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

RBC Dominion Securities analyst Darko Michelic is taking a “wait and see” approach toward Canadian Imperial Bank of Commerce (CM-T) following a “good” first-quarter, believing “2020 seems like a transition year.”

Before the bell on Wednesday, CIBC reported adjusted earnings per share of $3.24, exceeding the projections of both Mr. Mihelic and the Street ($3.03 and $3, respectively).

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“Better EPS versus our forecast was driven by Capital Markets and lower than expected provisions for credit losses (PCLs),” said the analyst. “Capital Markets earnings are not usually something we rely on so our capital markets estimates moved modestly higher.”

Mr. Mihelic said he had three main takeaways from the release:

  • Loan growth is stabilizing in its Canadian P&C business but not accelerating at the pace expected
  • A $339-million pre-tax restructuring charge is expected to reduce 2021 run-rate expenses by $260-million.
  • The impact of executive changes will not make an impact immediately

With a “sector perform” rating, Mr. Mihelic lowered his target by a loonie to $120. The average on the Street is $113.75, according to Bloomberg data.

“Valuations seem attractive but it’s still too early with too many moving parts for us to get more positive on the stock at this time,” he said. “It seems like CM is using 2020 as a year of transition with cost reductions and management changes. CM is trading at 8.7 times our 2020 core EPS estimate versus a peer average of 10.2 times. On a P/B [price-to-book] basis, CM is trading at 1.32 times vs. a peer average of 1.64 times.”

Elsewhere, Credit Suisse’s Mike Rizvanovic increased his target to $110 from $108 with a “neutral” rating.

Mr. Rizvanovic said: “CM’s inability to grow its mortgage book (flat in Q1) remains an issue as shareholders have consistently heard about normalization to industry level growth rates in recent quarters, which has clearly not happened. The drivers of that relative underperformance are difficult to pinpoint, and while management maintained that guidance for ‘normalization’ once again in Q1, we remain very skeptical and believe that mortgage growth is likely to trail peers for the foreseeable future. With respect to the restructuring charge, we view the resulting cost savings as a positive, although the charge itself does diminish earnings quality as we believe investors should view restructuring as an ongoing necessity for the banks as they continue to transition to a more digital-focused offering that will require fewer branches and employee headcount."

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Pointing to his price-to-book value model and viewing it as a “trading stock,” Raymond James analyst Ben Cherniavsky upgraded Finning International Inc. (FTT-T) on Thursday.

Though he said he doesn’t feel “it is time to ‘back-up-the-truck,’” Mr. Cherniavsky advised investors to “start building a position in this stock and averaging down on weakness,” moving his rating to “outperform” from “market perform.”

"When we first started covering Finning’s stock in the late 1990s we recall a sage, veteran investor telling us: ‘trading Finning’s stock is simple, you buy it close to book value and you sell it over two times book,’” he said. “Looking back at over 30 years of data it is amazing how reliably that strategy has worked. In investing, understanding why something happens is not always as important as understanding that something happens. In this case, the theory is that book value represents a good floor for a dealer stock insofar as most of its assets represent liquid inventory and working capital; it also tends to be the price around which many dealer-to-dealer transactions occur. But regardless of the explanation, it is impossible to refute the historical data that supports this relationship.”

“At its current price of $19.57, the stock is now trading at exactly 1.5 times book value. That ... has been the historical threshold for the four most attractive buying opportunities on this stock over the past 30+ years. Another iteration of this data - what we awkwardly call our CABGM [Cyclically-Adjusted Ben Graham Multiple] ratio - tells us the same thing. The current trading price also represents 45 per cent downside from its most recent peak in 2Q18, which fits with most of the large, historical corrections in this stock. Finally, it is less than 20 per cent below our last trading call to downgrade the stock to Market Perform when it rallied on a favourable 3Q19 print, which in turn was less than 10 per cent above our upgrade to Outperform a few months earlier.”

Mr. Cherniavsky maintained a $24 target for Finning shares. The average on the Street is $25.91.

