Inside the Market’s roundup of some of today’s key analyst actions
As second-quarter earnings season for Canadian banks approaches, Desjardins Securities analyst Doug Young warns investors to “prepare for a bumpy ride.”
“We are forecasting a 4 per cent year-over-year increase in pre-tax, pre-provision (PTPP) earnings on average for the Big 6 banks,” he said in a research report released Tuesday. “That said, macro developments, not quarterly results, will be a bigger driver of bank stocks over the near term, in our view—specifically inflation, recession concerns, supply chain issues and the Russia–Ukraine conflict.
“Bank stocks have gone from outperforming the market earlier in the year to underperforming now on a year-to-date basis. And the above uncertainties could remain a cloud over the sector near term.”
While he remains “constructive” on the banking sector for the next year, Mr. