Inside the Market’s roundup of some of today’s key analyst actions
National Bank of Canada’s (NA-T) share price underperformance Wednesday relative to peers in the wake of the release of better-than-expected quarterly results was “unjustified,” according to Mike Rizvanovic of Credit Suisse.
Canada’s sixth-biggest lender closed down 0.55% on Wednesday, even as the financials services sector overall gained 0.5%.
Mr. Rizvanovic and a handful of other analysts modestly raised their price targets on National Bank on Thursday.
“NA’s adjusted Q3 EPS of C$2.36, which was well ahead of both our estimate and consensus, was driven primarily by lower PCLs [Provision for Credit Losses], consistent with what we’ve seen from most banks so far this quarter. However, PTPP (Pre-Tax Pre-Provision earnings) earnings slightly beat our forecasts with notable strength in the P&C Banking and USSF&I segments. As such, we view [Wednesday’s] share price underperformance as unjustified,” Mr. Rizvanovic said in a note.
“NA’s sizable net PCL reversal of C$43mm was a positive surprise in Q3, although we note that management appears to be taking a cautious approach on further potential [credit provision] recoveries despite having what we believe is the most excess reserves among the Big Six. We see a high likelihood for further near-term meaningful recoveries depending on how the next wave of COVID impacts the macroeconomic outlook in Canada,” he added.
Mr. Rizvanovic said he believes National Bank’s move to eliminate commissions at its online brokerage should end up being a net benefit to the bank. The move will have minimal impact to the bottom line, and so far has not yet been followed by peers. It could drive a decent amount of new client acquisitions in the near term, the analyst suggested.
He raised his price target to C$106 from C$104 and reiterated an “outperform” rating.
Elsewhere, Canaccord Genuity raised its price target to C$103.50 from C$101; RBC increased its price target to C$99 from C$97; and Desjardins Securities raised its price target to C$103 from C$100.
CIBC kept its price target unchanged at C$$102 and maintained a “neutral” rating. Analyst Paul Holden noted that National Bank has less capital on hand to conduct stock buybacks, when such a move is allowed again by regulators.
National Bank’s CET1 ratio, the amount of securities that can serve as a first line of defense in a financial crisis, is 12.2%, the bottom end of the range. “While NA did announce a fintech investment this quarter ($103MM) the bank clearly has less excess capital than peers to drive EPS upside. We estimate that using all excess capital would enable NA to repurchase 3% of its shares o/s vs. a peer average of 6%. However, NA does have capacity for a massive dividend increase, in the range of 20%- 40%, to take the payout ratio back to target,” Mr. Holden noted.
The average analyst target on National Bank is now C$102.46, up from $100.25 one month ago, according to Refinitiv Eikon data.
Several analysts have raised their price targets on Royal Bank of Canada (RY-T) following its earnings beat on Wednesday.
Among them: Canaccord Genuity hiked its target price to C$143 from C$140; CIBC raised its price target to C$145 from C$138; Credit Suisse raised its target price to C$140 from C$135; National Bank of Canada raised its price target to C$144 from C$140; and Desjardins Securities raised its target to C$141 from C$138).
The average analyst target on RBC shares is now C$140.92, up from $135.08 one month ago.
Here are some highlights of how analysts are reacting to the earnings:
Canaccord Genuity’s Scott Chan: “RY reported a core EPS beat which we estimate was largely in line adjusting for better credit results. Overall, the firm generated PTPP (Pre-Tax Pre-Provision earnings) growth of 6% YoY (incl. Cdn. P&C Banking at 13%), supported by net revenue growth (Net interest income ex trading up 6% YoY) and good expense control. We remain positive on RY shares due to the bank’s strong fundamentals (e.g., volume growth, credit) and its excess capital position (that could support above-average NCIB and dividend increases). Thus, we maintain our buy rating.”
Scotiabank’s Meny Grauman: “We turned more positive on RY in the wake of Q2′s results thanks to a clear improvement in earnings in Canadian Banking and a very bullish outlook on the post-pandemic recovery and RY’s ability to thrive under those conditions. This quarter those same positives continued to shine through even as the results themselves were not quite as impressive relative to some peers, especially with respect to all-bank PTPP growth. Canadian Banking continued to beat our expectations and show well (PTPP earnings growth of 13%, op. leverage of 6% Y/Y and mortgage growth of 12.9% Y/Y) while Management reiterated its conviction in the durability of the recovery and RY’s ability to benefit from a number of trends including a comeback in cards activity, the potential for upside to rising rates especially at City National, and a very robust investment banking pipeline.” The analyst reiterated a “sector outperform” rating and C$148 price target.
CIBC’s Paul Holden: “FQ3 provided a positive update for net interest income, fee income, credit, expenses and capital.... Cooling capital markets revenue and earnings were broadly expected, but there has been a concern they would hinder PTPP (Pre-Tax Pre-Provision earnings) growth and positive operating leverage. While capital markets PTPP was down 14% Y/Y, RY was still able to produce all-company PTPP growth of 6% Y/Y. We assume capital markets revenue will slow in F2022 (-6%), but still forecast PTPP growth (10%) and positive operating leverage of 3%.”
