Inside the Market’s roundup of some of today’s key analyst actions
Though he’s “pleased” with Canadian National Railway Co.'s (CNR-T, CNI-N) first-quarter operational results, Desjardins Securities analyst Benoit Poirier says he’s waiting for further clarity on the impact of COVID-19 on volumes in coming months before revisiting his thesis on its stock, seeing it as “fairly valued in the current context.”
After the bell on Monday, CN reported quarterly results that exceeded his expectations despite facing slowdowns due to rail blockades. Revenue of $3.545-billion was in line with the projections of Mr. Poirier ($3.473-billion) and the Street ($3.482-billion), while adjusted fully diluted earnings per share of $1.22 beat estimates ($1.08 and $1.09, respectively).
At the same time, CN withdrew its 2020 guidance and three-year financial targets due to the uncertainty stemming from COVID-19.
“While CN withdrew its 2020 RTM [revenue ton mile] growth guidance due to the uncertainty around the COVID-19 pandemic, management provided useful comments for each segment,” said Mr. Poirier. "Management noted that the volume decline should peak in May before starting to recover gradually through 4Q20. Management expects automotive volumes to remain under pressure until OEMs [original equipment manufacturers] restart production (expected mid-May). Meanwhile, CBR volumes are expected to deteriorate further given recent market conditions. We forecast RTM growth of a decline of 6.5 per cent in 2020, driven by a 12.1-per-cent reduction in 2Q and a recovery thereafter as contracts with GM (started in Vancouver in October 2019), the ONE (effective June 2020; we estimate revenue of $70–80-million) and COSCO (started in August 2019; we estimate annual revenue of $40-million) ramp up later in 2020. For 2021, we forecast a modest recovery with RTM growth of 3.6 per cent, driven mainly by the new contract with Teck Resources. Management remains disciplined and continues to target inflation-plus pricing despite the current volume softness.
"Bottom line, while the COVID-19 pandemic is creating significant uncertainty, we are pleased that CN continues to work to leverage its tri-coastal network to unlock long-term growth opportunities."
Despite the COVID-19 concerns, Mr. Poirier raised his 2020 EPS projection to $5.26 from $5.19. His 2021 estimate rose to $5.98 from $5.98.
Maintaining a "hold" rating, he raised his target for CN shares by a loonie to $119. The average on the Street is $114.44.
Elsewhere, RBC Dominion Securities analyst Walter Spracklin raised his target to $112 from $107 with a "sector perform" rating.
Mr. Spracklin said: “While we view the withdrawal of guidance as elevating the company’s risk profile, we view the resiliency demonstrated in Q1 amid a February blockade and subsequent recovery as positive to the stock. Accordingly, we are taking up our target multiple, which offsets the impact from our lowered estimates.”
Citi analyst Christian Wetherbee raised his target to US$80 from US$68.
Mr. Wetherbee said: “We rate Canadian National Neutral as it currently screens less attractively from a growth and valuation standpoint at a time when industry stock performance has been weak, while it also would have further to fall to reach a trough multiple.”
A "tough quarter" is expected for Canadian asset managers, according to Canaccord Genuity analyst Scott Chan.
However, he cautioned that their outlook is more important.
“Industry-wide mutual fund net flows were significantly impacted in March with total net redemptions of $14.1-billion (including $4.1-billion into money-market funds); according to IFIC,” he said. “FSZ has less retail exposure which puts them in a more favorable position. Based on our Fund tracker, we marked Apr. 2020 (TD) market performance between 4-6 per cent.”
After upgraded his valuation multiples. Mr. Chan increased his target prices for stocks in his coverage universe. His changes were:
CI Financial Corp. (CIX-T, “buy”) to $17 from $16. The average on the Street is $16.50.
Analyst: “We look forward to a Q2TD flow update next week before we revise our annual sales forecasts. SG&A will remain topical after the low print at year-end results as we look for costs to increase sequentially this quarter but slightly below their $120-million quarterly guidance (CG Q1 estimate: $118.5-million). One notable transaction closing in Q1 is US RIA Surevest Wealth Management with One Capital Management and The Cabana Group expected to close in Q2. Previously announced, CI still has on LOI pending for an additional RIA purchase. We believe CI’s US RIA pipeline remains solid and should be the focus on M&A for this year.”
Fiera Capital Corp. (FSZ-T, “buy”) to $10.50 from $7.50. Average: $8.17.
