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

Thomson Reuters Corp.’s (TRI-N, TRI-T) third-quarter results were slightly better than expected, but investors should stay patient for a more timely entry point, said RBC analyst Drew McReynolds.

He reiterated a “sector perform” rating on the company while trimming his price target to US$133 from US$136.

“We believe the recent pullback in the stock has lowered the degree of valuation risk that prevailed following the run-up in the shares into Q2/23 (forward twelve month EV/EBITDA of 20.6x versus a peak of 24.5x),” Mr. McReynolds said in a note. “Nevertheless, we remain patient for a more timely entry point with a three-fold focus on: (i) the ability to generate organic revenue growth in excess of +6% on a sustained basis; (ii) improved visibility on the impact of accelerated AI adoption and monetization; and (iii) the extent to which macro uncertainty ultimately translates to a slower net sales environment.”

Despite the near-term reservations, Mr. McReynolds made clear he believed Thomson Reuters was a good stock to hold for the long run. Bigger picture, Thomson Reuters remains a high-quality, core holding in our view reflecting a resilient asset mix, a healthy capital return program and attractive NAV growth that can generate average annual total returns in the +10%-15% range over the long-term,” he said.

Thomson Reuters reported higher third-quarter revenue and kept its key financial targets for the year steady as the information and software provider prepares to roll out new artificial-intelligence tools in key products.

Revenue of US$1.59-billion increased 1 per cent in the quarter that ended Sept. 30, compared with a year earlier. After accounting for lost revenue from several smaller asset sales over the past year, revenue was up 6 per cent, which was roughly in line with analysts’ expectations.

“We view 2024 as somewhat of a transition year reflecting the combination of navigating a more challenged macro environment, incremental investments and executing on a comprehensive generative AI product roadmap,” the RBC analyst added. “Our 2024 forecast currently translates to flattish free cash flow growth year over year reflecting the impact of these incremental investments, higher capex intensity, a lower LSEG dividend contribution and a slightly higher cash tax rate. Looking into 2025, we see the potential for the company to enter another period of accelerated NAV growth driven by an uptick in organic revenue growth (i.e., generative-AI commercialization and monetization, increased retention rates, easing macro headwinds) and renewed adjusted EBITDA margin expansion underpinned by positive operating leverage and the scaling of recent tuck-in acquisitions. We expect these medium-term growth drivers to be discussed at the investor day scheduled for March 2024.”

Elsewhere, National Bank Financial reiterated a “sector perform” rating and trimmed its price target to C$180 from C$186.

And Scotiabank analyst Maher Yaghi cut his price target to US$142 from US$145 while reiterating a “sector perform rating.”

“We think the storyline is shifting away from ever-increasing margins to upfront investments in AI to achieve higher revenue growth down the road,” Mr. Yaghi commented. “As a result of those investments, 2024 is likely to see lower margins y/y and flat free cash flow production, a year when higher development spending will need to be made before achieving topline upside acceleration. We continue to believe that TRI’s business model is fundamentally very strong and management is undertaking the right investments to position the company to gain upside from AI.”

The average price target is now US$130.67, down from US$136.98 a month ago, according to Refinitiv Eikon data.

***

Athabasca Oil Corp. (ATH-T) delivered strong third-quarter results, said RBC analyst Luke Davis as he raised his price target on the stock to C$5 from C$4.50. His rating remains “sector perform.”

Production volumes of 36,176 barrels per day of oil equivalent were ahead of the consensus of 35,620 boe/d, with the Leismer asset leading the way at 24,232 bbl/d. Third quarter cash flow per share of $0.24 was ahead of consensus of $0.22, largely on stronger price realizations.

“We believe the company is well positioned into 2024 with continued thermal growth, increased capital allocation to the light oil business, and focus on return of capital,” Mr. Davis said in a note.

In the meantime, the company has a strong balance sheet, existing the third quarter with $155 million in net cash, and has also been busy buying back shares.

“Athabasca remains committed to returning 75% of excess cash flow to shareholders,” Mr. David said. “Athabasca shares trade at a premium to oil-weighted peers, which we believe reflects strong free cash generation, exposure to WCS heavy oil, and management’s continued focus on return of capital.”

Elsewhere, BMO maintained a “market perform” rating with an increased target price of C$4.75 (from C$4.50).

The average analyst price target is C$4.91, up from C$4.56 a month ago.

***

National Bank Financial analyst Dan Payne reiterated an “outperform” rating on Tourmaline Oil Corp. (TOU-T) in the wake of the company reporting third-quarter operating and financial results ahead of expectations.

