Inside the Market’s roundup of some of today’s key analyst actions
With BlackBerry Ltd. (BB-N, BB-T) now trading at multi-year highs and above peers, RBC Dominion Securities analyst Paul Treiber downgraded his rating for the Waterloo, Ont.-based tech company on Tuesday, believing the fundamental outlook for its UEM/Cylance businesses has not “materially changed” and seeing a low probability of an unannounced IP licensing gain.
“BlackBerry shares have rallied 207 per cent since November 30 (vs. S&P 500′s 6-per-cent gain),” he said. “BlackBerry’s valuation has increased from 2.7 times EV/S [enterprise value to sales] to 9.5 times currently, which is now at 5-year highs (1.3- 9.5 times range, 3.5 times EV/S average). BlackBerry is trading 26 per cent above peers (7.5 times), vs. trading at a 32-per-cent average discount over the last 5 years, given lower growth. Unlike peers, BlackBerry has not experienced acceleration in growth due to WFH (work from home), and therefore, a wider, not narrower, valuation discount to peers is warranted, in our view.”
Moving BlackBerry shares to “underperform” from “sector perform,” Mr. Treiber thinks a discount to peers is warranted given its low growth.
“While the valuation multiples of peers has expanded over the last year, it appears to reflect the acceleration in growth experienced as a result of higher demand due to COVID and the shift to WFH,” he said. “Specifically, enterprise security and cybersecurity software peers are trading at 10.6 times and average FTM [forward 12-month] revenue growth of 14 per cent over the next 12 months (FTM), based on consensus estimates. Excluding CrowdStrike (NASDAQ: CRWD, which is trading at 42 times FTM EV/S), enterprise security and cybersecurity software peers are trading at 7.5 times FTM EV/S and average 11-per-cent FTM revenue growth. Within this peer group, low growth peers (less than 10 per cent year-over-year FTM revenue growth) trade at 5.8x FTM EV/S, below BlackBerry despite similar growth (3 per cent vs. BlackBerry’s 3 per cent). Meanwhile, small cap peers within our peer group (less than $10-billion enterprise value) trade at 8.8 times, below BlackBerry despite much higher growth (15 per cent vs. BlackBerry’s 3 per cent).”
Mr. Treiber emphasized there have been no significant changes to the outlook for its software and services business since it reported third-quarter 2021 results on Dec. 21, which showed UEM/Cylance has experience no “material” organic growth.
As well, though it confirmed the sale of 90 patents to Huawei Technologies Co Ltd. and reached a patent licensing settlement with Facebook Inc., the analyst said “we believe the magnitude of the potential one-time gain is likely to be smaller than the $7-billion increase in the company’s market cap.”
“Based on our view that a material patent sale or licensing settlement agreement has not occurred of the magnitude of the $7-billion value creation in the stock, we believe the fundamental justification for the rally in the stock to more than $18 per share would only stem from an improved outlook for either BlackBerry’s QNX/BTS automotive business or recurring IP licensing revenue,” he said. “In our DCF, we can arrive at more than $18 per share if BlackBerry’s QNX/BTS automotive business reaches $100 per vehicle in FY28 or 40-per-cent compounded growth (vs. $17 per vehicle, 15-per-cent compounded in our outlook or management’s target for $25 per vehicle) and 5 times the economics of BlackBerry’s recurring IP licensing revenue (currently $250-million per year). This appears overly optimistic, in our view.”
Mr. Treiber maintained a US$7.50 target for BlackBerry shares. The current average target on the Street is $8.10, according to Refinitiv data.
Citing “increased confidence in the North American traffic outlook and the recent pullback in both stocks,” Raymond James analyst Steve Hansen raised both Canadian National Railway Co. (CNR-T) and Canadian Pacific Railway Ltd. (CP-T) to “outperform” from “market perform” recommendations on Tuesday, expecting 2021 macro tailwinds “to rise tides.”
