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

Shares of Canadian National Railway Co. (CNR-T) are now “fully valued,” according to RBC Dominion Securities analyst Walter Spracklin, seeing a limited potential return to his target following recent gains.

That led him to lower his rating for its shares to “sector perform” from “outperform” on Thursday, seeing downside risk from hedge fund selling if TCI Fund Management Inc., CN’s second-largest investor, fails to land its proposed board changes.

Mr. Spracklin thinks a 5.2-per-cent jump in share price on Wednesday suggests that investors views the surprise resignation of chief executive officer Jean-Jacques Ruest bringing a “higher likelihood that the TCI slate prevails.”

“The key tenets of our downgrade are: 1) the shares now fully reflect in our view a complete operational turnaround; and 2) the share price move [Wednesday] reflects the market’s view that TCI’s slate has a high likelihood of success; however - we believe there is more risk to that view.”

Mr. Spracklin thinks a 5.2-per-cent jump in share price on Wednesday suggests that investors views the surprise resignation of chief executive officer Jean-Jacques Ruest bringing a “higher likelihood that the TCI slate prevails.”

“While we were previously of the view that the TCI slate had a high likelihood of success (all else equal), several factors have emerged that in our view suggest the opposite,” he said.”1. CN has moved closer to TCI’s key demands. TCI began initially with the demand that the CEO and Chair resign — both of which have occurred; 2. Cascades involvement in Selection Committee. With Cascades’ representative appointed to the CEO Selection Committee, it is clear to us that Cascades will support the choice of that committee, which may or may not select TCI’s nominee. Cascades’ involvement on the Committee and resulting support is important given that Cascades is CN’s largest shareholder (at approximately 10 per cent); 3. Our survey suggests investors want change, but not necessarily the TCI slate. When we polled investors as to the outcome of the proxy contest, preliminary results suggest a higher proportion of investors expect that a negotiated option emerges (43 per cent) or TCI fails to achieve enough (12 per cent).”

Mr. Spracklin maintained a $168 target for CN shares, noting it “already reflects a full rebound to PSR (55.7 per cent operating ratio in 2023), with an estimated EPS of $8.00 that is above consensus and almost 40 per cent above 2021.” The average on the Street is $157.08.

“In summary, with the stock now reflecting significant operating improvement, combined with the downside risk to the shares of hedge fund selling, should anything less than an all out TCI slate victory emerge, we see better opportunity elsewhere in the sector,” he said.


Though the third-quarter results from Canadian Pacific Railway Ltd. (CP-N, CP-T) fell short of expectations, Mr. Spracklin said there’s no change to his “very positive” long-term view, reaffirming it as his preferred name in the rail sector and a top conviction idea across his coverage universe.

“While Q3 results were below, we view this as immaterial given: 1) the transitory drivers of the Q3 challenges; 2) the constructive preliminary view on 2022 from the conference call; and 3) the substantial longer-term opportunity presented with the proposed acquisition,” he said. “Further, management did a good job refuting the theory of concessions, and while the analyst community is divided, we land squarely on the side of management in viewing the concession ‘risk’

Before the bell on Wednesday, CP reported adjusted earnings per share of 88 cents, falling 8 cents below Mr. Spracklin’s projection and 4 cents lower than the consensus forecast on the Street. He attributed the miss to lower yields and higher-than-anticipated operating ratio (59.4 per cent versus his 57-per-cent estimate).

“Overall, we view the operational challenges as being external and transitory; and when combined with the reiterated 2021 guide, we view Q3 as a non-event,” he said.

After management reiterating its full-year 2021 guidance, Mr. Spracklin found the commentary around 2022 to be “encouraging.”

