Inside the Market’s roundup of some of today’s key analyst actions
Loblaw Companies Ltd. (L-T) is “well-positioned to achieve solid earnings growth next year,” according to Desjardins Securities’ Chris Li.
He was one of several analysts on the Street to raise their targets for the grocer’s shares following Wednesday’s release of stronger-than-anticipated third quarter results.
Though he cautioned about the presence of near-term industry headwinds, including moderating food-at-home sales, cost inflation and incremental growth investments, Mr. Li pointed to several potential drivers for Loblaw moving forward, including: “(1) continuing shift to discount (albeit slower than previously anticipated but could accelerate due to high food prices); (2) sales recovery of higher margin products (cosmetics, pharmacy services, apparel, etc); (3) ongoing process and efficiency initiatives (supply chain, shrink, pharmacy distribution and goods not for resale); (4) retail excellence (early innings); and (5) better merchandising execution.”
Despite his optimism, Mr. Li noted Loblaw’s current valuation, at 16.2 times his 2022 earnings per share projection (versus a 15-times historical average), already reflects the expectation for “continued solid EPS growth” of approximately 10 per cent next year.
“This is also supported by L’s strong FCF and consistent capital return,” he said. “We believe there is upside to valuation from a renewed focus on execution and reprioritizing strategic initiatives under the new management team. This could support EPS growth above the 8–10-per-cent framework and improving ROIC.”
After bumping his 2021 and 2022 EPS projections to $5.50 and $6.04, respectively, from $5.20 and $5.67, Mr. Li raised his target to $105 from $88, keeping a a “hold” rating. The average on the Street is $100.55.
Others making changes include:
* RBC’s Irene Nattel to $118 from $112 with an “outperform” rating.
“Stronger-than-expected Q3 results and upward revision to 2021 outlook supportive of our constructive view on Loblaw. Despite 55-per-cent share price gain year-to-date, L shares still trading at only 8.4 times fiscal 2022 estimated EBITDA. Performance relative to Metro (MRU-T) similarly supportive of our thesis that as Loblaw delivers better and more consistent results, justification for valuation gap is getting tougher, arguing for multiple re-rating upward,” she said.
* BMO’s Peter Sklar to $100 from $85 with a “market perform” rating.
“The stock has run up considerably in 2021, with Loblaw’s stock now trading at almost 8.5 times 2021 estimated EBITDA, which is slightly above the midpoint of Loblaw’s historical range of 6-9-times trailing EBITDA,” he said. “With growth expected to slow with more people eating away from the home post COVID-19, we need to see a pullback to become more constructive on the stock.”
* CIBC World Markets’ Mark Petrie to $108 from $106 with an “outperformer” rating.
“Loblaw reported strong Q3 results with a significant earnings beat and recovery from a challenging 2020. Retail revenues and GM% were ahead of forecast and reflect the more balanced execution underway as consumer habits slowly revert, most importantly at Shoppers Drug Mart. Our Q4 estimates are increase,” said Mr. Petrie.
* National Bank’s Vishal Shreedhar to $107 from $92 with an “outperform” rating.
* ATB Capital Markets’ Kenric Tyghe to $105 from $103 with an “outperform” rating.
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While he expected the fourth-quarter 2021 financial results for Goodfood Market Corp. (FOOD-T) to be hurt by “unusually high” levels its customers opting to eat outside of the home, Canaccord Genuity analyst Luke Hannan said he was surprised by the magnitude of the drop in order rates and new customer signups.
Shares of the Montreal-based online meal kit and grocery delivery company plummeted 26.4 per cent on Wednesday after it reported a quarterly loss and said its revenues slipped as pandemic lockdowns eased.
“This level of demand has persisted following the quarter, suggesting (1) demand headwinds may stick around longer than we originally thought, meaning (2) the cost deleveraging witnessed in the quarter will likely continue in the near term, although we concede growth in its on-demand business may help offset this,” he said. “Neither price increases taken over the prior periods nor food cost management via flexible menu planning have been sufficient to stave off margin headwinds, namely higher food and labour costs.”