Analyst: " We believe Fiera’s net sales trend is more favorable mainly due to their lower exposure to retail AUM, higher proportion of HNW (assets typically are stickier), and solid relative Fund performance (e.g. 70 per cent of FSZ’s investment strategies were outperforming their respective benchmarks year-to-date; as of April 20). A primary focus on results would relate to its balance sheet (e.g. leverage ratio) and maintaining the dividend (management is committed to current one)."
IGM Financial Inc. (IGM-T, “hold”) to $25 from $24. Average: $28.
Analyst: “Net sales were supported by Mackenzie (MKF), with net redemptions from Investors Group (IG) and Investment Planning Counsel (IPC). The impact of COVID-19 led to less than $0.5-billion in total net outflows for March. We believe investors will be most interested in IGM’s retail and institutional flow outlook and potential revision to their 2020 SG&A growth guidance of 3 per cent.”
Onex Corp. (ONEX-T, “buy”) to $72 from $68. Average: $79.13.
Analyst: “Before quarter-end, Onex disclosed $2.8-billion of cash (no debt) representing $28 per share. (or 28 per cent of total NAV and slightly higher than the firm’s 25-per-cent medium-term target). We believe excess cash can support its NCIB (e.g. ONEX trading at 13-per-cent discount to hard NAV) and new portfolio investments (e.g. purchase of Independent Clinical Services in OPV post quarter).”
RBC Dominion Securities analyst Steve Arthur said he'll be focused on the commentary accompanying the first-quarter financial results for Canadian auto part suppliers, seeking guidance on "restart, liquidity, and recovery."
"Q1 auto production declined 11 per cent year-over-year in North America and 21 per cent in Europe," he said. "We caution that Q1 only included a few weeks of the COVID-19 driven shutdown in March, which we expect brought North American production to near 0 in April. As a result, we expect Q2 production to be materially lower, down 68 per cent in North America, down 55 per cent in Europe, and 44 per cent lower on a global basis.
"We have further tweaked our 2020 estimated full-year outlook and price targets for each of the Canadian suppliers."
Emphasizing the state of the companies' balance sheets and liquidity through 2020 as well as "share price opportunities looking at longer-term recovery scenarios," Mr. Arthur made the following changes:
"We expect revenue to be down 17 per cent year-over-year, consistent with global production volumes," he said. "Focus remains on Balance Sheet resiliency and liquidity - we estimate leverage to peak at 2.2 times by end of 2020, with no real leverage covenants. In our view, Magna shows attractive value at 3.6 times 2021 estimated EV/EBITDA for a high quality player with solid execution that should be able to weather the storm ahead."
Linamar Corp. (LNR-T, “sector perform”) to $36 from $37. Average: $38.50.
"Linamar pre-announced commentary on industry dynamics last week, highlighting near-term pressure across its business. We expect Q1 Transportation sales to decline more than industry (22 per cent) and Industrial revenues down 34 per cent year-over-year. Looking beyond Q1/20E, we stress test LNR's Balance Sheet and point to 'stress case' leverage approaching 3 times by year-end '20E. On softer market outlook across each segment, we lower our price target."
Martinrea International Inc. (MRE-T, “outperform”) to $15 from $16. Average: $12.71.
“We expect sales decline of 20 per cent in Q1, essentially inline with regional production for the quarter,” he said. “In our stress case, we see leverage peaking at 2.8 times by Q4/20E, still below covenants at 3 times. At 2.9 times 2021 estimated EV/EBITDA, shares are trading at discounted multiples of depressed earnings. With lower volumes and earnings outlook, [our] target decreases.”
Industrial Alliance Securities analyst Chelsea Stellick initiated coverage of LexaGene Holdings Inc. (LXG-X), a Massachusetts-based company developing a fully automated pathogen detection instrument, with a “speculative buy” rating on Tuesday, seeing “ample upside as the commercial roll-out gains traction.”
“LexaGene’s instrument, LX2, is currently in its developmental phase with plans for commercialization in H2/F20,” she said. “The functions of the LX2 are highly relevant in our current environment where timely pathogen detection becomes a vital piece in stopping the spread of disease. We see value in the LX2, particularly in its use in the veterinary diagnostics space, which is expected to be a US$29-billion market by 2043. With our conservative assumptions, the LX2 is a scalable, high margin, razor-blade business model which makes it an attractive take-out candidate post successful commercialization.”
Currently the lone analyst on the Street covering the stock, Ms. Stellick set a target of $1 per share.
Despite its second-quarter financial results exceeding his expectations, including “impressive” organic growth, Desjardins Securities analyst Gary Ho thinks an “unclear” employment picture for the second half of the fiscal year could weigh on People Corp. (PEO-X).