“Management maintained its guidance for double-digit EPS growth (in line with consensus expectation of up 11 per cent); though it is tempering its volume growth guidance to low single digits (from high single digits), also in line with expectations,” he said. “Importantly, management provided some initial colour around 2022, which we view as positive: 1) significant volume decline in Canadian Grain can be offset by growth in other areas, resulting in the expectation for positive total volume growth in 2022 (better than our expectation of flat); and 2) that there would be margin improvement in 2022 (which is in line with expectations).

“Based on the volume commentary, we are taking our 2022 numbers up, though we remain somewhat more conservative on our 2022E EPS vs. street. Regardless, we note that 2022 is largely a transition year with the KCS merger and highlight that our estimates are in line in 2023 and meaningfully above consensus post-merger in 2024 and 2025.”

Though he sees the timeline for its merger with Kansas City Southern improving, he trimmed his target for CN shares by $1 to $115. The average target on the Street is $103.86.

Other analysts making target adjustments include:

* Desjardins Securities’ Benoit Poirier to $103 from $104 with a “buy” rating.

“We continue to like the long-term potential of the KCS transaction for value creation. As a result, we are maintaining our preference for CP over CN in the current context,” said Mr. Poirier.

* Stephens analyst Justin Long to US$74 from US$72 with an “equal-weight” rating.


Raymond James analyst Michael Glen admitted he’s “quite perplexed” by the “shockingly strong” reaction to Magna International Inc.’s (MGA-N, MG-T) “material” negative guidance revision.

Accordingly, taking a “more pointed contrarianian stance” on Magna shares, he downgraded it to “underperform” from “market perform.”

Shares of the Aurora, Ont.-based auto parts manufacturer rose almost 1.6 per cent on Wednesday after it cut its 2021 outlook, reducing its sales forecast to a range of $35.4-$36.4-billion (from $38-$39.5-billion) and margins to 5.1-5.4 per cent (from 7.0-7.4 per cent).

“In our view, this revision is clearly representative of worsening supply chain conditions, specifically on the semiconductor side,” said Mr. Hansen. “That said, while we acknowledge there are still a number of conflicting headlines in the market regarding if and when such chip shortages will be alleviated, our view overall is that conditions for the auto parts companies continues to worsen. In that regard, with the overwhelming view in the market being that the worse is behind us (and perhaps investors are waiting (or begging) for another headline on the Apple car) we have become extremely cautious on the name.”

Citing historical valuations and an “extremely muted” outlook, Mr. Hansen sees “fairly significant downside in the stock.”

Warning of “a building amount of risk in the name,” he cut his target to US$68 from US$83. The average on the Street is currently US$101.75.

“While we understand the market is trying to create a new narrative surrounding Magna’s business as a whole, the fact remains that the business is highly sensitive to production volumes, particularly in North America,” he added. “As such, with volumes constrained by chip shortages and OEMs starting and stopping production as components become available, this creates a very challenging scenario for the parts companies to navigate (particularly when there is substantially less ability to flex/adjust labour in the current market). From that standpoint, we would make the observation that today’s negative revision comes from an update provided early August (just 2.5 months ago), which presents us with concerns surrounding the pace of deterioration that has manifested since the earnings report on August 6, 2021. The other emerging aspect that we need to start thinking about is how rising gas prices impact truck/SUV demand and if consumers start to switch back to smaller passenger cars in the face of a U.S. gas price that has been steadily moving higher. Mix has been a positive tailwind for the industry as a whole for several years now. Putting it all together, we can’t help but have a relatively muted outlook for the business.”


Desjardins Securities analyst Benoit Poirier thinks the divestiture of its U.S. dedicated truckload business could be the next catalyst for TFI International Inc.’s (TFII-T) “story,” pointing to strong market conditions south of the border.

In a research note released Thursday, he estimated the sub-segment could fetch US$0.8-$0.9-billion, emphasizing the ongoing shortage of drivers and trucks as well as the strong potential for margin expansion could justify a price at the high end of that range.