Though he thinks Goodfood may benefit moving forward from the roll-out of micro-fulfilment centres in large urban areas, Mr. Hannan anticipates investors will be “unlikely to reward the stock with a higher multiple until (1) demand headwinds abate and (2) the growth profile of its on-demand business is clearly shown in its financial results.”
Accordingly, he lowered his rating for its shares to “hold” from “buy” and dropped his target to $6 from $11.50. The average on the Street is $9.11.
Elsewhere, Scotia Capital analyst George Doumet downgraded Goodfood to “sector perform” from “sector outperform” with a $6.50 target, down from $12.
“While we acknowledge that we should have been more cautious into the quarter (given the significant easing in pandemic-related restrictions), there was simply too many pressure points that simultaneously materialized, namely: more top line deleveraging than expected, higher labor and food costs, and supply chain inefficiencies,” said Mr. Doumet. “Furthermore, we saw a greater than expected step up in investments in the build-out for the grocery offerings (including on-demand). These headwinds are expected to persist over the coming quarters.
“While we acknowledge that the shares look attractive from a valuation standpoint (trading at 0.7 times EV/Revenue 2022 estimates vs. HFG at 2.4 times), we believe the risk profile has substantially increased.”
Acumen Capital’s Jim Byrne moved it to “hold” from “buy” with a $6.50 target, down from $11.50.
“We believe the headwinds for profitability and growth will prevail for the next few quarters as it adds to its 1-hour delivery offering and pandemic related demand wanes. While the grocery delivery market is undoubtedly a larger TAM, we believe the next several quarters will be challenging for the company as it pursues this new strategy,” he said.
Others making changes include:
* Desjardins Securities’ Frederic Tremblay to $9 from $13 with a “buy” rating.
“4Q FY21 results were severely pressured by seasonality, removal of COVID-19-related demand tailwinds, inflation and costs associated with implementing the growth strategy,” said Mr. Tremblay. “While the surprisingly large impact of these near-term factors is hard to digest, Goodfood’s large appetite for meal kits and grocery products is intact. The latest development, and key pillar of the next leg of growth, is the gradual launch of on-demand (one-hour) delivery from micro fulfillment centres in high-density markets.”
* Stifel’s Martin Landry to $8 from $15 with a “buy” rating.
“FOOD is facing two main issues in our view. First, a meal kit industry which is maturing and becoming more competitive, reducing future growth prospects. Second, investors’ limited visibility on the online grocery opportunity combined with limited metrics disclosed by the company to monitor progress. Hence, FOOD has become a “show-me” story which may keep shares rangebound near-term, in our view. Long-term we believe FOOD will be successful in creating value with its online grocery initiative,” said Mr. Landry.
* RBC’s Paul Treiber to $6 from $9 with a “sector perform” rating.
“While the headwind from re-opening was widely known, the magnitude was greater than expected. Goodfood’s increasing prioritization of online grocery is leading to reduced investor sentiment. Online grocery is a large opportunity, but involves uncertainties compared to meal kits, in our view,” he said.
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Canaccord Genuity analyst Robert Young said the “high level of negative sentiment and growing expectations for a rising rate environment” have weighed on shares of Real Matters Inc. (REAL-T) more than he anticipated.
Accordingly, admitting he was late to adjust his view, Mr. Young downgraded the Markham, Ont.-based tech firm to “hold” from “buy” after resetting his expectations on “the assumption of a more difficult environment in 2022 more than offsetting expected share gains.”
Real Matters dropped almost 14 per cent on Wednesday despite the premarket release of “stronger-than-feared” fourth-quarter results, including net revenue and EBITDA that topped both the expectations of both Mr. Young and the Street expectations.
“Expectations of rising interest rates are a headwind to mortgage origination volumes and, by extension, to Real Matters,” he said. “While purchase-driven volumes appear to be stable, refinance volumes have been in decline. While cash-out refi and last-minute refinance activity in front of a more clearly rising rate environment may be offsets, the worry of rate increases remains a significant obstacle for sentiment on Real Matters stock”
See also: Real Matters, an early pandemic darling, is the victim of inflation
After reducing his our fiscal 2022 and 2023 estimates for both its Title and Appraisal segments “anticipating a more difficult operating environment,” Mr. Young cut his target to $8.75 target from $22. The average is $13.72.
