Inside the Market’s roundup of some of today’s key analyst actions
The outlook for Canadian insurance companies has improved since the market lows of March, according to Desjardins Securities analyst Doug Young.
However, in a research report previewing third-quarter earnings season, he cautioned that several risk remain, including the duration of the pandemic and its related impact on businesses, interest rates and the equity markets. He also sees the potential for credit-related “bumps” and consequences stemming from the results of U.S. election on operations south of the border.
“We are expecting core EPS to decline on average by 5 per cent in 3Q20 and 2 per cent in 2020,” he said. "For 2021 and 2022, we expect core EPS to increase on average by 7 per cent and 6 per cent, respectively. We expect 2020 core results for the group to be negatively impacted by COVID-19-related headwinds (eg lower sales, higher group disability claims, etc), volatile equity markets (higher hedging costs vs 2019) and lower interest rates (impacts new business gains or strain).
“As we look to 2021, we expect a more normal environment, at least relative to 2020. In terms of drivers: (1) SLF — margin expansion at its U.S. group insurance operations, momentum in Asia, expense actions in Canada and potentially capital deployment (although we have not built any in); (2) MFC — momentum in Asia and in wealth management, and expense efficiencies; (3) IAG — integration of acquisitions, organic growth, profit improvement from all businesses and leveraging improved distribution capabilities domestically; and (4) GWO — expense savings in the US and Canada, growth in Europe and the inclusion of MassMutual’s US retirement business.”
Mr. Young adjusted his third-quarter headline earnings per share projections for the fourth companies in his coverage universe. His changes were:
- Manulife Financial Corp. (MFC-T) to 48 cents from 63 cents.
- Sun Life Financial Inc. (SLF-T) to $1.29 from $1.16.
- Great-West Lifeco Inc. (GWO-T) to 67 cents from 63 cents.
- IA Financial Corp. Inc. (IAG-T) to $1.53 from $1.38.
“Several items impacted 3Q20 headline earnings: (1) higher equity markets (positive); (2) higher government bond yields (positive); (3) narrowing corporate spreads (negative); (4) shift in swap spreads (neutral); and (5) steepening U.S. and Canadian yield curves (positive for SLF and negative for MFC),” he said. “First, equity markets increased 6.2 per cent on average across all regions we track, with the most important index for lifecos, the S&P/TSX, increasing 3.9 per cent. Second, US 10- and 30-year Treasury yields increased 3bps and 4bps, respectively, and Government of Canada 10- and 30-year yields increased 3 basis points and 12bps, respectively. However, the shift in the yield curve was not parallel, which skews actual results vs our expectations (sensitivities provided are for parallel changes). Corporate spreads in the U.S. narrowed by 10bps (negative) and swap spread movements had a neutral impact.”
Mr. Young maintained his target prices, ratings and pecking order for the companies. In order of preference, they are:
- Sun Life with a “buy” rating and $61 target. The average target is $58.38.
- Manulife with a “buy” rating and $23 target. Average: $23.54.
- IA Financial with a “buy” rating and $55 target. Average: $56.44.
- Great-West Lifeco with a “hold” rating and $28 target. Average: $28.67.
“Compared with average historical P/BV [price-to-book value] levels, three of the four lifecos are trading below historical price-to-book averages,” said Mr. Young. Given MFC’s lower ROE outlook compared with pre-crisis levels (partially a function of hedging costs), we believe a lower multiple is warranted. GWO also deserves a lower multiple, in our view, due to issues at Putnam and its exposure to uncertainty in the UK. We believe SLF warrants a multiple above the historical average given (1) its lower risk profile (ie sale of its US annuity operations); (2) a larger portion of earnings coming from MFS; (3) its strengthened and stable Canadian operations; (4) a clearer strategy; and (5) a strong financial position."
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European Residential REIT (ERE.UN-T) is in the “very early stages in its growth cycle with its potential access to a robust acquisition pipeline over time,” according to Raymond James analyst Brad Sturges.
In a research report released Thursday, he initiated coverage with an “outperform” rating, calling it a “unique investment opportunity in the Canadian REIT landscape.”
“ERES is the only Canadian-listed REIT to focus on the European multifamily real estate market,” said Mr. Sturges. “We believe ERES provides investors an opportunity to invest in a geographic region with unique investment features that differentiates itself from other publicly traded Canadian multifamily owners and operators providing investors an attractive way to diversify their Canadian REIT exposure.”