“TFI management has been laser-focused on unlocking shareholder value with its M&A strategy, either via acquisitions (eg UPS Freight) or divestitures (eg waste management business for $800-million in October 2015),” said Mr. Poirier. “Ultimately, we believe the robust market conditions in the U.S. could enable management to opportunistically divest of the TL business to improve its ROIC [return on invested capital] while deploying capital toward more strategic/appealing sectors such as LTL and last mile.”

“Other avenues for value creation include: (1) successful integration of UPS Freight with an adjusted OR of 85 per cent by 2024; (2) resumption of the M&A strategy in attractive markets such as LTL and logistics; and (3) organic growth of the last mile business in North America.”

Citing its “strong potential for value creation,” Mr. Poirier increased his target price for TFI shares to $158 from $146, maintaining a “buy” recommendation. The average on the Street is $131.66.

“TFII remains our favourite name in the transportation sector and we recommend investors buy the shares ahead of 3Q results (October 28),” he said.


CIBC World Markets analyst Hamir Patel now sees “limited catalysts on the horizon” for forestry, building products and packaging companies.

“Lumber/OSB prices have already reinflated from their summer lows (and are now close to levels we expect prices to average next year), lumber futures are correcting, and the housing backdrop (while likely to stay above 1.5 million for several years yet) is only likely get more cloudy as rising mortgage rates (now at 3.2 per cent) raise affordability concerns with home prices already at record highs,” he said.

“While household balance sheets certainly remain strong (which bodes well for R&R), and the threat of a ‘buyers strike’ is low until rates approach 4%, we struggle to see what could attract new investors to these names. At the same time, we see increasing risks of forestry companies making questionable capital allocation decisions (consider West Fraser’s recent purchase of a greenfield sawmill at record valuations).”

In a research report previewing earnings season, Mr. Patel said he’s “moving to the sidelines on four lumber names,” downgrading their shares:

* Interfor Corp. (IFP-T) to “neutral” from “outperformer” with a $35 target. Average: $42.83.

* West Fraser Timber Co. Ltd. (WFG-T) to “neutral” from “outperformer” with a $120 target. Average: $139.27.

* Western Forest Products Inc. (WEF-T) to “neutral” from “outperformer” with a $2.50 target, down from $2.60. Average: $2.80.

* Resolute Forest Products Inc. (RFP-N, RFP-T) to “neutral” from “outperformer” with a US$15 target. Average: US$17.

Citing “a slightly higher multiple with risks from the company’s heavier B.C, exposure having moderated as producer curtailments over the summer prevented a prolonged period of weaker pricing,” Mr. Patel raised his target for Canfor Corp. (CFP-T) to $35 from $34, keeping an “outperformer” rating. The average is $39.83.

“We had last revised our rating on bellwether West Fraser (our prior top pick) in March 2020 (Upgrading West Fraser As Lower Rates Fuel More Refi Activity) when WFG was trading at $51/share prior to the H2/20-H1/21 surge in lumber prices,” he added. “We remain at Outperformer on Canfor, as we see attractive valuation with its growing European operations providing steady earnings. While double-digit free cash flow yields are still anticipated for the group in 2022, we see most lumber companies’ EBITDA generation declining 20 per cent-plus in 2023 as increased capacity additions lead to a more normalized commodity environment. If we look at mid-cycle valuations, West Fraser is trading at 6.7x our trend EBITDA forecast of $1.3-billion, higher than WFG’s historical average of 6.25 times and Norbord’s prior 5.5 times average multiple.”

Saying containerboard demand is “starting to disappoint at a time of significant cost inflation,” Mr. Patel also lowered Cascades Inc. (CAS-T) to “neutral” from “outperformer” with a $17 target, down from $18. The average is $19.61.


Pointing to an “attractive” potential rate of return and growing dividend, Scotia Capital analyst Benoit Laprade upgraded Stella-Jones Inc. (SJ-T) to “sector outperform” from “sector perform” before the Nov. 9 release of its third-quarter results.

“Over the last 12 months, SJ shares are down marginally, a sharp contrast with the performance of the S&P TSX, of the TSX Industrials Index, and of commodity lumber producers,” he said. “We believe the weak performance of the last year or so stems mainly from the recent – but expected – cooling of the residential lumber market (and associated reduction to 2021 guidance) as well as the absence of growth by acquisitions despite publicly-stated intentions to be active in that regard in 2021.

“SJ shares are now trading below its 1-year and 10-year averages EV/EBITDA and P/ E multiples despite an attractive (and growing every year) dividend and a solid balance sheet.”

Mr. Laprade maintained a $55 target, exceeding the $54.44 average on the Street.

“We believe the Biden Administration infrastructure spending plan could be a tailwind for both its Utility Poles and Railway Ties segments on the back of expected investments in renewable energy (that needs to be transported to markets) and rail infrastructure,” he added.


Though 2021 has been a “tough” year for precious metals producers, analysts at Canaccord Genuity think gold is “nearing a turning point” as third-quarter earnings season approaches.

“Gold is down 7 per cent year-to-date and the S&P/TSX gold index 9 per cent (in US$ terms),” the analysts said. “The royalty/streaming companies and large-cap producers have outperformed suggesting investors are defensively positioned ahead of a Fed tapering decision. We note that the performance of the S&P/TSX gold index has been skewed by the outperformance of a few large-cap names, notably Franco-Nevada and Kirkland Lake, up 13 per cent and 10 per cent, respectively, and Wheaton down 1 per cent; excluding these 3 names that account for 40 per cent of the index, the index would be down 18 per cent. In our view, the main drivers for the weakness in precious metals are: 1) the continuing COVID19 recovery theme which has investors focused elsewhere given strong equity markets and rising energy & industrial commodity prices reducing safe-haven demand for gold and 2) investors pricing in Fed tapering. Based on the Fed Chair Jay Powell’s recent commentary and with core inflation now above its 2-per-cent target, tapering appears to be all but a foregone conclusion with a potential November announcement.”

The firm thinks that potential tapering announcement could be the catalyst for gold to break out of its recent range, noting it has largely priced in tapering.

“We suspect we could see a relief rally following the announcement,” he said. “We saw a similar setup in the 2013 taper tantrum with gold falling 27 per cent from the start of 2013 to the official Fed tapering announcement at its December meeting. After a negative reaction to the news, down 3 per cent, gold bottomed the next day and went on to rally 16 per cent within the next 3 months and gold stocks jumped 33 per cent. Similarly, ahead of the Fed lift-off from zero in 2015, gold was down 10 per cent year-to-date into the December announcement and likewise bottomed the next day and went on to gain 21 per cent in the next 3 months with the gold equities up 55 per cent. Notwithstanding a tapering announcement and as we move past the ‘peak recovery,’ given structural deflationary pressures (record debt levels, demographics and globalization), we believe there is little room for the Fed to maneuver (the Fed’s last tightening cycle ended at 2 per cent), and we expect real rates to stay lower for longer, which we see as supportive of gold prices.”

Expecting current gold prices to drive “strong” margins, free cash flow and rising cash balances, Canaccord now sees equity valuations as “attractive.”

Based on the implied return to his target, analyst Carey MacRury upgraded Franco-Nevada Corp. (FNV-T) to “buy” from “hold” with a $200 target. The average is $200.13.

He also made a series of target changes for both royalty and senior producers in his coverage universe. His changes include:

  • Wheaton Precious Metals Corp. (WPM-T, “buy”) to $66 from $72. Average: $73.65.
  • Osisko Gold Royalties Ltd. (OR-T, “buy”) to $23 from $24. Average: $23.08.
  • Newmont Corp. (NEM-N/NGT-T, “buy”) to US$66 from US$71. Average: US$72.45.
  • Barrick Gold Corp. (ABX-T, “buy”) to $32 from $35. Average: $28.07.
  • Agnico Eagle Mines Ltd. (AEM-T, “buy”) to $88 from $92. Average: $102.15.
  • Kirkland Lake Gold Ltd. (KL-T, “buy”) to $70 from $65. Average: $62.11.
  • Kinross Gold Corp. (K-T, “buy”) to $11 from $12.50. Average: $12.76.
  • Endeavour Mining PLC (EDV-T, “buy”) to $42 from $45. Average: $43.96.
  • Pan American Silver Corp. (PAAS-Q/PAAS-T, “buy”) to US$32 from US$35. Average: $36.37.
  • Yamana Gold Inc. (YRI-T, “buy”) to $8 from $9.50. Average: $8.51.
  • B2Gold Corp. (BTO-T, “buy”) to $8.50 from $9.50. Average: $8.27.

Analyst Dalton Baretto upgraded Centerra Gold (CG-T) to “buy” from “speculative buy” based on the removal of overhang brought by the dispute over its Kumtor mine. He maintained a $11.50 target, exceeding the $10.68 average.


JP Morgan analyst Tyler Langton cut his target prices for a series of TSX-listed mining companies.

His changes included:

  • Agnico Eagle Mines Ltd. (AEM-T, “neutral”) to $81 from $86. Average: $102.15.
  • B2Gold Corp. (BTO-T, “neutral”) to $6 from $7. Average: $8.27.
  • Franco-Nevada Corp. (FNV-T, “underweight”) to $191 from $200. Average: $200.13.
  • Kinross Gold Corp. (K-T, “overweight”) to $12 from $13. Average: $12.76.
  • Pan American Silver Corp. (PAAS-T, “overweight”) to $45 from $50. Average: US$36.27.
  • SSR Mining Inc. (SSRM-T, “overweight”) to $25 from $27. Average: $31.48.
  • Wheaton Precious Metals Corp. (WPM-T, “overweight”) to $70 from $75. Average: $73.65.


In a research report ahead of earnings season for TSX-listed energy infrastructure companies, CIBC World Markets analyst Robert Catellier lowered his rating for Keyera Corp. (KEY-T) to “neutral” from “outperformer,” citing “weaker iso-octane margins due to butane costs rising faster than RBOB price.”

His target for its shares fell to $33 from $36. The average on the Street is $34.65.

Mr. Catellier’s colleague Mark Jarvi also made a series of target changes to utilities in his coverage universe:

  • Algonquin Power & Utilities Corp. (AQN-T, “outperformer”) to $17 from $17.50. The average is $17.35.
  • Capital Power Corp. (CPX-T, “neutral”) to $44 from $43. Average: $45.08.
  • Fortis Inc. (FTS-T, “neutral”) to $58 from $59. Average: $59.03.
  • Northland Power Inc. (NPI-T, “outperformer”) to $45 from $46. Average: $49.25.

Elsewhere, Scotia’s Robert Hope increased his targets for Capital Power Corp. (CPX-T) to $44 from $43 with a “sector perform” rating and TransAlta Corp. (TA-T) to $16 from $14 with a “sector outperform” rating.

“During Q3, the shares of TransAlta and Capital Power had strong returns as the outlook for the Alberta power market continues to improve,” said Mr. Hope. “Despite a strong oil and gas environment, the pipeline and midstream shares saw mixed returns. It would appear that investors are not meaningfully increasing their energy weighting, but rather re-allocating some capital from the midstream and pipeline space towards the more torquey producers. But we see upside for the midstream group, especially as NGL pricing remains strong. Key beneficiaries of higher NGL pricing are Pembina, AltaGas, Tidewater, and Keyera. Utilities had small gains during the quarter, though we note that investor interest is limited. The renewables had another challenging quarter, though share price returns have improved in October. Despite limited year to date returns, we continue to see significant interest in the renewable space. AltaGas is our favourite utility as we see valuation upside. We believe that TransAlta is not reflecting the value of its hydro assets, which should be benefiting from the current Alberta power price environment. Keyera would be our favourite pipeline and midstream name. Of the renewables, we prefer Northland due to its potential for valuation expansion, strong financial position, and attractive near- and long-term growth prospects.”


