Inside the Market’s roundup of some of today’s key analyst actions
After its shares have performed “well” in 2021, Desjardins Securities analyst Doug Young now sees “limited room” for multiple expansion of National Bank of Canada (NA-T).
Accordingly, following Wednesday’s release of its quarterly results that saw pre-tax, pre-provision earnings fall 8 per cent below his estimate with each of its business divisions underperforming, he cut his rating for its shares to “hold” from “buy.”
“In our view, NA deserves a premium P/BVPS [price to book value per share] multiple,” he said. “But, we see limited room for multiple expansion; NA also has greater exposure to capital markets, where we expect results to be tempered through FY22.
Though he raised his 2022 and 2023 earnings expectations, Mr. Young also lowered his target for National Bank shares to $105 from $108. The average is $107.30.
“We like its risk-adjusted NIM, ACL coverage and ROE,” he noted.
Elsewhere, Veritas Research analyst Nigel D’Souza lowered the stock to “reduce” from “sell” with a $105 target.
Other analysts making target changes include:
* Scotia Capital’s Meny Grauman to $112 from $114 with a “sector perform” rating.
“After a steady diet of beats NA delivered a rare miss in Q4 as core EPS and PTPP earnings came in 1 per cent and 7 per cent below Street expectations ... The issue is not that the bank’s results this quarter were bad - it’s just that they are not as good as they once were,” he said. “After growing by 15 per cent year-over-year in Q3, NA saw PTPP growth slow to 8 per cent in Q4, and noted that this was likely to dip even lower in Q1/F2022. For the year as a whole Management is guiding to mid single digit PTPP growth in F2022, which is below the 12-per-cent growth the bank saw in F2021 and even the 9 per cent it saw in F2020. We were concerned about the shares heading into yearend reporting because on an expected deceleration in performance, and that dynamic proved to be even more dramatic than we had expected.”
* CIBC World Markets’ Paul Holden to $108 from $112 with a “neutral” rating.
“A number of factors that drove relative outperformance for National earlier this year look to be turning - slower residential mortgage growth, margin compression in mortgages and slowing capital markets revenue. At the same time, we are observing a pickup in areas that had contributed to lagging performance for other banks,” said Mr. Holden.
* Canaccord Genuity’s Scott Chan to $105 from $109.50 with a “hold” rating.
* RBC’s Darko Mihelic to $111 from $99 with a “sector perform” rating.
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Though he deemed its fourth-quarter earnings release “disappointing,” Scotia Capital analyst Meny Grauman remains “optimistic” about Royal Bank of Canada (RY-T).
Before the bell on Wednesday, RBC reported adjusted earnings per share of $ 2.71, missing the Street’s estimate of $2.81 and “well below” the $3 projection from Mr. Grauman, who anticipated “a much larger” reversal in provisions for credit losses. He attributed the result, which was down 10 per cent from the third quarter and 19 per cent year-over-year, to “outsized” margin pressure in Canadian Banking and at City National.
“After a steady streak of earnings beats, RBC closed the year with a rare EPS miss driven by outsized margin pressure and elevated expenses that muted the impact of strong loan growth,” said Mr. Grauman. “The end result was a disappointing PTPP earnings result which was about 4 per cent below the Street, and which the bank’s CEO labeled as disappointing during the earnings call with analysts. This was not the best way to close the books on F2021, but the real question is how this disappointing result impacts our outlook for F2022 and beyond.
“The good news is that we believe Q4 was a misstep and not a sign of something more structural. In our view Royal Bank continues to have significant torque to the post-pandemic recovery including upside to rising rates especially in its US wealth business, and significant exposure to a bounce back in credit card activity and commercial loan growth. During the earnings call Management continued to highlight its constructive margin outlook that will only be further helped by rising rates, and its clear focus on delivering positive operating leverage despite the headwinds from rising inflation.”
Keeping a “sector outperform” rating for RBC shares, Mr. Grauman trimmed his target to $146 from $149. The average is $144.52.
Others making changes include:
* Barclays’ John Aiken to $141 from $138 with an “overweight” rating.
“We continue to like RY’s diversified operations and believe that it supports a premium valuation, given an ongoing positive outlook. Admittedly, the quarter was not as robust as we would have liked but this appears to be a sectorwide, rather than stock-specific, phenomenon this quarter. We are modestly lowering our target price ... given a little greater uncertainty on the nearterm growth outlook,” he said.
