Inside the Market’s roundup of some of today’s key analyst actions
Following an “idiosyncratic” fourth quarter, Desjardins Securities analyst Doug Young lowered his rating for Royal Bank of Canada (RY-T, RY-N) on Thursday, seeing limited upside to his one-year target price for its shares.
“Every quarter, one bank tends to surprise versus expectations, and this quarter (at least so far) RY assumes the mantle," said Mr. Young in the wake of results that fell short of his expectations.
Before the bell on Wednesday, RBC reported cash earnings per share of $2.22, which missed his estimate by 7 cents as well as the consensus projection on the Street by 6 cents.
“On a segmented basis vs our estimates (ex unusual items), Canadian P&C banking, insurance, wealth management and I&TS [Investor & Treasury Services] were in line, while capital markets and corporate missed,” the analyst said.
Mr. Young pointed out two positives stemming from the quarterly results: an earnings increase for its Canadian P&C segment and his belief that it remains on track to add 2.5 million net new Canadian banking clients by fiscal 2023.
Conversely, the analyst saw four concerns: a decline in City National Bank’s (CNB) adjusted earnings; a capital markets earnings miss attributable to “tougher” market conditions; a larger-than-anticipated provisions for credit loss (PCL) rate decline; and elevated non-interest expenses.
Based on the results, Mr. Young lowered his 2020 and 2021 cash EPS estimates to $9.30 and $9.80, respectively, from $9.37 and $9.81.
Moving the stock to “hold” from “buy,” he maintained a target of $111. The average target on the Street is $110.60, according to Bloomberg data.
“We like RY’s scale, quality franchises and strong capital position (12.1-per-cent CET1 ratio),” he said.
Elsewhere, CIBC World Markets analyst Robert Sedran lowered his target to $119 from $120, keeping an “outperformer” rating.
Mr. Sedran set: "The last two quarters of this fiscal year had some common threads. Good progress in P&C Banking and Wealth Management offset down performances in Capital Markets and the Investor & Treasury Services segments (including a decision to take a meaningful charge in the latter business), with normalizing loan losses throughout. While those first two segments are key to the outlook for this bank, momentum is also needed in the Capital Markets to sustain estimates. Management seemed confident that it would return in the coming year, at least on a relative basis.
“For our part, we recently upgraded the shares based on an expectation that earnings growth would prove to be more resilient than its peers in F2020 and F2021. While that growth rate is projected to land below the medium-term target range (and our numbers came down modestly), we still believe that to be the case and so our investment thesis is unchanged.”
In a separate research note, Mr. Young raised his target for National Bank of Canada (NA-T) following the release of better-than-anticipated fourth-quarter results.
“The bank achieved all of its medium-term targets in FY19 and reiterated its targets for FY20,” he said. “NA remains overweight Quebec and secured lending, and based on FY19 results, there appears no need for change. In 4Q FY19, cash EPS was above our estimate and consensus.”
On Wednesday, National reported EPS of $1.69, topping the $1.62 projection of both Mr. Young and the Street.
“On a segmented basis vs our estimates, all operating divisions beat while corporate missed," he said. "The capital markets beat added 11 cents.”
After raising his 2020 and 2021 EPS projections to $6.73 and $7.04, respectively, from $6.60 and $6.90, Mr. Young increased his target price for National shares to $72 from $68, keeping a “hold” rating. The average on the Street is $70.58.
“Management hit its targets in FY19,” he said. “However, as domestic growth tempers, the focus will turn to whether it can drive the same NIX ratio improvement in FY20.”
Elsewhere, Canaccord Genuity analyst Scott Chan removed his valuation discount on National Bank shares to reflect “above-average growth.”
With a “hold” rating, his target rose to $72.50 from $68.50.
“Although our F20 EPS forecast is relatively unchanged , we roll forward our valuation one quarter and introduce F21 EPS of $6.97,” he said. “The primary driver of our target price increase is removing our price-to-earnings valuation discount of 3 per cent (to 0 per cent) reflecting above-average growth. For F20, we forecast NA EPS growth of 6 per cent year-over-year (F19: 7 per cent), which should fall slightly ahead of peers once Bank reporting season is done.”
On the heels of a “large” earnings per share miss, Canaccord Genuity analyst Scott Chan is waiting for the resumption of portfolio growth to get more “constructive” toward Laurentian Bank of Canada (LB-T).
On Wednesday morning, Laurentian reported an earnings per share decline of 14 per cent year-over-year to $1.05, falling well short of the $1.17 expectation of both Mr. Chan and the Street.
“Relative to Canaccord estimates, we view results as lower quality, benefiting again from lower taxes and better credit,” said Mr. Chan. “Both are expected to normalize over our forecasted period.”
The analyst emphasized the slowing of portfolio growth across its portfolios, noting: “Total loans of $33.7-billion (down 0.6 per cent quarter-over-quarter and down 2 per cent year-over-year) was slightly below our forecast. Once again, residential mortgages (down 1 per cent and 6 percent, respectively) and personal loans (down 4 per cent and 13 per cent) were down sequentially, and commercial volume slowed (up 1 per cent and up 8 per cent) for the second straight quarter. That said, management maintains their commercial double-digit loan growth target in F20 with their focus on niche segments (e.g. inventory and equipment financing, real estate loan construction). Mortgages and personal lending had been impacted by the labour relations situation. With the resolution, management expects gradual improvement on these portfolios.”
After lowering his 2020 EPS projection by 4 per cent to $4.63, Mr. Chan reduced his target for Laurentian shares to $35 from $36, maintaining a “sell” rating. The average on the Street is $43.27.
Elsewhere, Credit Suisse analyst Mike Rizvanovic lowered his target by a loonie to $40 with an “underperform” rating.
Mr. Rizvanovic said: “LB traded at a 6-per-cent discount to its larger Big Six Canadian bank peers as of Dec. 3 (on NTM [next 12-month] consensus EPS), which is materially better than LB’s historical average 19-per-cent discount. As such, we believe there is downside risk on relative valuation, although we note that many investors will view LB’s current discount to book value (a P/B multiple of 0.81) as a support level for the shares.”
Though it displayed slower than usual organic growth in the third quarter, Raymond James analyst Steven Li thinks Descartes Systems Group Inc. (DSGX-Q, DSG-T) remains “remains well positioned to benefit from the dynamic global environment and the Amazon effect.”
On Wednesday after the bell, the Waterloo, Ont.-based tech firm reported largely in-line results. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of US$31.5-million represented an increase of 31 per cent year-over-year and fell met the consensus on the Street of US$31.2-million.
“Unlike other businesses, an increasingly dynamic environment (trade wars, changing tariffs and duties, Brexit adding new borders etc.) can be a boon for DSG,” the analyst said. “With complexity comes increasing reliance on DSG to assist in managing global logistic networks. Similarly, the explosion of ecommerce is putting the onus on businesses to deliver products cost effectively and quickly to businesses and consumers. The Amazon effect of customers was on full display last week for Black Friday. Customers are now accustomed to shorter delivery times and real-time visibility on the status of their orders. As such, there is increasing value in supply chain participants being able to connect with multiple parties on a single platform. DSG remains a great way to play these changes in the global trade landscape.”
Also pointing to potential near-term opportunities in the backhaul trucking market, particularly south of the border, Mr. Li raised his target for Descartes shares to US$40 from US$36 with a “market perform” rating (unchanged). The average target is currently US$44.06.
“Valuation at 10.0 times calendar 2020 revenues however leave us with little room,” he said.
Meanwhile, Canaccord Genuity’s David Hynes Jr. raised his target to US$48 from US$44 with a “buy” rating.
Mr. Hynes said: "Descartes posted another solid print as the earnings power of recently acquired Visual Compliance drove a third consecutive quarter of 30 per cent-plus EBITDA growth. DGSX shares aren’t cheap at 32 times EV/FCF [enterprise value to free cash flow] on calendar 2020 estimates, but it goes to show that investors are willing to pay up for predictability, which Descartes delivers in spades. Owning at least a handful of ‘cash flow kings’ is a logical strategy in a still somewhat jittery software tape. Taking a longer-term view, there are several reasons that we think DSGX will continue its quiet grind higher: (1) M&A is a reliable means to adding scale, there is no shortage of targets in the space, and Descartes has proven itself to be a prudent buyer; (2) managing for EBITDA growth, which has consistently been 15 per cent or more, keeps the firm from making silly decisions; (3) operating cash conversion at 85-90 per cent of Adjusted EBITDA is best-in-class for a regular acquirer; and (4) we believe there’s potential for gradually accelerating organic growth as some of the more compelling parts of the firm’s portfolio (real-time asset tracking, capacity matching, etc.) grow into a larger part of the mix.
“Our view remains that DSGX is the kind of stock that long-term holders should trade around a valuation range. With the firm operating at heightened growth rates and with generally high multiples in software, that range is probably something like 25-33 times forward FCF today. We’re near the high end of that target now, which means DSGX is fine, but we’d look to pullbacks to be more aggressive in the stock.”
Predicting a “long road ahead to achieve growth success,” RBC Dominion Securities analyst Josh Wolfson initiated coverage of Eldorado Gold Corp. (EGO-N, ELD-T) with an “underperform” rating, seeing a “weaker” risk-reward proposition for investors following 2019 share price appreciation.
“Beyond 2020, we see positive FCF and the value realization within EGO’s portfolio as a very long-term endeavor, requiring successful resolution of simultaneous financing uncertainties, development/technical risk, and permitting/geographic ambiguities,” said Mr. Wolfson. “If resolved, our forecasts outline the potential for net positive free cash flow beyond 2025. Prior to this, we forecast ongoing high capital consumption for the foreseeable future. Following EGO’s relative share price outperformance in 2019 (year-to-date up 172 per cent vs. GDX up 28 per cent), we believe investors are no longer compensated for this very long-dated risk-reward outlook.”
Mr. Wolfson did note that the company’s 2020 guidance outlines “material” improvements in volumes year-over-year, and he expects upcoming catalysts to be “constructive.”
“Beyond EGO’s expected financial improvement, upcoming events could surface value from heapleach production at Kisladag beyond 2021 (update scheduled in 1Q20), a Lamaque expansion (4Q19 PEA), an Olympias expansion (permits received), and the long-term potential advancement of Perama Hill," he said. "Our forecasts outline a reasonably optimistic outlook for EGO, incorporating all of these opportunities, despite uncertainties existing. Should EGO successfully gain a sizable equity partner for its Greek portfolio, this event could represent a positive catalyst, thereby providing project funding and reducing attributable project spending requirements.”
Mr. Wolfson set a target price of US$6.50 per share. The average is currently US$9.44.
Though he thinks Wednesday’s 8.9-per-cent drop in Dollarama Inc.'s (DOL-T) share price was “likely overdone,” Desjardins Securities analyst Chris Li expects the retailer’s margin “reset” to continue to weigh on the stock and limit near-term visibility.
Seeing limited catalysts and a “still fairly healthy” valuation, Mr. Li thinks Dollarama will remain range-bound.
“We attribute the share price weakness yesterday mainly to a tempered EBITDA margin outlook,” the analyst said. “Prior to the 3Q FY20 results, we estimate consensus expected EBITDA margin to increase 70 basis points year-over-year in FY21, driven by higher gross margin and SG&A leverage. Management expects a gross margin tailwind in FY21 from non-recurring DC integration costs this year, offset by higher transportation costs related to IMO 2020. Freight rates have increased as ships are mandated to use a more expensive low-sulphur fuel starting on Jan. 1, 2020. Please see our industry initiation report for more details. In addition, SG&A rate in 3Q FY20 increased vs a year ago even after excluding the impact of higher labour costs related to the calendar shift. Management noted the low-hanging fruit for SG&A expense reduction is gone. We believe this likely impacted expectations.”
Seeing the release of its fiscal 2021 outlook on April 1 as the next potential catalyst, Mr. Li lowered his EPS estimate for the next fiscal year to $2.01 from $2.07 after reducing his EBITDA margin estimate and expecting a flat gross margin.
He did note the earnings reduction does still offer “a fairly attractive growth rate” of 14 per cent year-over-year.
With a “hold” rating (unchanged), Mr. Li lowered his target for Dollarama shares to $47 from $51. The average on the Street is $49.35.
