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

Desjardins cut its rating and price target on Canadian Imperial Bank of Commerce (CM-T) after the bank posted disappointing quarterly results.

Analyst Doug Young cut his rating to “hold” from “buy” and dropped his price target to $118 from $125. The median is $130, according to Zack’s Investment Research.

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“Cash EPS missed by only a penny, but the composition was less appealing. Our Magic 8-Ball reads ‘outlook not so good.’ We are lowering our target price to $118 (from $125) and our rating to Hold (from Buy). Valuation remains compelling; however, absent any P/E multiple expansion (unlikely for the group), we fail to see a catalyst that would cause CM’s stock to outperform,” Mr. Young said.

The bank’s cash earnings per share came in at $2.97 versus Desjardins’ estimate and consensus of $2.98. “On a segmented basis versus our estimates, Canadian personal and small business banking missed, while all other segments beat; the capital markets beat added 8 cents," he said.

On the positive side: “(1) U.S. commercial banking and wealth had good results (earnings +14 per cent year over year on a US$ basis), driven by volume growth and lower PCLs. NIMs [net interest margins] are likely to flatline going forward, but management seems optimistic about volume growth. (2) Canadian commercial banking and wealth results were better than expected. (3) Credit trends remained benign. (4) CM has executed its deposit growth strategy in Canada and the U.S. (5) The capital markets beat was driven by strong underwriting and advisory revenue growth,” he said.

Additional concerns include: “(1) Canadian personal and small business banking earnings missed (earnings -2 per cent year over year) and the outlook remains tough (NIMs likely to trend higher through FY19, offset by higher NIX [non-interest expense] and slower loan growth). (2) The CET1 ratio was 20bps [basis points] below our estimate, which could impede share buybacks (no share buybacks over the last two quarters). (3) The all-bank NIX ratio was higher than expected and, more importantly, CM will likely not hit its 55 per cent target in FY19 due to its revenue growth (and expense) outlook. Other: CM expects cash EPS to be flat in FY19 vs FY18 (vs its +5–10 per cent medium term target), although this is already baked into estimates. But what about FY20?”

Desjardins’ target is “1.4-1.5 times (from 1.5–1.6 times) our estimated 2Q FY20 BVPS [book value of equity per share],” he said.

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After Lowe’s Companies Inc. (LOW-N) reported higher same-store sales in the latest quarter, but then cut its full year profit outlook, RBC Capital markets cut its price target on the company.

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“Lowe’s 3.5 per cent comp [comparable store sales] outperformed Home Depot, but about 150bps [basis points] of GM [gross margins] degradation pushed GP [gross profit] $s down ( about 3 per cent) and prompted an (about 8 per cent) FY EPS guidance cut after just 1 quarter – a move we expect will generate questions around the speed/magnitude of the company’s turnaround process. We still recommend LOW, given a growing (albeit moderating) home improvement market and some catch-up opportunity to HD [Home Depot] over time, but still prefer HD,” said analyst Scot Ciccarelli.

He kept his “outperform” rating on the stock but cut his price target to US$110 from US$120. The median is US$120.

“We are lowering our 2019/2020 EPS estimates to US$5.55/US$6.50 from US$6.00/US$7.00. Our PT goes to US$110 from US$120 (based on 19 times our FTM EPS estimate vs. 20 times previously) as we roll forward our model and reduce our multiple target due to lower margin expectations."

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Citi is cutting its price target on Magna International Inc. (MGA-N) to reflect the company’s latest guidance.

Analyst Itay Michaeli kept his “buy” rating on the stock but cut his price target to US$62 from US$66. The median price target is US$62.

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The company’s latest guidance “incorporated surprise setbacks in a few specific ADAS [advanced driver-assistance systems] launches, amongst other challenges,” he said.

“Magna became the latest auto supplier to encounter launch/validation cost issues in the post-RFQ [request for quotation]/pre-production phase. The bad news is that we don’t view consensus EPS as necessarily being de-risked for additional macro/operational hiccups. The good news is that Magna’s ADAS challenges do appear to reflect highly advanced awards that, at least in theory, should enhance the company’s LT tier-1 capabilities within sensor fusion, advanced cameras and LiDAR. Net-net, with the stock having underperformed since the disappointing Q1 miss, we still view risk/reward to be attractive at an approximately 12.6 per cent FCF [free cash flow] yield,” he said.