* CIBC World Markets’ Paul Holden to $149 from $143 with a “neutral” rating.
* Canaccord Genuity’s Scott Chan to $141 from $143 with a “buy” rating.
* TD Securities’ Mario Mendonca to $150 from $155 with a “buy” rating.
* National Bank Financial’s Gabriel Dechaine to $140 from $144 with an “outperform” rating.
Meanwhile, Veritas Research analyst Nigel D’Souza raised the stock to “buy” from “reduce” with a $147 target.
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Following its Investor Day event on Wednesday, iA Capital Markets analyst Matthew Weekes assumed coverage of TC Energy Corp. (TRP-T), maintaining the firm’s “buy” recommendation for its shares after emphasizing its “substantial” capital growth program and “right-sized” dividend growth rate.
“TRP highlighted an overall CAGR [compound annual growth rate] in EBITDA of 5 per cent (iA estimate of 4.8 per cent) through 2026,” he said. “ Key highlights are that the Power segment is expected to grow at roughly double the corporate average, the Natural Gas segment is expected to grow at approximately the corporate average, while the Canadian Natural Gas and Liquids Pipelines segments will likely experience growth below the corporate average. Based on the Company’s projections, by 2026 EBITDA is expected to be $11.8-billion. By 2026, Canadian and U.S. Natural Gas Pipelines should account for approximately two-thirds of EBITDA, which is similar to today’s share.”
“The Company also highlighted its $29-billion growth program. The segments that will consume the largest proportion of capital will be US Natural Gas, Canadian Natural Gas, and Power. Also, investors should feel highly confident that additional projects will be announced next year.”
TRP also reiterated its dividend growth outlook of 3-5 per cent, falling from a projection of 5-7 per cent last year. Mr. Weekes pegged the decline of the decline to the demise of the Keystone XL Pipeline, which caused a “significant” loss of near-term EBITDA growth.
“While a dividend growth rate in excess of 5 per cent was possible, it was aggressive,” he said.
After slight reductions to his 2022 estimates and in response to a recent decline in equity prices, Mr. Weekes trimmed the firm’s target for TRP shares to $66 from $70. The average on the Street is $67.95.
Elsewhere, CIBC World Markets analyst Robert Catellier trimmed his target to $72 from $74 with an “outperformer” rating.
“While the financial strategy is largely unchanged, higher capital spending in the near term causes us to reduce our price target. The company should be able to achieve targeted returns in the short term by leveraging existing assets as it undertakes a gradual transition to renewables. Longer term, this strategy may make it challenging to generate targeted returns,” said Mr. Catellier.
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Emera Inc.’s (EMA-T) Investor Day event on Wednesday was “better than expected with a nice step up in growth capital in its core areas,” according to Scotia Capital analyst Robert Hope.
“The presentation highlighted: 1) Tampa Electric as a core growth engine for the company, 2) significant opportunities to de-carbonize its Nova Scotia utility, 3) low regulatory risk, and 4) what we view to be an easy to execute funding plan,” he said.
The analyst emphasized Emera’s “strong” rate base growth, noting: “The company sees 2020-2024 annual rate base growth of 6.8 per cent, which is slightly below the prior 2019-2023 plan of 7.5 per cent. This small step down was expected and largely relates to a stronger Canadian dollar. On a constant currency basis, rate base growth would be 7.3 per cent out to 2024. This strong rate base growth should drive top tier EPS growth.”
Raising his 2022 and 2023 financial estimates to “reflect a higher capital spend,” Mr. Hope increased his target for Emera shares to $65 from $64, keeping a “sector outperform” rating. The average is $61.41.
“Based on our 2023 estimates, EMA’s price-to-earnings is below its closest peers at 17.7 times, a 0.4-times discount to FTS and a 1.3-times discount to H,” he said. “Our $65 target price is predicated on a 19.5 times 2023 estimated P/E, which is line with Fortis at 19.5 times and at a slight premium to Hydro One at 19.25 times.”
Others making changes include:
* JP Morgan’s Chris Turnure to $61 from $59 with a “neutral” rating.
* National Bank’s Patrick Kenny to $59 from $58 with a “sector perform” rating.
