Inside the Market’s roundup of some of today’s key analyst actions
Citigroup has made some major cuts to its price targets on copper miners, and also downgraded some ratings, as a result of taking a knife to its base metal assumptions as recession worries brew.
“The structural outlook for miners looks as good as we can remember based on a combination of supply challenges (underinvestment, resource nationalism and ESG) and demand opportunities (de-carbonization and electrification),” Citigroup analyst Alexander Hacking said in a note to clients.
“But macro weakness has interrupted – and thus Citi’s global commodity team has made significant downgrades to metals price forecasts,” he said.
The bank is especially bearish on copper, expecting prices to fall another 15% to about $6,500/ton by the first quarter of next year given new mine supply and softening developing markets demand.
“Copper equities will likely struggle against falling copper prices given a lack of free cash flow support, in our view. Cost support is more theoretical than practical at this point and very sensitive to diesel,” Mr. Hacking said.
For First Quantum Minerals Ltd. (FM-T), Citigroup cut its price target to C$20 from C$40.
“We downgrade First Quantum to Sell/High Risk. We continue to like the long-term story and path to 1mtpy copper but falling copper prices will be a headwind and costs are exposed to thermal coal prices at Cobre Panama starting next year,” the bank said
Teck Resources Ltd.’s (TECK-B-T) target went to C$45 from C$58 but Citigroup still rates the company a buy.
“Teck remains one of our preferred mining names given Citi’s relatively constructive view on met coal. Falling copper prices are a headwind but we see Teck as an outperformer,” the bank explained.
Freeport-Mcmoran Inc.’s target (FCX-N) went to US$28 from US$48.
“We downgrade Freeport to Neutral. The stock is the ‘go to’ copper name for most investors and we continue to like the long-term story, but falling copper prices will be a headwind,” it said.
In the aluminum sector, Citi cut its price target on Alcoa Corp (AA-N) to US$45 from US$84.
“We remain Neutral on Alcoa with a positive long-term view on the commodity but lacking near-term catalysts,” he said.
***
Goodfood Market Corp.’s (FOOD-T) fiscal third quarter results on Wednesday have left analysts with a case of indigestion, with most slashing their price targets on the meal kit provider. The company had been one of the hot stock plays of the early pandemic days but over the past year has seen its stock price plunge.
Goodfood reported mixed results overall, with revenue of $67 million missing the consensus call of $74 million. Adjusted EBITDA was negative $10.6 - just slightly beating the analyst consensus.
Goodfood also slightly pushed out its target to reach positive revenue growth and profitability in the next several quarters. The company is contending with higher food and labour costs, as well as a preference by consumers to dine out more often and leave the cooking up to restaurants. Goodfood has embarked on growth initiatives that includes on demand delivery of meal kits and groceries.
“Investor visibility is low given the continuing drop in meal-kit revenue, potential competition, and cash burn,” RBC analyst Paul Treiber said in summing up concerns about the company. He cut his price target to C$1.75 from C$2.
Other analyst moves include: National Bank of Canada cut its target to C$2 from C$2.25; Scotiabank cut its target to C$1.50 from C$2.75; Acumen Capital cut its target to $2.00 from $3.50; and Desjardins Securities - one of the few brokerages to still rate the company a buy, lowered its target to C$2.75 from C$4.
Stifel GMP analyst Martin Landry cut his price target to $1.45 from $2.75 and maintained a “hold” rating.
“Goodfood had a large decrease in its active customers, which were down by 35,000 during the quarter, the second largest decrease in the company’s history,” Mr. Landry noted. “The company added 11,000 customers in its on-demand offering, suggesting that the decline of meal kit customers is larger than 35,000. This decline of near 15% in the company’s customer base is concerning. We believe that it is due to a more disciplined customer acquisition strategy by Goodfood coupled with a slowdown in demand for meal kits.”
Goodfood aims to generate positive adjusted EBITDA in at least one quarter of the first half of 2023.
But, said Mr. Landry, “this suggests a significant turnaround from the existing situation which may come from further asset disposal and streamlining of operations. Our forecasts currently are not aligned with management’s goals as we believe that the economic slowdown may make revenue growth more challenging than expected.”
Mr. Landry also believes the meal kit service industry is going to be faced with major challenges in gaining traction with consumers going forward.
“Management argues that the meal kit industry could benefit from a gain of wallet share as consumers reduce their restaurant outings. We believe that consumers looking at reducing their discretionary spending, could be tempted to cut their subscription services, including meal kits. In our view, meal kits are perceived as a premium option to grocery shopping and in a world of trade down patterns, this may create demand headwinds,” he said in a note to clients.
Overall, Goodfood has six hold ratings and two buys, with an average price target of C$1.86, according to Refinitiv Eikon data. That’s down from C$3.19 just a month ago.
***
RBC analyst Alexander Jackson is downsizing expectations for shares of Stelco Holdings Inc (STLC-T) in light of a sharp pullback in steel prices.
“Following an initial rally after Russia invaded Ukraine, the HRC [Hot-rolled Coil steel] price has retraced due to a combination of raw material substitution, adjusting trade flows and weaker demand,” Mr. Jackson noted. “Service centers restocked in March and April when concerns over potential availability of future steel supply prompted increased buying activity, however we are now seeing much weaker demand for steel. Pig iron and scrap prices have also fallen and prior concerns over raw material availability has abated, reducing support levels.”
But the analyst expects hot-rolled coil sheet prices to steady at current levels as buyers re-enter the market with underlying demand remaining solid.
He expects Stelco to report strong second quarter results, with increased volumes helping to offset higher operating costs and slightly weaker forecast pricing.
He reduced his price target to C$48 from C$62. “Stelco remains well positioned to continue returning capital to shareholders, however in the current environment we remain more neutral and maintain our sector perform rating,” he said.
The average analyst price target is C$54.11.
***
Credit Suisse analyst John Roberts has initiated coverage on Nutrien Ltd (NTR-N, NTR-T) with a suggestion that investors stay clear of the fertilizer producer for now. He rates the stock “underperform” with a price target of US$67.
“We believe farm economics and fertilizer profitability are near peak levels,” he explained in a note to clients. That means fertilizer prices could soon start trending lower. One risk is that with potash prices surging 300% from a year ago, farmers may temporarily reduce applications. Meanwhile, ammonia capacity is increasing in the industry, and that could also push prices lower for Nutrien’s products.
“Peak conditions could continue longer than normal, and accelerating capacity announcements will take time to bring online. However, we would expect valuation to remain low until the cycle eventually bottoms,” the analyst added. He also believes capital deployed in Nutrien’s retail unit may become devalued as the company shifts to a mostly wholesale fertilizer company.
His view on Nutrien contrasts sharply with much of the rest of the Street. The average price target is US$112.88. The stock has 15 buy recommendations, five holds and only the one sell.
***
BofA Securities analyst Michael Feniger upgraded Ritchie Bros Auctioneers Inc. (RBA-N, RBA-T) to a “buy” rating from a “neutral,” believing that the economic cycle is starting to turn in the company’s favour.
Ritchie Bros. operates the world’s leading marketplace for heavy equipment. Rising inventories of equipment combined with an economic slowdown should help unlock supply tightness and boost the company’s prospects, Mr. Feniger said.
“We see a path for RBA to outperform as cyclical & secular drivers align for 2023,” he said in a note to clients. “In our view, RBA is passing a key test that suggests some share gains - GTV [gross transaction value] is up low single digits over the last 12 months in an extremely tight supply environment vs GTV declines of about 10% in prior periods of tightness (2010/11, 2017). We believe RBA is well positioned for the next auction cycle, which typically kicks off in industrial slowdowns.”
“Our BofA Construction Dealer survey suggests we are likely at ‘peak’ tightness as we see signs that equipment supply is likely to improve into 2023: used inventories are building from low levels, OEMs are still in production mode and demand expectations are likely to slow. In our view, weak pockets in the economy (i.e., housing) can unlock equipment to be disposed and sold into stronger areas (i.e., infrastructure),” he said.
Mr. Feniger also thinks the company’s new chief financial officer, Eric Jacobs, will be a positive thanks to his background in developing marketplaces - especially virtual ones - within the sector.
His price objective was raised to US$75 from US$61.
National Bank on Wednesday downgraded the company to an “underperform” rating, citing mostly valuation concerns given the stock’s strong outperformance relative to the broader market this year. Its price target remained at US$56.
The average analyst price target is US$65.33.
***
BMO analyst Ambrish Srivastava upgraded Advanced Micro Devices Inc (AMD-Q) to “outperform” from “market perform,” believing shares can advance much further thanks to the strong product execution of its CEO, Dr. Lisa Su.
“There is no going back for customers to the old days of when AMD’s share would be capped,” the analyst said in a note. “We see a sustainable compute franchise as a result of continued superior execution on all fronts under Dr. Su’s leadership.”
Due to some “near-term headwinds,” she lowered some estimates on the company’s finances, but raised her price target to US$115 from US$100. Her new target is still well below the Street average of $131.41.
“We are hearing of continued momentum from our work around the industry, and see AMD’s server share continuing to expand,” she said.
***
In other analyst actions:
First Quantum Minerals Ltd (FM-T): Citigroup cuts price target to C$20 from C$40
Teck Resources Ltd (TECK-B-T): Citigroup cuts price target to C$45 from C$58
Tourmaline Oil Corp (TOU-T): Scotiabank raises target price to C$106 from C$98
Alcoa Corp (AA-N): Citigroup cuts price target to US$45 from US$84
Alphabet Inc (GOOGL-Q): Atlantic Equities cuts target price to US$2,450 from US$2,900; Citigroup cuts price target to US$2900 from US$3175
Cisco (CSCO-Q): JP Morgan cuts to neutral from overweight . Price target cut to US$51 from $62
Freeport-Mcmoran Inc (FCX-N): Citigroup cuts price target to $28 from $48
Meta Platforms Inc (META-Q): Atlantic Equities cuts target price to $215 from $285
Snap Inc (SNAP-N): Atlantic Equities cuts target price to $18 from $26
Empire State Realty Trust Inc (ESRT-N): BMO raises to market perform from underperform; raises target price to US$8 from US$7.50
Costco Wholesale Corp (COST-Q): Deutsche Bank raises target price to US$579 from US$525; upgrades to buy from hold
Netflix Inc (NFLX-Q): BMO cuts target price to US$365 from US$405
Tesla Inc (TSLA-Q): Truist Securities starts coverage with buy rating; target price US$1000
Twitter Inc (TWTR-N): Rosenblatt Securities raises to buy from neutral and raises target price to US$52 from US$33
Centene Corp (CNC-N): Jefferies raises to buy from hold; raises target to US$115 from US$82
With files from Reuters
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.
Darcy Keith