Thursday’s analyst upgrades and downgrades

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

Finding the earnings call that followed the release of in-line third-quarter financial results “more constructive” than anticipated, Canaccord Genuity analyst Derek Dley raised his rating for Alimentation Couche-Tard Inc. (ATD-T) to “buy” from “hold” previously.

“The company commented that it is starting to see improvements in what has been a challenging labour environment and has implemented initiatives to improve its supply chain and inventory positioning,” said Mr. Dle. “Furthermore, Couche-Tard implemented a 5.6-per-cent price increase midway through the quarter which should more than offset inflationary pressures on cost of goods sold.

“While the volatility in oil prices has led to some near-term weakness in fuel margins, which may persist through the remainder of the quarter, the company remains confident that it should be able to generate 30 cent per gallon fuel margins in the U.S. (if not higher over time) as the structural “break-even” margin for its smaller independent competitors has increased and the market has remained disciplined in its fuel pricing.”

Late Tuesday, the Quebec-based retailer reported adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $1.495-billion, exceeding the estimates of both Mr. Dley and the Street ($1.313-billion and $1.405-billion, respectively). Adjusted earnings per share of 70 cents also topped forecasts (60 cents and 63 cents).

Mr. Dley said the largest driver of the beat came from its fuel margins south of the border. It reported 39.6 cents per gallon, which was “well ahead” of his 35.0 cent estimate.

“Couche-Tard reported what we viewed as a relatively in-line quarter, after adjusting for better-than-expected fuel margins,” he said. “The company continues to gain traction with its fresh food offering and packaged beverage business, which helped drive strong merchandise same-store sales in the U.S. and Europe. Furthermore, Couche-Tard commented they have begun to see an improvement in fuel volumes as the COVID-related restrictions have diminished. Importantly, the company passed through price increases in Q3/F22 that more than offset the increase in cost of goods sold due to inflation, which should provide a boost to merchandise margins over the near term.

“The company’s balance sheet remained exceptionally healthy as of quarter-end, even after repurchasing $510 million of shares during the quarter, finishing Q3/F22 with a net leverage ratio of 1.33 times, a 0.1 times increase quarter-over-quarter. We believe the company has ample balance sheet capacity to either undertake large-scale M&A should the opportunity arise or step up its pace of share buybacks.”

After raising his revenue and earnings expectations through 2023, Mr. Dley hiked his target for Couche-Tard shares to $61 from $51. The average on the Street is $60.54, according to Refinitiv data.

“Recent price increases, and a soon-to-be lapping of COVID-related incremental costs, should be supportive of margin growth over the course of our forecast period, while fuel margins over the medium term appear to be sustainable at the 30 cent per gallon level. Furthermore, while we have not incorporated share buybacks into our estimate, we do expect the company to be active with its NCIB over the coming 12 months,” he said.

Other analysts making target adjustments include:

* CIBC World Markets’ Mark Petrie to $56 from $75 with an “outperformer” rating.

“Couche-Tard’s Q3 results were boosted by fuel, but highlighted healthy U.S. merchandise sales and margin trends. These remain key tenets of our bullish view and we are encouraged by the payoff of localized pricing (and promo) supporting margins in a challenging inflationary environment. Higher fuel prices add uncertainty, but we believe the combination of re-opening and company initiatives are substantial offsets,” said Mr. Petrie.

* Stifel’s Martin Landry to $55 from $49 with a “hold” rating.

“We have increased our valuation multiple to reflect the improved outlook and a shorter time horizon to our forecasts. Couche-Tard’s shares trade at 10 times EV/calendar 2023 EBITDA, in-line with the 5-year historical levels and at similar valuation to peers despite having a better balance sheet. We do not see, however, a potential for a meaningful valuation multiple expansion unless the company returns on the acquisition path,” said Mr. Landry.

* Scotia Capital’s Patricia Baker to $66 from $64 with a “sector outperform” rating.

“Despite a backdrop that includes ongoing COVID related challenges, very tight labour markets and certain supply chain challenges, ATD continues to execute against its broad organic growth strategy and is seeing positive momentum across a number of initiatives,” said Ms. Baker. “ATD has a full agenda actively rolling out the various initiatives aimed at driving enhanced organic growth. To date, these are meeting with good customer response and have potential to enhance both the top and bottom line. ATD is well on track to deliver on its FY23 EBITDA target, which anticipates $5.1-billion EBITDA driven entirely by organic growth.”