“Canadian rail traffic performed largely as expected in 4Q20, drawing pronounced strength from Grain, Intermodal, Potash, and Forestry end-markets, while Petchem (CBR) and MetMin (frac sand) both lagged,” he said. “In this context, CN and CP RTMs [revenue ton miles] increased 8.8 per cent year-over-year and 2.4 per cent year-over-year, respectively (vs. our prior 6.3 per cent and 3.0-per-cent forecasts), with CN having the notably benefit/tailwind of lapping a weeklong strike in late 2019. Despite this outcome, FX and traffic mix leaned against both carriers in the period, causing modest reductions to our 4Q20 estimates.”
“After a volatile 2020 marred by COVID, we enter 2021 with a upbeat freight outlook underpinned by several key variables including: 1)an emerging economic recovery (rising industrial activity, lean supply chain inventories); 2) easy 2Q20 comps (lapping peak COVID uncertainty); 3) improving coal exports; 4) accelerating housing/forestry activity; 5) robust Ag fundamentals; and 6) strong associated potash export prospects. Despite this optimism, we caution these tailwinds are not expected to flow evenly throughout the year, with 1Q21 still expected to grapple with lingering crude-by-rail, mix, and FX headwinds.”
Mr. Hansen said he’s “encouraged” by the initial traffic seen in the first quarter of 2021 with revenue ton miles up 12.6 per cent for CN and 8.2 per cent for CP in the first three weeks of the year, both exceeding his expectations.
“At the same time, we note that easy comps are just around the corner, with CN soon to lap the rail blockades it faced last Feb., and both carriers expected to lap acute COVID comps in 2Q21,” he said.
Mr. Hansen raised target for CP shares to $485 from $445. The average on the Street is $476.34.
His CN target jumped to $160 from $145, which exceeds the $132.40 average.
“Despite the improving outlook described, CN and CP shares have both staged healthy pullbacks from their recent highs (CN: down 6.6 per cent, CP: down 8.4 per cent), providing a solid entry point for long-term shareholders, in our view,” he said. “While both stocks admittedly trade at the upper-end of their historical trading ranges, we note they both now trade at healthy discounts to the broader market (S&P 500).”
“2021 [is] potentially shaping up to be a big year” for Fairfax Financial Holdings Inc. (FFH-T), according to Scotia Capital analyst Phil Hardie, seeing “accelerated growth in book value through investment gains.”
“We see the biggest opportunities for FFH to generate outsized investment returns as 1) a long-awaited resurgence in value investments lead to a mean reversion of returns relative to growth stocks that have dominated returns, and 2) successful monetization of a number of private investments through either IPO or strategic sales,” he said.
Believing “the visibility to align a number of key catalysts to propel Fairfax share price has improved substantially” and seeing “solid” upside, Mr. Hardie raised his rating to “sector outperform” from “sector perform.”
“Large investment gains are expected for Q4/20 and into 2021, reflecting strong performance across a range of investments in FFH’s equity portfolio,” he said. “We expect gains to continue and benefit from recent shifts in the investment landscape with potential upside surprises from surfacing value in private equity investments. Given recent volatility, our base case forecast reflects BlackBerry valued at analyst consensus target price rather than its latest market value. Among other assumptions, our Bull case assumes Fairfax locks in recent BlackBerry gains through hedging or monetization near current market prices and FFH stock sheds its discount to book value over the next twelve months.”
Touting its “attractive” valuation and expecting increased investor interest, Mr. Hardie hiked his target for Fairfax shares to $590 from $500. The average is $547.94.
“FFH shares continue to trade at a large discount to the insurance conglomerate peer group,” he said. “Over the next 12-18 months, we see three key factors likely to contribute to a narrowing discount: 1) increased investor confidence that FFH can attain on average, double-digit BVPS growth over the coming years, 2) improving investor perception by generating outsized investment returns, and 3) increased underwriting leverage.”
“We estimate that FFH trades at 0.8 times Q4/20 estimated P/B, well below its historical average of 1.1 times, and a 34-per-cent discount to the insurance conglomerate peer group. In combination with its discounted valuation, we believe the recent shift in investor risk appetite and burgeoning ‘value rotation trade’ is increasingly putting Fairfax back on the radar. Unexpectedly strong performance across a number of public holdings and accelerated organic growth of its insurance platforms given a favourable pricing environment are also helping Fairfax garner greater investor attention.”
