Inside the Market’s roundup of some of today’s key analyst actions
National Bank Financial analyst Cameron Doerksen is “staying neutral” on Canadian railway companies, expecting volume growth to remain muted into at least the early part of 2024.
In a research report released Thursday, he emphasized Canadian National Railway Co. (CNR-T) has seen a decline in revenue ton miles of 0.8 per cent year-over-year thus far in the fourth quarter, while Canadian Pacific Kansas City Ltd. (CP-T) are up just 0.9 per cent. That led the analyst to trim his revenue and earnings forecast for both the quarter as well as full-year fiscal 2024.
“Although we see some recent positive volume trends (petroleum & chemicals, potash, automotive), overall Canadian rail volumes will face some ongoing headwinds in the first half of 2024, most notably intermodal, where a material rebound in container imports into Canada seems unlikely to materialize in the near-term. Canadian grain is also a headwind (more so for CPKC) due to a weaker harvest this year,” said Mr. Doerksen. “Although we believe volumes will inflect more positively at some point in 2024, we note that ours and consensus forecasts already assume a healthy rebound in revenue and EPS in 2024 (consensus 2024 estimates for CN assume 5-per-cent revenue growth and 10.4-per-cent EPS growth while the consensus 2024 estimates for CPKC assume 9.7-per-cent revenue growth and EPS growth of 16.9 per cent).”
Ahead of the release of the companies’ quarterly results in late January, the analyst thinks the valuations for both companies has become “less compelling” for investors.
“Driven by better share price performance as well as some trimming of forward estimates, rail stock valuations have expanded materially versus three months ago,” said Mr. Doerksen. “Indeed, in early October, the U.S. Class I peer group traded at 15.7 times 2024 P/E [price to earnings] on average versus 19.0 times 2024 P/E today. In October, CN was at 17.8 times 2024 P/E and CPKC was at 21.5 times versus today where CN is at 20.6 times and CPKC is at 23.1 times. While both CN and CPKC are currently trading at modest discounts to their historical forward average multiples, we do not find the valuations for either stock overly compelling.”
While he thinks his “sector perform” recommendations for both companies “have been the correct call for both stocks in 2023 as the stocks are up only 3 per cent year-to-date,” Mr. Doerksen raised his targets on Thursday.
He moved CN to $172 from $168. The average target on the Street is $164.67, according to Refinitiv data.
“We think CN management’s target to generate 10-15-per-cent EPS growth over the 2024-26 period is achievable, although we forecast 2024 EPS growth at the low end of that range,” the analyst said. “Given our expectation that volume growth will remain muted into the early part of 2024 at least, our neutral view on the stock is unchanged. We continue to value the stock based on our updated 2025 EPS forecast, but to reflect the fact that sector valuations have expanded, we are increasing our valuation P/E multiple to 19.0 times from 18.0 times previously.”
Mr. Doerksen’s target for shares of CP rose to $112 from $107, remaining below the $114.77 average.
“We continue to view CPKC as having compelling long-term growth prospects driven by merger-driven new business wins and synergies and the long-term near-shoring trend that should boost cross-border Mexico-U.S. volumes,” he said. “However, like CN, CPKC faces some volume headwinds that we think will limit near-term upside for the stock. With rail peer group valuations expanding in recent months, we increase our P/E valuation multiple to 21.0 times from 20.0 times previously and after applying this to our updated 2025 estimates for CPKC, our target moves to $112.00 from $107.00 previously. We believe a premium valuation multiple for CPKC relative to CN is justified as our forecast over the 2024-25 timeframe implies a higher EPS growth rate in both years.”
Elsewhere, JP Morgan’s Brian Ossenbeck cut his targets for CP to $116 from $121 with an “overweight” rating as well as TFI International Inc. (TFII-N/TFII-T, “overweight”) to US$132 from US$133, below the US$144.23 average.