* National Bank’s Vishal Shreedhar to $57 from $53 with a “sector perform” rating.

* TD Securities’ Michael Van Aelst to $62 from $60 with a “buy” rating.

* BMO’s Peter Sklar to $65 from $59 with an “outperform” rating.

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Canadian Tire Corporation Ltd.’s (CTC.A-T) Investor Day event “underscored the impressive journey the company has been on over the last few years with respect to strengthening its digital platform and, importantly, driving a connectedness across the entire network of businesses,” according to Scotia Capital analyst Patricia Baker.

She said the Wednesday event unveiled a new strategic view that is expected to accelerate growth and drive earnings per share of $26 by fiscal 2025, which would represent growth of 37.5 per cent from its record results from 2021.

“Embedded in the F25 guide is an assumption that EPS growth in the first two years will be in the mid- to high-single-digit range, while F24 and F25 will see EPS growth in the low-teens range,” said Ms. Baker. “CTC.a will also make significant investments to support its growth plans: $3.4-billion over the four-year period with an anticipated capex in F22 between $825-million and $875-million. $2.2-billion will be invested in enhancing the omnichannel experience with $1.2-billion earmarked to update 225+ stores and open new stores in Ontario and Alberta. An additional $675-million will be invested in fulfillment, while a further $500M will be invested in modernizing the company’s IT infrastructure to drive efficiencies.”

Ms. Baker said there is now greater clarity on how the retailer will operate its business in a “truly integrated manner.”

“CTC’s loyalty program, Triangle Rewards, featured prominently and should be a significant enabler of growth for the company as should Owned Brands,” she noted.

“The primary drivers of retail growth for CTC.a over the course of the next four years will be market share gains, increased loyalty penetration, an enhanced omnichannel experience and Owned Brands growth. Market share gains are expected to come from new product introductions, localized assortment initiatives, store investments, new stores, and a targeted focus on categories where CTR sees opportunities to take share. In essence CTC.A intends to modernize the business, creating a more contemporary experience for the customer. At the same time omnichannel investments will unify the banners.”

With its shares trading “significantly below historical average,” Ms. Baker raised her target to $273 from $270, reaffirming a “sector outperform” recommendation. The average is $233.60.

“The current valuation, in our view, completely ignores the far improved market position of CTC.a and the myriad of market share opportunities it faces,” she said. “We believe a retailer with exceptional brand equity, a pipeline of innovation, a powerful loyalty program, and one of the best marketing platforms in the country which has been growing share across a broad range of categories is truly undervalued at this valuation. We believe that over time as CTC.a executes and delivers against its four-year plan it should earn a mid-teens multiple.”

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Despite fundamental tailwind growing for Canadian oilfield service providers, Canaccord Genuity analyst John Bereznicki warns pricing gains continue to “lag” as inflationary pressures increase.

“While most service providers have been able to implement pricing gains in over the past two quarters, we believe their margin impact has been muted by surging inflationary headwinds,” he said in a research note. “Our channel checks suggest broad-based cost pressures of approximately 5 per cent to 25 per cent thus far in 2022 for inputs such as labour, fuel, lodging, transport proppant, OCTG and oilfield chemicals. In our view, Q1/22 realized sector margins could disappoint as pricing usually lags cost inflation and oilfield service providers undertake non-recurring start-up and asset relocation costs. Should commodity prices remain robust, we believe the OFS sector should begin to realize more meaningful real pricing (and margin) gains by 2H22, supported by improved fixed cost absorption as activity recovers.”

Mr. Bereznicki said contract drillers have led the group thus far in 2022, pointing to the strong share price performance of both Precision Drilling Corp. (PD-T) and Ensign Energy Services Inc. (ESI-T), which have been “accompanied by some of the most significant upward revisions in consensus 2023 EBITDA expectations over this same period.”

“In our view, this at least partly reflects the typical lag between drilling, completion, and (ultimately) production spending,” he said. “We believe this creates opportunity elsewhere in the sector as cash flow expectations ultimately move higher. We note TOT [Total Energy Services Inc.] and CEU [CES Energy Solutions Corp.] have had already experienced solid year-to-date EBITDA estimate revisions but have lagged in terms of relative share price performance.”

