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

While expecting Parkland Corp.’s (PKI-T) “material weakness” in the third quarter to be “largely transitory,” iA Capital Markets analyst Matthew Weekes warns investors will require patience despite an enticing valuation.

That led him to lower his recommendation for the Calgary-based energy and retail company to “buy” from “strong buy” previously.

“The headwinds impacting Q3 could create a near-term overhang going into 2023, particularly in the context of the current macroenvironment, as investors await (a) improved performance in Q4 and guidance to underpin the outlook beyond 2022, and (b) a step-up in cash flow and deleveraging following a rapid M&A growth phase,” he said in a research note. “As such, despite the stock trading at a highly attractive valuation and our view that that PKI’s strategy should drive expansion of the multiple over time, we are electing to move our rating.”

On Wednesday, shares of the dropped 7.1 per cent following the premarket release of a business update that included adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) guidance of $325-million, missing both Mr. Weekes’s $421-million projection and the consensus estimate on the Street of $430-million. It blamed several factors included a sharp drop in fuel prices and non-recurring wholesale inventory and risk management losses of approximately $65-million for its U.S. operations.

“These factors offset stable retail demand in Canada, strong non-fuel margins, strong Refining utilization and crack spreads, and the consolidation of Sol during the quarter,” Mr. Weekes said.

“PKI expects to meet its 2022 Adj. EBITDA guidance range of $1.6-1.7-billion, which implies a stronger Q4 than previously expected as several of the headwinds experienced in Q3 should normalize. Canadian commercial demand typically experiences a seasonal increase in Q4, and PKI has noted a strong start to the tourism season in Florida and the Caribbean. With the absence of the non-recurring losses, the U.S. should trend more in line with prior expectations, and PKI expects the capture rate to improve at Burnaby as it depletesits higher-priced inventory.”

In response to the report, Mr. Weekes lowered his financial forecast to “sharpen” assumptions on business and interest costs. He’s now projecting adjusted EBITA of $1.603-billion in 2022, down from US$1.661-billion previously, with his 2023 estimate sliding to $1.7-billion from $1.747-billion.

“The miss highlights cost pressures facing the Company, sensitivity to the volatile fuel price environment, and certain shortfalls experienced in PKI’s risk management program and market forecasting in the US, and thus warrants a degree of caution. However, we believe that PKI’s broader outlook, demand trends, and strategy remain positive, and expect much of the weakness to be transitory,” he said.

Mr. Weekes reduced his target for Parkland shares to $42 from $49. The average target on the Street is $44.07, according to Refinitiv data.

“The stock is now trading at around a two-and-a-half-year low following an 7-per-cent decline in the previous market session, resulting in a valuation of 6.5 times EV/EBITDA and 18-per-cent AFFO yield,” he said. “We have updated our valuation to reflect higher interest rates, which contributes to our reduced target price.”

Elsewhere, others making changes include:

* National Bank Financial’s Vishal Shreedhar to $38 from $44 with an “outperform” rating.

“We consider valuation to be attractive (we estimate 2023 free cash yield of 12 per cent),” he said. “PKI currently trades at 6.3 times our NTM [next 12-month] EBITDA vs. the five-year average of 8.7 times. For reference, this is the lowest valuation within the last five years. ... Despite management’s plans to reduce inventory in the U.S. business, investors may place heightened scrutiny on PKI’s risk management practices, delaying near-term opportunity for a favourable multiple re-rating.”

* Raymond James’ Steve Hansen to $42 from $52 with a “strong buy” rating.

“Despite this uncharacteristic shortfall, management reiterated its FY2022 guidance (implying a robust 4Q22), citing swift containment of wholesale losses, a favorable crack spread backdrop, strong start to the Caribbean season, and a full quarter of International segment consolidation,” he said. “While we’ve trimmed our forecasts in response, we regard yesterday’s stern market reaction (7.1 per cent down) as overdone, leaving the stock trading near its COVID-induced lows despite upbeat macro fundamentals and impressive subsequent enhancements to the company’s core earnings power.”

* RBC’s Luke Davis to $40 from $47 with an “outperform” rating.

“Parkland’s Q3 results were negatively impacted by inventory adjustments, increasing costs, and hedging losses. We are now slightly below the bottom end of guidance for the year and have revised our price target down to $40 per share with our rating unchanged. We believe the stock may remain under pressure near-term given recent missteps with strong execution key to restoring investor confidence in the outlook,” said Mr. Davis.