Industrial Alliance Securities analyst Elias Foscolos thinks energy sector activity is exhibiting a “solid” recovery, supporting his “constructive” outlook” for Canadian Energy Services and Diversified Energy companies.
“Early in 2020, global economies and fuel demand were decimated as the COVID-19 pandemic swept across the globe, causing widespread implementation of economic and social restrictions,” he said. “After experiencing a period of severe negative returns, equity markets and commodities have seen very strong recoveries over the past few months. The TSX has returned 15 per cent since the end of October 2020 as investors appear to be taking a bullish view on longer-term economic recovery. In our view, this is mostly attributable to the successful development of COVID-19 vaccines.
“Investors are clearly looking out past the early stages of vaccination efforts, as so far, per capita vaccinations in Canada are comparatively low to other countries such as the U.S., and economic restrictions have generally become tighter through this period of strong market performance. WTI crude oil is up 47 per cent since the end of October and is currently trading at US$53 per barrel. The U.S. Energy Information Administration (EIA) recently published its January Short-Term Energy Outlook report, which projects WTI to average US$50 per barrel in 2021, supported by increasing global consumption, stagnant U.S. production, and restrained production increases from OPEC.”
In a research report reviewing 2020 and previewing fourth-quarter earnings season, Mr. Foscolos raised his 2021 U.S. rig count forecast in order to “build in a moderated pace of growth relative to what has been occurring in recent months as we consider structural shifts in the industry and key risk factor.”
He also made “minor” changes to his forecasts for the fourth-quarter results. However, citing projected performance and his improved industry outlook, he upgraded his ratings for both Secure Energy Services Inc. (SES-T) and Tervita Corp. (TEV-T) to “speculative buy” from “hold”
His target price for shares of Secure rose to $3.75 from $3.25. The average target on the Street is $3.58.
“SES’s Canadian focus and production exposure screen favourably in the context of our industry outlook, and we expect the Company will begin benefitting from the government’s well abandonment and site rehabilitation program later in 2021,” said Mr. Foscolos. “With minor maintenance CAPEX requirements, SES should be able to generate free cash flow and continue deleveraging in 2021. We view the most significant potential catalyst for the stock as being the successful disposition of the drilling & completion-related business lines. While SES has most recently targeted completion of these divestitures by year-end 2021, we believe the Company will prefer to remain patient rather than sell at an undesirable price, particularly given positive trends in Canadian drilling. We are not currently building these divestitures into our model, but we continue to highlight the upside. Given the aforementioned factors, we believe that our increased target price supports enough risk- adjusted upside to justify our rating upgrade.”
Mr. Foscolos’s Tervita target increased to $4.25 from $3.75. The average is $4.48.
“TEV had the second most negative return in our coverage universe in 2020 at 61 per cent, much of which we believe was due to uncertainty in regards to its note refinancing,” he said. “This was ultimately resolved in November 2020, as TEV was able to close a US$500-million note offering. However, having to refinance at the bottom of the cycle resulted in unfavourable pricing, with the notes paying an 11-per-cent coupon. Despite the increased interest burden, we estimate TEV can generate upwards of $50-million in run-rate annual free cash flow, which we expect will be applied to the balance sheet, with select growth upside in the Environmental Services business. TEV screens favourably in the context of our industry outlook due to its Canadian focus and production exposure, and also being an obvious beneficiary of the government’s well abandonment and site rehabilitation program. We believe that our increased target price supports enough risk-adjusted upside in the context of our constructive industry outlook to warrant our rating upgrade.”
At the same time, Mr. Foscolos made these target price changes:
- Badger Daylighting Ltd. (BAD-T, “hold”) to $40 from $39. Average: $41.22.
- CES Energy Solutions Corp. (CEU-T, “buy”) to $1.90 from $1.50. Average: $1.88.
- Pulse Seismic Inc. (PSD-T, “speculative buy”) to $1.80 from $1.50. Average: $1.50.
- Pason Systems Inc. (PSI-T, “hold”) to $9.50 from $7.50. Average: $9.07.