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RBC Dominion Securities analyst Paul Treiber thinks investor visibility to the near-term momentum in the stabilization in BlackBerry Ltd.’s (BB-N, BB-T) revenue and path to sustained profitability is “low” and continues to decline.
“While Q3 results were in line, BlackBerry materially reduced its Q4 outlook,” he said. “Management reiterated plans to achieve breakeven, but the task is more challenging in light of near-term headwinds. Cash continues to decline, which may require BlackBerry to pursue additional financing that may be expensive and/or dilutive.”
After the bell on Wednesday, the Waterloo, Ont.-based company reported third-quarter 2024 revenue of US$175-million, up 4 per cent year-over-year and in line with the expectations of both Mr. Treiber and the Street (US$175-million and US$174-million, respectively. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of US$18-million was better than expected (losses of US$14-million and US$11-million) due to “a high mix of license revenue and lower opex,” leading to stronger-than-anticipated non-GAAP earnings per share of 1 US cents (versus projections of a 3-US-cent loss).
However, BlackBerry made notable reductions to its expectations for the final quarter of its current fiscal year, expecting revenue of US$150-159-million revenue, well below the consensus estimate of US$201-million. The gap is due largely to performance for its Cybersecurity and Internet of Things business.
“Management sees large deals taking longer to close in Cybersecurity and delayed software programs reducing the expected ramp at IoT,” said Mr. Treiber. “Following Q3, we are reducing our fiscal 2025 revenue estimate to $638-million, down from $725-million previously.”
After operating cash flow fell below his estimates and net cash continued to drop, the analyst thinks BlackBerry will need to explore further aggressive restructuring options.
“Visibility has declined further,” he said. “Although Q3 Cybersecurity revenue was healthy (up 8 per cent year-over-year to $114-million, matching consensus), it reflects contribution from a large license contract. BlackBerry’s reduced Q4 Cybersecurity outlook and soft KPIs like ARR (down 13 per cent year-over-year), net revenue retention (82 per cent), and deferred revenue (down 3 per cent year-over-year) are visible indicators of the challenges the business continues to face. For IoT, the reduction in BlackBerry’s Q4 outlook reflects both near-term headwinds (i.e. reduced auto production) and delays regarding new investments (i.e. developer seats, services). BlackBerry is continuing with the separation of IoT and Cybersecurity, which could lead to ‘optionality’ such as a divestiture or spin-off. While these corporate actions may be potentially value creating, it raises uncertainty regarding BlackBerry’s future, in our view.”
Maintaining a “sector perform” recommendation for the company’s shares, Mr. Treiber cut his target to US$4 from US$4.50. The average target on the Street is US$5.25.
“BlackBerry remains in the midst of its turnaround and the split of the company into two standalone entities has just begun,” he concluded. “However, near-term visibility to growth and improved profitability is low. Pending improved visibility to near-term growth and profitability, we believe BlackBerry’s IoT and Cybersecurity businesses will continue to trade below peers.”
Elsewhere, others making target adjustments include:
* Raymond James’ Steven Li to US$6.50 from US$7 with a “market perform” rating.
“In-line 3Q but weak 4Q guide with Cyber mostly to blame,” said Mr. Li. “Focus remains squarely on separating Cyber and IoT/QNX. Each is expected to operate independently and on a profitable and cashflow-positive basis going forward. Restructuring/separation has begun with managementexpecting to see cost savings of $50-million on an annualized basis starting next fiscal year (May).”
* CIBC’s Todd Coupland to US$4.25 from US$4.75 with a “neutral” rating.
“Blackberry’s FQ3/24 results were slightly better than FactSet estimates, but its FQ4 revenue guidance was 15 per cent below FactSet estimates,” said Mr. Coupland. “We expect the lower outlook will negatively impact Blackberry’s share price.