* CIBC World Markets’ Kevin Chiang to $43 from $49 with an “outperformer” rating.

“We do view the unexpected headwinds that hit PKI’s results as largely contained in the third quarter. As such, we remain confident that PKI remains on track to hit its 2025 run-rate EBITDA target of $2B. Applying a refinery multiple to PKI’s earnings would suggest a floor value in the mid-$20 range, which is where it currently sits,” Mr. Chiang said.

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A recent pullback in shares of Constellation Software Inc. (CSU-T) “offers a chance for defensive growth,” according to National Bank Financial analyst Richard Tse, citing a “more constructive outlook for M&A and attractive defensive attributes.”

With the Toronto-based firm having fallen almost 8 per cent over the last month, he raised his recommendation to “outperform” from “sector perform” in a research report previewing 2023 for the Canadian technology sector.

“In light of the accelerating pace of capital deployment, moderating market valuations and its continued strong defensive attributes (recurring revenue and cash flow), we’re upgrading CSU ... We believe moderating valuation expectations of sellers increases the probability that Constellation’s accelerated pace of capital deployment will continue into 2023,” said Mr. Tse.

He pointed to Constellation’s “aggressive” capital deployment thus far in 2022, emphasizing it nearly doubles the level required to maintain a 15-per-cent revenue growth rate in fiscal 2022.

“In light of that capital deployment, we’re now forecasting revenue growth of 28 per cent year-over-year, an increase from our 15.5 per cent following Q4′2021 earnings on Feb. 11, 2022,” said the analyst. “We also believe a moderating valuation environment could support the pace of capital deployment. In light of that, we believe there could be potential for expanding operating leverage as well.”

Mr. Tse also thinks the firm possesses “enviable” defensive attributes.

“Given the challenging macro backdrop, investor sentiment has shifted towards profitability, and with that, companies that have a resilient record and outlook with FCF,” he said. “In our view, Constellation plays well into that mindset shift (but with growth) boasting a F23 estimated FCF yield of 6.2 per cent, Adj. EBITDA margin of 27 per cent, and more than 70-per-cent recurring revenue.”

Mr. Tse maintained his price target for Constellation Software shares of $2,350. The average on the Street is $2,533.01.

Mr. Tse and colleague John Shao also made these target reductions:

  • Altus Group Ltd. (AIF-T, “outperform”) to $60 from $70. Average: $64.63.
  • Copperleaf Technologies Inc. (CPLF-T, “outperform”) to $12 from $14. Average: $10.86.
  • Docebo Inc. (DCBO-T/DCBO-Q, “outperform”) to US$60 from US$85. Average: US$59.
  • E Inc. (EINC-T, “sector perform”) to $5.50 from $10.
  • Farmers Edge Inc. (FDGE-T, “sector perform”) to 50 cents from $1. Average: $1.58.
  • Q4 Inc. (QFOR-T, “outperform”) to $5 from $7. Average: $6.28.
  • Shopify Inc. (SHOP-N/SHOP-T, “outperform”) to US$60 from US$75. Average: US$40.81.
  • Thinkific Labs Inc. (THNC-T, “outperform”) to $4 from $5. Average: $5.70.

“While valuations in our coverage universe will be subject to outsized influence from macro factors under the current backdrop, strategic and operating execution on business plans will ultimately drive valuation re-ratings beyond the current volatility for the individual names,” the analysts said. “At the same time, we’re cognizant to recognize that a number of growth names have outsized risk exposure in the short term given the lack of profitability under a rising rate environment, which is why we continue to offer a selection of names under the short-term volatility. Those names are ones having defensive attributes in the form of recurring revenue (cash flow), profitability and growth include CGI, OpenText and Constellation Software which we’re upgrading to Outperform (from Sector Perform).”

“Bottom line, when we look at the implied growth rates of our analysis relative to the sector, we think valuations look reasonable today with some potentially outsized value in names based on implied long-term growth being: Coveo, Nuvei, OpenText, Pivotree, Q4, Telus International and Thinkific.”

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Canaccord Genuity analyst Aravinda Galappatthige thinks Canadian telecommunication companies’ “robust” strength in wireless is sustainable and can continue to drive overall returns.

“In Q3 (and even beyond), we expect a continuation of the robust wireless performance that we’ve seen over the last few quarters, as many of the central drivers remain valid. This includes more moderated competitive conditions in general (although Freedom was more active during BTS than we’ve seen of late), rising roaming revenues, and increased uptake of premium-tiered plans,” he said. “The latter, in particular, has genuine longevity, in our view, and augurs well for the incumbents well into 2023. Specifically, in Q3, we expect 7.2-per-cent service revenue growth at Bell, 6.5 per cent at TELUS, and 3.7 per cent (up 8.9 per cent excluding customer credits of $90-million) for Rogers. This is well supported by ARPU [average revenue per user] growth of 3 per cent at Rogers (down 1.9 per cent including customer credits), 2.6 per cent for Bell, and 2.2 per cent at TELUS, and a further uptick in volumes”

Ahead of the coming third-quarter earnings season, Mr Galappatthige said “the case for an overweight on Telecoms remains credible, led by its natural defensive traits and the current phase of notable strength in wireless fundamentals.”

“So far this year, the Canadian Telecoms have performed moderately better than the S&P TSX composite index (down 8 per cent vs down 11 per cent),” he added. “While on the surface this may be deemed somewhat underwhelming considering the defensive credentials of the sector (in a down market), one has to consider the resource-heavy nature of the TSX, which has allowed it to outperform the S&P500 by 10 per cent. Moreover, the Telecoms have outperformed the Banks (by 4 per cent) and REITS (by 18 per cent) this year and are essentially on par with the Utilities (in fact, ahead by 1 per cent). Finally, the Canadian Telecoms have sharply outperformed the U.S. Telecom space due to the sustained sell-off of their cablecos and uneven execution at Verizon and AT&T.”

Mr. Galappatthige lowered his recommendation for Cogeco Communications Inc. (CCA-T) to “hold” from “buy” after cutting his target multiples for its Canadian and U.S. businesses,” mainly reflecting the significant multiple compression within cablecos in general, particularly in the U.S.” That resulted in a target reduction to $70 from $96. The average is $101.11.

Citing a “significant upswing in rates since August,” he also made these target changes:

  • BCE Inc. (BCE-T, “hold”) to $63 from $67. Average: $67.23.
  • Rogers Communications Inc. (RCI.B-T, “buy”) to $63 from $67. Average: $74.17.
  • Telus Corp. (T-T, “buy”) to $33 from $44. Average: $33.63.

“We continue to see TELUS as our preferred pick within the sector,” he said. “TELUS’ valuation of 8.9 times EV/EBITDA (23E), whilst not necessarily cheap for a Telco, we believe is well justified owing to its defensive traits in an uncertain macro environment with its resilient telecom operations and a genuine growth element from its fast-growing business segments (i.e., TI, TH, and AgTech), not to mention the positive backdrop for incumbents’ wireless.”

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In a research report titled The Song Remains the Same, RBC Dominion Securities analyst Drew McReynolds said
growing macro concerns and higher interest rates continue to “negatively impact” Canadian media companies, which continue to struggle heading into third-quarter earnings season.

“Yeaar-to-date, total returns for all of the companies in our media coverage are negative with all stocks underperforming the negative 10-per-cent total return for the TSX Composite,” he said. “We attribute the pullback mainly to rising interest rates and macro concerns heading into 2023 with potential negative implications for the advertising market. With few places to hide, the top performing stocks in our coverage are Transcontinental (down 11 per cent), Thomson Reuters (down 13 per cent) and Stingray (down 21 per cent). We would continue to group the significant laggards within the group into two buckets – companies in our coverage that went public in 2021 where liquidity is unusually low (Boat Rocker, VerticalScope) despite relatively constructive fundamentals, and companies in our coverage that are also somewhat new to the public markets, tend to fly under the radar but also have digital advertising exposure (AcuityAds, Enthusiast Gaming).”

Mr. McReynolds expects the group to remain under pressure “until there is greater visibility as to whether a soft or hard landing scenario emerges.”

“Our best ideas are defensive and/or oversold under most macro/interest rate scenarios – Thomson Reuters (Outperform, US$118 Price Target), VerticalScope (Outperform, $24 Price Target) and Boat Rocker (Outperform, $6 Price Target),” he said.

The analyst made a series of target adjustments. They are:

* Thomson Reuters Corp. (TRI-N/TRI-T, “outperform”) to US$118 from US$124. Average: US$123.54.