- Shawcor Ltd. (SCL-T, “speculative buy”) to $6.50 from $5. Average: $5.14.
He maintained his targets for these stocks:
- Computer Modelling Group Ltd. (CMG-T, “speculative buy”) at $6. Average: $5.50.
- Mullen Group Ltd. (MTL-T, “buy”) at $14.50. Average: $12.38.
“Most of our target price increases are driven by upward estimate revisions, with the exception of PSD, which is due to the incorporation of a lower discount rate used in our DCF,” he said. “We believe that a lower cost of capital for PSD is justified, as the Company has generated free cash flow and reduced its leverage through 2020. PSD announced a significant Transactional seismic sale in December 2020, which should support another lump sum payment on the revolving credit facility, which had a balance of $18-million drawn as of December 2020. This is now all of PSD’s debt, as the Company has repaid its term loan.”
Calling its US$800-million deal for UPS Freight, the “less-than-truckload” and dedicated truckload divisions of United Parcel Service Inc. (UFS-N), a “game-changing acquisition” CIBC World Markets Kevin Chiang upgraded TFI International Inc. (TFII-T, TFII-N) to “outperformer” from “neutral.”
“It makes the company a top-five LTL player in North America and adds $4-billion in revenue,” he said. “While the assets are currently generating minimal operating income, we see significant earnings and equity upside as TFII captures both revenue and cost synergies (targeting 90-per-cent OR in three years).”
Mr. Chiang hiked his target to $105 from $77. The average target on the Street is $77.38.
“One of the concerns we had with TFII looking out past 2021 was the impact of capacity coming back into the market given the surge in Class 8 orders and drivers returning to the labour force as economies reopen and government assistance checks come to an end. Looking back historically, we see that the S&P Trucking Index has peaked when orders peaked. As such, we had a somewhat more cautious view on trucking cycle in 2022. The acquisition of UPS Freight changes this for TFII. Harvesting the synergies from this deal provides the company with significant earnings momentum that is less exposed to where we are in the trucking cycle,” he said.
Other analysts increasing their targets included:
* Desjardins Securities’ Benoit Poirier to $102 from $78 with a “buy” rating.
“In addition to the attractive multiple paid for UPS Freight (5.3 times EV/2020 EBITDA), we are quite pleased with the strategic rationale behind the transaction, which will enable TFII to enter the consolidated U.S. LTL market with sufficient scale to compete, while also complementing its network in the U.S. to accelerate its industrial and e-commerce growth,” said Mr. Poirier. “We derive adjusted EPS accretion of 32 per cent in 2022, although there is more upside if TFII is able to expand margins beyond the three-year target of 10 per cent.”
* Scotia Capital’s Konark Gupta to $106 from $78 with a “sector outperform” rating.
“The news or timing didn’t surprise us given TFII is an acquisition-oriented growth story, but the sheer size of the acquisition surprised us (stock was up 32 per cent),” said Mr. Gupta. “The largest and most strategic acquisition in TFII’s history makes it the fifth largest LTL player in North America and almost doubles its business, along with the recent DLS acquisition. Yet, TFII’s pro forma leverage ratio increases only slightly, leaving the door open for more M&A (likely tuck-ins in the near term), buybacks or dividend growth. We remain positive with our Sector Outperform rating and are raising our target by 36 per cent ... We also introduce 2023 estimates, which cautiously reflect TFII’s likely conservative margin target for UPS Freight and could have upside risk from better execution or more M&A.”
* RBC Dominion Securities’ Walter Spracklin to $106 from $80 with an “outperform” rating.
* National Bank’s Cameron Doerksen to $103 from $85 with an “outperform” rating.
* BMO Nesbitt Burns’ Fadi Chamoun to $105 from $80 with an “outperform” rating
* Cowen and Co. analyst Jason Seidl to US$82 from US$53 with an “outperform” rating.
* Credit Suisse’s Allison Landry to US$82 from US$69 with an “outperform” rating.