“While we are not confident in our ability to call future mortgage rates, the perception of a more difficult period in the near term limits investor appetite, in our view,” said Mr. Young. “We are less confident on the near term given Real Matters’ focus on 2025 targets, the potential for tax-loss selling, and the likelihood of growth resumption in H2 being low, given a difficult Q1 and Q2 comparison.”
Others making changes include:
* BMO’s Thanos Moschopoulos to $9 from $15 with a “market perform” rating.
“While the quarter was ahead of consensus, interest rates have been on an upward trajectory in recent weeks, creating a strong macro headwind for REAL,” he said. “We don’t view the stock’s valuation as sufficiently attractive given the uncertainty with respect to where industry volumes will ultimately settle out at over the next couple of years, and the potential impact that desktop appraisals may (or may not) have, longer term, on REAL’s business.
* Scotia Capital’s Paul Steep to $13 from $14 with a “sector perform” rating.
“We remain cautious on Real Matters shares given the impact of repositioning the firm’s U.S. title business and cyclicality in the U.S. mortgage refinancing market,” said Mr. Steep. “We would opt to take a wait-and-see approach to the stock in watching for stabilization of the firm’s Title operations, up-take by new Tier 1 & 2 clients in this segment, and improved visibility into the U.S. mortgage refinancing market. Factors we are monitoring in revisiting our view on the shares include the ramp-up of volumes in U.S. Title, given the new Tier 1 client launch, the impact of rising interest rates on U.S. mortgage volumes (in particular refinancing activity) and additional new client wins.”
* Raymond James’ Steven Li to $18 from $25 with an “outperform” rating.
“Most of the reset in our numbers is from Title segment (refi),” said Mr. Li. “Given we are expecting market share gains (from Tier 1 & 2 launches etc), this implies we are factoring in even further deterioration in the refi market from here. It also now factors in the complete rationalization of their Diversified title business ($7-million in revenues in F2021 going to zero). This should effectively scrub the implied refi number pretty close to a baseline refi number.”
* National Bank Financial’s Richard Tse to $10 from $12 with a “sector perform” rating.
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The third-quarter results of High Liner Foods Inc. (HLF-T) highlight “underappreciated” operational improvements, according to BMO Nesbitt Burns analyst Jonathan Lamers.
“The COVID-19 pandemic has masked an impressive operational turnaround under CEO Rod Hepponstall. Q3 earnings exceeded our estimate with better organic sales volume despite supply chain constraints, and we have increased conviction High Liner can continue to grow its earnings at a moderate pace,” he said. “The stock is trading at only 6.3 times EV/ EBITDA (2022) on our increased estimates, at the low end of its historical range of 6-10 times, and a wide 3-times discount to the North American food processor sector.”
That view led him to raise his rating for the Nova Scotia-based frozen seafood company’s shares to “outperform” from “market perform.”
“Following the initial earnings lift from 2018-2019 on necessary expense reductions, EBITDA has improved at a 6.9-per-cent annualized rate from Q3 2019 through Q3 2021, despite the COVID-19 pandemic’s impact on food service demand and recent supply chain challenges,” he said. “We believe this has largely been achieved from increased focus on driving sales of higher-margin value-add products. During the call, High Liner noted its revenue to the foodservice channel for Q3 were 12 per cent above the same time in 2019, including value-add sales 36 per cent above 2019, despite the pandemic’s effects on away-from-home dining. We note EBITDA has been meaningfully above consensus estimates for 7 of the past 11 quarters (since year-end 2018).”
Expecting further dividend hikes, Mr. Lamers raised his target to $18.50 from $15.50. The average is $18.13.
“High Liner stock closed at 6.3 times forward EV/EBITDA based on our revised 2022 estimates, 3 times below Canadian-listed protein processor Maple Leaf Foods (MFI; $31.05; Outperform rated by Peter Sklar) at 9.3 times and the North American food processor sector at 9.0 times,” the analyst said. “The historical range for High Liner has been 6-10 times, and the stock was in the 8-9-times range for the three years prior to the May 2019 dividend reduction. Potential catalysts to narrow the discount include continued delivery of consistent results demonstrating organic growth, and further dividend increases.”
Others making changes include:
* Scotia’s George Doumet to $15.50 from $14.50 with a “sector perform” rating.
“HLF reported a good set of Q3 results that came in line with our expectations, but well ahead of the Street beating consensus revenues and adj. EBITDA by 4 per cent and 12 per cent, respectively,” said Mr. Doumet. “The company also increased its quarterly dividend by 43 per cent to 10 cents (3-per-cent dividend yield). As expected, the quarter was a continuation of the Q2 narrative - meaning, a strong recovery in foodservice volumes, offset by lost volumes driven by supply chain challenges. We expect this trend to be in place over the next few quarters - and to eventually be met by higher input costs in many of HLF’s species.
“We continue to look for a more stable/predictable recovery in volumes to get more constructive on HLF. In the context of ongoing supply chain challenges and rising commodity cost inflation, we believe this could take longer to achieve. Until then, we expect the company’s trading multiple to remain range-bound.”
* RBC’s Sabahat Khan to $16 from $15 with a “sector perform” rating.
“Through the balance of 2021, we expect capital to be directed towards capex (weighted towards maintenance spend) and dividends. Longer-term, we believe management could consider M&A as the operating environment “normalizes” and given that the balance sheet is in good shape,” said Mr. Khan.
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Brookfield Infrastructure Partners L.P. (BIP.UN-T, BIP-N) continues to be “a standout growth vehicle for long-term shareholders,” according to iA Capital Markets analyst Naji Baydoun.
Upon resuming coverage following the closing of its US$600-million bought deal offering and concurrent US$400-million private placement with Brookfield Asset Management (BAM.A-T, BAM-N), he said the moves are in line with its funding strategy, including gaining capital from a variety of sources.
“The Company indicated that it intends to use the net proceeds from the offerings to fund an active and advanced pipeline of M&A investment opportunities, including near-term organic growth capital requirements, and for general working capital purposes,” said Mr. Baydoun. “Overall, we believe that the capital raise (1) improves BIP’s pro-forma liquidity profile, positioning it well to continue executing on its growth strategy, and (2) supports our investment thesis on the Company’s accelerating growth profile.”
“Importantly, the combination of LP units (Bermuda-based partnership structure) and BIPC shares (corporate structure) offered highlight one way that BIPC can clearly enhance BIP’s access to capital (in our view). The offerings will also further increase BIPC’s public float.”
Mr. Baydoun reaffirmed a “strong buy” rating and US$71 for Brookfield Infrastructure units. The current average is US$65.20.
“We view BIP as a unique and diversified way for investors to play the broad long-term infrastructure investment theme, with (1) access to a global, large-scale infrastructure investment platform (ownership interests in more than US$60-billion of assets), (2) defensive cash flows (approximately 90 per cent of FFO regulated/contracted), (3) visible and sustainable organic cash flow growth (6-9 per cent per year, CAGR 2020-25), (4) potential upside from accretive M&A, and (5) attractive income characteristics (3.50-per-cent yield, 60-70-per-cent long-term FFO payout, and a 5-9 per cent per year dividend growth target),” the analyst said.
Elsewhere, CIBC’s Robert Catellier raised his target to US$66 from US$64 with an “outperformer” rating.
“Following the share offering, we reiterate our view that the units are a core holding for infrastructure investors and offer strong upside. With $1 billion in capital raised, this is a good indicator to us of a strong investment pipeline,” he said.
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In a review of the quarterly earnings season for precious metals producers, Credit Suisse analyst Fahad Tariq made a series of target changes to stocks in his coverage universe.
“There were two major themes in the Q3-21 results: i) commentary on cost inflation, particularly into 2022, and ii) expectations for 2021-end reserves,” he said. “On cost inflation, most companies are now guiding to approximately 5-7-per-cent inflation in 2022. ... On a positive note, companies that have indicated more limited impact from cost inflation are Barrick (GOLD) and Endeavour Mining (EDV). Unsurprisingly, the royalty/streaming companies Franco Nevada (FNV), Wheaton Precious Metals (WPM), and Triple Flag (TFPM) have indicated no impact from cost inflation. On year-end reserves, most companies indicated they are on track to nearly replace depleted reserves, with more exploration spend in 2021 vs. 2020 (2020 drilling activity was of course negatively impacted by Covid-19 lockdowns).”
