Inside the Market’s roundup of some of today’s key analyst actions
While acknowledging Air Canada (AC-T) is facing near-term headwinds from higher fuel prices and “significant operational challenges that are impacting the entire global airline industry,” National Bank Financial analyst Cameron Doerksen reiterated his view that it is set to benefit from the ongoing “robust rebound“ in air travel demand, seeing “a recovery in earnings and cash flow accelerating in the coming quarters.”
In a research report released Thursday previewing the airline’s second-quarter earnings report, Mr. Doerksen called the operational challenges, particularly at its key hubs in Toronto and Montreal, “temporary” and said they reflect “resurgent” demand.
“Air Canada will face some near-term headwinds from significantly higher jet fuel costs (jet fuel price up 84 per cent in Q2/22 versus 2019 average) and operational challenges at the airports,” he said. “However, airlines are having success in passing on higher fuel through airfare increases (Canadian air transport CPI up 17 per cent in May versus 2019). The negative headlines around airport congestion are clearly pressuring Air Canada shares, but we see these issues as temporary.”
“The underlying driver behind the airport issues this summer is that demand for air travel has returned more strongly and more quickly than anticipated, which should be viewed positively given the near-complete shutdown of air travel over the past two years. Although demand has rapidly recovered, passenger traffic in Canada remains below pre-pandemic levels (down 13 per cent versus the same period in 2019 in the latest week).”
The analyst also emphasized the shift by its largest competitor, WestJet Airlines, to focus on Western Canada is likely to benefit Air Canada, which has already established its dominance in Eastern Canada.
“WestJet’s de-emphasizing of the Eastern Canada market means that some of this capacity could be filled by other competitors including Flair, Lynx Air and an expanding Porter,” said Mr. Doerksen. “This could result in more low-cost competition for Air Canada in Eastern Canada. However, Air Canada has the fleet and capital necessary to quickly take advantage of a reduction in capacity by WestJet, and we believe Air Canada’s global network and position at the key hubs in Toronto and Montreal will make it difficult for new competitors to take market share.”
After increasing his fuel cost forecast and estimates for expenses incurred to deal with operational hurdles, Mr. Doerksen trimmed his full-year earnings per share projection for 2022 to a loss of $3.68 from a loss of $3.46 previously. However, his 2023 expectation increased to a profit of $1 from an 82-cent gain.
Keeping an “outperform” rating for Air Canada shares, he reduced his target by $1 to $30. The average on the Street is $28.80, according to Refinitiv data.
“Air Canada’s current market cap is only 15 per cent higher than at the same time during July 2020 when air travel was essentially completely shut down and there were no prospects for a recovery in air travel materializing any time soon,” said Mr. Doerksen. “As such, we see a major disconnect between the current share price and the outlook for Air Canada as the company’s prospects today are orders of magnitude better than was the case two years ago.”
After “materially” reducing his financial expectations, Scotia Capital analyst Konark Gupta downgraded both Canadian National Railway Co. (CNR-T) and Canadian Pacific Railway Ltd. (CP-T) on Thursday to “sector perform” recommendations from “sector outperform” to “reflect a potential downturn scenario in 2023 that is similar to the 2015-16 and 2020 industry downturns (in terms of traffic growth) but not as severe as the 2009 recession.”
“Although CNR has proven to be a safe haven over the past downturns and CP has significantly outperformed coming out of the market troughs, we note this year CNR is already exceeding its downturn performance while CP is significantly outperforming the market unlike the prior downturns,” said Mr. Gupta in a research report released before the bell.
“We recognize the self-help Canadian grain story effective Q3/22 and CP’s unique growth prospects with KCS (assuming the merger gets approved), but we think Canadian rails’ year-to-date outperformance vs. the market, U.S. comps, and domestic peers makes their risk/reward less attractive vs. our covered aviation and trucking stocks that have sold off significantly (e.g., AC, BBD.B, CJT, HRX, and TFII). That said, it is possible that investors may continue to hide into the rails until Street expectations come down for all sub-sectors.”
Though he sees the near-term outlook remaining “strong,” Mr. Gupta reduced his 2023 and 2024 earnings per share estimates for CN by 8 per cent and 4 per cent, respectively to $7.34 and $8.44. His CP projections slid 6 per cent and 2 per cent to $4.47 and $5.28.