“Not only does the acquisition give TFII a strong foothold in the U.S. LTL market, but there is significant scope for margin improvement though operational efficiencies; yield improvement; and structural cost reductions. Considering line of sight to $300-million of incremental EBIT by year 3 (vs. UPS’ ’20 estimated EBIT of $39-million), and an implied deal multiple of less than 4 times EV/2020 EBITDA, the 32-per-cent jump in the stock was hardly surprising. We continue to see compelling upside,” said Ms. Landry.
* JP Morgan’s Brian Ossenbeck to US$76 from US$58 with an “overweight” rating.
After announcing a plan to liquidate its cannabis oil inventories as well as the acquisition of LYF Food Technologies and a $40-million equity raise, Raymond James analyst Rahul Sarugaser downgraded The Valens Co. (VLNS-T) to “underperform” from “market perform” with a $2 target, down from $3.50 and below the $3.96 average.
“Throughout our coverage of The Valens Company, we have consistently given this company’s management team the benefit of the doubt,” he said. “With this cascade of recent announcements however, it is evident this rosy outlook was misplaced, so we are resetting our opinion on VLNS.”
Several more analysts on the Street raised their target prices for Aurinia Pharmaceuticals Inc. (AUPH-Q, AUP-T) in response to the approval from the U.S. Food and Drug Administration to sell its drug for a severe form of lupus.
On Monday, shares of the Victoria-based company jumped over 26 per cent in response to the late Friday announcement.
“Aurinia’s sole product, voclosporin (brand name LUPKYNIS), is now FDA-approved for the treatment of active lupus nephritis in adults, and the product label overall is in line with our expectations while average pricing guidance is above our prior forecast,” said RBC Dominion Securities analyst Douglas Miehm. “We reiterate our view that Aurinia is well positioned to gain market share in this underpenetrated therapeutic area, with robust Ph. III data, a sizeable cash position, and an experienced commercialization team in place.”
Mr. Miehm raised his target to US$28 from US$20 with an “outperform” rating. The average target is now US$27.70.
Elsewhere, Jefferies analyst Maury Raycroft raised his target to US$35 from US$21 with a “buy” rating.
Conversely, Mackie Research analyst André Uddin downgraded the stock to “hold” from “speculative buy” with a US$17.90 target (unchanged).
“The FDA approval of Lupkynis is certainly a big win for AUPH,” he said. “However, we believe it is prudent to stand on the sidelines for now as the market likely has fully factored in the near term Lupkynis commercialization.”
See also: Monday’s analyst upgrades and downgrades
In a research report previewing earnings season for TSX-listed diversified financial firms, CIBC World Markets analyst Nik Priebe raised his target prices for several stocks in his coverage universe, including:
* Power Corporation of Canada (POW-T) to $37 from $34 with an “outperformer” rating. The average is $32.
* Onex Corp. (ONEX-T) to $92 from $81 with an “outperformer” rating. Average: $87.10.
* ECN Capital Corp. (ECN-T) target to $8.25 from $7 with an “outperformer” recommendation. Average: $7.85.
“Docebo provided a preliminary view of Q4/20 results alongside a marketed US$100-million secondary public offering. [Annual recurring revenue] continues to trend ahead of expectations,” said Mr. Young. “Q4 ARR is expected to be $73-million to $74M, up 55-57 per cent year-over-year exiting December, versus our $70.6-million estimate. This is the sixth straight quarter of 50-per-cent-plus ARR growth and an extension of recent growth acceleration from 54.5-per-cent ARR growth in Q2 and 54.9-per-cent growth in Q3. Given a lack of large deal announcements, the quarter appears to be driven by singles and doubles, which underscores the momentum in the business, in our view. We remain positive and confident in the company’s growth outlook.”
The Toronto-based firm expects revenue in a range of US$18.25-million to US$18.75, exceeding Mr. Young’s $18.2-million projection. Based on that result, he moved his projection to US$18.5-million, representing a rise of 50 per cent year-over-year, with ARR of US$73.5-million, up 55.7 per cent.
He reiterated a “buy” rating for Docebo shares with a US$72 target, increasing from US$70 and matching the consensus.
“Based on regression analysis that considers revenue growth and FCF margin, we continue to view Docebo as attractively valued relative to peers,” he said.