In other analyst actions:

* After the close of its $11.5-million bought deal offering following its $42.2-million acquisition of Prairie Sky Resources, ATB Capital Markets analyst Patrick O’Rourke raised InPlay Oil Corp. (IPO-T) to “outperform” from “sector perform” with a $2.25 target, up from $1.75 but below the $2.67 average.

“Overall, we view the event as a clear positive with the acquisition adding substantial quality inventory (historical well results in-line to above recent IPO results) from a highly contiguous land base to IPO’s core Willesden Green asset,” he said. “The acquisition should help to improve IPO’s relevancy with institutional investors.”

* Ahead of the Nov. 8 release of its third-quarter results, Canaccord Genuity analyst Yuri Lynk raised his target for shares of Hardwoods Distribution Inc. (HDI-T) to $66 from $62 with a “buy” rating. The average on the Street is $58.70.

“We believe HDI will report another strong quarter, driven by robust organic growth and the Novo acquisition completed on July 30, 2021,” he said. “Housing and repair and remodel markets and hardwood prices remain strong, which in our view should continue to benefit HDI’s volumes and gross margins. An attractive valuation and significant acquisition upside in a highly fragmented industry only add to HDI’s compelling investment case.”

* Mr. Lynk also raised his North American Construction Group Ltd. (NOA-T) target to $28 from $25, exceeding the $24.40 average, with a “buy” rating.

“We believe NACG shares can continue to outperform through 2022,” the analyst said. “The company boasts a record backlog of $1.9-billion (up 128 per cent year-over-year) that is more than 50 per cent outside the oil sands, supporting management’s diversification efforts. Diversification not only exposes NACG to non-oil-linked end markets, such as infrastructure and metals mining, but allows the company to put its underutilized fleet of smaller equipment to work. This should improve margins and drive continued EPS growth through 2023 and mid-to-high teens pre-tax ROIC.”

* TD Securities analyst Tim James cut his Air Canada (AC-T) target to $29 from $32 with a “buy” rating. The average is $29.29.

* Mr. James also raised his Bombardier Inc. (BBD.B-T) target to $2.75 from $2.50 with a “speculative buy” rating and his Heroux Devtex Inc. (HRX-T) to $24 from $23 with a “buy” rating. The averages are $2.05 and $22.75, respectively.

* CIBC World Markets analyst Robert Catellier cut his target for Keyera Corp. (KEY-T) to $33 from $36 with an “outperformer” rating. The average is $34.65.

* National Bank Financial analyst Travis Wood raised his Imperial Oil Ltd. (IMO-T) to $50 from $49 with a “sector perform” rating. The average on the Street is $48.

* National Bank’s Vishal Shreedhar increased his target for Sleep Country Canada Holdings Inc. (ZZZ-T) to $40 from $39, maintaining a “sector perform” rating. The average is $40.29.

* Evercore ISI analyst Stephen Richardson raised his Canadian Natural Resources Ltd. (CNQ-T) target to $57 from $52 with an “in-line” recommendation. The average is $57.25.

* JP Morgan analyst John Royall raised his Parkland Corp. (PKI-T) target to $53 from $51, above the $50.14 average, with an “overweight” rating.

* Cowen and Co. analyst David Deckelbaum hiked his Lithium Americas Corp. (LAC-N, LAC-T) target to US$24 from US$19 with a “market perform” recommendation. The average is US$26.56.

* Alliance Global Partners analyst Aaron Grey reduced his Hexo Corp. (HEXO-T) target to $5 from $7, keeping a “buy” rating. The average on the Street is $5.31.

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