“Our revised estimates still suggest EPS growth in 2023 and 2024 (stronger for CP due to KCS),” he noted. “This is our first attempt to model a potential downturn and there could be more revisions over time as uncertainty lingers on and there are many moving parts (e.g., end-markets, pricing, fuel/FX, and cost inflation). We are currently assuming that traffic declines in 2023 (vs. 2022) similar to that in 2015-16 (vs. 2014) and 2020 (vs. 2019), excluding coal, crude, grain and fertilizers, which are not always correlated with GDP growth. Our estimated total traffic decline in 2023 is slightly better than the weakness witnessed in 2015-16 and 2020 due to Canadian grain’s potential 50%+ rebound in the upcoming crop year (effective August 2022), lapping prior year’s drought-impacted harvest, and potential resilience in coal, potash and other fertilizers due to commodity price strength and/or Russia-Ukraine conflict. Historically, energy & chemicals, metals & minerals, automotive, coal, and forest products segments have posted steeper traffic declines than intermodal and grain as well as total traffic.”
The analyst did acknowledge that both companies have outperformed the broader market thus far in 2022. CN is down 7 per cent and CP is flat, while the S&P 500 is lower by 20 per cent and the TSX by 12 per cent.
“Historically, CNR outperformed the market by 7-11 per cent (average 9 per cent) during the past three downturns while CP underperformed by 8 per cent in two instances (up 1 per cent during the 2020 sell-off),” he said.
“In terms of forward P/E valuation (on next 12-month consensus), CNR is now trading at 20.4 times and CP at 23.4 times for premiums of 26 per cent and 45 per cent over S&P 500, respectively, vs. their similar long-term average premiums of 12 per cent. On our revised 2023 / 2024 EPS estimates, CNR and CP (including KCS synergies) are trading close to each other at 20.2 times/17.6 times and 20.9 times/ 17.7 times, respectively. We have lowered our target valuation multiples to 19.0 times for CNR and 20.0 times for CP vs. their similar 10-year averages of 19 times. We think our P/E premium for CP is justified by potential upside to its stated KCS synergy targets. Also note that we continue to assume a 75-per-cent probability of KCS merger approval in our CP target price (remaining 25-per-cent probability = $13 per share potential upside to our CP target).”
Mr. Gupta’s target for CN shares fell to $152 from $172. The average on the Street is $162.91.
His CP target dropped to $99 from $105, versus a $105.37 consensus.
RBC Dominion Securities analyst Joseph Spak does not see an enticing risk-reward proposition for investors heading into second-quarter earnings season for the North American automobile industry.
“Even though many companies we spoke to expected a tougher 2Q22 owing to the China shutdowns (and thought IHS for the quarter was too high at the time), few companies guided to 2Q22,” he said in a report released Thursday. “Existing consensus seems to have followed an April IHS cadence. This means we will likely see negative 2Q22 revisions into earnings. That said, on earnings we expect many companies to reiterate full-year guidance (even if guidance is indicated closer to the low end) so the year will look more back-end weighted. This increases risk in ability to hit 2022 numbers, as if there are any more hiccups/disruptions – the calendar starts to work against companies.”
Based on that view, Mr. Spak said he’s now more on focus on 2023, predicted global light vehicle production could return to more than 85 million unit.
“So after earnings, the setup for suppliers looks more favorable,” he said. “To us, the key catalyst for suppliers to begin to work absolutely is not 2Q22 earnings, but production in the July/August/Sept time frame running at rates which could then be extrapolated to have greater confidence in stronger 2023 production. We believe the recovery in China thus far has been encouraging, we are hopeful NA could get more stable and are most concerned on Europe production especially given rising energy concerns. We understand the hesitance for broader investor participation in suppliers – mainly macro concerns/ recession fears. While it’s clearly possible for volumes to go lower in an economic downturn, we don’t think it would come close to approaching prior drawdowns as NA and European production volumes are near the lows. 2022E NA production will be the 7th lowest since 2000 (and that’s coming off 2020-21 which are the 4th and 5th lowest). 2022E European production is 2nd lowest since 2000 (coming off 2020-21 which are the 4th and the 1st lowest). Suppliers are a volume game. Our mid-term view is volumes can’t get much worse, but they can get better.”