Emphasizing its “substantial” valuation disconnect within the specialty semiconductor segment, Raymond James analyst Michael Glen initiated coverage of 5N Plus Inc. (VNP-T) with a “strong buy” recommendation, seeing “a clear opportunity in the stock.”
“In a market that has seen significant multiple expansion among technology and semiconductor names, we view 5N Plus as an anomaly of sorts,” he said. “In fact, we are surprised by the degree to which the market has dismissed any reasonable fundamental valuation approach to the company’s EM segment, which is effectively a highly specialized semiconductor materials business. This segment has demonstrated the ability to innovate and introduce new products, delivers exceptional margins, and has been deemed by the U.S. government as a critical domestic source for portions of its semiconductor business.
“We understand some of the reasons investors have been reluctant to apply a higher multiple to 5N Plus; however, we believe many of these views are outdated. We have seen this story play out in the Canadian market many times before: investors remain focused on a company’s history, and are hesitant to acknowledge management’s efforts to transition to a more specialized end market. We aim to demonstrate that from both an operational and fundamental approach, we believe 5N Plus is one of those companies – a significantly undervalued entity.”
Mr. Glen set a $5 target for shares of Montreal-based company. The average on the Street is $3.88.
Seeing “compelling” macro trends and “strong” M&A and organic growth, Raymond James analyst Steve Hansen initiated coverage of Vancouver-based bioplastic producer Good Natured Products Inc. (GDNP-X) with an “outperform” rating and $1.50 target, exceeding the $1.33 consensus.
“In short, we believe Good Natured is superbly positioned to capitalize on consumer’s shifting preference away from petroleum-based plastics toward sustainable, plantbased packaging and everyday products,” he said. “Coupled with the company’s unique strategy and transformative recent acquisitions, we see outsized growth opportunities ahead.”
In other analyst actions:
* National Bank analyst Adam Shine raised Cineplex Inc. (CGX-T) to “outperform” from “sector perform” with a $14 target, up from $8, while CIBC World Markets’ Robert Bek increased his target to $12 from $9 with a “neutral” rating. The average is $8.50.
“We continue to rate Cineplex at Neutral, but increase our price target ... to reflect industry developments that suggest a greater investor appetite for theatrical stocks, increasing the likelihood that the sector can exit the crisis relatively whole,” said Mr. Bek. “Our price target increase reflects improved sentiment and valuation for the sector overall. Even Cineplex’s heavily-challenged industry peers are finding investors willing to extend capital, even as film slate uncertainty remains elevated and liquidity concerns are paramount. While the film slate has slipped once again, delaying the jump-start for Cineplex’s theatrical operation, the huge backlog of movies in H2/21 and FY22 still underpins the prospect of a material bounce in value at some point. We remain at Neutral, given the many moving parts, all tied to global virus recovery timing, but there is no doubt the entire sector has seen risks reduced, as liquidity concerns are funded by investors.”
* Scotia’s Orest Wowkodaw trimmed his target for Sherritt International Corp. (S-T) to 30 cents from 40 cents, keeping a “sector underperform” recommendation. The average is currently 46 cents.
* Scotia’s Ovais Habib raised his target for K92 Mining Inc. (KNT-T) to $8.75 from $8.50 with a “sector outperform” rating. The average is $11.48.
* Berenberg analyst Jonathan Guy cut his target for Endeavour Mining Corp. (EDV-T) to $53 from $56 with a “buy” rating. The average is $50.09.
“We update our model for OVV’s preliminary results announced earlier this month, which doesn’t appear to be fully incorporated in consensus estimates,” he said.
* Desjardins Securities analyst Gary Ho raised his target for Dominion Lending Centres Inc. (DLCG-X) to $4.75 from $3.25 with a “buy” rating. The average is $4.38.
“Our positive thesis is predicated on: (1) a rebound in housing activity bodes well for DLC in the near term; reorg will focus purely on the DLC business, supporting a valuation rerate; (2) reflagging efforts to add new brokers could bolster DLC growth in 2021; (3) a potential fintech play with Newton/Velocity, a business that is already EBITDA and FCF positive; and (4) the monetization of non-core assets could reduce leverage,” he said.