The analyst emphasized the REIT’s “attractive” exposure to a growing multifamily property market in the Netherlands, which is expected to see above-average population and household growth in the coming years.
“ERES may be well positioned to capture above-average organic growth year-over-year in the next 12 months given the tight leasing conditions and a continued shortage of available affordable housing options across the Netherlands,” the analyst said. “As such, ERES could generate SP-NOI [same property net operating income] growth of 3 per cent year-over-year, mainly reflecting rent indexation achieved upon lease renewals. Due to the low annual multifamily suite turnover rates that are generally experienced in the REIT’s portfolio, we believe ERES may require limited capital improvements to generate the REIT’s above-average organic growth prospects.”
He set a target of $5 per unit, falling 8 cents short of the current consensus.
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RBC Dominion Securities analyst Alex Zukin came away from Zoom Video Communications Inc.'s (ZM-Q) annual conference and analyst day with “increased conviction in the potential for durable hyper-growth” and now sees a path to 60-per-cent growth next year in his latest upside scenario.
“Coming into the analyst day, we believe the two main investor concerns about owning ZM were: 1) how to comp against this year’s dramatic growth; and 2) how will it defend against competition from Microsoft?,” he said. “We believe [Wednesday’s] announcements soundly put those concerns to rest, as we see that just as Zoom helped turn video from a commodity into a utility, we believe the company is in the process of building the world’s first live interactive video platform. As we lay out in our Zoomtopia product announcement recap, we believe OnZoom has the potential to be the single most globally impactful gig economy innovation since ride sharing.”
“OnZoom’s marketplace aggregates the supply of content creators and the demand of users, all familiar with the company’s global brand, and offers a single platform to host live video experiences. For the creator, this means a single place to distribute, schedule, and manage video, as well as accept payment. We believe this is a TAM-inflective opportunity in and of itself, but Zoom took it a step further by releasing Zapps, an update to its app ecosystem that will allow apps to be accessible natively within the Zoom user interface, creating a true video platform with feature configurability that we believe will be in a class of its own.”
Mr. Zukin thinks the San Jose-based company has “seized” the opportunity created by the current environment, seeing it “delivering with a product vision that we believe no other company has the scale, brand, or technological leadership to match.”
Keeping an “outperform” rating for its stock, he hiked his target to US$600 from US$450. The average on the Street is US$474.81.
Elsewhere, several other analysts raised their targets for Zoom shares, including: Needham’s Richard Valera to US$540 from US$440; BoA’s Kash Rangan to US$570 from US$450; Bernstein’s Zane Chrane to US$611 from US$228 and Wells Fargo’s Phil Winslow to US$465 from US$375.
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Canaccord Genuity analyst Maria Ripps thinks content “momentum” and the impact of the COVID-19 pandemic point to a “strong” third quarter for Netflix Inc. (NFLX-Q).
“Now that we are past the expected flurry of competitive launches, Netflix’s years-long head start and billions of dollars invested to build out its library of original content will be important competitive advantages for the streaming video leader,” she said. "The company has a global subscriber base that is fast approaching 200M paying users and has built a category-defining brand.
“During Q3 Netflix continued to deliver a steady supply of buzz-generating original titles, despite facing backlash following the release of French film Cuties, which led to a #CancelNetflix movement online. We expect a muted impact to subscriber trends in the U.S. from the short-lived boycott and see the potential for Netflix to raise prices in the U.S. at some point next year following the company’s recent decision to do so in Canada and Australia. While some competitors reorganize their corporate structures and refresh platform branding on a seemingly monthly basis to focus more on their streaming strategies, Netflix’s singular focus on building out a diverse library of engaging content should help it maintain its leadership position in the SVOD industry for the foreseeable future.”
Seeing increasing popularity for its reality shows, like Floor is Lava, Selling Sunset and Million Dollar Beach House as well as its children’s offerings, the analyst raised her sales and earnings projections for 2020 and 2021. She thinks the Street’s third-quarter and 2021 estimates for both may be “conservative.”
