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

A day after its second-quarter results blew past expectations on the Street, a group of equity analysts on the Street raising their target prices for shares of Bank of Montreal (BMO-T).

Before the bell on Wednesday, BMO reported adjusted earnings per share of $3.13, exceeding the consensus forecast of $2.77. The beat was driven by lower-than-expected provisions for credit losses (PCLs).

Though investor response to the release was muted, sending BMO shares up only 1.46 per cent, Scotia Capital’s Menny Grauman said he will “continue to cheer.”

“Based on the market’s initial reaction to BMO’s Q2 earnings release one would think that the result had some fundamental flaw in it,” he said. “But besides some elevated card revenue (we estimate about $30-million), which was offset by some unusual expenses, the numbers were actually quite impressive led by a 13-per-cent beat to consensus. True, the year-over-year comparison is being impacted by improving credit as well as a very easy comparable, but look beyond that and you see strong fundamentals, and the potential for top-line momentum as the recovery takes hold on both sides of the border.

“Some have suggested that BMO’s time in the sun has passed as the stock has outperformed the group over the past 12 months and narrowed its discount to the group from 17 per cent in May 2020 to 4 per cent currently based on one-year forward consensus EPS. However, we highlight that the Street’s pre-reporting EPS estimate for F2021 is still woefully too low at $11.28, in our view, with the bank already delivering $6.19 in core EPS the first half alone. There is probably more debate about F2022 numbers, but even here we see upside, especially given management’s bullish commentary on margins and loan growth.”

Mr. Grauman raised his target for BMO shares to $138 from $137 with a “sector outperform” rating.

Elsewhere, RBC Dominion Securities’ Darko Mihelic thinks BMO is “in the sweet spot, for now.”

“Our credit and revenue expectations improved following good Q2/21 results,” he said. “The current economic recovery with robust capital markets and commercial loan growth outpacing consumer loan growth fits BMO’s business mix very well and may persist for a couple more quarters. We see next year developing as more consumer driven with slightly higher interest rates – still positive for BMO but just a little less so on a relative basis.

Keeping a “sector perform” rating for the bank’s shares, Mr. Mihelic increased his target to $141 from $125. The average target on the Street is $132.44, according to Refinitiv data.

Other analysts making target adjustments include:

* BofA Securities’ Ebrahim Poonawala to $145 from $142 with a “buy” rating.

“We expect the year-to-dae stock momentum to build once investors gain better visibility around the relative operating trends from BMO’s peers over the next few days,” he said. “However, results reaffirmed our bullish view that EPS growth and ROE outlook should benefit from both cyclical (as economic growth rebounds) and secular factors (ROE optimization strategies, market-share gains; see here for details: CFO meeting takeaways: Best of both worlds). At 10.8 times ’22e EPS and 1.6x P/Book, we see BMO as attractively valued and we consider as among our top ideas for investors looking to add exposure to the Canadian banks.”

* Desjardins Securities’ Doug Young to $128 from $119 with a “hold” rating.

“Cash EPS handily beat our estimate and consensus, and more importantly PTPP earnings were 4 per cent above our estimate. The composition of the beat was good. The outlook for BMO and the banking sector remains constructive in our view,” said Mr. Young.

* National Bank Financial’s Gabriel Dechaine to $136 from $128 with an “outperform” rating.

* Canaccord Genuity’s Scott Chan to $139 from $132 with a “buy” rating.

* Credit Suisse’s Mike Rizvanovic to $131 from $125 with an “outperform” rating.


Scotia Capital analyst Konark Gupta thinks Canadian National Railway Co. (CNR-T) “looks more attractive” following a share price drop of almost 12 per cent since its first proposal to acquire Kansas City Southern (KSU-N) was revealed on April 20.

With it trading at a rare discount to both S&P 500 and its peers and see an enticing risk-reward proposition for investors, he raised his rating to “sector outperform” from “sector perform,” emphasizing he’s “now constructive on both Canadian rails, which are at interesting crossroads.”

“We see limited downside risk in CNR, even under a conservative KSU divestiture scenario, but see attractive upside potential if the KSU merger closes successfully,” he said. “As such, we are upgrading CNR ... By contrast, CP looks relatively expensive from a fundamental standpoint, trading at a premium to S&P 500 and peers. However, we think CP could potentially revisit M&A (either with KSU or another Class 1 rail), depending on CNR/ KSU’s regulatory outcome (we assume 50-per-cent probability of success at this time), which could further catalyze CP shares.”

Mr. Gupta increased his target for CN shares to $147 from $143. The average on the Street is $149.67.

“We have a positive view on CNR due to its recently improved risk/reward amidst the ongoing KSU merger saga,” the analyst said. “Fundamentally, we view CNR as a long-term growth compounder with a strong competitive moat, including its unique three-coast network and exclusive access to deep-water ports on the west and east coasts of Canada with excess capacity or greenfield potential. CNR is a top-quality industrials stock with highly defensive attributes, strong track record of growth, solid margins, balance sheet and FCF generation, and consistent shareholder returns. The company would be able to further enhance its competitive position and leverage the new USMCA trade agreement if it successfully closes the proposed KSU acquisition.”