For Aurora, Ont.-based Magna International Inc. (MGA-N, MG-T), Mr. Spak is forecasting second-quarter sales of US$8.82-billion, up from his previous estimate of US$8.77-billion but below the consensus on the Street of US$9.06.
“The increase in our forecast is from slightly higher LVP in Europe than prior and offset by a larger negative currency translation adjustment,” he said. “MGA experienced deterioration particularly in Europe late in 1Q22 associated with increasing utility costs that should more heavily impact 2Q22, specifically the BES and P&V segments. Likewise, adverse currency changes in the euro are expected to weigh further.”
Based on a reduction to his below-consensus operating income forecast, he cut his earnings per share estimate to 91 US cents from 95 US cents. The Street expects 97 US cents.
That led him to lower his target for Magna shares to US$76 from US$79 with an “outperform” rating. The average is US$81.11.
“We believe guidance is achievable but see some incremental pressure due to strengthening USD,” said Mr. Spak. “MGA still working with customers on additional price recoveries and this could provide some incremental relief if MGA can capture some non-contractual givebacks. Some y/y lapping effect of inflationary pressure and higher LVP in 2H22 provides a setup for margin improvement going forward. Stock continues to lag peers YTD but we continue to be positive on MGA’s ability to execute its long-term strategy and see an attractive mid-term risk/reward at current levels. Much of the ability to hit targets depends on offsetting inflation and recoveries, so more communication here is needed. Given MGA’s size/diversity, we believe this is likely to occur in a myriad of ways which may make it more difficult for management to communicate progress to the Street.”
Among original equipment manufacturers (OEMs), Mr. Spak cut his targets for Ford Motor Co. (F-N, “sector perform”) to US$16 from US$18 and General Motors Co. (GM-N, “outperform”) to US$48 from US$58. The averages on the Street are US$16.78 and US$57.07, respectively.
Also previewing powersport vehicle manufacturers, Mr. Spak raised his revenue forecast for BRP Inc. (DOO-T) to $2.3-billion from $2.29-billion and earnings per share estimate to $2.55 from $2.53. The averages on the Street are $2.31-billion and $2.63.
That led him to bumped up his target for shares of the Valcourt, Que.-based company to $113 from $111 with an “outperform” rating. The average is $131.75.
“Our $113 12-month price target is based on applying a 10x multiple to our FY2023 EPS estimate,” he said. “This is in line with the multiple we use for closest peer PII which we believe BRP should trade at least in line with. While a P/E of 10 times is below BRP’s past 3-year NTM [next 12-month] average of 14 times, it is more in line with the average over the past 12 months. We believe the lower than historical multiple is due to concerns about an economic impact on demand, margin pressure, and potential overearning. While we acknowledge these risks, we believe they are more than priced in. Our price target and implied return support our Outperform rating.”
Though he thinks rising demand uncertainty “clouds” the near-term outlook for commodities, Scotia Capital analyst Orest Wowkodaw thinks “the risk-reward proposition for the mining equities remains reasonably attractive.”
“Escalating global macroeconomic concerns from ongoing pandemic lockdowns in China and the impact of rising interest rates and higher energy prices in ex-China markets (which are stoking recession fears), have placed significant downside pressure on most commodity prices,” he said. “Due to weaker demand expectations, we now see most major commodity markets shifting towards a near-term balance or a modest surplus position which is likely to weigh on prices. Despite this uncertainty, we do not anticipate a complete collapse in near-term commodity prices given that visible inventories are low and are projected to remain at reasonable levels until large structural market shortages arrive. Moreover, the supply side also remains under considerable pressure. In the medium to long term, we continue to anticipate the emergence of a new commodities super cycle driven by growing demand from global decarbonization efforts to address climate change amplified by the impact of severe underinvestment in new production capacity.”
In a research report released Thursday, he lowered his price assumptions through 2026 for nickel, zinc and copper, while his iron, coal and uranium projections remain essentially unchanged.
“Among the base metals, we continue to prefer Cu exposure given low inventories and our forecast of a reasonably tight near-term market, before transitioning to a large medium-term structural deficit due to supply erosion,” said Mr. Wowkodaw. “We also anticipate Cu to be among the biggest beneficiaries of global decarbonization efforts. We are concerned with over-supply risks in Zn and Ni. Given weak steel mill margins and slowing steel output, we still see meaningful downside pricing risks for HCC and Fe from elevated spot levels; however, we continue to like the outlook for the premium segment of bulk commodities. U3O8 fundamentals are improving on aggressive inventory stockpiling and the dual Western World agendas of decarbonization and energy independence.”
