Monday’s analyst upgrades and downgrades

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

Ahead of third-quarter earnings season, RBC Capital Markets analyst Walter Spracklin thinks the North American waste sector is “screening good value.”

“The waste sector underperformed the market, clocking in a loss of 9.8 per cent vs. a 3.4-per-cent loss for the S&P 500,” he said. “The underperformance was driven by GFL (down 17.8 per cent), whose increased capex funded by offset by sale proceeds, did not sit well with investors and WM (down 10.9 per cent), which lowered guidance on the back of a slower-than-expected recovery of recycled commodity prices. On the other hand, WCN and RSG provided solid quarterly prints with the highest positive variance vs. consensus, which carried through to more muted share price declines in line with the market of 4.5 per cent and 5.7 per cent, respectively.”

“We saw forward multiples tighten over the quarter, with GFL showing a meaningful 2 times contraction. Waste’s premium to the market has narrowed on general style shift and a higher risk on trade. The sector average forward multiple ended the quarter at a 6-per-cent premium to the S&P 500 index, below the historical average of 11 per cent. Though the move down was expected, given waste had been trading at a 20-per-cent premium to the market for much of 2022. We view WCN and GFL as the most attractively valued, trading at the low end of their historical 5-year valuation ranges compared to RSG and WM trading at the midpoint.”

In a research report released Monday, Mr. Spracklin left his estimates across the sector largely unchanged ahead of quarterly releases with the lone exception being a slight reduction to Waste Connections Inc. (WCN-N/WCN-T) “to better align with guidance.”

“Given the solid full-year guidance provided in Q2, key areas of focus will be 1) pricing well ahead of declining cost inflation and the expansionary effect on margin, 2) negative volumes either intentional to improve revenue quality or unintentional due to dampening macro conditions, 3) commentary on continuing increase in OCC prices, and 4) early impact of M&A activity between the majors and sustainability investments updates,” he said.

After introducing his 2025 financial projections, he adjusted his target prices for three of the four stocks in the sector. They are:

* GFL Environmental Inc. (GFL-N, GFL-T) to US$45 from US$43 with an “outperform” rating. Average: US$41.60.

* Republic Services Inc. (RSG-N) to US$166 from US$163 with a “sector perform” rating.

* Waste Connections Inc. (WCN-N, WCN-T) to US$164 from US$159 with an “outperform” rating. Average: US$159.66.

Mr. Spracklin kept a “sector perform” rating and US$160 target, below the US$180.19 average, for Waste Management Inc. (WM-N).

“Our preferred names in the waste sector remain our two outperform-rated names: Waste Connections and GFL,” he said. “We see WCN as the best-in-class operator with tailwinds driven by the Arrowhead acquisition and the greatest ability for meaningful margin expansion to exit the year. WCN is trading at the lower end of its 5-year historical 1 year forward valuation range and is attractively valued, in our view. On the other hand, GFL has underperformed its peers this quarter (down 17.8 per cent vs down 9.8-per-cent peer average), though it has outperformed year-to-date (9.1 per cent) as the company executed on its plan to de-lever significantly and slow down major acquisitions to focus on integration. We see further upside given the recent pullback from: 1) unadjusted FCF infection expected in 2023, 2) further deleveraging via FCF inflection, and 3) margin enhancement opportunities via densification and cost-saving initiatives.”

Elsewhere, Canaccord Genuity raised its targets for GFL Environmental Inc. (GFL-N/GFL-T) to US$45 from US$43 and Waste Connections Inc. (WCN-N/WCN-T) to US$164 from US$159.

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Citing recent share price “underperformance,” TD Securities analyst Linda Ezergailis upgraded Canadian Utilities Ltd. (CU-T) to “buy” from “hold” on Monday.

“Since we last published on the company, CU’s share price has dropped almost 13 per cent, underperforming its utilities peergroup, which experienced a share-price decline of 8 per cent, and our coverage universe, which saw share prices decrease 4 per cent,” she said. “CU’s downward share-price movement implies a higher return to target, and as a result, we are upgrading the stock ... It is important to note that this upgrade is driven entirely off of the company’s stock performance and is not indicative of any material change that we are aware of in the fundamentals of the company.

“We note that CU has recently been trading at 13.0 times earnings, a discount to the 15.7 times that the utility peers have been trading at, and below its approximately 16.3 times historical average. Although we acknowledge that elevated interest rates are a headwind to utility valuations, we expect any higher interest costs and other inflationary pressure to continue to be recovered from customers in the form of higher rates, and we believe the significant long-term growth opportunities related to energy transition and electrification are not reflected in valuations.”