“We view Thomson Reuters as a high-quality core holding with both growth and defensive attributes,” he said. “We believe the company has the ability to deliver average annual total returns of approximately 10–15 per cent over the longer term and has entered a new phase of 8–12-per-cent annual dividend growth underpinned by a step-up in FCF generation driven by the ongoing Change Program. While not immune to an economic slowdown, we believe revenues should prove among the most resilient in our coverage and we believe the company remains on track to meet its outlook for 2022 and 2023.”

* Enthusiast Gaming Holdings Inc. (EGLX-T, “outperform) to $4 from $6. Average: $5.81.

“ In addition to a challenging economic and market backdrop, we attribute the pullback in the shares to concerns around the extent to which the company has sufficient capital and liquidity to fund its growth objectives,” he said. “While our forecast suggests the company can balance growth and profitability and therefore we see current levels as an attractive entry point, until earnings visibility improves in the current environment, the risk profile of the stock will remain elevated putting downward pressure on valuation. Bigger picture, we see the opportunity for Enthusiast Gaming to further aggregate and monetize the still highly fragmented fan experience segment of a broader gaming ecosystem that continues to benefit from exceptionally strong secular tailwinds.”

* VerticalScope Holdings Inc. (FORA-T, “outperform”) to $24 from $26. Average: $23.29.

“With almost 70 per cent of revenues driven by digital advertising, VerticalScope earnings are not immune to a recession. Furthermore, supply-chain disruption and ad tech evolution continue to negatively impact major advertising categories as well as investor sentiment. However, we believe the stock at 4.4 times FTM [forward 12-month] EV/EBITDA remains deeply oversold particularly given: (i) one of the most profitable and proven business models in our coverage that includes mid-to-high single digit normalized organic revenue growth, 4-5-per-cent-plus EBITDA margins and 70-per-cen-plus EBITDA-to-FCF conversion (a business model that we believe warrants a double-digit EV/EBITDA multiple in a normal operating environment); and (ii) company-specific factors that should help mitigate macro headwinds, including strategic initiatives in e-commerce, continued optimization of digital advertising with FORA and additional accretive tuck-in M&A.”

* AcuityAds Holdings Inc. (AT-T, “sector perform”) to $5 from $6. Average: $4.41.

“AcuityAds stock has not been immune to industry headwinds that have included concerns around the potential impacts of evolving privacy controls, a choppy digital ad market, macro uncertainty, greater competitive intensity and rising bond yields,” he said. “At 0.7 times FTM EV/net revenue (versus an average of 0.9 times for select DSP and SSP peers excluding The Trade Desk), we believe the stock is more fully pricing in these headwinds. However, until incremental visibility around the growth trajectory for illumin emerges, we do expect the stock to be somewhat range bound.”

* Boat Rocker Media Inc. (BRMI-T), “outperform”) to $6 from $7. Average: $7.25.

“Within our traditional coverage (broadcasting, publishing, advertising, printing and content production), we believe the earnings of content production and distribution companies should prove the most resilient in an economic slowdown reflecting what continues to be a robust streaming-driven content cycle,” he said. “Against this backdrop, we believe Boat Rocker shares at 3.9 times FTM EV/ EBITDA are too cheap to ignore, particularly given: (i) independent content company peers that trade at an average of 9.2 times; (ii) 2022 guidance that implies double-digit adjusted EBITDA growth with a strong premium TV pipeline, high-margin assets (Kids and Family, Representation) and net debt-free balance sheet; (iii) a diversified revenue mix by genre, channel and geography enabling the company to seamlessly pivot where needed; and (iv) a strong management team that is commercially and FCF minded.”

* Stingray Group Inc. (RAY.A-T, “outperform”) to $7 from $8. Average: $7.70.

“We believe management continues to execute well in identifying and capitalizing on new growth opportunities, including retail media, SVOD/OTT and advertising with decent growth runways for each ahead,” he said. “Given rising macro uncertainty, we expect the focus to shift to the overall advertising trajectory and the extent to which growth in retail media/Stingray Advertising can offset continued, if not renewed, weakness in radio advertising. Notwithstanding a hard landing scenario for the economy, we expect these growth drivers along with mid-30-per-cent adjusted EBITDA margins and 60-per-cent EBITDA-to-FCF conversion to deliver healthy NAV growth that should translate to a relatively firm floor on the stock.”

* Cineplex Inc. (CGX-T, “outperform”) to $13 from $14. Average: $14.79.