Noting “forward EV/EBITDA valuations in the sector remain depressed by historic measures while lagging the commodity price recovery,” he made a trio of target price changes:

* Precision Drilling Corp. (PD-T, “hold”) to $85 from $70. The average is $84.44.

* Trican Well Service Ltd. (TCW-T, “buy”) to $4.50 from $4.30 . Average: $4.19.

* Total Energy Services Inc. (TOT-T, “buy”) to $11 from $10. Average: $9.81.

“We continue to favour SES and CEU but recommend TCW and TOT for those seeking relative natural gas exposure,” he said.

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Believing the “global drive to diversify and decarbonize has received an unexpected push from Russia,” Stifel’s mining equity analysts have an bullish view of base metals moving forward.

“Commodity prices are gaining, with some industrial commodity prices climbing to dizzying all time highs in recent weeks,” they said in a research note released Thursday. “While the invasion of Ukraine by Russia has without question exacerbated some supply and demand concerns and introduced some extreme price volatility, we firmly believe that these actions only accelerated a politically and economically driven price response that was already solidly underway. With governments across the globe now more than ever set to enhance investments in renewable electricity and related infrastructure, which are more copper intensive than fossil fuel powered sources, we have an increasingly optimistic outlook for many commodities, copper in particular.”

“As Germany’s Economy Minister Mr. Habeck said this past week with regards to reducing reliance on Russian supplied fossil fuels,’ the construction of electricity networks, LNG terminals and renewable energy must be done at ‘Tesla’ speed’. Regardless of the outcome in Eastern Europe, we believe most governments, companies and individuals to remain steadfast in their desire to see a more diversified, renewable and stable energy supply, with the current supply and price shock and volatility a stark reminder of the high cost of fossil fuel dependence.”

The analysts raised their near-term base metals and metallurgical coal price forecasts as well as their long-term copper price projection (to US$4 per pound from US$3.75). That led them to raise their target prices for shares of primary producers.

“On average, our NAVPS and target prices for the copper miners have moved up by 12 per cent and 13 per cent, respectively, with First Quantum, Capstone and Teck having the biggest bump (Teck benefited as we also adjusted our met coal price higher for 2022 and 2023),” they said. “Amongst the precious metal producers with base metals exposure, our estimates for Dundee Precious Metals saw the greatest move higher, with Barrick also seeing a positive move higher.

“Strong free cash flows to continue to support increased returns to shareholders, while growth projects (there aren’t really that many) are likely to see a renewed focus. Now more than ever, we see permitting and environmental and social concerns to projects advancing as the main determinant impacting whether a project gets built or not. At current commodity prices, we believe most projects are capable of generating positive returns, with investments in community engagement in our view one of the single most important factors impacting a project’s ability to get built.”

For senior producers, their changes are:

• First Quantum Minerals Ltd. (FM-T, “buy”) to $43 from $36. Average: $39.39.
• Freeport-McMoRan Inc. (FCX-N, “buy”) to US$54 from US$49. Average: US$46.25.
• HudBay Minerals Inc. (HBM-T, “buy”) to $16.50 from $15. Average: $13.28.
• Lundin Mining Corp. (LUN-T, “hold”) to $14 from $13.25. Average: $13.17.
• Teck Resources Ltd. (TECK.B-T, “buy”) to $68 from $59. Average: $53.95.

For intermediate producers, their changes are:

• Capstone Mining Corp. (CS-T, “buy”) to $9 from $7.25. Average: $8.16.
• Copper Mountain Mining Corp. (CMMC-T, “buy”) to $5.80 from $5.75. Average: $5.21.
• Taseko Mines Ltd. (TKO-T, “hold”) to $3.75 from $3.10. Average: $3.17.

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While supply chain disruptions weighed on the profitability of Blackline Safety Corp. (BLN-T) during its seasonally weak first quarter, Echelon Capital Markets analyst Amr Ezzat thinks its “current valuation disconnect is flagrant,” seeing its “high visibility business model trading at a discount.”

On Wednesday, the Calgary-based tech company reported revenues of $15.7-million, down from 18.7 per cent from the previous quarter but up 46.8 per cent year-over-year and in line with the estimates of Mr. Ezzat ($15.4-million) and the Street ($16-million). An Adjusted EBITDA loss of $6.4-million was below forecasts (losses of $3-million and $3.4-million, respectively).