“Our target falls to US$62 from US$66 on lower estimates with target multiples unchanged since the FCF story appears largely intact (our target equals nearly ~9 per cent ‘19E FCF yield, ~10 per cent ‘20E yield) with the company also taking an aggressive stance on buybacks. Pinpointing NT catalysts is admittedly tougher now since the stock will likely depend more on execution updates on quarterly calls, but it is noteworthy that Magna remains relatively underweight in China. From our vantage point, we’d like to see the company take more time to drill-down the nature of recent ADAS/AV awards, including how they might potentially morph Magna’s long-term position within an addressable market that we remain bullish quite on” he said.

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CIBC reduced its price target for Confiex Timber Inc. (CFF-T) as analyst Hamir Patel reduced estimates.

He kept his “neutral” rating and cut his price target to $1.50 from $1.75. The median is $4.50, according to Zack’s Investment Research.

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“While we remain on the sidelines given the risk profile (liquidity of only about $26-million), potential asset sales by the company over the next six months could significantly reduce the liquidity risks weighing on the story. CFF’s profitability is going to be constrained throughout the remainder of 2019 as its U.S. mills are still ramping up while earnings from its legacy Canadian operations will be challenged by elevated log costs and weak W. SPF prices (currently US$308/mfbm),” he said.

“With fibre scarcity affecting all producers in B.C. and higher stumpage prices slated to go into effect on July 1, we suspect Conifex’s annual allowable cut (AAC) in the province would have greater value to larger producers in the company’s operating regions with lower manufacturing costs. Monetizing some of its legacy Canadian operations would allow the company to accelerate high return capital projects across its three-mill platform in the U.S. South,” he said.

“Reflecting higher B.C. cost assumptions, we have cut our 2019 EBITDA forecast from $21-million to $9-million. We have also reduced our 2020 EBITDA forecast from $51-million to $44-million,” he said.

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CIBC raised its price target for Neo Performance Materials Inc. (NEO-T) due to the potential for a rare earths trade spilling over from the U.S.-China trade dispute.

Analyst Scott Fromson kept his “outperformer” rating and raised his price target to $16 from $15. The media target is $18.

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“How would NEO’s business fare in the event of the U.S./China trade war spilling over to the rare earths space? This has the potential to increase rare earths pricing – and the NEO share price – in the near term, in anticipation of higher EBITDA over the medium term,” he said.

“News stories on Xi Jinping’s visit to a major domestic rare earths facility suggest that his government will use American dependence on China for about 80 per cent of its rare earths consumption as leverage in the ongoing trade war. China’s upcoming tariff increase on U.S. rare earths imports is of little consequence to NEO due to its sourcing of raw materials from China, Europe and Malaysia. Further, NEO’s shipments from China to the U.S. are minor. What is more important is the potential for lower year over year Chinese rare earths mining and separation quotas, as well as the ongoing crack-down on illegal mining. These could serve to drive up rare earths pricing – and punish the U.S.," he said.

“In this event, we could see NEO reaping the rewards. From our analysis of a pricing spike around 2010, we think the market would look through mildly negative near-term implications as lagged pricing pass-throughs take hold. As evidence, the stock price of NEO’s predecessor rose significantly following this spike, culminating in Molycorp’s acquisition in H1/12. We are decreasing our FY/19 estimates (accounting for near-term trade, automotive and indexing lag issues), but increase our FY/20 estimates in anticipation of higher rare earths pricing,” he said.

“NEO is trading at 4.6 times EV [enterprise value] /EBITDA on our 2019 estimates. We believe the current valuation fully reflects potential negative China trade risk,” he said.

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BMO initiated coverage on Chartwell Retirement Residences (CSH-UN-T) as the stock is “a long-term play on the Grey Tsunami.”

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Analyst Troy MacLean gave the stock an “outperform” rating and a target price of $16. The median is $16.

“Our positive thesis is based on the company’s attractive valuation (-2 per cent discount to NAV [net asset value] despite being the largest seniors’ housing operator in Canada) and the positivce demand outlook for the sector (key demographic growing at more than 3 per cent per year),” he said.

“We expect FFO [funds from operations]/unit growth will improve in 2019 and 2020 as CSH benefits from stabilizing G&A, and continued rent growth in its retirement portfolio,” he said.

Chartwell has been a steady performer over the past 11 years, with just one year of negative SPNOI [same property net operating income] growth (a -0.5 per cent decline in 2009).

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In other analyst actions:

Canadian Imperial Bank of Commerce: Canaccord Genuity cuts rating to hold from buy

Lithium Americas Corp: National Bank of Canada cuts price target to C$6.25 from C$8.50

BMO: Raised Restaurant Brands International target price to US$76 from US$71 based on the popularity of the “Impossible Whopper.”

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