Ms. Ezergailis maintained a $37 target, exceeding the average target on the Street by 7 cents.

“We expect the core Alberta utilities businesses to earn solid returns under their respective regulatory arrangements. CU’s energy infrastructure footprint and extensive experience position it well to participate in societies’ transition to lowcarbon energy over the coming decades, in our view.” she concluded. “As a result of the returns implied by our target price, relatively attractive valuation, strong balance sheet, and stable infrastructure franchise, we are upgrading CU.”

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In response to a decline in U.S. rig count during the third quarter, National Bank Financial analyst Zachary Evershed lowered his financial forecast for materials technology firm Shawcor Ltd., which now operates Mattr Infratech (MATR-T) on Monday.

“Given the negative Q3 comp in rig count and frac spreads in the U.S. to the tune of a 12-per-cent year-over-year decline, we lower our Composite Technologies organic growth estimate to negative 6.0 per cent in the quarter (was negative 0.5 per cent), adjusted for the segment’s roughly 50/50 exposure to oil & gas and industrial end markets,” he said. “We also tweak our Q4 organic growth rate down to negative 10.0 per cent (was negative 7.0 per cent) on the basis of a year-over-year decline in activity anticipated in Q4, leaving our segment revenue estimates more or less flat sequentially. We lean on our previous work done on the relationship between rig counts, frac spreads and organic Composite growth, indicating a relatively strong correlation, with a potential for a harder hit in Q4 given the timing of the decline and the likely 30-90 day lag before being felt in Flexpipe orders.”

Also adjusting for the recent $220-million divestment of the majority of its pipe coating division to Tenaris S.A. (TS-N), Mr. Evershed is now forecasting revenue for 2023, 2024 and 2025 of $910-million, $978-million and $1.078-billion, respectively, falling from previous estimates of $923-million, $993-million and $1.095-billion. His earnings per share projections rose for 2023 and 2024 to $2.23 and $1.32, respectively, from $1.04 from $1.21, while his 2025 expectation fell to $1.50 from $1.54.

“Finalizing our accounting for the removal of PPS from continuing operations, we present EPS on a consolidated basis, ratcheting our forecasts back upward in the short term even as we increase Financial & Corporate Adj. EBITDA to reflect costs taken over from PPS, which we expect will be partially offset upon closing of the deal by a transition services agreement,” he said. “Finally, as we estimate each $1 per share rise equates to $2-million in share-based compensation, we fine-tune our Q3 estimates to reflect recent share price movement (down $3 per share in the quarter), resulting in additional uplift to our EPS forecast, as MATR does not present an Adj. EPS figure.”

Maintaining an “outperform” recommendation for Mattr shares, Mr. Evershed dropped his target to $20.50 from $25. The average on the Street is $23.11.

“In addition to the revisions to our estimates to account for declining rig counts and to better align our model with expected GAAP presentation, we also lower the multiple used for Composite Technologies in our sum-of-parts valuation to 5.5 times (was 7 times), dropping our target to $20.50 (was $25),” he said. “Our new target is equivalent to a 6-per-cent FCF yield, a level we believe is more defensible given current opportunity cost of cash investments. Despite the cut to our target, given the clear potential for continued sustainable growth and margin expansion as a clean balance sheet supports the pursuit of both organic and inorganic opportunities, we emphatically reiterate our OP rating.”

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In separate research notes released Monday,

Canaccord Genuity analyst Yuri Lynk made a pair of target price adjustments to stocks in his coverage universe.

* Badger Infrastructure Solutions Ltd. (BDGI-T, “buy”) to $46 from $44. The average is $39.

“We hosted Rob Blackadar, President & CEO, and Rob Dawson, CFO, for two days of meetings with institutional investors in Toronto and Montreal,” he said..” Key themes discussed during the meetings, including increasing growth opportunities in the U.S. and the company’s new pricing system, are detailed below.

“Management is more focused on pricing than it’s ever been. The company rolled out its Oracle-based customized pricing engine, CPQ (Configure, Price, Quote), in June and has yet to see the bulk of the impacts from this dynamic pricing system that sets the price based on factors such as branch utilization, timing, and market ranking. Badger’s team highlighted that it expects to see more of its benefit in Q3 and Q4 of this year and that this is relevant for the 30 per cent of its revenue that is spot priced, while the rest is contracted (national and regional accounts”

* Finning International Inc. (FTT-T, “buy”) to $51 from $48. Average: $48.56.