“We believe earnings visibility for Cineplex is steadily improving following a two-year period of major industry disruption,” he said. “Specifically, we are encouraged by: (i) the prospect of a full year of normal operations in 2023; (ii) early indications that consumer demand and the effectiveness of an evolving theatrical release window remain largely intact relative to pre-COVID-19 trajectories; (iii) management’s expectation of returning to pre-COVID-19 consolidated EBITDA margin levels; and (iv) a balance sheet that should strengthen given adjusted EBITDA growth and outright debt repayment alongside the continued support of lenders. We believe the pullback provides a more attractive and timely entry point reflecting: (i) a 2023 EV/EBITDA multiple of 6.9 times versus Cinemark at 6.7 times and a pre-COVID-19 FTM EV/EBITDA range of 7.5–10.5 times; (ii) sequential box office improvement in Q4/2022 and 2023 following a relatively weak Q3/22 and 2022; and (iii) the general resilience of theatrical exhibition as an out-of-home entertainment option during slower economic environments.”

* Transcontinental Inc. (TCL.A-T, “outperform”) to $23 from $24. Average: $21.67.

“Despite macro uncertainty and a challenging operating environment (inflation, supply chain, labour shortages), we continue to see the potential for an upward re-rating of the stock given what is accelerating organic revenue growth momentum within Packaging (with the packaging revenue contribution now approaching 60 per cent) and an improving Printing narrative with one-third of Printing and Media revenues growing double-digits,” he said.

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Scotia Capital analysts Robert Hope and Justin Strong think the earnings outlooks for Canadian utilities and energy infrastructure companies “remain resilient.”

However, they lowered their target prices for stocks in their coverage universe by an average of 11 per cent on Thursday to account for a higher-yield environment and moderating commodity prices.

“We like the Alberta power producers going into the quarter given the strong pricing environment as well as the fact that we believe they are less interest rate sensitive than other companies in our coverage universe,” they said. “We continue to like the gas focused midstream companies, Keyera and Pembina, given the favourable outlook for volumes. The renewable power group has seen its valuation decrease since mid-September (largely share price driven) and have yet to test a lower bound. That said, we continue to see a number of tailwinds for the group that are supportive of higher valuation. Our favourite renewable names are Boralex, Brookfield Renewable, and Northland Power.”

The analysts’ changes were:

  • Algonquin Power & Utilities Corp. (AQN-N/AQN-T, “sector perform”) to US$13 from US$16.50. Average: US$15.75.
  • AltaGas Ltd. (ALA-T, “sector outperform”) to $31 from $34. Average: $33.55.
  • Altius Renewable Royalties Corp. (ARR-T, “sector outperform”) to $11 from $13.75. Average: $14.
  • Boralex Inc. (BLX-T, “sector outperform”) to $51 from $53. Average: $50.38.
  • Brookfield Renewable Partners LP (BEP.UN-T, “sector outperform”) to US$38 from US$42. Average: US$40.31.
  • Capital Power Corp. (CPX-T, “sector perform”) to $50 from $54. Average: $51.96.
  • Emera Inc. (EMA-T, “sector outperform”) to $59 from $69. Average: $60.36.
  • Enbridge Inc. (ENB-T, “sector perform”) to $56 from $62. Average: $59.50.
  • Fortis Inc. (FTS-T, “sector perform”) to $57 from $63. Average: $58.32.
  • Gibson Energy Inc. (GEI-T, “sector perform”) to $24 from $26. Average: $25.68.
  • Hydro One Ltd. (H-T, “sector perform”) to $33 from $36. Average: $36.38.
  • Innergex Renewable Energy Inc. (INE-T, “sector perform”) to $18 from $21.50. Average: $21.58.
  • Keyera Corp. (KEY-T, “sector outperform”) to $34 from $38. Average: $35.27.
  • Pembina Pipeline Corp. (PPL-T, “sector outperform”) to $50 from $55. Average: $51.19.
  • TC Energy Corp. (TRP-T, “sector outperform”) to $67 from $76. Average: $67.75.
  • Tidewater Midstream and Infrastructure Ltd. (TWM-T, “sector outperform”) to $1.50 from $1.75. Average: $1.76.
  • Tidewater Renewables Ltd. (LCFS-T, “sector outperform”) to $17.75 from $21.. Average: $21.18.
  • TransAlta Ltd. (TA-T, “sector outperform”) to $15.50 from $17. Average: $16.25.
  • TransAlta Renewables Inc. (RNW-T, “sector perform”) to $17 from $18.50. Average: $17.65.