His adjustments include:
- Alamos Gold Inc. (AGI-N/AGI-T, “neutral”) to US$7.50 from US$8. The average on the Street is US$10.75.
- Eldorado Gold Corp. (EGO-N/ELD-T, “underperform”) to US$9.50 from US$8.75. Average: $17.62 (Canadian).
- Iamgold Corp. (IAG-N/IMG-T, “neutral”) to US$3 from US$2.50. Average: US$3.30.
- Kirkland Lake Gold Ltd. (KL-N/K-T, “neutral”) to US$42 from US$44. Average: US$45.75.
- New Gold Inc. (NGD-N/NGD-T, “neutral”) to US$1.70 from US$1.30. Average: US$1.74.
- Wheaton Precious Metals Corp. (WPM-T, “neutral”) to $53 from $54. Average: $72.58.
“Our top picks are Agnico Eagle (AEM), Newmont (NEM), and Endeavour Mining (EDV). Other Outperform-rated stocks are: Kinross (KGC), Barrick (GOLD), Triple Flag (TFPM), and Yamana (AUY),” said Mr. Tariq.
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Barclays analyst Guarav Jain thinks Canadian companies are “unlikely to benefit” from cannabis growth in the U.S.
“The Canadian cannabis market is ultimately small,” he said. “We estimate a FY30 legal market of C$10-billion, which we see supporting manufacturer fiscal 2030 EBITDA of C$1-2-billion and FY29 EV of C$7-23-billion. “This implies that Canada accounts for 30 per cent of Canopy’s and Tilray’s operating EV, and 40 per cent of Cronos’. The rest of their EV is attributable to optionality in the U.S. market. However, Canadian companies cannot directly invest in the U.S. market. They are entering into structured transactions with US MSOs that would convert into minority stakes upon US federal legalization. We think the benefit of these deals accrues to the shareholders of MSOs rather than those of the Canadian companies.”
He initiated coverage of Canopy Growth Corp. (CGC-Q, WEED-T) with an “equal weight” rating and US$14 target. The average is US$16.20.
Mr. Jain gave Cronos Group Inc. (CRON-Q, CRON-T) and Tilray Inc. (TLRY-Q, TLRY-T) “underweight” recommendations with targets of US$5.50 and US$10, respectively. The averages on the Street are US$6.43 and US$12.76.
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In other analyst actions:
* In a research note wrapping up earnings season for Canadian infrastructure companies, Credit Suisse analyst Andrew Kuske raised Atco Ltd. (ACO.X-T) to “outperform” from “neutral” with a target of $48, up from $47 and above the $47.63 average. Mr. Kuske also increased his targets for Fortis Inc. (FTS-T, “neutral”) to $60 from $58 and Canadian Utilities Ltd. (CU-T, “neutral”) to $39 from $38. The averages are $58.54 and $37.53, respectively. He cut his TC Energy Corp. (TRP-T) target to $70 from $74, topping the $68.52 average, with an “outperform” rating.
“One of the most predominate issues in the sector is the direction of interest rates and part of the inflation debate – that is largely focused on timing with the potential for better buying opportunities,” he said.
* RBC’s Drew McReynolds lowered his Cogeco Communications Inc. (CCA-T) target to $127 from $129 with a “sector perform” rating. The average is $129.60.
“While we see rising value in the shares (not unlike other Canadian cableco peers) given current valuation at 6.8 times FTM [forward 12-month] EV/EBITDA, we look for more timely entry points with a focus on accelerating returns on F2022 network investments beginning in F2023, alongside a likely wireless entry in Canada also in F2023,” he said.
* Scotia Capital’s Daniel Sampieri initiated coverage of Excelsior Mining Corp. (MIN-T) with a “sector perform” rating and 65-cent target, which implies an “attractive” 40-per-cent return. The average is $1.75.