“We are reiterating our BUY rating on Finning and increasing our one-year target price to $51.00 (from $48.00) after attending its Investor Day on September 26, 2023, in Antofagasta, Chile,” said Mr. Lynk. “In our view, Finning shares are unduly inexpensive as investors heavily discount the company’s ability to maintain its record TTM [trailing 12 months] through Q2/2023 EPS of $3.75. Our above-consensus 2024 EPS estimate implies 8-per-cent year-over-year growth to $4.09, which we see increasing 11 per cent year-over-year in 2025 on continued product support growth and operating leverage. On our estimates, Finning trades at just 9.8 times 2024 estimated EPS and 8.8 times 2025E EPS. CAT, Komatsu, and Toromont trade at 13.8 times 2024E on average.”

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Obsidian Energy Ltd. (OBE-T) was added to RBC’s “Global Energy Best Ideas List” on Monday.

“We are adding Obsidian Energy to the Global Energy Best Ideas list on the back of the company’s differentiated growth model led by Peace River heavy oil; existing Bluesky development spans only 34 sections to date relative to roughly 500 sections held in the Peace River region,” said analyst Luke Davis. “Management’s recent Peace River update has outlined a path to 50,000 boe/d [barrels of oil equivalent per day] by 2026 (annualized 16 per cent/25 per cent CAGR [compound annual growth rate] for total volumes/liquids), with a long runway for opportunity while being internally funded. We believe the company’s growth orientation while focusing on operational sustainability, cash cost improvements, debt reduction, and NCIB activity, positions the company favourably to narrow the current valuation gap.”

Mr. Davis has an “outperform” recommendation and $14 target for Obsidian shares. The average on the Street is $13.10.

Norway’s Aker Solutions ASA was also added to the list, which now consists of 21 equities and rose 1 per cent in September.

Other TSX-listed stocks are: Suncor Energy Inc. (SU-T), Topaz Energy Corp. (TPZ-T), ARC Resources Ltd. (ARX-T), Tourmaline Oil Corp. (TOU-T), Canadian Natural Resources Ltd. (CNQ-T), AltaGas Ltd. (ALA-T), Pembina Pipeline Corp. (PPL-T) and Superior Plus Corp. (SPB-T).

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Expressing concern about potential execution risks stemming from its strategic review process, Laurentian Bank Securities analyst Frederic Blondeau lowered Northwest Healthcare Properties REIT (NWH.UN-T) to “speculative buy” from “buy” on Monday.

“Management provided, in our opinion, only a partial update on the process, with limited visibility on the CEO search and the overall business plan, given the present context,” he said. “NWH indicated having received a broad range of enquiries, inclusive of expressions of interest and non-binding proposals regarding certain assets. In addition, the REIT is exploring strategic initiatives involving the potential sale of all, or part, of NWH’s U.S. and/or Brazil portfolios and did not provide details on the UK portfolio. Although we fully acknowledge the REIT’s relatively complex structure, we find relatively difficult, and arguably premeditated, to see any value generating outcome from such initiatives. We think a formal search for the CEO role and a redefined business plan, in the context of the existing portfolio, should be established before considering any core asset dispositions, the case thereof the REIT did/does not receive comprehensive bids.”

Mr. Blondeau reduced his target for Northwest units to $7, matching the average on the Street from $9.

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Citi analyst Jon Tower is concerned about McDonald’s Corp.’s (MCD-N) declining foot traffic in the United States and “discouraging” app data internationally, suggesting investors may “grimace” at earnings per share revisions.

“MCD shares have followed the broader limited-service group lower as of late (shares down 10 per cent/15 per cent vs the S&P year-to-date/since mid-May), and as such, we are receiving greater investor interest in the name,” he said. “However, valuation is not overly compelling (in-line with 5-year average relative to S&P) even before accounting for FX headwinds, and data points in the US/IOM appear to be decelerating ahead of a tough 4Q lap. All this makes it hard to argue for building positions into the 3Q print. From there we expect the debates will center on 4Q lap/expectations into the December event, where we have some initial concerns that investors: (1) are perhaps too optimistic on how quickly the unit growth engine ramps; and (2) may not be accounting for the capex tied to franchise U.S./IOM new store growth.”

In a research report released before the bell on Monday, Mr. Tower emphasized a “decelerating picture” in the United States as well as growing signs of weakness elsewhere.

“Footfall metrics are a growing concern, with growth year-over-year and versus 2019 both steadily decelerating from mid-July onward and year-over-year growth moving into negative territory,” he said. “This is also not simple a result of decelerating industry trends, but MCD has also seen their market share of all tracked LSR concepts and of the big three steadily erode since that same mid-July window (aka the Grimace peak).”