“The implied share price returns to our target prices are currently higher than normal,” they said. “This is not surprising given the significant downdraft in share prices since the start of September. At this point, we do not make any changes to our ratings as the market has a significant number of “cheap” stocks. That said, we are warming up to Algonquin as it is trading at 13.2 times 2023 estimated P/E, which is well below its 10-year average of 20.5 times forward P/E. That said, we have not seen a pickup in investor inbounds on Algonquin as investors are focused on the more defensive pure-play utilities. We could get more positive on the name if the December Investor Day provides additional clarity on the funding outlook as well as the path forward with the Kentucky Power acquisition.”

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Scotia Capital analyst Konark Gupta has “more conviction” on his bullish investment thesis on the business jet market after attending the world’s largest business aviation trade show in Orlando this week.

He thinks “upbeat industry sentiment” at the 2022 NBAA Business Aviation Convention & Exhibition “bodes well” for Bombardier Inc. (BBD.B-T) as well as CAE Inc. (CAE-T) and Heroux-Devtek Inc. (HRX-T).

“The numerous OEMs, suppliers, brokers, customers, training providers, and industry analysts we met with unanimously agreed that demand for new jets and aftermarket continues to be robust; production rates must increase given solid backlogs and new products; new bizjet users that entered the market during the pandemic are here for longer; pricing continues to be strong due to ultra-low pre-owned inventory, high inflation and strong industry discipline; customers have accepted inflation given it is broad-based; and parts supply and labour continue to be challenges in meeting demand. When compared to pre-pandemic, we observed that the event was busier, enthusiasm was stronger across the board, and the number of private jet showings was far more this year.”

After meeting with Bombardier executives, Mr. Gupta thinks his recently updated estimates for the Montreal-based company were “too conservative” in both the short and long terms.

“Specifically, it is becoming even more likely that BBD’s recent 900-per-cnet increase in 2022 FCF guidance (currently more than $515-million) has more upside risk, potentially beyond our $700-million estimate, while its aftermarket revenue target of $2.0-billion in 2025 (higher-margin) could also have meaningful upside risk,” he said. “It appears that BBD’s backlog and customer contract terms are strong enough to provide protection in a potential downturn as customers won’t find it easy to cancel orders in this cycle. Management still intends to retire more debt using excess cash and future FCF, set up working capital facilities to ensure good liquidity, and refinance longer-term debt when it makes most sense. We remind that BBD has no debt maturing until late 2024. In addition, the company is already very close to its long-term net debt target of $4.5-billion as of Q2/22 while we think FCF this year is highly likely to exceed its 2025 guidance of more than $500-million.”

Mr. Gupta added: “We think ignoring the stock due to its cyclical business or its over-levered balance sheet today relative to other industrials could be a significant lost opportunity for investors.”

Maintaining a “sector outperform” recommendation for Bombardier shares, he raised his target to $52 from $50. The average is $50.15.

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CIBC World Markets analyst Krista Friesen cut her target prices for auto parts supplier stocks on Thursday.

Her changes are:

  • Linamar Corp. (LNR-T, “outperformer”) to $72 from $80. The average on the Street is $77.40.
  • Magna International Inc. (MGA-N/MG-T, “outperformer”) to US$63 from US$74. Average: US$72.44.
  • Martinrea International Inc. (MRE-T, “neutral”) to $10 from $10.50. Average: $14.22.

She also cut her target for Boyd Group Services Inc. (BYD-T, “neutral”) target to $197 from $194, below the $212.17 average.

“Through the first half of the year we pointed to an improving latter half for the auto industry under the assumptions that supply chains would improve and demand remain strong,” said Ms. Friesen. “However, as we move into the back half of 2022 we have yet to see a substantial improvement in the supply chain, the consumer is weaker than originally anticipated, and Europe is becoming a serious problem for those with operations there. While we still believe that the auto industry is entering a new cycle and that suppliers will benefit from rising production, the long cycle we were expecting might be curtailed as a result of weakening demand. We maintain an Outperformer rating on ACQ, MGA, and LNR and a Neutral rating on BYD and MRE. We have lowered our price targets for LNR, MGA, and MRE, and raised our price target for BYD.”