“Notably, the quarter saw robust product revenues growth (up 91.3 per cent year-over-year), a precursor to high-margin services revenues,: the analyst said. “Lower GM% (namely on the Product side) and higher SG&A on an increased headcount led to lower EBITDA relative to our forecast.

“As expected, the Company is also holding higher inventory levels than normal to mitigate the effects of any potential future supply chain disruptions. We expect a steady ramp of activity and continued sales traction for the remainder of the year, with the launch of the G6 personal safety device expected in July 2022.”

Though he cut his near-term earnings projections to account for “the investment ramp ahead of the G6 personal safety device launch in the second half of the year, as well as supply chain disruptions and inflationary pressures,” Mr. Ezzat continues to expect Blackline to triple its sales by fiscal 2024. Accordingly, he thinks ”using multiples on short-term estimates significantly (and incorrectly) undervalues BLN shares as it gives no recognition to the Company’s explosive growth profile.””

However, he lowered his target for Blackline shares to $10 from $12, keeping a “buy” rating. The average is $10.44.

“We are lowering our 12-month target price target .... on adjustments to short- and medium-term margin assumptions to account for global supply chain issues and inflationary pressures,” he said. “Our new target price provides for 62.7-per-cent return from current levels. We believe a much more aggressive return profile is possible beyond our target price should the Company successfully transition into a positive cash flow generator.”

Others making changes include:

* National Bank Financial’s John Shao to $9 from $10 with an “outperform” rating.

“Starting with the positive, we like the top-line momentum with the strong growth in both the product and service segment,” said Mr. Shao. “If we consider the seasonality and the timing of the revenue recognition from some large service contracts, that growth has the potential to accelerate in the remainder of the year. Additionally, the 103-per-cent net dollar retention rate also suggested a higher level of customer engagement today vs. during the pandemic. While revenue growth remained solid, both gross and adj. EBITDA margins came in below our previous estimates care of the unfavorable macro environment and supply chain issues that drove up the input costs. That said, it’s our view that investors should look beyond one quarter’s mixed results given the significant market opportunity ahead. As discussed in our channel checks note ... we believe the Company’s existing product lines only addressed 10 per cent of the market demands and the upcoming G6 has the potential to scale that number meaningfully. It’s that opportunity, paired with the Company’s market leadership that has us maintain our Outperform rating.”

* Canaccord Genuity’s Doug Taylor to $8.50 from $9 with a “buy” rating.

“Looking ahead, the company expects product revenue to continue strengthening along with margin improvements in H2/22, driven by EXO mix and the upcoming G6 launch. While the company has demonstrated its ability to absorb costs to maintain its hardware growth trajectory, we have updated our model to reflect a higher degree of conservatism on near-term profitability amid ongoing supply challenges. Consequently, our updated forecast reflects wider EBITDA losses and FCF burn as the company manages against supply chain and inflation-related impacts,” said Mr. Taylor.

* TD Securities’ David Kwan to $10.50 from $11.50 with a “speculative buy” rating.

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After reporting a fourth-quarter earnings miss, National Bank’s Endri Leno expects a “long road” to recovery for K-Bro Linen Inc.’s (KBL-T) hospitality business and potential margin risk given the inflationary backdrop.

Late Tuesday, the Edmonton-based company reported revenue of $62.2-million, exceeding Mr. Leno’s $59.5-milion estimate and the Street’s forecast of $58-million. However, adjusted EBITDA of $8.9-million fell short of projections ($10.8-million and $10.3-million, respectively).

“A significant portion of the EBITDA margin miss (14 per cent in Q4/21 vs. 18-per-cent estimate) was from labour that increased 600 basis points year-over-year (to 39.5 per cent of revs) mainly due to 1) 250 basis points from min wage increases as well as 2) 250 basis points from absenteeism/AHS transition,” he said. “Other operational costs such as delivery and materials/supplies also increased due to labour and the inflationary backdrop. Although these expenses will continue into H1/22, a portion will wrap up with the AHS transition by mid-2022. KBL also plans to ultimately pass some of these costs via price increases, although there will be a lag. However, min wage increase pressures will likely persist due to increases in several provinces (ON, QC, BC) in 2022.”

While its hospitality segment has been “negatively impacted by the pandemic,” Mr. Leno thinks its healthcare business, which accounts for approximately 55 per cent of revenue, has been “resilient with tailwinds including more frequent use of reusable personal protective clothing and elevated hospital occupancies alongside the outsourcing of laundry volumes by provincial governments and long-term care facilities.”