“We expect Netflix to report 3.6 million net additions (up from our prior estimate of 2.6 million net adds and guidance of 2.5 million), as the platform will likely continue to benefit from broader industry tailwinds amid the extended stay-at-home environment,” she said. “One of the key considerations for investors becomes the progression of net additions in 2021, where we currently assume a 23 per cent year-over-year decline (but still estimate 13 per cent year-over-year total subscriber growth). Potential price increases in the U.S. could be another growth lever next year, adding 1-2-per-cent upside to total company FY21 revenue.”
That led her to hike her target for Netflix shares to US$630 from US$550 with a “buy” rating (unchanged). The average on the Street is US$530.15.
Elsewhere, KeyBanc analyst Andy Hargreaves hiked his target to US$634 from US$590 with an “overweight” rating.
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In a research report on TSX-listed independent power producers,CIBC World Markets analyst Mark Jarvi lowered TransAlta Renewables Inc. (RNW-T) to “neutral” from “outperformer," believing it “has become more fairly valued after its recent run and think the upside from potential dropdowns is largely reflected at the current level.”
He raised his target to $18 from $16. The average on the Street is $16.50.
Mr. Jarvi also raised his target prices for a group of other renewable energy companies on Thursday, noting:
“In general, power companies with a higher focus on renewables are best positioned to benefit from the decarbonization of power markets,” he said. “While recent performance of the renewable power sector has clearly been very strong, especially for the pure play renewables, we don’t believe the rally is over. Rather, we believe there will be continued positive momentum as renewable energy-focused companies benefit from potential multi-decade growth trends. Beyond the upside from secular growth trends, many of the Independent Power Producers (IPPs) have created strong asset portfolios backed by favourable asset mixes and contract portfolios that provide resilient cash flows that can weather turbulent economic and market periods like we witnessed this year with the COVID-19 pandemic. Often in times of intense pessimism during a market sell-off and conversely in times of euphoria (which has taken hold of renewable energy stocks lately), clusters of stocks in a sub-sector move together with little differentiation of company-specific attributes and qualities.”
His changes included:
- Northland Power Inc. (NPI-T, “outperformer”) to $44 from $38. Average: $39.45.
- Innergex Renewable Energy Inc. (INE-T, “neutral”) to $26.50 from $23. Average: $24
- Brookfield Renewable Partners LP (BEP-UN-T, “neutral”) to US$54 from US$46. Average: US$46.88.
- Capital Power Corp. (CPX-T, “outperformer”) to $34 from $33. Average: $33.86.
- Boralex Inc. (BLX-T, “neutral”) to $43 from $36. Average: $38.53.
- Algonquin Power & Utilities Corp. (AQN-N/AQN-T, “outperformer”) to US$16 from US$15. Average: US$15.46.
“Combining both defensive and growth characteristics as well as opportunity for further multiple expansion (i.e. re-rating potential), we flag AQN, NPI and BLX (as much as it has re-rated substantially this year). BEP ranks well on quality and growth, but has much less valuation upside, in our view,” said Mr. Jarvi.
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Several equity analysts on the Street raised their target prices for shares of Vancouver-based women’s fashion chain Aritzia Inc. (ATZ-T) in the wake of the release of better-than-anticipated quarterly results after the bell on Wednesday.
Also touting a “stronger” near-term outlook than he expected, Canaccord Genuity analyst Derek Dley increased his target to $26 from $24, keeping a “buy” rating. The average target on the Street is $24.94.
“In our view, Aritzia has done a great job of navigating a changing retail landscape by offering an aspirational customer experience within its brick-and-mortar locations and an improved e-commerce platform. With over 20 consecutive quarters of same-store sales growth prior to the onset of COVID-19, a robust pipeline of new store openings, healthy balance sheet to support growth and margin enhancement initiatives, and a well aligned management team, we believe Aritzia is deserving of a premium valuation,” said Mr. Dley.
Elsewhere, BMO Nesbitt Burns' Stephen MacLeod raised his target by a loonie to $25 with an “outperform” rating.
“COVID-19 is shining a spotlight on Aritzia’s strong omnichannel and has introduced attractive real estate opportunities,” he said.
“We continue to believe Aritzia is well-positioned to weather COVID-19 as well as drive long-term growth, with ample liquidity, a strong e-commerce platform, category expansion opportunities, and a loyal employee and client base.”