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In other analyst actions:

* In an earnings preview for equipment dealers titled Thinking of Shifting to Cheap, Scotia Capital’s Michael Doumet reduced his targets for Finning International Inc. (FTT-T, “sector outperform”) to $35 from $39, Toromont Industries Ltd. (TIH-T, “sector outperform”) to $114 from $120 and Wajax Corp. (WJX-T, “sector outperform”) to $23.50 from $26.50. The averages are $39.13, $117.63 and $25.13, respectively.

“The 3Q22 setup should resemble that of 2Q – i.e. high probability of EPS beats, but (we think) a somewhat muted response from the market. Successive (and future) rate hikes increases the risk of a recession,” he said. “For the dealers, we believe 2H22 EPS beats are less likely to be rewarded in full as investors remain cautious on 2023/24. That being said, valuations have compressed well ahead of softening activity levels, implying lower earnings expectations (not yet reflected in Street estimates) – this is particularly evident in the uneven de-rate of FTT and WJX. In effect, we believe we are in the latter innings of TIH’s outperformance (although we see most room for upside surprises in 2H22) – with its P/E premium at a record – but believe we need to see some earnings revisions or visibility improve for the group before making a full shift to the cheaper names.”

* National Bank Financial’s Patrick Kenny expects summer export margin pressures to “compress” AltaGas Ltd.’s (ALA-T) third-quarter results. Ahead of their release, he cut his target to $30 from $33, below the $33.55 average on the Street, with an “outperform” rating.

“Moving our cost of equity assumption up 100 basis points in line with our Economics & Strategy Group’s most recent interest rate forecast, our target moves down to $30 (was $33),” he said. “That said, based on a total return opportunity of 22.3 per cent, and a SOTP valuation of $30 per share, we recommend buying the name on current weakness ahead of recovering Midstream margins this winter and a forecast mid-single digit dividend increase.”

* CIBC World Markets’ Jacob Bout lowered his target for Ag Growth International Inc. (AFN-T) to $45 from $52 with an “outperformer” rating. The average on the Street is $52.89.

Mr. Bout also lowered his targets for Chemtrade Logistics Income Fund (CHE.UN-T, “outperformer”) to $9.50 from $11 and Methanex Corp. (MEOH-Q/MX-T, “neutral”) target to US$39 from US$45. The averages are $10.68 and US$44.91, respectively.

“Historically during a recessionary environment, chemical stocks have underperformed the market (typical early-cycle performers), while fertilizer companies’ share price performance has largely been in line. We are expecting a different outcome in the case of a 2023 recession, as we expect elevated farm income to drive ag-input demand, and considering ag/fertilizer stock valuation levels are at decades lows. Our top two picks are AFN and NTR,” said Mr. Bout.

* Credit Suisse’s Andrew Kuske dropped his Emera Inc. (EMA-T) target to $53.50 from $63 with a “neutral” rating, while JP Morgan’s Richard Sunderland cut his target to $56 from $66 with a “neutral” rating. The average is $61.92.

“In a surprise move, Nova Scotia’s Government introduced a Bill on October 19th that, if passed, would likely limit capital investments, revenues, selected costs and overall returns for Emera Inc.’s (EMA) wholly-owned subsidiary, Nova Scotia Power Inc. (NSPI),” said Mr. Kuske. “We view this type of Government invention as having potential material near-term valuation consequences, in part, given uncertainty and a risk premia re-assessment. Proof of this dynamic was EMA’s abundant underperformance that included 400bps versus the Canadian market and about 300 basis points against Utility benchmarks on both sides of the Canadian-US border. That profile is staggering, in our view, as NSPI only accounted for 15 per cent of 2021 total operating earnings. We witnessed many episodes of regulatory uncertainty over the years – some caused by greatly unexpected Governmental actions. Before coming to “this too shall pass”, capital should flow to other (more likely) opportunities and, accordingly, we reduced multiples in an already skittish market environment.”

* Mr. Sunderland also lowered his target for Fortis Inc. (FTS-T, “neutral”) to $54 from $64. The average is $58.75.

* National Bank’s Rupert Merer trimmed his GFL Environmental Inc. (GFL-T) target to $47 from $53 with an “outperform” raitng. The average is $46.20.

“The waste industry is typically recession resistant with contracted operations,” he said. “While GFL could see headwinds from rising rates, we believe its debt is manageable. Since the beginning of the year, GFL has lagged its peers (GFL down 25 per cent vs. waste peers at 4 per cent) with concern over rising yields, higher debt levels and an M&A-focused model. GFL could repay debt while executing some M&A, and we believe contributions from operational improvements could support FCF in the coming years.”

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