“Although we expect opportunities for KBL, particularly in Canadian healthcare (such as clearing of surgical backlogs), hospitality M&A activity will likely depend on the sector’s postpandemic recovery that several organizations do not anticipate occurs in full until 2024,” he added.

Keeping “a neutral view due to the cost pressures and a slow hospitality recovery,” Mr. Leno cut his target for K-Bro shares to $38 from $42, maintaining a “sector perform” rating, after reducing his margin expecations. The average target on the Street is $46.44.

Others making changes include:

* Raymond James’ Michael Glen to $47 from $50 with a “strong buy” rating.

“We have trimmed 1H to reflect higher labour, energy, and transition expenses (Alberta related). We see these pressures moderating in the back half of the year and into 2023,” he said. “Offsetting these pressures is a notable uptick to our hotel volume assumptions, which helps push our revenue forecast higher. We continue to believe the underlying business fundamentals for KBL’s operations are strong, and remain confident that in purchasing KBL stock at this level, a moderately patient investor could generate an attractive all-in return over the coming year (i.e., dividend + capital return).”

* Acumen Capital’s Jim Byrne to $44 from $52 with a “buy” rating

* Laurentian Bank Securities’ Anthony Linton to $45 from $50 with a “buy” rating.

* TD Securities’ Derek Lessard to $42 from $49 with a “buy” rating.

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In other analyst actions:

* In response to STEP Energy Services Ltd.’s (STEP-T) fourth-quarter earnings beat and constructive outlook as well as his own higher macro forecasts, Raymond James analyst Andrew Bradford raised his rating for its shares to “outperform” from “market perform” with a $4.25 target, up from $4.15. The average is $3.25.

“Despite the high targeted return, STEP relatively low market liquidity tempers our rating,” he said.

* RBC Dominion Securities analyst Andrew Wong raised his Ag Growth International Inc. (AFN-T) target to $50 from $45, keeping an “outperform” rating. The average on the Street is $51.22.

* RBC’s Keith Mackey cut his Calfrac Well Services Ltd. (CFW-T) target to $6, above the $5.79 average, from $6.50 with a “sector perform” rating.

* CIBC’s Scott Fletcher cut his target for Information Services Corp. (ISV-T) to $25 from $30 with a “neutral” rating, while RBC’s Paul Treiber lowered his target to $27 from $30 with a “sector perform” rating. The average is $28.30.

“SV reported a Q4 beat that saw adjusted EBITDA 10 per cent above consensus as the strong Saskatchewan economy continued to drive registry growth and margin expansion. Services revenue benefitted from a change in revenue recognition that increased revenue and decreased margins. Even with that change, the consolidated business saw margins exceed consensus by 160 basis points. With 2022 guidance reiterated and consolidated EBITDA margins set to normalize after elevated transaction volumes in 2020 and 2021, we continue to expect minimal catalysts in 2022,” said Mr. Fletcher.

* TD Securities’ Brian Morrison cut his Magna International Inc. (MGA-N, MG-T) target to US$90 from US$105 with a “buy” rating. The average is US$92.19.

* National Bank’s Tal Woolley raised his Northwest Healthcare Properties REIT (NWH.UN-T) target to $15 from $14.50 with a “sector perform” rating, while RBC’s also increased his target to $15 from $14.50 with a “sector perform” rating. The average is $15.31.

* Raymond James’ Steve Hansen raised his Nutrien Ltd. (NTR-N, NTR-T) target to US$105 from US$95 with an “outperform” rating. The average is US$96.81.

“We are increasing our target price on Nutrien ... based upon [Wednesday’s] news that the company plans to increase its 2022 potash production to 15.0 million mts (vs. 14.0 million mts prior) given the acute supply uncertainty arising from recent Belarusian sanctions and the horrific Russia-Ukraine conflict—two widely unexpected events with almost dizzying global supply implications. At the same time, we stress that the ongoing Russia-Ukraine conflict also introduces extreme, and arguably compounding, supply uncertainty into global wheat, nitrogen, and phosphate markets, all with positive implications for Nutrien’s global platform.

* TD Securities’ Greg Barnes raised his Triple Flag Precious Metals Corp. (TFPM-T) target to $23 from $22 with a “buy” rating. The average is $20.64.