Blackberry also indicated the process is underway to fully establish standalone IoT and Cybersecurity divisions and right size their cost structures to increase the available options for maximizing shareholder value. The changes to the Cyber unit should be announced in FQ4 together with a goal to be cash flow positive within two quarters (May 2024).This should open up options, including a possible divestiture of its Cyber unit.”
* TD Securities’ Daniel Chan to US$3.75 from US$4 with a “hold” rating.
* Canaccord Genuity’s T. Michael Walkley to US$4.25 from US$5 with a “hold” rating.
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Citi analyst Patrick Cunningham blames the drop in lithium price this year to “the perfect storm of destocking, deceleration in EV demand, and continued 25-per-cent-plus supply growth.”
He now thinks “risk skews to the upside as prices find a bottom and expect curtailments and restocking to be potential catalysts in 2024.”
“Citi Commodities team recently cut price forecasts on near-term supply surpluses but note growing cost curve pressure on producers,” he added. “Supply is expected to remain in a small surplus.”
In a research report released Thursday, Mr. Cunningham trimmed his 2024 estimates for both Toronto-based Lithium Royalty Corp. (LIRC-T) and U.S. peer Albermarle Corp. (ALB-N) to reflect the impact of the pricing pressures. However, he remains “bullish on the names as we see prices finding a bottom near-term.”
“The refreshed supply & demand model from Citi’s global commodities team forecasts 2-3-per-cent surpluses for the 2024-2026, as the deceleration in EV demand in 2023-2024 (our commodities team estimates 15.6 million units next year) comes at a time with more than 200kt LCE expansion into next year,” he said. “Biggest downside risks to market balances will likely come from further declines in EV growth rate below 20 per cent, as we have seen in the latter part of this year. Biggest upside risk to more favorable market balances will come from supply responses near-term with potential delayed brownfield expansions or adjusted production schedules. Our commodities team suggests 1 mmtpa of projects have an incentive price about $15k/t (assuming 25-per-cent return) – suggesting some could either be delayed or shelved. To date, we have seen limited supply response.”
Keeping a “buy” rating for Lithium Royalty shares, he lowered his target to $13.50 from $15. The average is $17.82.
“IRC had two significant catalysts in the quarter pointing to continued upside from the portfolio,” said Mr. Cunningham. “Atlas Lithium (LIRC has 3-per-cent gross revenue royalty or ‘GOR’ over its Das Neves project) achieved fully funded status for its Phase I production of 150ktpa with 80 per cent of offtake secured. Atlas is proceeding at accelerated pace, aiming to start Phase I production in 4Q24 and Phase II (additional 150 ktpa) in 2025. We pull forward our model to assume production ramping in 2025 and add the additional Phase II to start in 2027. We take a 10-per-cent haircut to volumes to reflect risk and normalized operating rates. Winsome Resources announced a 59Mt inferred mineral resource at its Adina project (LIRC owns a 4-per-cent GOR and 2-per-cent NSR over certain claims), making it a globally significant mineral resource. LIRC release cites third party estimates that suggest the project can support 400ktpa spodumene production. We maintain our estimates for the collection of Winsome projects (Adina, Cancet, Sirmac-Clapier) which assumes first production in 2026 and reaching run-rate of 300ktpa across the collection in 2031 but recognize there could be significant upside. We update our NAV model with Citi Commodities team estimates to reflect lower spodumene and lithium chemicals pricing near-term but maintain long-term spodumene price of $1,200 per ton.”
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Stifel analyst Ian Gillies thinks Nippon Steel’s US$14.9-billion deal to buy U.S. Steel Corp. (X-N) alongside improving fundamentals should be “supportive of higher valuations” after a number of years of the stocks “struggling to find a reason to re-rate.”
“Nippon Steel’s proposed bid for U.S. Steel is the North American steel industry’s 2023 version of Clark finding the Griswold family Christmas tree in rural Illinois after an arduous adventure,” he said in a note released Thursday.