With the changes to his commodity price deck, he lowered his 2022, 2023 and 2024 EBITDA estimates by an average of 15 per cent, 19 per cent and 17 cents, respectively. That led him to make a series of target price reductions to stocks in his coverage universe by an average of 24 per cent.
“We recommend 11 of 21 equities under our coverage. TECK.B remains our top pick; we also highly recommend CS-T and FM-T for Cu exposure. We also prefer CCO-T, CIA-T, CMMC-T, ERO-T, FCX-N, HBM-T, IVN-T, and TRQ-T. The average implied return for our preferred equities is now 55 per cent (vs. 27 per cent last quarter),” said Mr. Wowkodaw.
For large-cap stocks, his target changes include:
- First Quantum Minerals Ltd. (FM-T, “sector outperform”) to $35 from $50. The average on the Street is $42.27.
- Teck Resources Ltd. (TECK.B-T, “sector outperform”) to $57 from $60. Average: $62.01.
For mid-caps, his changes are:
- Capstone Copper Corp. (CS-T, “sector outperform”) to $5 from $7.50. Average: $8.
- Champion Iron Ltd. (CIA-T, “sector outperform”) to $7.50 from $8.50. Average: $8.55.
- Ero Copper Corp. (ERO-T, “sector outperform”) to $20 from $27. Average: $24.32.
- Hudbay Minerals Inc. (HBM-T, “sector outperform”) to $7.50 from $10. Average: $12.39.
- Lundin Mining Corp. (LUN-T, “sector perform”) to $10 from $13. Average: $13.22.
Touting “one of the most attractive fundamental set-ups for the balance of 2022,” Raymond James analyst Jeremy McCrea upgraded Advantage Energy Ltd. (AAV-T) to “strong buy” from “outperform” following the release of stronger-than-anticipated second-quarter results and guidance after the bell on Wednesday.
“At some point, valuations will be important,” he said. “Unfortunately today, given the volatility in commodity prices, a valuation argument is only as sound as the underlying commodity assumption. With WTI prices moving as much as they have, we’ve seen a washout in Energy stocks, but names like AAV, that are weighted 90-per-cent gas, shouldn’t have suffered to the same degree (down 38 per cent since June 8 (XEG: down 26 per cent)).
“The difference in AAV, which will be more apparent in 2023, is the company doesn’t pay a dividend. 100 per cent of free-cashflow will be used in buy-backs, continued debt repayment, and additional production growth (where the company continues to have spare capacity). All combined (and at our $5.00 AECO assumption), we have AAV trading at 1.0 times EV/EBITDA (excluding any value for Entropy). Probably worth repeating: 1.0 times EV/EBITDA! As the company grows 15-per-cent production per share; and closer to 35-per-cent FFO per share when including the changing liquids/gas mix, this already moves to the upper end of growth for the sector. This growth is supersized given the cash expected to build throughout 2023 that will ultimately be redirected to buybacks.”
Mr. McCrea maintained a target price of $13.50. The current average on the Street is $14.35.
National Bank Financial’s Jaeme Gloyn predicts IGM Financial Inc. (IGM-T) will continue to “deliver strong earnings growth and valuation upside.”
However, the equity analyst expects risks to assets under management (AUM) levels will “remain elevated in the near term given the geopolitical/market uncertainty.” He said those conditions were the primary driver of a 9.8-per-cent quarter-over-quarter decline in IGM’s reported AUM for the second quarter nd the first quarterly outflow at Mackenzie since the third quarter of 2019.
“Ultimately, we believe IGM’s robust growth strategies (see takeaways from our CEO fireside chat here) will offset these headwinds over the longer term,” said Mr. Gloyn. “Crucially, IG Wealth net flows remained positive in Q2-22. We are keeping a close eye on household savings rates and investor confidence as leading indicators of net flow performance. Both drivers, while tempering from recent peaks, remain at or above pre-pandemic levels. This suggests IGM can sustain solid net flow performance in today’s environment. However, should these drivers continue to decline, IGM’s ability to execute its growth strategies could be impaired. South of the border, we already see personal savings rates dip below pre-pandemic norms. In addition, adjusted for CPI, Canadian excess savings are nearing their historical trend – in other words, much of the nest egg has already been absorbed by inflation.”