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RBC Dominion Securities analyst Paul Treiber sees “stronger structural growth” from Descartes Systems Group Inc. (DSGX-Q, DSG-T) following better-than-expected third-quarter 2022 results.
“Q4 baseline implies that double-stacked organic growth is likely to reach all-time highs next quarter,” he said. “Although trade volumes are elevated at the moment, we believe that Descartes is also benefiting from stronger structural demand for logistics software, which is augmenting Descartes’ capital allocation model.”
After the bell on Wednesday, the Waterloo, Ont.-based tech firm reported revenue of US$109-million, up 24 per cent year-over-year and exceeding the projections of both Mr. Treiber (US$107-million) and the Street (US$108-million). With that “strong” growth and “solid” cost management, adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) rose 32 per cent year-over-year to US$48.2-million, exceeding the company’s 10-15-per-cent long-term target and also topping estimates (US$45.5-million and US$46.8-million, respectively).
“Constant currency organic growth accelerated to 16 per cent Q3, up from 15 per cent Q2 and above our estimate for 14 per cent,” the analyst said. “Organic growth improved despite slightly tougher year-over-year comparables. Growth reflects the strong global trade environment, customer adoption of additional solutions to streamline/digitize processes, and uptake of Descartes’ solutions to address Brexit trade compliance, among other drivers. Organic growth of 16 per cent is Descartes’ highest in more than 10 years. Q3 organic growth is also Descartes’ highest in 10-plus years on a double-stack basis at 18 per cent.”
Mr. Treiber said this growth is “augmenting Descartes’ model,” noting: “Descartes has successfully balanced organic growth and complementary M&A, which has led to 18-perf-cent compounded FCF/share growth over the last 10 years. Amidst stronger global demand, Descartes is seeing higher crossselling and revenue synergies, which have the potential to increase Descartes’ IRR on acquisitions and long-term shareholder returns. While takeout valuations are high, there are more companies for sale, and management remains focused on finding value-creating acquisitions.”
After raising his full-year fiscal 2022 projections, Mr. Treiber increased his target for Descartes shares to US$100 from US$95, maintaining an “outperform” recommendation. The average target is US$88.17.
Others making changes include:
* Raymond James’ Steven Li to US$83 from US$80 with a “market perform” rating.
“Strong execution in Q3 (slight beats on revenue and A-EBITDA),” said Mr. Li. “Importantly, we calculate 16 per cent organic growth at constant currency. While compares gets tougher in the next quarter, we believe DSGX organic growth, once normalized, is likely to still track well ahead of pre-pandemic levels of 5-6 per cent given tailwinds. DSGX remains well positioned to benefit from economies re-opening (network volume),the growing importance of supply chains coming out of this pandemic, which has been furthermagnified by current ongoing shortages.”
* Scotia Capital’s Paul Steep to US$87 from US$84 with a “sector outperform” rating.
“We view Descartes Q3 results as reflecting continued traction in the firm’s business beating our and consensus estimates with 14-per-cent organic growth (in constant currency SGM estimated) reflecting ongoing improvement due to growth in the customs business via Brexit, stronger results at recent acquisitions, and increased shipping volumes as demand for shipping and logistics services remains robust,” he said. “Our view remains that the company is in a strong leadership position in the software logistics market given its proven M&A-driven growth strategy, sustained organic trends, and ongoing margin expansion. We anticipate that the firm will continue to adapt to a changing logistics market and strengthen its product offering in key markets.”
* Barclays’ Raimo Lenschow to US$90 from US$89 with an “equal-weight” rating.
“Descartes reported another quarter of healthy execution as it continues to benefit from customers looking to digitize their supply chains more coming out of the pandemic,” he said. “This quarter, Descartes accelerated Services revenue to grow north of 25 per cent as labor shortages and supply chain constraints drove increased adoption and investment. This growth was also profitable with adj. EBITDA margin coming in at 44.2 per cent. Despite the strong showing in the face of uncertainty, questions linger around the sustainability of this growth and the overall macro impact of the new Omicron variant. Hence, at 33 times calendar 2023 estimated FCF, we view the valuation as fair.”
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Wedbush analyst Dan Ives has “increased confidence” in Apple Inc.’s (AAPL-Q) iPhone 13 growth cycle entering 2022, seeing it on pace to sell more than 40 million units during the holiday season despite headwinds brought on by the global chip shortage.