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Seeing it possess a “healthy mix of production and development,” Haywood Securities analyst Kerry Smith initiated coverage of Nomad Royalty Company Ltd. (NSR-T) with a “buy” rating.
“Nomad holds a portfolio of eleven precious metals royalties and streams plus a gold prepay loan and one commercial production payment, which includes six assets that are currently in production, one that is on C&M and one that is expected to be in production late this year or early 2021,” he said. "Nomad is one of the newest players in the precious metals' royalty space, led by a team with significant experience from their tenure with Osisko Royalties (OR-T, “buy” rating, $24.50 target). Nomad is focused on free cash flow generation from precious metals royalties and streams, is targeting the lowest G&A in the sector and has already declared an inaugural annual dividend of 2 cents per share, payable quarterly as of October 15th 2020, for an implied yield of 1.4 per cent, versus the peer average of 0.9 per cent."
Recommending investors accumulate its shares, Mr. Smith set a $2.25 target. The average is currently $2.07.
“Nomad is one of the newest players in the precious metals royalty space with a vast amount of experience in the sector and has utilized that knowledge to purchase eight streams and royalties, one gold loan and one commercial production payment as part of its RTO, and then follow that up with another three royalty transactions,” he said. “Nomad has tremendous potential and should continue to grow through new acquisitions that will translate into growing free cash flow and in turn, growing dividends to shareholders.”
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In other analyst actions:
* Citing stronger-than-anticipated hot-rolled coil performance, National Bank Financial analyst Maxim Sytchev increased his Stelco Holdings Inc. (STLC-T, “sector perform”) target to $12 from $7. The average is $13.23.
“The post-pandemic HRC rebound we are witnessing now resembles the 2009 post-recession experience,” he said. “The bigger question is whether the upward momentum can structurally sustain once mothballed capacity in the U.S. reactivates (demand dynamics will also have to cooperate). In addition, recovery curvature (and timing) remains a hotly contested topic. STLC shares have outperformed this year (the pristine balance sheet helps) while many other cyclical names remain range-bound given an uncertain election season and vaccine-related newsflow. In our view, it will not be too late to play the recovery trade when “recovery” actually takes shape. Hence, we are staying on the sidelines for Stelco despite a currently much improved pricing environment (which we are not convinced is sustainable in the medium term).”
* Mr. Sytchev increased his target to Toromont Industries Ltd. (TIH-T, “outperform”) to $88.50 from $76. The average is $78.50.
* TD Securities analyst Craig Hutchison raised Denison Mines Corp. (DML-T) to “speculative buy” from “hold” with an 85-cent target. The average on the Street is $1.06.
* Goldman Sachs analyst Jack O’Brien initiated coverage of Lundin Mining Corp. (LUN-T) with a “buy” rating and an $11 target. The average is $10.18.
* CIBC’s Mark Petrie raised his target for Restaurant Brands International Inc. (QSR-N/QSR-T, “outperformer”) to US$69 from US$63, while Goldman Sachs raised his target to US$67 from US$62. The average is US$66.24.
* Scotia Capital analyst Phil Hardie hiked his target for TMX Group Ltd. (X-T, “sector outperform”) to $160 from $150, exceeding the average of $146.43.
* Scotia’s Ben Isaacson raised his target for Methanex Corp. (MEOH-Q/MX-T, “sector outperform”) to US$36 from US$31. The average is US$25.85.
* Raymond James analyst Brian MacArthur raised his target for Champion Iron Ltd. (CIA-T, “outperform”) to $4 from $3.75. The average is $3.90.
“We believe Champion offers investors good exposure to premium iron ore through its Bloom Lake asset, which is a long-life, lower-cost asset producing high-grade iron ore concentrate (66-per-cent Fe) located in Quebec, Canada, a lower-risk jurisdiction. In addition, we believe Champion has potential for growth through its Bloom Lake Phase 2 expansion project at favourable capital costs, given the previous owners spent significant capital. Given Champion’s exposure to premium iron ore (which we believe should trade at a premium given structural changes in the iron ore industry), high-quality asset, growth potential, and low jurisdictional risk, we rate the shares Outperform.”
* Baird analyst Ben Kallo hiked his target for Tesla Inc. (TSLA-Q) shares to US$450 from US$360, keeping a “neutral” rating. The average is US$312.66.
David Leeder