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

Investors should focus on Aecon Group Inc.’s (ARE-T) strong fundamentals in the wake of the federal government’s decision to block the proposed $1.5-billion takeover of the Canadian construction company by China Communications Construction Co. Ltd., said Desjardins Securities analyst Benoit Poirier.

Feeling Aecon’s current valuation does not properly reflect its “solid” business base, Mr. Poirier upgraded his rating for its stock to “buy” from “tender,” citing both recent share price weakness and an 18-per-cent upside potential to his target price.

“While we are disappointed by the outcome, we believe it offers a nice opportunity for long-term investors to revisit the story,” said Mr. Poirier. “We continue to like ARE for its strong business fundamentals, pristine balance sheet and record backlog.”

His target price for Aecon shares fell by 37 cents to $20. The average target on the Street is $19.06, according to Thomson Reuters Eikon data.

“Since the announcement of the proposed takeover of ARE by CCCI, valuation multiples have expanded across all industry subsectors, fuelled by solid fundamentals in key markets and the positive impact of U.S. tax reform,” said Mr. Poirier. “Notwithstanding the expansion of industry valuation multiples, ARE’s EV/trailing 12-month EBITDA multiple decreased to 7.3 times (from 9.3 times) as concerns about the deal’s acceptance increased. In our view, this multiple is unjustified given ARE’s (1) strong balance sheet, (2) record backlog, which exceeds $5.5-billion including new contracts awarded during the quarter, (3) potential for margin expansion in the long term (current TTM EBITDA margin of 5.4 per cent versus U.S. contractor average of 7.0 per cent), (4) solid recurring revenue growth (up 12 per cent year over year in 1Q18), and (5) attractive fundamentals of many additional growth opportunities in infrastructure (mainly with P3s), nuclear (mainly with Bruce Nuclear Generating Station), energy (mainly pipeline construction), telecom, gas and power distribution.”

Elsewhere, Industrial Alliance Securities analyst Neil Linsdell also raised his rating for Aecon, bumping the stock to “hold” from “tender.”

“Given the news [Wednesday] night, we are moving to a more short-term focus as we evaluate Aecon’s follow-up actions, including the return to the search for a permanent CEO or the return to a sale process for the company,” said Mr. Linsdell.

His target price for Aecon shares dropped to $17.50 from $20.37.

“Using a 5-times enterprise value-to-EBITDA multiple (on the low end of the historical trading range of 5-7 times) on our current year adjusted EBITDA forecast of $192-million, we derive a target price of $17.50 (from the offer price of $20.37), which is also closer to the trading price of $16.52 immediately before the CCCI offer in October, but still above the $14.34 share price in August before the company indicated that it had engaged advisors to explore the sale of the company,” said the analyst.

Canaccord Genuity’s Yuri Lynk raised his target to $22 from $20.37 with a “buy” rating (unchanged).

Mr. Lynk said: “In the immediate aftermath of the deal falling apart, we don’t see Aecon trading south of $14.00, which we would view as an extremely attractive entry point. Admittedly, it is tough to call where the stock goes in the near term given the supply/demand dynamics associated with merger arbitrage accounts selling their shares to fundamental investors. However, at $14.00, Aecon would trade at 5.9 times 2018 estimated construction EBITDA (assuming the Bermuda Skyport concession is worth $1.54 per share), an unwarranted, in our view, 18-per-cent discount to the group. This would also have Aecon trading in line with the least expensive construction stock (on 2018 EBITDA at least) in North America.

“Taking a medium term view, we believe Aecon shares should trade around current levels as we peg fair value at $17.65. This analysis conservatively assumes Aecon trades at 7.5 times 2018 construction EBITDA (roughly in line with the group at 7.2x) and, again, values the Bermuda Skyport concession at $1.54 per share. Every half turn in the EV/EBITDA (2018E) multiple assumed impacts our fair value estimate by $1.15. We would expect Aecon shares to settle around these levels once the shareholder base has been reestablished.”

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Canadian Imperial Bank of Commerce’s (CM-T, CM-N) second-quarter results were “light” and its prospects for growth are dimming, according to RBC Dominion Securities analyst Darko Mihelic.

On Wednesday, CIBC reported adjusted earnings per share of $2.95, missing Mr. Mihelic’s projection of $2.97 but ahead of the consensus on the Street of $2.81. He noted the result was boosted by the use of a tax-loss carryforwards that are unlikely to be repeated.

“Canada P&C and U.S. business segment earnings were modestly above our forecasts, which we view positively,” the analyst said. “Our estimates for these business units are largely unchanged and we continue to expect solid results in the second half of 2018 — we are forecasting Canada P&C earnings growth of 10 per cent in 2018.”

Given a slower Canadian housing market, the bank said it expects to issue approximately 50 per cent fewer home loans this year in comparison to 2017. However, the bank expects stable revenue growth with the dip in mortgage originations offset by improved margins, product mix and volume.