“A solid quarter, and the company continues to exemplify the strength of its scale-oriented operations – positively expanding and concurrently maximizing returns,” Mr. Payne commented as he maintained an C$80 price target. If that target is realized, investors would make a total return of about 10 per cent over the next 12 months.

Tourmaline reported cash flow per share of $2.55, better than the consensus expectation of $2.43.

The company’s production expanded at an annualized rate of 5 per cent. The analyst commented that its annualized cash yield of 8 per cent is well supported by strong liquidity.

BMO analyst Randy Ollenberger raised his price target on Tourmaline to C$82 while reaffirming an “outperform” rating.

“Tourmaline’s 2024 guidance was relatively in line with expectations, and it plans to announce quarterly special dividends throughout 2024. We believe the company’s shares should trade at a large premium to peers given its extensive inventory, competitive cost structure, market diversification, healthy balance sheet, and growth potential,” Mr. Ollenberger commented.

Elsewhere, Atb Capital Markets cut its target price to C$92 from C$93 and TD Securities raised its target price to C$82 from C$79.

The average price target is now C$84.16, up from C$81.53 a month ago.

***

Raymond James analyst Frederic Bastien reiterated a “strong buy” rating on Brookfield Infrastructure Partners L.P. (BIP-N, BIP-UN-T) after reviewing the company’s third quarter results. But he did lower his price target, to US$40 from US$45, due to the impact of higher interest rates.

Funds from operations were 73 cents a unit, a penny shy of consensus estimates. “Organic growth was in the high single digits again, owing to elevated inflation across the Utilities and Transport segments and the commissioning of new capital projects over the past year, while the payout ratio (67%) headed lower still. Liquidity now stands at $2.1 bln proforma the Compass deal, providing BIP with significant firepower to capitalize on today’s buyers’ market,” Mr. Bastien commented.

The Raymond James analyst saw a lot of things to like in the results. “First, embedded inflationary escalators and secured capex offer visibility into healthy organic growth over extended periods of time. Second, a healthy capital deployment run has padded the next years with built-in growth, yielding management the flexibility to pace investment activity in accordance with capital recycling successes. Third, 90% of BIP’s debt is locked with average maturity of seven years, providing certainty on borrowing costs well into the future. Lastly, management is backing its strong conviction in the value of the business with share buybacks,” he said.

“With the higher interest rates pushing up discount rates for valuation, we are lowering our target price to funds from operations multiple from 13.5x to 12.5x, BIP’s 5-year average. We view this metric as reasonable even in a risk-off environment, given Brookfield Infrastructure’s differentiated full-cycle investment strategy, scale advantages, and steadily growing cash flows,” he concluded.

The average analyst price target is US$39.25, down from US$42.33 a month ago.

***

Canadian National Railway Co.’s (CNR-T) acquisition announced Wednesday of a stake in the Cape Breton & Central Nova Scotia Railway (CBNS) from Genesee & Wyoming will be positive for investors, as it will increase the company’s reach in the east and help drive growth longer-term, said RBC analyst Walter Spracklin.

“CN currently interchanges with the CBNS in Truro - and the agreement is designed to help service existing customers on the line. Key for us will be the extent to which the agreement drives incremental volumes on CN’s under-utilized Eastern Network (which we expect would come on at solid incremental margin due to excess capacity),” the analyst said.

No financial details were disclosed. Mr. Spracklin said he expects to get more information on the transaction when he speaks with CN management next week.

For now, he reiterated a “sector perform” rating on CN Rail with a price target of C$158.

The average analyst price target is C$165.25.

***

RBC downgraded Estee Lauder Companies Inc (EL-N) to “sector perform” from “outperform” and slashed its target price to US$115 from US$195 after the cosmetics giant reduced its guidance. Several other analysts also cut price targets.

Commented RBC analyst Chris Peters: While EL’s F1Q’24 played out better than expected, the material guidance cut was a major disappointment. While the data points around China were negative during the quarter, we thought EL’s guidance (provided last quarter) already embedded this dynamic. We were clearly wrong. While we gave management the benefit of the doubt on having a handle on the situation, there are simply too many headwinds and not enough visibility at this time for us to believe in the 2H growth story.

***

Tempted to buy Canadian bank stocks while they’re struggling? CIBC analyst Paul Holden has some thoughts on that today, although no changes were made to his price targets or ratings.

“Our Conclusion: The valuation discount in Canadian banks is apparent to everyone. Hence, the common question on whether there is more downside or not. Our valuation work shows that banks are trading at trough-type levels and imply the type of PCLs [provision for credit losses] we would associate with a hard landing. Those are important observations for value investors. However, tactically we would argue that it’s too early to remove an underweight position in banks. We need to see higher PCLs in estimates and/or Bank of Canada cutting rates before advocating for a sustained rebound in share prices.