On Wednesday, the Winnipeg-based firm reported assets under management and advisement (AUM&A) of $242.1-billion for June, down 5.4 per cent month-over-month and 9.8 per cent year-over-year. It missed Mr. Gloyn’s estimate of $260.9-billion “due to negative investment returns across all platforms and net outflows at Mackenzie.”
“Overall, we understand there might be some short-term noise in AUM given the geopolitical/market backdrop; however, we maintain our positive outlook as i) investment returns recover; and ii) household savings rates – while tempering from recent peaks - are still above average,” he said.
Cutting his earnings per share projections for the second quarter as well as 2022 and 2023, Mr. Gloyn reduced his target for IGM shares to $49 from $53, keeping an “outperform” rating. The average on the Street is $46.43.
“IGM currently trades at a P/E of 9.4 times consensus NTM [next 12-month] earnings, below the long-term average 12.3 times,” he said. “IGM also trades at a discount to global wealth and global asset management peers (though roughly above or in line with the average discount in the past five years), despite similar revenue, EPS and EBITDA growth expectations.”
Moneta Gold Inc. (ME-T) presents investors with an “attractive entry point to a large-scale gold project,” according to iA Capital Markets analyst Sehaj Anand.
He resumed coverage of the Toronto-based company with an “outperform” recommendation, calling its 100-per-cent-owned Tower Gold Project “one of the largest undeveloped gold projects in North America.”
“The Company recently published its updated resource estimate featuring a total resource base of approximately 11.7Moz gold, 40 per cent higher than the previous resource estimate of 8.4Moz (combined Garrison & Golden Highway),” said Mr. Anand. “With its 2022 drill program, Moneta, along with its resource upgrade infill drilling, is testing new areas outside the current resource at the Halfway Lake, 55, Garrcon, and South Basin targets.”
“For the Tower Gold Project, we now model a conceptual scenario of 298Koz/annum gold production at a robust US$976 per ounce AISC [all-in sustaining cost]. We envision a 25,000tpd central mill facility fed by several open pit and underground deposits. We believe that the availability of multiple deposits at Tower provides greater flexibility in mine sequencing and other production-related optimization opportunities.”
Pointing the importance of Tower’s Tier 1 location near Timmins, Ont., which provides “easy access to a skilled workforce and major suppliers/contractor,” Mr. Anand sees significant M&A potential swirling around Moneta.
“Despite the recent turmoil in the markets, the gold mining sector has continued its consolidation trend as seen with the recent Goldfields (GFI-N)/Yamana Gold (AUY-N) and Orla Mining (OLA-T)/Gold Standard Ventures (GSV-T) transactions,” he said. “Owing to its scale, operational flexibility, and exploration upside potential, we see the Tower Gold Project easily fitting into any major gold producer’s portfolio.”
Seeing a “highly discounted valuation,” he set a $4.70 target for Moneta shares. The average on the Street is $4.68.
“Overall, the stock provides an attractive entry point to a large gold project in a mining-friendly jurisdiction. Potential upcoming catalysts include: 1) Assay results from the ongoing exploration drill program, and 2) Updated PEA including both Golden Highway and Garrison resources expected in H2/22,” he said.
Echelon Capital Markets analyst Stefan Quenneville initiated coverage of Toronto-based Mindset Pharma Inc. (MSET-CN) with a “speculative buy” rating, seeing it poised to benefit from a first-mover advantage in the “highly competitive” next-gen psychedelics industry through patenting of its innovations and possessing “one of the strongest IP positions in the space.”
“Mindset is developing four families of drug candidates inspired by psilocybin and DMT but with improved safety profiles and optimized potency and bioavailability,” he said. “By leveraging the existing data generated in ongoing trials of the classic psychedelic compounds, they may also be among the first second-gen psychedelic drugs to market with robust patent protection.”
“While TRD and end-of-life cancer angst are growing, multi-billion-dollar markets, Mindset’s drug candidates could further expand these and other markets by accelerating the onset of action and truncating the hallucinogenic effects, potentially allowing for higher clinical patient throughput.”
