Frederic Bastien said last week’s release of better-than-expected fourth quarter results, including an eighth consecutive earnings per share beat, strengthened his conviction on Russel Metals Inc. (RUS-T), believing its “catch-up trade still has legs.”

“Although we expect the changing interest rate environment to affect some sectors of the construction market, we see the company profiting disproportionately from the billions of dollars earmarked for steel-hungry projects in the foreseeable future,” he said. “For this RUS has to thank the reshoring of advanced manufacturing, rising levels of infrastructure spending, and healthy demand from both conventional and green energy sources. This positive backdrop, combined with modest inventory across the supply chain, will also help maintain steel prices well above historical levels. This, at least, is what is implicit in the upward revisions to both our estimates and target price.

“With many U.S. steel stocks ripping to new highs on the strength of healthy industrial and infrastructure markets, Russel also has the potential to play catch-up, in our opinion. Although the stock has lagged behind Reliance Steel & Aluminum (RS) in recent years, its EV/EBITDA multiple discount has recently blown up to a 20-year high of 2.5 times. This aberration is all the more remarkable to us, considering RUS is firing on all cylinders.”

Reiterating an “outperform” recommendation for the Mississauga-based company, Mr. Bastien raised his target to $44 from $36. The average is $38.

Others making changes include:

* Scotia’s Michael Doumet to $38 from $37 with a “sector perform” rating.

“RUS produced its eight consecutive EPS beat, demonstrating continued margin resilience as metal prices gradually normalize from their recent peak,” said Mr. Doumet. “In the last two years, RUS generated EPS of $12.80 and FCF of $8.90, significantly improving its B/S and increasing its BV. Assuming a through-the-cycle ROE of 15 per cent, RUS’s BV of ~$25/share suggests it can generate a mid-cycle EPS of $3.75 (vs. its dividend of $1.52/share). Before considering any M&A, we estimate mid-cycle EPS for the business, as it stands now, amounts to >$2.50 (roughly equivalent to our 2024E). With plate prices still well above historicals and RUS’s energy field stores expected to perform well, we expect RUS to generate EPS above its more than $2.50 run-rate, at least for several quarters.”

* BMO’s Devin Dodge to $34 from $32 with a “market perform” rating.

“RUS appears to be performing well and the strong balance provides the company with flexibility to pursue organic and M&A-related growth opportunities. However, we believe the risk to steel prices remains weighted to the downside and falling steel prices have historically been a challenging backdrop for the stock,” said Mr. Dodge.

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IA Capital Markets analyst Ronald Stewart sees Hot Chili Ltd. (HCH-X) “ready to ‘light at fire’” at its flagship Costa Fuego copper-gold-silver-molybdenum project in Northern Chile.

“Despite being among the largest copper projects not controlled by a major, HCH has one of the lowest market valuations,” he said. “We think that could change as it continues to de-risk the project and investors come to appreciate the significant upside opportunity available today.”

Touting its “significant” resource base, infrastructure advantage and partnership with Glencore, which owns a 9.99-per-cent equity stake, Mr. Stewart initiated coverage of Australian company, which trades on the TSX Venture Exchange, with a “buy” recommendation, emphasizing “the long and short of the copper market suggest that Hot Chili’s Costa Fuego copper-gold-silver-molybdenum project is well worth becoming familiar with.”

He set a target of $2.50 per share. The average is $1.75.

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National Bank Financial analyst Zachary Evershed expects Shawcor Ltd. (SCL-T) to sell its Pipeline and Pipes Services segment this year, pointing to its “tight focus on simplifying the business by paring back non-core operations under the strategic review announced in September.”

“Though timing and valuation are up in the air at this time, we believe the assumption of $210 million in proceeds (1.8 times EBITDA) at year end is credible,” he said.