“The focus of the Street has been on the lingering chip shortage for Apple (and every other tech and automotive player), however the underlying iPhone 13 demand story for Cupertino both domestically and in China is trending well ahead of Street expectations in our opinion,” he said in a research note. “We estimate in China alone there are roughly 15 million iPhone 13 upgrades for the December quarter as this key region remains a major source of strength for Apple heading into 2022 and beyond.”
Though he acknowledged “macro/Fed and Omicron worries will rule the day” and expects near-term market volatility to persist, Mr. Ives sees Apple as a “safety blanket in a near-term market storm.” He sees its fundamental story “strengthening into 2022 on the heels of the most robust Cupertino product cycle in the last decade.”
“On a SOTP we believe the services business is worth $1.5-trillion as this $75-billion+ annual revenue stream is showing no signs of slowing down as the Street further appreciates this Apple re-rating story going into 2022,” he said. “The bull/bear debate on Apple will continue to center around how sustainable this product cycle is into 2022 and the valuation the stock deserves, although we believe the risk/reward is very favorable at current levels for this ‘safety blanket’ tech stalwart during this market storm. To this point, we believe on a SOTP valuation Apple is well on its way to being a $3 trillion market cap during 2022 as the Street catches up to this growth story.”
Seeing “the pent-up demand story for Cupertino is still being underestimated by investors with chip issues a transitory issue in our opinion,” Mr. Ives called Apple “a top tech name to own,” raising his target for its shares to US$200 from US$185 with a “buy” recommendation. The average is US$168.95.
“The tech bull cycle will continue (despite this near-term white knuckle period) in our opinion its upward move into 2022 given the scarcity of growth names/winners in this market looking ahead on the heels of the 4th Industrial Revolution playing out among enterprises/consumers,” he said. “Our favorite large cap tech name to play the 5G transformational cycle is Apple, with the 1-2 punch of its massive services business and iPhone product cycle translating into a $3-trillion market cap for Cupertino during 2022 in our opinion.”
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Calling it a “a fast-growing digital disruptor in the wholesale used vehicle auction space,” Scotia Capital analyst Michael Doumet initiated coverage of E Automotive Inc. (EINC-T) with a “sector perform” rating, expecting to see it achieve annual sales growth of 35 per cent or more through 2023 as it grows south of the border.
“The prospects of the digital dealer-to-dealer (D2D) auction market growing at a 25 per cent to 35 per cent CAGR [compound annual growth rate] through 2025 (and beyond) are realistic; the two largest players are targeting cumulative volume growth of 115 per cent and 225 per cent through 2025,” he said. “Each year in North America, 15 million used vehicles are transacted from one dealer to another through physical auctions (5 million) and other channels (10 million). Today, by comparison, digital D2D auctions account for 1.5 million of those transactions. The pandemic has accelerated the adoption of e-commerce in automotive retail and wholesale markets and volumes in the digital D2D channel are inflecting as they are cheaper and more efficient than the physical auction channel.
“Scale (in the United States) is the name of the game. EINC experienced rapid sales growth in the last three years (97 per cent CAGR), driven by strong organic growth in its leading digital platform and enhanced by its acquisition strategy. EINC has established a leading position in Canada and, with its recent acquisition in the United States, has established a beachhead for an ambitious cross-country rollout. As with any marketplace, scale drives network effects. We believe the need for liquidity suggests that this may be a ‘winner-take-most’ market. In the physical auction market, KAR Auction Services, Inc. (KAR-Q, not covered) and Manheim Express (private) have a 70-per-cent market share. A leading technology platform and fully capitalized balance sheet suggest EINC can be one of those winners. It is a matter of execution.”
Seeing its shares, which began trading on the TSX in early November after its initial public offering, as “rich, but rich in opportunity,” Mr. Doumet set a target of $24 per share, versus its closing price on Wednesday of $18.