“Based on our calculations and assumptions, this implies mortgage growth could fall to nil or potentially result in lower mortgage balances in Q4/18,” said Mr. Mihelic. “We continue to assume slower residential mortgage growth of 2 per cent on an annualized basis over our forecast period (in line with CM’s mortgage growth guidance). However, our “back of the envelope” calculations suggest flat residential mortgage balances through Q4/19 could lower our 2019 core EPS estimate somewhere in the neighbourhood of around 17 cents and the earnings impact is likely understated.”

Emphasizing its capital position remains “strong,” Mr. Mihelic raised his 2018 and 2019 EPS projections to $11.94 and $12.60, respectively, from $11.90 and $12.44 in order to reflect CIBC’s intention to buyback 2 per cent (or up to approximately 9 million) of its common shares.

He maintained a “sector perform” rating for CIBC shares, but he lowered his target to $135 from $141 “to reflect uncertainty surrounding CM’s growth outlook.” The average target on the Street is $131.21.

“Valuation remains below historical averages but in our view CM’s discounted valuation could persist for some time and might widen if credit quality deteriorates,” he said. “CM is trading at 9.4 times our 2018 core EPS estimate — the lowest multiple of the large Canadian banks we cover (average multiple for peers is 11.5 times). CM is currently trading 10 per cent below its historical average discount to peers on a P/E basis.”

Elsewhere, Desjardins Securities’ Doug Young called the results “neutral” and kept a “buy” rating and $134 target.

“We like CM’s valuation, dividend yield (4.6 per cent) and execution in Canadian banking, as well as the opportunity within its U.S. banking strategy,” said Mr. Young.

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Canaccord Genuity analyst Derek Dley expects another “strong” quarter from BRP Inc. (DOO-T) as demand for side-by-side recreational vehicles remains “robust.”

Ahead of the May 31 release of its first-quarter 2019 results, Mr. Dley is projecting earnings per share of 38 cents, up from 25 cents a year ago. His EBITDA forecast of $112-million exceeds both the consensus on the Street ($99-million) and the previous year’s result ($81-million).

“BRP outpaced the strong industry growth in the SSV segment throughout F2018, with the company’s SSV sales increasing in the mid-30-per-cent range, well ahead of the robust high single-digit growth in the North American SSV industry over the same period,” he said. “We are forecasting 16-per-cent year-over-year growth in Year-Round Product sales during Q1/F19 as we expect the company’s market share gains to continue in the North American SSV industry, which we believe grew by high single digits in the quarter. Furthermore, we expect continued strength in the company’s new product slate to lead to further market share gains for BRP over the course of our forecast period.

“At the Seasonal product division, we are forecasting a 4-per-cent year-over-year increase in revenue as we expect strong seasonal sales of the Sea-Doo brand to generate growth within this division. ”

Also expecting a “favourable” product mix to lead to higher margins, Mr. Dley increased his target price for BRP shares to $60 from $57, keeping a “buy” rating.

“We are increasing our target multiple as we believe BRP deserves to trade at a premium to its peers, which currently trade at 10.5 times, given it is well positioned to capture additional market share in a growing powersports market as it introduces new products while extending its reach into complementary product lines,” he said. “We believe the company’s fiscal 2021 EPS target of $3.50 is readily achievable, and that the current valuation represents an attractive entry point for what we believe is a healthy medium-term growth profile.”

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Canaccord Genuity analyst Eric Zaunscherb increased his target price for shares of Cobalt 27 Capital Corp. (KBLT-X) in the wake of its $145-million deal for a cobalt and nickel stream on a portion of producing Ramu Ni-Co mine in Papua New Guinea.

“The acquisition is the first Co stream deal for Cobalt 27, confirming to a fatiguing market its ability to execute its business plan,” said Mr. Zaunscherb. “We remain constructive on the Co market.”

Maintaining a “speculative buy” rating, his target jumped to $18 from $16.50. The average is $17.15.

“Cobalt 27 was trading at 1.3 times P/NAV at the beginning of the year but has fallen below 1.0 times on investor fatigue, in our opinion, awaiting consummation of a streaming deal,” he said. “Uranium Participation Corp. (U-T) is the only comparable metal holding company and it trades at 1.1 times. Covered royalty companies currently trade at 0.8 times to 1.6 times P/NAV, averaging 1.3 times P/NAV.”

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Though he expects fiscal 2019 to be “choppy,” RBC Dominion Securities analyst Brian Tunick thinks Ralph Lauren Corp.’s (RL-N) looks conservative.

“As we expect RL to provide more details on its [long-term] targets at its June 7 analyst day with more metrics/initiatives on return to revenue growth and capital allocation, in the near term FY19 guidance suggests low-single-digit sales declines and 50–75 basis point gross margin expansion, partly offset by flat opex yielding to moderate OM expansion,” he said. “As we look at the cadence of the year, once again we note that the revenue growth trajectory will be choppy, as both 1Q and 4Q are hurt by Easter shift, 1Q will benefit from shipment timings and FX, and 2H will be hurt by off-price sales reductions.”