Concurrently, he also raised his Canadian Pacific Railway Ltd. (CP-T) target to $108 from $96, exceeding the $105.41 average, with a “sector outperform” recommendation.

“We believe CP could potentially be involved in an M&A transaction regardless of the CNR/KSU outcome, which could maintain upward pressure on the stock with some interim volatility on any CNR/KSU updates,” said Mr. Gupta. “For example, if CNR wins regulatory approvals for both KSU voting trust and merger control, CP could potentially be involved in downstream industry consolidation (e.g., merging with CSX or NSC) given it would be the smallest (and most efficient) Class 1 rail in North America following CNR’s acquisition of KSU. Similarly, if CNR fails to win regulatory approval for either KSU voting trust (as early as June 2021) or merger control (likely in 2022), CP could potentially be interested in re-engaging with KSU if conditions warrant at the time. We believe KSU could also be inclined to re-enter into a definitive merger agreement with CP rather than pursuing the CNR transaction without a voting trust (very high risk). However, KSU could potentially be more expensive than CP’s terminated US$275 per share offer, if and when it becomes available in 2024 (assuming KSU continues to grow earnings through 2024).”


Seeing it as “a multifaceted growth story,” ATB Capital Markets analyst Tim Monachello initiated coverage of Ag Growth International Inc. (AFN-T) with an “outperform” recommendation, projecting strong near-term earnings and free cash flow momentum with a bullish long-term view for agricultural equipment based on global demographic trends.

“We believe AGI is positioned for significant growth both near and long term, with a compelling multifaceted alignment across geographies, including both mature, low-growth, high-productivity North American markets which contribute a reliable base of cash flow, and less mature, higher-growth, developing markets, with a focus on India and Brazil which should drive the significant growth,” he said. “In addition, AGI’s expansion into the digital farm business offers significant strategic benefits, including increasing its revenue capture from its North American Commercial and Farm equipment business segments, but also differentiating its offering from other relatively commoditized equipment manufacturers while adding high-growth and high-margin recurring SAAS and IoT hardware revenue to its portfolio. We believe AGI’s established North American brands, market experience, and manufacturing footprint can be leveraged to accelerate growth in its developing international markets with a focus on Brazil and India.”

Expecting a rebound in demand following the COVID-19 pandemic, Mr. Monachello is forecasting 2021 earnings before interest, taxes, depreciation and amortization of $162-million, up 23 per cent year-over-year, with its backlog up 40 per cent as at March 31 with growth across all of its geographic and operating segments.

“AGI continues to advance its strategic growth priorities in the downstream food processing sector and in the upstream digital farm and commercial spaces,” he said.

“After investing heavily to build out its growth platform, AGI is now focused on growth within its existing platform, which suggests lower capital intensity and higher free cash flow (FCF). We estimate AGI will generate $58-million, $113-million, and $125-million in distributable FCF in 2021, 2022, and 2023, respectively. We believe excess FCF will be primarily used for deleveraging and AGI could reduce its net debt/EBITDAS from 5.6 times to 3.4 times by year-end 2023, which could be a catalyst for shareholders. See page 29 for details.”

Touting its attractive valuation versus its historical trading range and emphasizing it offers FCF yiels in the mid teens, which “is attractive given the relatively moderate risk of its underlying businesses,” Mr. Monachello set a target of $60 per share. The average on the Street is $55.14.

“AGI currently trades at 9.8 times 2021, 8.2 times 2022, and 7.3 times 2023 estimated EV/EBITDAS, and offers investors 8-per-cent, 15-per-cent, and 16-per-cent distributable FCF yields in each year before its 1.48-per-cent dividend yield,” he said. “Our $60.00 price target is supported by our three-stage DCF model, which incorporates a 10.5-per-cent discount rate and a 1.75-per-cent terminal FCF growth rate, and represents 10.1 times 2022 estimated EV/EBITDAS. For context, AGI has traded up to at least 11.0 times current year EV/EBITDAS in every year since 2014; at 11.0 times 2022 estimated EV/EBITDAS, our model suggests roughly a $69.00 per share valuation.”


RBC Dominion Securities analyst Joseph Spak feels increasing confidence Ford Motor Co.’s (F-N) “more cohesive” strategy, which he thinks focuses on its strengths.

Accordingly, he raised his rating for the vehicle maker to “outperform” from “sector perform” on Thursday.

“Ford still needs to execute, but the upside opportunity is clearer to us,” said Mr. Spak. “In particular, we’d highlight Ford Pro and connected services. Ford is dominant in commercial fleet, but using electrification and connectively to not only defend, but grow their position. Ford Pro can grow from $27-billion in 2019 revenue to $45-billion by 2025. We think that alone could be worth 70 cents to EPS. Meanwhile, their connected services opportunity (33 million vehicles by 2028) is interesting and a pillar of Ford moving from transaction based to an ‘always-on’ relationship based revenue model with new opportunities. Assuming 50-per-cent attach rate, $50 per month would get you $10-billion in annual recurring revenue, potentially $8-billion in gross profit, though a portion of this is considered in the Ford Pro opportunity.”