Mr. Quenneville called Mindset’s recent collaboration agreement with Otsuka PharmaceuticaL “one of the first big pharma deals in the space (first and only deal for next-gen drug candidates).”
“In return for single-digit royalties and right of first refusal/negotiation, Otsuka paid US$5-million upfront and agreed to cover all development expenses through the Phase Ib for shorter-acting Family 2 and 4 drug candidates that allow for increased patient throughput (US$30-40-million total),” he said. “This unique deal with a global pharma player is a major validation of Mindset’s IP portfolio while providing it with non-dilutive financing.”
Seeing “multiple catalysts on the horizon,” the analyst set a target of $1.25 per share, representing 279-per-cent upside from current levels. The average is $5.
Coelacanth Energy Inc. (CEI-X) is “well positioned out of the gates with over $80-million cash, a proven management team, and 155 net sections of prolific Montney acreage in the Two Rivers area,” said Acumen Capital analyst Trevor Reynolds, initiating coverage with a “buy” rating.
The Calgary-based company began trading on the Venture Exchange on June 20 after being spun out by Vermilion Energy Inc. following its acquisition of Leucrotta Exploration Inc.
Mr. Reynolds sees its stock “well supported,” noting: “VET established a 12.5-per-cent equity position in CEI out the gate and is expected to grow that over time. Additionally, the company and VET have an information sharing agreement in place, and Dion Hatcher the President of Vermilion has a seat on the board of CEI. We view the information sharing agreement as a strategic advantage as both companies look to optimize and maximize the impact of longer reach horizontals with increased frac density in the play. Notably, VET continues to drill today on the Alberta side of the border which allows CEI to analyze longer reach, higher density completions as they plan out their development and delineation program.”
Mr. Reynolds, the first analyst to initiate coverage of Coelacanth, set a $1 target for its shares.
“CEI has entered the market in a position of strength with cash on the balance sheet and a significant land position. The company is well capitalized, with proven management, and is surrounded by numerous companies that will compete for their acreage when it comes time to sell. We view CEI’s significant Montney land position with multiple takeaway options as strategic. We look to the drilling of CEI’s first pad later this year or early next and an infrastructure arrangement as potential near to medium term catalyst,” he concluded.
In other analyst actions:
* RBC Dominion Securities analyst Keith Mackey raised his CES Energy Solutions Corp. (CEU-T) target to $3.50 from $3.25, maintaining an “outperform” recommendation. The average is $3.95.
He also increased his Precision Drilling Corp. (PD-T) target to $156 from $147m above the $130.35 average, with an “outperform” rating.
“Fundamentals within the energy sector appear strong as oil markets remain in a tightening cycle, North America and global rig counts increase, and equipment & labour capacity tightens across the oilfield services sector,” said Mr. Mackey. “The aforementioned fundamental factors lead us to increase our 2022/23 EBITDA estimates by 3/10 per cent, while the recent pullback in stock prices leaves the sector trading well below its mid-cycle average multiples which we believe presents a buying opportunity on balance. Our preferred stocks are SLB, HP, PD, PSI, and SES.”
* TD Securities’ Arun Lamba resumed coverage of K92 Mining Inc. (KNT-T) with a “buy” rating and $12 target, which is 30 cents below the average.
* ATB Capital Markets’ Tim Monachello lowered his North American Construction Group Ltd. (NOA-T) target to $22 from $28.50, below the $26.60 average, with an “outperform” rating.
“We have reduced our estimates for NOA from Q2/22 to Q1/23 given we expect meaningful near-term margin compression due to 1) cost inflation, which continues to outpace pricing for NACG’s core oil sands contracts, and 2) shortages of heavy-duty mechanics, which we believe could limit NOA’s fleet utilization over the medium term,” he said. “We believe these factors are largely transitory given ongoing conversations with customers regarding retroactive pricing increases and scheduled price escalation in mid-Q3/22 with NOA’s largest customer, and we believe rising wages and improving access to out-of-province labour pools should be tailwinds for recruiting heavy-duty mechanics over the medium term.”
* After hosting an in-person Refinery & Convenience Investor Tour, RBC’s Luke Davis raised his Parkland Corp. (PKI-T) target to $47 from $45 with an “outperform” rating. The average is $48.
“We came away with a constructive tone and high degree of confidence in the company’s operating ability; our estimates increase to reflect stronger refining margins,” he said.