“We realize that seemingly capricious changes in our rating on Finning may not be particularly helpful, or at least practical, for larger investors,” the analyst said. “However, we have made it very clear in our research that the way to make money on this stock is to be very price-sensitive and trade it nimbly. A corollary to this principle is that, in order to take advantage of the most discounted prices, one must be willing to buy the stock when the company’s outlook appears the bleakest. Again, the historical data strongly supports this tactic with prior lows in the P/BV multiple all occurring during cyclical downturns. Lest anyone needs reminding, the recent ‘coronaection’ in the market only adds to a long list of accumulating headwinds for Finning (Brexit in the UK, pipelines in Canada, copper in FINSA, to name just a few). The risk is that if we are tipping into a recession (or if the markets Finning serves are already in one) then investors might be catching a falling knife. In this scenario, more bad news and downward earnings revisions are likely pending for Finning. To some extent that may already be in the stock. With the 2020 estimates P/E now at 11 times 2-3 points lower than the long-term trough multiple (see Exhibit 3), we can infer that the market does not believe current forecasts Still, the historical P/BV precedents indicate the stock could trade down to the $16.00-$17.00 range (1.2-1.3 to estimated BV) on more bad news.”

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With its 2020 financial guidance falling short of his expectations on the heels of in-line fourth-quarter financial results, Industrial Alliance Securities analyst Jeremy Rosenfield lowered his rating for Northland Power Inc. (NPI-T), citing recent share price appreciation and limited upside to his target price for its share.

On Tuesday after the bell, the Toronto-based operator of power producing facilities reported quarterly EBITDA of $273-million, exceeding the consensus estimate on the Street of $260-million. At the same time, free cash flow per share of 37 cents fell 2 cents short of the Street.

Concurrently, Northland introduced 2020 financial guidance for EBITDA of $1.1-1.2-billion and FCF of $1.70-2.05 per share. Higher costs stemming from development activity weighed by an estimated $40-50-million.

“The Company’s guidance is lower than we had expected, 0imarily reflecting higher development spend,” the analyst said.

Lowering Northland to “buy” from “strong buy,” Mr. Rosenfield maintained a $33 target. The average on the Street is currently $33.63.

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“NPI offers investors an attractive mix of (1) stable cash flows from contracted power assets (2GW net in operation, 11-year weighted average contract term), (2) healthy FCF/share growth (7-9 per cent per year, CAGR 2019-24, excluding the Taiwan offshore wind projects), (3) longer-term potential upside (Taiwan and organic development activity), and (4) an attractive dividend profile (4-per-cent yield, 50-70-per-cent FCF payout over 2019-24),” he said. “Although we remain positive on the long-term outlook for NPI, we are moving our rating.”

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Industrial Alliance Securities analyst Neil Linsdell raised his rating for Medical Facilities Corp. (DR-T) in response to the sale of a majority of its interest in Unity Medical and Surgical Hospital (UMASH) in Indiana.

On Wednesday before the bell, the Toronto-based company announced it has sold a 55.9-per-cent stake in the facility to local investors in exchange for $1.1-million in cash, a $3.0-million reduction in UMASH’s debt obligation to MFC, and $20.0-million being structured on a five-year term secured by the buyers’ equity in UMASH.

Medical Facilities now holds a 31.7-per-cent stake in UMASH.

"MASH has been problematic and a drain on resources soon after its acquisition in 2016," said Mr. Linsdell. "Management had previously indicated that it was evaluating all options to address this underperformance, including the possible sale of part or all of its stake in the hospital. Bringing in several physician groups should also provide a boost to performance in this division."

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Moving Medical Facilities stock to “speculative buy” from “hold,” Mr. Linsdell maintained a $6.50 target for its shares. The average on the Street is $5.50.

“With the sale of a significant piece of the struggling UMASH operation, the sale of the associated real estate, plus the recent sale of MFC’s interest in Central Arkansas Surgical Center, MFC is showing more commitment to addressing underperforming assets,” he said. “Although we have labelled this a ‘show me’ story due to repeatedly disappointing quarters and the dividend being slashed last quarter, we see these recent transactions as a reassuring sign that investors can expect more improvements in 2020. As such, and with the significant potential return to our target price, we are raising our recommendation.”

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Two of the three analysts on the Street currently covering Richard Branson’s space tourism company Virgin Galactic Holdings Inc. (SPCE-N) downgraded its stock on Thursday.

Credit Suisse analyst Robert Spingarn thinks the company remains “compelling,” however, he lowered it to “neutral” from “outperform" based on its current valuation, a day after its shares drop 15.5 per cent with weaker-than-anticipated quarterly results.

“While SPCE remains a compelling story from the perspectives of near-term catalysts toward first revenue flight, its leading market position, strong incremental margin potential, and the scarcity value of the investment opportunity, we find ourselves no longer able to recommend SPCE shares after a 185-per-cent year-to-date run (through 2/25) and commensurate expansion in the stock’s multiple (now trading at 21 times 2024 EV/EBITDA—undiscounted),” said Mr. Spingarn.