“The proceeds from a large divestiture would undoubtedly be partly funneled towards organic growth expansion projects, as strong demand in Composite Systems and Automotive & Industrial markets warrants additional capacity (thoughtful M&A could achieve the same goal). We believe the most interesting project would likely be wire and cable production south of the border, opening doors to major infrastructure projects with Made in America requirements.”

Assuming coverage of the Toronto-based oilfield services company with an “outperform” recommendation in a research report titled Less is more, Mr. Evershed thinks recent and anticipated improvements are now “at odds” with its valuation.

“While the stock has been on a run, this has been driven almost entirely by the improving trend in revenue growth and profitability, while SCL’s valuation multiple remains stubbornly compressed,” he said. “We see upside for a market leader providing high-margin, non-commoditized products and set to materially reduce exposure to the more cyclical and backlog-driven parts of the business. SCL has already shown dramatic improvements in both ROIC [return on invested capital] and the balance sheet and should be able to convert 40-50 per cent of EBITDA to FCF post-divestment.”

Mr. Evershed raised the firm’s target for Shawcor shares to $18 from $16. The current average is $15.94.

“Given clear catalysts to unlock shareholder value, opportunities for both plentiful growth and a gradual valuation re-rate and upside to our target, even if the PPS segment were sold for cents on the dollar, we rate Shawcor Outperform,” he concluded.

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BMO Nesbitt Burns analyst Michael Markidis initiated coverage of two industrial-focused real estate investment trusts on Monday:

* Granite REIT (GRT.UN-T) with an “outperform” rating and $98 target. The average on the Street is $93.22

“Our positive stance reflects GRT’s positioning as a modern and global industrial real estate business, solid near-term earnings growth potential, and strong balance sheet. The REIT’s weighting to Magna is still significant; however, the recent early renewal at Graz, which extended the lease maturities to 2034, has alleviated concerns,” he said.

* Nexus Industrial REIT (NXR.UN-T) with a “market perform” rating and $11.50 target. The average is $12.35.

“Significant progress has been made in its transformation from a diversified commercial REIT to an industrial pure play and valuation remains attractive compared to certain TSX-listed peers,” said Mr. Markidis. “Our neutral stance takes into consideration the potential risks associated with legacy properties in the portfolio and our somewhat muted earnings growth outlook (2-year FFO CAGR [funds from operations compound annual growth rate] of approximately 3 per cent) through 2024.”

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In other analyst actions:

* TD Securities’ Cherilyn Radbourne moved her target for ATS Corp. (ATS-T) to $63 from $59 with a “buy” rating. The average is $61.50.

* CIBC’s John Zamparo cut his target for Aurora Cannabis Inc. (ACB-T) to $1.75, below the $1.83 average, from $2.25 with a “neutral” rating.

* KBW’s Michael Brown raised his Brookfield Corp. (BN-N, BN-T) target to US$47 from US$45 with an “overweight” rating. The average is US$47.19.

* TD Securities’ Daryl Young raised his Colliers International Group Inc. (CIGI-Q, CIGI-T) target to US$150 from US$135, above the US$143.86 average, with a “buy” rating.

* National Bank’s Patrick Kenny increased his target for Fortis Inc. (FTS-T) shares by $1 to $56 with a “sector perform” rating. The average is $58.07.

* RBC’s Geoffrey Kwan bumped his IGM Financial Corp. (IGM-T) target to $46 from $43 with a “sector perform”, while Canaccord Genuity’s Scott Chan also raised his target to $46 from $43 with a “buy” rating. The average is $45.50.

“Overall, we think IGM continues to execute well on its growth strategy,” said Mr. Kwan. “IG Wealth’s strong net client flows bode well for future mutual fund sales; Mackenzie’s overall investment performance has seen recent significant improvements and potential signs of improving net sales performance; and investments made during the transformation have helped set IGM up to hold the line on OpEx growth and generate positive operating leverage. Finally, with a healthy balance sheet, IGM is also well positioned to capitalize on potential acquisitions. While we remain slightly cautious on our asset/wealth manager coverage universe, we view IGM as our preferred name in the space.”