Scotiabank analyst Jason Bouvier upgraded Enerplus Corp (ERF-T) to “sector outperform” from “sector perform,” citing its attractive valuation, strong balance sheet, and natural gas exposure. He has a C$10 price target, which is below the average analyst price target of $11.44.
“Overall, we view the recent pullback in ERF’s share price as a good opportunity to buy a quality name,” Mr. Bouvier said in a note to clients.
Enerplus’s share price has declined by 10% over the past month compared to an average decline of 5% for its peers. But many of those peers have less natural gas production as part of their overall product mix. That makes Enerplus well positioned, as about 35% of its expected 2022 production is gas versus about 20% for its its Canadian mid-cap peers, he noted. Over the past month, natural gas prices have been on the upswing even as crude oil futures have declined.
Raymond James analyst Bobby Griffin upgraded Dick’s Sporting Goods Inc. (DKS-N) to “market perform” from “underperform,” citing “another game changing quarter.”
And he wasn’t alone in applauding the company’s latest quarterly results. At least 16 analysts raised their price targets on the stock. The average price target is now US$145.67, up sharply from US$113.67 a month ago.
The company reported fiscal second quarter adjusted EPS rose 58% to $5.08, almost double the consensus expectation of $2.88.
Mr. Griffin, who doesn’t have a specific price target on Dick’s Sporting Goods, had been one of the most pessimistic analysts on the Street regarding that stock. He now concedes that’s been a mistake.
“Admittedly, we have been wrong on DKS, as demand has remained robust longer than we anticipated and the company has consistently surpassed expectations over the past year,” Mr. Griffin said in a note to clients. “Looking back, we underestimated the bullish potential on DKS including 1) the investments the company has made over the past four years in omni-channel capabilities, and 2) the changes to the margin structure (BOPIS for eCommerce, private label, lower promos, etc.) that are leading to higher profitability relative to history. Positively, changes like BOPIS and private label brands, could be more permanent (although we’re likely at peak levels for gross margin rate today, as some promos return). In addition, DKS highlighted its confidence in the operating model via raising its quarterly dividend by 21% along with a special dividend payment of $5.50. All in, while we still find it challenging to recommend committing to new capital to DKS, with shares trading at 15x our next 12 months EPS estimate (vs. 13x historical average) and facing very tough compares in calendar year 2022, the impressive recent performance cannot be ignored and justifies a more constructive view.”
Canadian mid-cap exploration and production companies are having one of their strongest years on record, with shares in many names doubling. But one company that has been lagging is Surge Energy Inc (SGY-T), despite a significant improvement in industry fundamentals.
Raymond James analyst Jeremy McCrea believes that’s about to change, and has raised his price target considerably to C$10.50 from C$1.25. He has an “outperform” rating on the stock. The stock was trading Thursday morning near $4.30.
There are a few reasons that he cited for this optimism, and some are somewhat unusual. One is that institutional investors have been looking up the stock more often on the Bloomberg terminal - a potential sign that many are considering purchasing the stock. Surge now ranks as the 15th most searched Canadian exploration and production company on the terminal, and 216th of TSX listed stocks, despite a market cap of only about $300 million. “Its ranking has also improved from 640th at the beginning of Q2, showing one of the largest increases in interest by investors, especially in the last couple of weeks,” he noted.
Meanwhile, he believes part of the reason for the share price lagging is the lack of new and existing shareholders buying in the second quarter. “Looking more closely at the ‘6 sellers’ of 2.3 mln shares, this was all from one Account (that controls six underlying funds). This Account is based out of Austin and uses a quant style of investing (i.e., doesn’t meet management or dealers) and is algorithmically driven. As such, we find these types of funds will miss fundamental step-changes before they occur. Ultimately, with investors showing renewed interest in SGY as it related to the Bloomberg sentiment but still no reported institutional buying in Q2, it seems the set-up is looking quite attractive in terms of new buying,” Mr. McCrea said in a report to clients.
Meanwhile, Mr. McCrea notes that one of the most important factors in a successful E&P company is return on capital. “High leverage, or steep declines can all be managed if field operations show high return metrics. In the current pricing environment, many companies are seeing quick payouts under 12 months and of the 90+ plays we cover within the sector, there’s not much differentiation between companies today on this metric,” he said.
The average analyst target on Surge is $9.48.
In other analyst actions:
Alimentation Couche-Tard Inc (ATD-B-T): Raymond James raises price target to C$59 from C$53
Chartwell Retirement Residences (CSH-U-T): National Bank of Canada resumes coverage with outperform rating and C$15 price target (previously C$14.50.)
Nuvei Corp (NVEI-T): Scotiabank raises target price to C$158 from C$123
Quarterhill Inc (QTRH-T): Raymond James starts with outperform rating; C$3.80 PT
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