On Monday, the Winnipeg-based management consulting company reported EBITDA for the quarter of $15-million, exceeding the estimates of both Mr. Ho ($12.6-million) and the Street ($12.9-million). Organic growth of 15.6 per cent also blew past Mr. Ho's projection (8.6 per cent), which he attributed to new product launches, new clients, cross-selling and inflation.
“However, we caution that 2Q ended in February, prior to business closures and the COVID-19 situation,” he said. “Management reiterated its 5–10-per-cent organic revenue growth assumption over the coming quarters, which is encouraging. We forecast 8.6 per cent in FY20 and 6.6 per cent in FY21.”
“While March results were stable, management noted potential impacts over the near term. Four key potential areas: temporary layoffs (no impact as coverage continues), headcount reductions (potentially negative), business failures (potentially negative) and claims volume reduction. Greater clarity on the last three items is expected over the coming quarters.”
Despite concerns over the fallout from the pandemic, Mr. Ho raised his 2020 and 2021 revenue and earnings expectations for People, leading him to increase his target by a loonie to $9.50 with a "hold" rating (unchanged). The average is $10.83.
“While we like the PEO story in the longer term, driven by favourable industry tailwinds, its proven acquisition track record and potential as a takeout candidate, we foresee a few near-term concerns: (1) slowdown in organic growth, (2) potential pause in M&A activity, and (3) uncertainty related to how job losses may impact SMEs,” he said.
Elsewhere, Canaccord Genuity's Scott Chan trimmed his target to $11.25 from $11.50 with a "buy" rating.
“We remain favorable on PEO shares based on positive growth trajectory which should be further complemented by future M&A once the pandemic contracts,” said Mr. Chan.
Canaccord Genuity analyst Bobby Burleson downgraded CLS Holdings USA (CLSH-CN), a Florida-based cannabis company listed on the Canadian Securities Exchange, to “hold” from “speculative buy” after reducing his estimates “substantially” due to uncertainty stemming from the ongoing litigation around its acquisition of In Good Health.
“Based in Brockton, Mass., In Good Health is a retail and production operation for which CLSH has an outstanding LOI,” he said. “Uncertainty regarding financing of the deal (CLSH needed to raise capital for its completion) has been compounded by In Good Health management’s refusal to abide by the LOI’s original terms and CLSH’s subsequent litigation. As a result, we are removing In Good Health from our model, lowering CY21E EBITDA from $40-million to $4-million.”
Currently the lone analyst covering the stock, Mr. Burleson cut his target to 10 cents from 50 cents.
RBC Dominion Securities analyst Kutgun Maral initiated coverage of a group of U.S. large-cap media stocks on Tuesday, stressing the importance of innovation in an "industry in transition."
“Media companies are seeing mounting secular pressures across all fronts, with key drivers of affiliate, advertising, and content licensing revenues having seen multiple step-function downward resets since the mid-2010s,” he said. “Investor conviction in the sustainability of the traditional TV bundle quickly started to fade as subscriber and ratings declines have accelerated while direct-to-consumer streaming video competitors have continued to scale and grow in prominence. One by one, each traditional media company has now (reluctantly) embraced the view that it’s time to make the strategic pivot toward owned-and-operated DTC streaming video services. In this note, we provide a deep thematic overview of the space focusing on: (1) the counterbalances between MVPD [multichannel video programming distributor] and DTC subscriber growth; (2) the MVPD ecosystem; (3) the DTC streaming video ecosystem; (4) advertising; and (5) M&A. We come away cautious on the traditional ecosystem but see compelling growth across DTC.”
Mr. Maral initiated coverage of the following stocks:
AMC Networks Inc. (AMCX-Q) with an “outperform” rating and US$27 target. The average on the Street is US$33.99.
"AMC Networks is fighting a well-understood uphill battle as a subscale cable network operator with significant exposure to the challenged Pay TV universe," he said. "Secular and cyclical pressures to affiliate and advertising revenue limit topline visibility while the trajectory of content licensing remains in flux," he said. "However, with shares down 46 per cent year-to-date, we do not think there is enough appreciation of AMCX’s targeted SVOD initiatives, attractive FCF profile, scope for deleveraging, and M&A optionality. We expect investor sentiment for media companies to remain cautious in the near term, but see AMCX as a relative outperformer."
Discovery Inc. (DISCA-Q) with an “outperform” rating and US$26 target. Average: US$26.36.