Meanwhile, CIBC World Markets’ Mark Petrie reduced his target to $48 from $50 based on a lower earnings projection. He kept a “neutral” rating.
“Though the underlying business remains strong, both in the context of competitors and consumers, Dollarama’s earnings growth remains hampered by a number of internal and external factors," said Mr. Petrie. “In short, we believe moves to solidify the value proposition and improve traffic drivers are sound, but imply more modest earnings growth than what investors have been accustomed to.”
Industrial Alliance Securities’ Neil Linsdell kept a “hold” rating and $45 target.
Mr. Linsdell said: “Good top line growth prompted an upward tightening in the full year SSSG guidance, however, this positive was overshadowed by continued pressure on profitability as the lack of inflation is keeping competitors and the Company from raising prices. Dollarama acts as a price taker, and resists raising prices in order to keep its value proposition intact. We consider Dollarama to be a solid operator, with industry leading margins and further growth opportunities in Canada and now Latin America, which justify a premium valuation, however with some potentially near-term pressures to both sales growth and margins, and with the current price level near our target, we maintain a Hold rating.”
Desjardins Securities analyst Maher Yaghi raised his target price for shares of Telus Corp. (T-T) following the announcement of its “sizeable” $1.3-billion acquisition of Berlin’s Competence Call Center.
Announced after the bell on Wednesday, the deal comes as Telus aims to build up its international unit with an eye to taking it public.
“TELUS International (TI) is gearing up for a possible public listing in the coming months,” said Mr. Yaghi. “We view the price paid for CCC as attractive given its recent double-digit growth rate as well as the potential unlocking of value in TI. We have increased our target to reflect the valuation gap between a telco and an IT service company; however, more upside is possible depending on how TELUS chooses to use the proceeds from a partial sale.”
On the potential public listing, Mr. Yaghi added: “T indicated that it is targeting an IPO of TI in the next 12–24 months. We have discussed this potential opportunity to crystallize value on several occasions. We still believe TI’s value is not fully reflected in T’s current share price. We estimate TI could be worth 11–13 times EBITDA, while we believe TELUS’s wireline segment currently trades at 7–8 times."
Keeping a “buy” rating for Telus shares, he hiked his target to $56.75 from $55.50. The average on the Street is $53.13.
“TELUS operates industry-leading networks, allowing the company to enjoy decent subscriber and profitability growth," he said. "In addition to the potential to unlock significant value through the public listing of TI, this has the potential to create significant shareholder value. We continue to like the shares at these levels.”
Citi analyst Jim Suva “materially” increased his sales and earnings per share expectations for Apple Inc. (AAPL-Q) in a research report titled “Why this Christmas is Different for Apple.”
“We believe Apple’s product offerings as well as pricing strategies and recent demand trends augur for a better Christmas quarter compared to last year when Apple negatively preannounced," the analyst said. "We do not see valuation multiple expansion as the valuation multiple has already expanded materially but we do see sales and EPS upside. We believe consensus is underappreciating the Apple Watch and Apple AirPods demand strength and Apple’s wearables segment likely to surpass $10 billion of quarterly sales this quarter. Yes we agree with consensus that generally believes Apple’s services will continue to grow and help margins.”
Mr. Suva raised his 2020, 2021 and 2022 earnings per share estimates to US$13.26, US$15.61 and US$17.16, respectively, from US$12.94, US$14.50 and US$15.90.
Maintaining a “buy” rating, his target for Apple shares jumped to US$300 from US$250. The average is currently US$259.90.
“Smartphone growth remains tempered and China remains a key risk, while wearables, services revenue growth and installed base growth are positives,” he said. “The full product + software + service package is what makes Apple unique as others do not control this. We see Apple shares as attractive given the revenue diversification, unique product + service set and potential for strong cash flow generation and shareholder returns.”
In other analyst actions:
Jefferies analyst Vikram Bagri initiated coverage of Enbridge Inc. (ENB-T) with a “hold” rating and $54 target. The average target on the Street is $55.32.
Deutsche Bank initiated coverage of TMX Group Ltd. (X-T) with a “buy” rating and $121 target, which falls short of the $125.25 average.