* TD Securities’ Sean Steuart raised his Interfor Corp. (IFP-T) target to $31 from $29 with a “buy” rating. The average is $35.50.

* Canaccord Genuity’s John Bereznicki cut his Precision Drilling Corp. (PD-T) target to $100 from $130 with a “hold” rating, while Raymond James’ Andrew Bradford lowered his target to $135 from $140 with a “strong buy” rating. The average is $147.39.

“While we continue to expect Precision to enjoy solid pricing and margin momentum this year, natural gas headwinds only serve to support our existing thesis that a flattening North American rig count will make it increasingly difficult for Precision to generate continued FCF growth in 2024 (barring a significant and sustained uptick in commodity prices),” Mr. Bereznicki said. “We thus see the pace of positive estimate revisions slowing significantly and are maintaining our HOLD recommendation.”

* TD Securities’ Derek Lessard raised his Premium Brands Holdings Corp. (PBH-T) target to $120, above the $112.90 average, from $115 with a “buy” rating.

* Canaccord Genuity’s Robert Young lowered his Sangoma Technologies Corp. (SANG-Q, STC-T) target to US$12 from US$13 with a “buy” rating. Others making changes include: Cormark’s Gavin Fairweather to $17 from $20 with a “buy” rating and TD Securities’ David Kwan to $14.50 from $16.50 with a “buy” rating. The average is US$14.

“We are reducing our F2023 revenue to the lower end of the $250-260-million guidance given the macro uncertainty. We have also reduced our F23 EBITDA estimate to $45.4-million to be conservative, given the macros and potential pricing pressure/ introduction of price bundles. We expect Sangoma to continue gradual margin expansion in the near term, particularly through cost discipline ($3-million savings in H2),” said Mr. Young.

* Scotia’s Orest Wowkodaw cut his Sherritt International Corp. (S-T) target to 55 cents from 70 cents with a “sector perform” rating. The average is 98 cents.

“Sherritt released weaker-than-anticipated Q4/22 results. 2023 guidance was pre-released,” he said. “A feasibility study and updated life-of-mine plan for the Moa JV is anticipated by the end of Q1/23. The company recently received its first distribution of Co under the new cobalt swap agreement with its Cuban partners. Overall, given our lower estimates and valuation, we view the update as negative for the shares.”

* JP Morgan’s Sebastiano Petti cut his target for Telus Corp. (T-T) to $33 from $36 with an “overweight” rating, while BMO’s Tim Casey trimmed his target to $32 from $33 with an “outperform” rating.. The average is $31.80.

“Q4 financial results were generally in line. Revenue, EBITDA and operational KPIs at TTEch were within expectations, while EPS of $0.23 was below consensus of $0.30,” said Mr. Casey. “DLCX results improved with higher revenue and margins from organic and acquisition growth. F23 guidance is roughly in line on revenue and EBITDA, but light on FCF ($2.0-billion vs. $2.8-billion consensus) based on several below the line items. The change effectively pushes out FCF growth by one year. We expect at least 7-per-cent dividend increases through 2025.”

* JP Morgan’s Andrew Steinerman raised his Thomson Reuters Corp. (TRI-N, TRI-T) target to US$114 from US$111 with a “neutral” recommendation. The average is US$120.42.

* Credit Suisse’s Andrew Kuske raised his West Fraser Timber Co. Ltd. (WFG-N, WFG-T) target to US$97, below the US$107.33 average, from US$95 with an “outperform” rating.

“We acknowledge some housing market headwinds, however, the rate debate, housing market trends in H2 2023 and industry actions that provide an interesting risk-reward for WFG’s shares,” he said. “In general, lumber prices increased in recent weeks from past lows – that should bode well for WFG’s cash flow generation. With an industry re-balancing occurring on a potentially accelerated basis, WFG’s discipline and positioning remains interesting at these levels..”