On Wednesday, Ralph Lauren shares jumped over 14 per cent to its highest point since 2015 after its fourth-quarter 2018 earnings and revenue exceeded expectations.

Earnings per share of 90 U.S. cents topped the Street’s expectation of 83 U.S. cents. Revenue dropped only 2 per cent year over year, versus the company’s guidance of a 7-per-cent drop, while gross margins expanded by 4.4 per cent.

“On the revenue front, we are encouraged by 6-per-cent Americas store comp (aided by 350 basis point Easter shift) and 17 per cent year-over-year growth in Asia and believe that Americas ecommerce and wholesale sales (down 18 per cent and 22 per cent, respectively) likely troughed this quarter. With the topline initiatives including cleaner distribution (closed 25 per cent U.S. department store doors), product improvements, improving profitability metrics, and catch-up investments in marketing (advance spend up 10 per cent in FY18, w/Q4 up 50 per cent), we believe RL could return to sales growth and see 100-200 basis point margin expansion yielding $7.00–8.00 earnings power.”

With a “sector perform” rating (unchanged), Mr. Tunick raised his target to US$130 from US$113. The average is US$122.71.

“We raise our FY18/19 EPS estimates to $6.45/$6.80 and our PT to $130, based on 20 times our FY19 estimated EPS (previously 18 times), given further confidence in the turnaround with more signs of revenue stabilization and margin recovery. We also highlight that given RL’s strong cash position, our valuation at 10 times EV/EBITDA is 2–3 times below global brand peers.”

Meanwhile, Credit Suisse’s Michael Binetti hiked his target to US$153 from US$135 with an “outperform” rating.

Mr. Binetti said: “Two key dynamics below the top line: 1) While RL has made significant progress on many of the operational strategies from the 2016 Way Forward strategy, Consensus EBIT margins (11.4 per cent in FY20) are still well below RL’s prior mid-teens target; and 2) we expect RL to outline a more aggressive strategy for its $2B in cash equivs at the Analyst Day (we assume buybacks increase to $325-million/$400-million in FY19/FY20 vs ~$0 in FY18). We think guidance is extremely conservative and expect positive revisions through the year.”

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The recovery of Deere & Co.’s (DE-N) agriculture business could accelerate in fiscal 2019 with higher grain prices, said UBS analyst Stephen Fisher, who sees a favourable set-up heading into growing season.

Expecting the company’s earnings per share to rise by 25 per cent year over year from agriculture revenue growth, margin expansion and buybacks, Mr. Fisher upgraded the stock to “buy” from “neutral.”

“We think higher grain prices would stimulate a recovery in North American high-horsepower tractors, which have been declining for five years,” he said.

Also expecting Deere to raise its dividend 21 per cent in fiscal 2018, Mr. Fisher hiked his target to US$185, up from US$175. The average is US$181.58.

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Apple Inc.’s (AAPL-Q) service businesses are quickly becoming its largest growth driver, said Morgan Stanley analyst Katy Hubert in a research note released Thursday.

“Apple revenue grew at an 8-per-cent [compound annual growth rate] over the last five years, driven in large part by sales of its flagship iPhone,” she said. “But as device replacement cycles extend and device installed base growth slows to single digits, we believe Services will pick up the growth baton and account for 67 per cent of Apple revenue growth over the next five years. We already see the early stages of this transition, with normalized Services revenue growth accelerating from 18 per cent year over year to 31 per cent year over year in the last five quarters, while iPhone unit growth averaged just 1-per-cent year-over-year growth over the same period. We acknowledge that iPhone data points remain relevant to the Apple thesis, but we believe investors instead ought to focus on understanding the drivers and growth trajectory of the Services business.”

Ms. Hubert feels investors are undervaluing the tech giant’s service business currently, and feels they need to recognize the “fundamental shift in structure” of the company.

“We believe that Apple is a structurally different company today than it was just five years ago, with a larger (and more accessible) cash balance and a Services business that accounts for roughly 15 per cent of revenue and 22 per cent of gross profit dollars this year versus 9 per cent of revenue and 10 per cent of gross profit dollars just five years ago,” she said. “By fiscal 2022, we believe Services will account for 27 per cent of Apple revenue and just under 40 per cent of gross profit dollars.”

With an “overweight” rating, Ms. Hubert hiked her target to US$214 from US$200, exceeding the consensus of US$197.02.

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In other analyst actions:

National Bank analyst Dan Payne lowered Nuvista Energy Ltd. (NVA-T) to “sector perform” from “outperform.”

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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 28/03/24 1:05pm EDT.

SymbolName% changeLast
CM-T
Canadian Imperial Bank of Commerce
+0.78%68.43
CM-N
Canadian Imperial Bank of Commerce
+1.06%50.6
NVA-T
Nuvista Energy Ltd
+1.52%12.04
ARE-T
Aecon Group Inc
+0.41%17.01
DOO-T
Brp Inc
+5.09%90.72
RL-N
Ralph Lauren Corp
+0.32%187.1
DE-N
Deere & Company
+0.5%411.2
AAPL-Q
Apple Inc
-1.13%171.36

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