Mr. Gillies said the acquisition price of US$55 per share was surprising, but he thinks it will be “a positive catalyst for the space given the elevated valuation.”
“Following the proposed acquisition of U.S. Steel, it was reported that Japan’s second largest steel producer, JFE Steel is looking for possible U.S. expansion,” he added. “We view this as another positive data point of M&A supporting higher valuations. We believe Canadian assets will be looked into as well. In particular, ASTL’s assets are transitioning to EAF from BOF with a very inexpensive valuation, which we believe would be of interest for foreign buyers.”
Increasing his 2024 EBITDA forecast for the sector, Mr. Gillies raised his target prices for stocks as well. His changes are:
- Algoma Steel Group Inc. (ASTL-T, “buy”) to $19 from $15. The average is $14.31.
- Russel Metals Inc. (RUS-T, “buy”) to $56 from $48. Average: $47.44.
- Stelco Holdings Inc. (STLC-T, “hold”) to $49 from $41. Average: $50.93.
“For risk tolerant investors we point to Algoma Steel and for those looking for a bit more stability we would point to Russel Metals,” he said.
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Stifel analyst Stephen Soock thinks Orla Mining Ltd. (OLA-T) could look to acquire a near-term-producing asset to fill the production growth gap left by uncertain status of its Cerro Quema project.
On Monday, Panama’s trade and industry ministry cancelling the company’s concessions for Cerro Quema project in the country. Orla said it would “explore all legal remedies available” to protect its investment, which exceed $120-million.
“Over the last few months, Panama has been rocked by street protests focused on First Quantum’s Cobre Panama mine,” said Mr. Soock. “Concerns have ranged from ‘no mining’ environmental slant to disagreements around the economic split of the taxes paid between various groups within the country. However, it has all culminated in a ruling by Panama’s Supreme Court that the mine’s contract with the government was unconstitutional and the president ordering the closure of the operation.”
“In the wake of this ‘anti-mining’ sentiment in the country, the government rejected Orla’s request for extensions of three mining concessions that cover its Cerro Quema project. The government also canceled the concessions and declared the area to be a reserve, effectively killing all exploration and mining prospects in the area for good. We find it unfortunate that Orla’s project was a political casualty of concerns directed elsewhere in Panama.”
Mr. Soock removed all value for Cerro Quema from his valuation for Orla, which includes $80-million for the heap leach oxide gold project, $93-million for the Caballito copper deposit and $10-million for the additional exploration value of the land.
That prompted him to cut his target for the company’s shares to $5.25 from $6.50, reiterating a “buy” recommendation. The average is $7.09.
“Orla’s oxide heap leach Camino Rojo mine is the cash generating-engine to fund the growth of the company,” he said. “We contend management executed the build very well (through COVID, no less) and intends to continue to build mines. The free cash flow generated by Camino Rojo will fund construction the South Railroad oxide project, boosting its production profile to more than 200koz per year by 2028. We see this followed by construction of the polymetallic Camino Rojo Sulphides scoped as an underground scenario targeting the highest-grade portions of the deposit. We think this asset alone can produce more than 250koz AuEq [gold equivalent] per year for almost two decades. We see the high-margin, low-capex oxide mines providing a non-dilutive cash source to fund both organic (and possibly nearer term opportunistic inorganic) production growth.”
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In other analyst actions:
* BMO’s Thanos Moschopoulos raised his Constellation Software Inc. (CSU-T) target to $3,600 from $3,350 with an “outperform” rating. The average is $3,243.13.
* In response to additional drill results at Fury Gold Mines Ltd.’s (FURY-T) Eau Claire project in the James Bay region of Quebec, H.C. Wainwright’s Heiko Ihle raised his target to $1.50 from $1.40, which is the current average, with a “buy” rating.
* TD Securities’ David Kwan, currently the lone analyst covering Lumine Group Inc. (LMN-X), raised his target for its shares to $30 from $28 with a “buy” rating.
David Leeder