“Key Points: A long drawn-out correction. Canadian bank stocks peaked in early 2022, which means we are nearly two years into this down cycle. As painful as it has been for Canadian bank stocks, they have not corrected as much as U.S. banks. We are skeptical that Canadian bank stocks can rally ahead of U.S. bank stocks given the valuation differential (favours U.S.) and a more challenged economic outlook in Canada (more rate-sensitive consumer).

P/B valuations are in deeply discounted territory. The average P/B today is nearly two standard deviations below average. This has only happened twice before in recent history – the trough of the financial crisis and the COVID pandemic trough. Perhaps new lows will be set this cycle, but there is no debate that we are in rare territory.

P/E multiples imply a hard landing. We compare current P/E multiples (2024E consensus) to historical averages to determine how much EPS downside is embedded in valuations. The answer is 20% EPS downside on average. If we isolate PCLs as the sole driver of EPS downside, then P/E valuations are implying a 2024 average PCL ratio of 74bps, nearly double the 38bps currently included in 2024 consensus. PCL ratios of around 70bps occurred in 2009 and 2020. In other words, valuations are implying that a really bad year is coming up.

If valuations are pricing in the worst, why not buy today? From a tactical perspective we would like to see at least one of these two conditions to occur: 1) higher PCLs to be embedded in consensus estimates (i.e., a clearing event that then paves the way for positive earnings revisions); 2) Bank of Canada starts to cut rates, alleviating some of the concerns over mortgage renewal risk.”

***

In other analyst actions:

Canada Goose Holdings Inc (GOOS-T): CIBC cuts target price to C$20 from C$27; TD Cowen cuts target price to C$17 from C$20; Raymond James cuts target price to C$16 from C$26; Wells Fargo cuts target price to C$16 from C$20

Capital Power Corp (CPX-T): Atb Capital Markets cuts target price to C$42 from C$44; CIBC cuts target price to C$41 from C$43; RBC cuts target price to C$45 from C$48

First Capital Real Estate Investment Trust (FCR-UN-T): CIBC cuts price target to C$17 from C$19; RBC cuts target price to C$17 from C$19

First National Financial Corp (FN-T): CIBC raises target price to C$40 from C$37

Interrent Real Estate Investment Trust (IIP-UN-T): CIBC cuts price target to C$13.50 from C$15; RBC cuts target price to C$16 from C$17

Lundin Mining Corp (LUN-T): Eight Capital raises to “buy” from “neutral” and increases target price to C$12.5 from C$12

North American Construction Group (NOA-T): Atb Capital cuts target to C$40 from C$45; TD Securities cuts target to C$33 from C$36

Parkland Corp (PKI-T): RBC raises target price to C$53 from C$48

Spin Master Corp (TOY-T): National Bank of Canada cuts target price to C$43 from C$46

Chevron Corp (CVX-N): Bernstein raises to “outperform” from “market-perform” but cuts price target to US$182 from US$184

Clorox Co (CLX-N): Citigroup raises price target to US$150 from US$135 and raises rating to “buy” from “neutral”

Kraft Heinz Co (KHC-Q): CFRA raises target price by US$2 to US$40 and raises rating to “buy” from “hold”

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 01/03/24 4:00pm EST.

SymbolName% changeLast
TRI-N
Thomson Reuters Corp
+0.95%159.29
TRI-T
Thomson Reuters Corp
+0.77%215.9
CNR-T
Canadian National Railway Co.
+0.41%176.69
ATH-T
Athabasca Oil Corp
+1.83%5.01
GOOS-T
Canada Goose Holdings Inc
+0.76%18.63
CPX-T
Capital Power Corp
+0.81%38.66
FCR-UN-T
First Capital REIT Units
+1.42%15.76
FN-T
First National Financial Corp
+0.12%40.26
IIP-UN-T
Interrent Real Estate Investment Trust
+1.47%13.78
PKI-T
Parkland Fuel Corp
-1.34%42.83
TOU-T
Tourmaline Oil Corp
+1.48%62.33
TOY-T
Spin Master Corp
+0.46%32.46
CVX-N
Chevron Corp
+0.53%152.81
CLX-N
Clorox Company
-0.8%152.08
EL-N
Estee Lauder Companies
+0.17%148.83
KHC-Q
Kraft Heinz Company
-0.43%35.13
BIP-N
Brookfield Infrastructure Partners LP
+1.9%29.02
BIP-UN-T
Brookfield Infra Partners LP Units
+1.91%39.4
LUN-T
Lundin Mining Corp
+0.75%10.81
NOA-T
North American Construction Group Ltd
+1.12%34.36

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