“While still growing year-over-year, weekly app usage in the U.S. has been trending down month-over-month (also since mid-July), and year-over-year growth has decelerated from consistently in the mid-30s to only the mid-teens. IOM data paints a more concerning picture, with app data showing the looming World Cup lap (MCD heavily promoted/discounted delivery during this period), and year-over-year growth crossing into negative territory for the first time since the pandemic.”

Also emphasizing foreign exchange is “moving sharply against” McDonalds, presenting an estimated earnings per share headwind of 5 per cent, and inflation continues to weigh on results, Mr. Tower cut his full-year 2023 EPS projection to US$11.35 from US$11.58. His 2024 and 2025 estimates slid to US$11.57 and US$12.69, respectively, from US$12.07 and US$13.16.

That led him to drop his target for the company’s shares to US$283 from US$316, reiterating a “neutral” recommendation. The average target on the Street is US$327.29.

“We expect MCD can turn U.S. post-pandemic momentum into a multi-year compounding growth story, and believe a combination of (a) strong wage/jobs growth offsetting inflationary pressures, (b) consumer trade down to a value play, and (c) franchisees coming into this challenging operating period at peak cash flows,” he said. “All limit the risk of a demand slowdown to materially impact US results. However, we believe ongoing inflationary pressures in Europe may weigh on (a) consumer demand and (b) profit margins, which could temper positive earnings revisions over the NTM [next 12 months].”

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In response to the recommendation from Alpha Lithium Corp.’s (ALLI-NEO) board of directors that shareholders accept a takeover bid from Tecpetrol Investments S.L., Echelon Capital Markets analyst Gabriel Gonzalez moved his rating for the Vancouver-based company’s shares to “tender” from “speculative buy” previously.

“The hostile Tecpetrol offer for the whole Company came during a management-sanctioned asset-sale strategic review process for the sale of the Tolillar property only,” he said. “In our view, the $1.48 per share offer is a fair indication of Tolillar’s value considering current market conditions, whereas in a previous more ebullient market it had elicited higher value. However, the offer does not give much if any value at all to Alpha’s second asset, the Hombre Muerto property.”

“With Company management announcing the Board’s Special Committee Tender recommendation, indicating that as of to-date the strategic review process has not resulted in an alternative binding offer for Tollilar or the Company’s shares, but not providing clarity on its voting intentions either, we believe investors will trim positions into near term market strength locking in early gains, while tendering into the offer. We note that the $1.48/shr offer aligns with the shares’ 52-week high.”

Mr. Gonzalez, currently the lone analyst covering the company, moved his target to $1.48 to align with the offer.

“Tolillar is an attractive asset with further growth potential, but it is not necessarily a scarce asset altogether,” he added. “There are other ways to play lithium junior developers, both in the Lithium Triangle with publicly traded junior developers like Lithium Chile (LITH-X, not rated) and Lithium South Development (LIS-X, not rated), and outside of it. Arguably, if Tolillar (or the whole Company) was up for sale or eliciting hostile bids, it was because it represented the better risk/reward proposition in the current market which may still see weakness from global macro headwinds, which also suggests that tendering one’s shares is a better risk/reward option.”

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In other analyst actions:

* Stifel’s Stephen Soock cut his Bear Creek Mining Corp. (BCM-X) target to $1.10 from $1.80 with a “buy” rating. The average on the Street is $1.07.

“Bear Creek Mining announced $9.5-million bought deal financing though issuance of units at $0.35 including full warrant with 5-year term and exercise price of $0.42 per share - extremely onerous terms for a company with a producing asset,” he said. “BCM has amended its gold and silver streams with SSL, with that company also consolidating and extending some debt. BCM also granted a 1-per-cent NSR to SSL on its Corani silver project in Peru. While we had expected a weaker cost quarter in Q2, this financing shows the company in dire straits. We have updated our model for the new stream terms, equity dilution and weaker operating expectations for Q3. These bring down our NAV by 29 per cent to $1.22 per share.”

* Raymond James’ Brian MacArthur trimmed his Centerra Gold Inc. (CG-T) target to $12 from $12.50, maintaining an “outperform” rating. The average is $10.92.

* CIBC World Markets’ Todd Coupland cut his Lightspeed Commerce Inc. (LSPD-T) to $23 from $27, keeping a “neutral” rating. The average is US$20.31.

* CIBC’s Mark Jarvi lowered his target for Northland Power Inc. (NPI-T) to $32 from $34 with an “outperformer” rating. The average is $35.71.