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“Though there could be upside to our estimates, we see this as constrained owing to the relatively more limited scalability of the business model—the expected build time of a mature SS2 (SS2-4 and SS2-5) is 24 months and the cost is in the tens of millions. Thus, with more limited estimate upside (outside of a significant positive pricing surprise or lower costs – both highly uncertain at this stage), further near-term share appreciation from here is dependent largely on incremental multiple expansion, in our view. This could potentially be achievable based on greater appreciation for the phase 3 opportunity (point-to-point travel, likely 10+ years away, but a $600-billion TAM per mgmt.), but we view that upside potential as currently unearned given that SPCE has not yet achieved its phase 1 goals, as well as the significant engineering, financial, and competitive challenges that the phase 3 expansion is likely to face.”

Though he lowered his financial expectations for fiscal 2020, he raised his target for Virgin Galactic shares to US$25, which of matches the consensus, from US$15.

Elsewhere, Morgan Stanley’s Adam Jonas cut it to “equal-weight” from “overweight” with a US$30 target, rising from US$22.

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In other analyst actions:

* Scotia Capital analyst Orest Wowkodaw lowered Sherritt International Corp. (S-T) to “under review” from “sector underperform” without a specified target.

Mr. Wowkodaw said: “Sherritt announced a proposed debt restructuring transaction that if successful, would both materially reduce the company’s debt outstanding and defer scheduled debt maturities. Under the terms of the proposed transaction, existing public debt holders will have to effectively choose whether to accept 50 cents on the dollar or risk the company entering liquidation as maturities start coming due next year. If the proposed transaction is approved by a majority of debt holders (more than 66 2/3% required), we believe this would translate into a significant positive for equity holders. However, given the material uncertainty with respect to this proposed transaction, we are moving our investment rating.”

“Our previous SU rating was based on the company’s high debt leverage, our cautious near-term outlook for nickel, along with ongoing uncertainty on the future of the Cuban oil business.”

* TD Securities analyst Timothy James raised Chorus Aviation Inc. (CHR-T) to “buy” from “hold” with a $9 target (unchanged). The average on the Street is $9.38.

* Eight Capital analyst Graeme Kreindler cut MedMen Enterprises Inc. (MMEN-CN) to “sell” from “neutral” with a 30-cent target, which falls below the $1.48 average.

* Desjardins Securities analyst Maher Yaghi lowered his target for shares of Telus Corp. (T-T) after coming off research restriction following its $1.5-billion equity issuance.

“While the deal dilutes shareholders, it provides management with increased flexibility which could be useful on the M&A front ahead of the 3.5GHz spectrum auction. Pro forma the deal, T’s leverage is now in line with the industry’s. We continue to recommend buying the shares given T’s attractive asset mix," he said.

Mr. Yaghi’s target fell to $57.50 from $59 with a “buy” rating. The average is $55.61.

* Seeing it "quickly checking the boxes of many of investor requests,” Raymond James analyst Jeremy McCrea raised his target for PrairieSky Royalty Ltd. (PSK-T) following recent marketing meetings with the company. With an “outperform” rating, he hiked his target to $20 from $19. The average on the Street is $17.39.

“There is no other company quite like PrairieSky,” said Mr. McCrea. “Between its essentially no leverage position and its ability to see some of the highest ‘value creation’ in the mid-cap space given its limited need for capital/acquisition spending, in our view there should be considerable long-term comfort with investors as it relates to the business. As such, we believe the company deserves a valuation premium higher than traditional E&P operators (unlike today). Overall, in the context of the current market sentiment, we believe investors can still play ‘a rebound’ in CDN energy without the undue risk seen elsewhere.”

* Raymond James analyst Frederic Bastien said he’s “pleased all around” with WSP Global Inc.'s (WSP-T) fourth-quarter results, leading him to raise his target for its shares to $110 from $105 with an “outperform” rating. The average is $97.50.

“We continue to believe that an enviable position at the intersection of horizontal and vertical infrastructure, a proven M&A blueprint and a rock-solid balance sheet position WSP Global to lead the engineering consultancy sector’s growth for years to come,” he said. “A globally diversified footprint also means the business should weather softness in any one market or region, and still produce healthy organic growth in 2020. With this much momentum, WSP can be picky in its pursuit of scale in the environmental sector. Whether that gets achieved through mediumsized transactions such as Ecology & Environmental or a more transformational deal a la AECOM, investors can rest assured management will have carefully thought it through.”

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