In justifying his upgrade, Mr. Spak pointed to five factors:

  1. Increased confidence in its 2023 8-per-cent margin target, noting “much of this has to do with our view that the favorable industry North American supply/demand dynamics that aid price/mix will mostly remain in F’s earnings power through then and is more reflective of ICE earnings power.”
  2. Concerns about its battery electric vehicle (BEV) strategy were addressed
  3. F-150 Lightning all-electric truck “likely a watershed moment for Ford and the industry (it is the best-selling vehicle).” He added: “For Ford, this not only protects its golden goose, but expands the F-150 franchise opportunity via unique features like Intelligent Backup Power.”
  4. “When you think Ford, think work.” Already possessing a “very strong” commercial fleet, Mr. Spak sees it " offering a more compelling product via electrification and connectivity that could increase its share in this profitable segment.”
  5. His view that 2022 estimates on the Street are too low.

After increasing his own financial projections for both 2021 and 2022, Mr. Spak hiked his target for Ford shares to US$17 from US$13. The average is currently US$13.59.

“We believe Ford has laid out a credible plan to take 2025+ profitability higher via Ford Pro and Ford’s connected services opportunity,” the analyst said. “This should increase the upside earnings opportunity (even if we have it balanced by execution risk and some likely margin impact from more BEV product). But if it becomes better appreciated by the market over the coming year (more Pro and connected services KPIs would help), could result in multiple expansion that could take the stock into the $20s.”


Canaccord Genuity analyst Kevin MacKenzie thinks Gatos Silver Inc.’s (GATO-N, GATO-T) flagship Cerro Los Gatos mine in Mexico is a “clear standout within the comp group in terms of its sizable production profile and low AISC [all-in sustaining cost].”

Calling the mine, which Gatos owns a 70-per-cent interest in, “one of the emerging leaders within the industry,” he initiated coverage of the Denver-based single-asset producer with a “buy” rating.

Gatos began trading on the New York Stock Exchange and the Toronto Stock Exchange on Oct. 28, 2020 following its initial public offering.

“Among the established silver producers within the Americas (greater than US$500-milion market cap), Gatos Silver has the highest percent silver production exposure at more than 60 per cent,” he said. “This, against the backdrop of many silver companies transitioning to gold companies via acquisitions, underscores our outlook that Gatos Silver is a clear go-to for investors seeking silver exposure.”

“CLG hosts multiple levels of actionable exploration upside, which includes (1) the demonstrated potential to expand the project’s reserve base, (2) the potential to further delineate established early-stage satellite resources, and (3) a number discovery targets within the CLG property and adjacent 100-per-cent owned Santa Valeria project. In the near term, we believe that ongoing exploration success will translate into a mine life extension at CLG, with the longer-term potential to establish additional centers of production.”

Mr. MacKenzie sees a number of potential near-term catalysts, including achieving steady production by the end of the second quarter of 2021, ongoing discovery-focused drilling results and a CLG resource update by the first quarter of 2022.

He set a target of US$18.50 per share, exceeding the US$12.75 average.


In other analyst actions:

* In a research note titled ESG is part of the data revolution NOT evolution, Credit Suisse analyst Kevin McVeigh raised his Thomson Reuters Corp. (TRI-N, TRI-T) to US$120 from US$115 with an “outperform” rating. The average is US$99.89.

* After “impressive” results at its 100-per-cent owned Warintza project located in Southeast Ecuador, Canaccord Genuity analyst Michael Pettingell raised his target for Solaris Resources Inc. (SLS-T) to $12.50 from $9.25. The average is $12.24.

“Given the market’s favorable sentiment towards copper and Solaris’ sustained exploration momentum, we maintain our SPECULATIVE BUY recommendation,” he said.

* BMO Nesbitt Burns analyst Tim Casey raised his target for BCE Inc. (BCE-T) to $61.50 from $59.50 with an “outperform” rating. The average is $60.39.

* TD Securities analyst Greg Barnes raised his Ivanhoe Mines Ltd. (IVN-T) target to $11.50, topping the $9.88 average, from $9.50 with a “buy” rating.

* Alliance Global Partners analyst Brian Kintstlinger cut his mCloud Technologies Corp. (MCLD-X) by $1 to $5 with a “buy” rating. The average on the Street is $4.50.

* National Bank Financial analyst Dan Payne raised his Spartan Delta Corp. (SDE-X) target to $7.25 from $6.75, reiterating an “outperform” rating. The average is $6.86.

* PI Financial analyst Jason Zandberg increased his target for Ayr Wellness Inc. (AYR.A-CN) to $75 from $60 with a “buy” rating after a first-quarter earnings beat. The average is $58.

“Ayr will experience a major ramp in their revenue in H2/21 from the New Jersey acquisition closing (likely in early Q3/21) and increased cultivation capacity across Ayr’s portfolio of markets. Additionally, Florida will reach a store count of 42 by year-end and investments in cultivation efficiencies will result in improved store performance,” he said.

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