“MIN is a small cap mining company focused on the ramp-up and staged development of its 100-per-cent-owned and fully permitted Gunnison in situ recovery copper (Cu) project near Tucson, Arizona,” he said. “Our target price is based on 0.5 times our NAVPS(10%) estimate. Our speculative risk ranking reflects MIN’s
small market capitalization, elevated technical risks associated with unconventional Cu ore extraction, medium-term development risk, and funding requirements.”
* With the announcement of its intention to a launch of a US$1-billion substantial issuer bid and sale of a 9.99-per-cent stake in Odyssey for US$900-million, Scotia Capital analyst Phil Hardie raised his Fairfax Financial Holdings Ltd. (FFH-T) target to $790 from $775 with a “sector outperform” rating. The average is $752.33, while BMO’s Tom MacKinnon raised his target to $665 from $650 with a “market perform” rating.
“We view the announcement positively and believe it provides an elegant solution to enhance book value per share in the near term while also supporting future growth,” Mr. Hardie said. “The transaction will likely enable FFH to take advantage of its discounted share price to support accretive share buybacks, while also effectively conserving financial flexibility to support further organic capital deployment across its insurance companies to increase underwriting leverage and benefit from a favourable pricing environment.”
“Fairfax remains one of our top value plays and offers significant upside potential given what we view as a valuation discount that is simply too steep to ignore.”
* Stifel analyst Andrew Partheniou raised his target for Field Trip Health Ltd. (FTRP-T) to $11.50 from $10 with a “speculative buy” rating. The average is $13.
* National Bank’s Matt Kornack increased his target for H&R Real Estate Investment Trust (HR.UN-T) target to $21.50 from $20.50, keeping an “outperform” rating. The average is $19.38.
* Seeing it “ready to feed a market starving for supply,” iA Capital Markets analyst Puneet Singh raised his Lithium Americas Corp. (LAC-T) target to $55 from $42 with a “speculative buy” rating, while Canaccord Genuity’s Katie Lachapelle bumped her target to $46 from $35 also with a “speculative buy” recommendation and BMO’s Joel Jackson increased his target to $30 from $22 with a “market perform” rating. The average is $41.41.
“There may be some share price volatility around the Thacker Pass RoD in Q1/22 thus we maintain our Speculative Buy rating,” said Mr. Singh. “However, we note that LAC is emerging as a serious player (existing assets have plans to ramp up to more than 140ktpa LCE) in the lithium sub-sector that has fewer investable choices than other metals such as gold/copper. Thus, we believe the premium is justified.”
* CIBC World Markets’ Mark Petrie increased his Metro Inc. (MRU-T) target to $67 from $64 with a “neutral” rating, while National Bank’s Vishal Shreedhar raised his target to $71 from $67 with a “sector perform” rating. The average is $67.09.
“Metro reported in-line Q4 results with slightly weaker same-store sales (SSS) growth partially offset by good GM% management. Inflation remains in focus, and we see Metro as well positioned to navigate periods of heightened inflation through its channel mix, merchandising efforts, and private label offering,” said Mr. Petrie.
* RBC’s Matt Logan raised his Melcor Developments Ltd. (MRD-T) target to $18 from $17 with a “sector perform” rating.
“Following a challenging year in 2020, Alberta is set to post some of the best GDP growth in Canada in 2021–22,” said Mr. Logan. “This, together with elevated resale activity and infrastructure investments in the province, bode well for Melcor Developments’ land development business. To date, the improving backdrop has supported steady demand for new lots in Alberta. The operating environment is not yet robust, but we see good tailwinds and meaningful torque if fundamentals strengthen further.”
* Canaccord Genuity’s John Bereznicki raised his target for Pembina Pipeline Corp. (PPL-T) to $48 from $47, exceeding the $44.03 average, with an “buy” rating.
* Mr. Bereznicki also increased his target for Tidewater Midstream and Infrastructure Ltd. (TWM-T) to $2 from $1.90, topping the $1.89 average, with a “buy” rating.
* TD Securities analyst Vince Valentini lowered his target for Rogers Communications Inc. (RCI.B-T) target to $70 from $72, keeping a “buy” rating. The average is $69.80.
David Leeder