"Discovery’s core Pay TV business is likely to continue seeing secular and cyclical pressures, but we believe its global DTC services are on a strong trajectory to scale and potentially support a rerating as the company demonstrates a credible path for subscriber growth and profitability," he said. "We also see Discovery as a leading takeout candidate across media, particularly for the growing number of well-capitalized streaming platforms looking to differentiate their services. Robust FCF growth will further support either deleveraging efforts or buybacks (once the macro normalizes), which should drive equity upside."
Fox Corp. (FOXA-Q) with an “outperform” rating and US$31 target. Average: US$32.17.
"We view Fox as having the most attractive portfolio of traditional media assets across our coverage," he said. "While we are cautious on the outlook for Pay TV, we see Fox’s must-have sports and news properties as being relatively well positioned to secure carriage, drive robust affiliate pricing, and attract advertisers. Accelerating secular and cyclical concerns will likely continue weighing on media sentiment, but we see Fox’s advantaged position in the ecosystem, high FCF conversion, and balance sheet strength driving relative share outperformance."
Lions Gate Entertainment Corp. (LGF.B-N) with a “sector perform” rating and US$7 target. Average: US$13.43.
"We believe Lionsgate will see increasing pressure from the earnings profile at Starz as the premium network transitions away from the linear premium bundle to an a la carte world where higher ARPU [average revenue per user] could be more than offset by increased churn and elevated costs," he said. "The film slate also faces tough comps ahead while the ongoing disruption to the theatrical market adds to an uncertain outlook. That said, we see limited downside at these levels given the attractive strategic positioning of the TV production business and M&A optionality."
Walt Disney Co. (DIS-N) with a “sector perform” rating and US$110 target. Average: US$126.92.
"Disney’s “all in” pivot toward DTC has provided the strategic visibility investors need to better appreciate the role (and value) media companies have in the evolving ecosystem, while its non-Pay TV assets like the theme parks and studio have seen step-function increases to their earnings profiles over the last decade," he said. "However, the ongoing pandemic poses meaningful direct headwinds (particularly impacting the parks, studio, and media networks) while we expect consumer discretionary spend to be subdued given the macro environment. We are bullish on Disney’s strategic vision, quality of assets, and execution, but remain on the sidelines until there is greater clarity on the post-coronavirus world."
ViacomCBS Inc. (VIAC-Q) with a “sector perform” rating and US$20 target. Average: US$25.42.
“ViacomCBS has faced a long list of sentiment headwinds, including a prolonged and messy merger process, disruptive management issues, and perpetual downward consensus estimate revisions,” he said. “While its scale has improved following the recombination, management’s strategy and execution remain heavily discounted show-me stories. We find it difficult to underwrite a re-rating without proof-points of a turnaround, which will be difficult to accomplish as the ongoing pandemic presents pressure across the key business lines and limits near-term capital allocation and asset monetization catalysts.”
In other analyst actions:
* TD Securities analyst Mario Mendonca cut Bank of Montreal (BMO-T) to “buy” from “action list buy” with a $85 target, rising from $84 and above the $83.08 consensus
* In the wake of the release of its quarterly results after the bell on Monday, TD Securities downgraded First Quantum Minerals Ltd. (FM-T) to “hold” from “speculative buy” with a $10.50 target, rising from $9.50. The average is $11.99.
* Ahead of the release of its first-quarter results on May 20, RBC Dominion Securities analyst Douglas Mihem trimmed his 2020 outlook for Bausch Health Companies Inc. (BHC-N, BHC-T), leading hi m to lower his target to US$25 from US$26 with a “sector perform” rating. The average on the Street is xx.x
“We estimate EBITDA of $797-million for the quarter, relatively in line with consensus, and believe the primary focus will be updated 2020 guidance, likely to be lowered slightly due to COVID-19,” he said. “We now forecast 2020 EBITDA of $3.47-billion, 4 per cent below our prior estimate and below guidance of $3.50-3.65-billion, and maintain our longer-term outlook.”
* RBC Dominion Securities analyst Sabahat Khan lowered his target for Gildan Activewear Inc. (GIL-N, GIL-T) to $17 from $18 with a “sector perform” rating (unchanged) after reducing his 2020 and 2021 forecasts. The average is US$18.31.
“We last updated our forecasts in mid-March based on initial feedback from Printwear distributors and other industry participants,” said Mr. Khan. “Since then, the outlook has become more challenged, with the timeline to 'normalized’ demand in the Printwear channel being pushed out further and becoming more uncertain. As such, we are revising our 2020 estimates lower to reflect the weaker outlook for the coming quarters, and a less pronounced ‘rebound’ in 2021.”