“While we do not expect EINC to be EBITDA positive until 2025, we believe it can sustain gross margins near 50 per cent and generate steady-state EBITDA margins of 25 per cent to 30 per cent at maturity,” he said. “In the second half of the decade, we believe EINC can achieve vehicle transactions of close to 1 million, depending on how quickly the D2D auction market grows and whether EINC maintains or gains market share. At 1 million transactions, EINC can generate revenues of $500 million to $600 million and steady-state EBITDA of $150 million to $180 million with strong FCF conversion. On that basis, we believe EINC could triple in value, all else being equal, which represents strong upside. While we believe EINC has a leading technology platform, the journey to 1 million transactions will be competitive and will require strong execution.”
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In other analyst actions:
* After its acquisition of 11 dealerships from the Autopoint Group in Southwestern Ontario, CIBC World Markets analyst Krista Friesen upgraded AutoCanada Inc. (ACQ-T) to “outperformer” from “neutral” with a $48.50 target, rising from $46. The average target is $59.84.
Others making changes include: Scotia’s Michael Doumet to $47 from $55 with a “sector outperform” rating; Stifel’s Maggie MacDougall to $65.50 from $64.50 with a “buy” rating and ATB Capital Markets’ Chris Murray to $85 from $80 with an “outperform” rating.
“Since reporting Q3 earnings, ACQ’s share price has declined 30 per cent versus its peer group, which saw declines of 10 per cent,” said Ms. Friesen. “While we attribute much of this decline to fears around peak earnings, we argue that auto inventory issues will not be resolved anytime soon. With ACQ’s strong inventory management system, it should continue to benefit from higher used-vehicle prices. Additionally, we view the acquisition of Autopoint as positive and in line with ACQ’s strategy and will look for additional acquisitions in the coming year.”
* Desjardins Securities analyst Justin Bouchard increased his target for shares of Athabasca Oil Corp. (ATH-T) to $1.50, exceeding the $1.38 average, from $1.25 with a “buy” rating.
“ATH announced its 2022 capital budget, which is primarily focused on sustaining production,” he said. “Volumes in 2022 are expected to be in line with 2021 and FCF will be used to reduce net debt. The volatility in oil prices over the last few days is a stark reminder of ‘what if’. Fortunately, ATH has 50 per cent of its volumes hedged in 2022, which helps stabilize the company’s cash flow and provides some comfort that net debt is going to grind lower.”
* TD Securities analyst Menno Hulshof cut his Baytex Energy Corp. (BTE-T) target to $4.25 from $4.50 with a “hold” rating, while Raymond James’ Jeremy McCrea raised his target to $5.75 from $5.50 with an “outperform” recommendation. The average is $4.88.
“We believe that BTE’s 2022 budget strikes the right balance between FCF generation and modest growth,” said Mr. McCrea. “A key feature of the Company’s 2022 guidance and five-year plan is the inclusion of its Peavine Clearwater asset which we believe has the potential to change the narrative on the story. Combine this asset with other quality plays like the Eagle Ford and heavy oil development (see our analysis inside) and Baytex should have the profitable land positions required to create substantial shareholder value. With sentiment still generally negative (as seen by the Street’s ratings), we think valuation is still relatively attractive given the Company’s assets and the improving debt situation. Overall, we expect the Company (and share price) to build momentum as the consensus begins to price in the high impact of Clearwater success (that we believe is still understated).”
* CIBC’s Mark Petrie raised his target for BRP Inc. (DOO-T) to $135 from $134 with an “outperformer” rating. Others making changes include: Canaccord Genuity’s Derek Dley to $130 from $125 with a “buy” rating and National Bank’s Cameron Doerksen to $128 from $131, maintaining an “outperform” rating. The average is $137.29.
“In our view, BRP is well positioned to capture additional market share in a growing powersports market as it continues to introduce new products and extends its reach into complementary product lines,” said Mr. Dley.
* TD Securities analyst Craig Hutchison raised his Capstone Mining Corp. (CS-T) target to $7.50, exceeding the $7.43 average, from $7 with a “buy” rating.
* National Bank Financial analyst Zachary Evershed raised his GDI Integrated Facility Services Inc. (GDI-T) target to $67.50 from $66 with an “outperform” rating. The average is $65.07.
* Though its third-quarter results fell in line with his expectations, Desjardins Securities analyst David Newman cut his target for Think Research Corp. (THNK-X) to $3 from $4 with a “buy” rating. The average is $3.35.
“We view THNK as a unique company focused on building a digital healthcare backbone to drive medical knowledge to the point of care, reduce costs and improve outcomes,” he said.
David Leeder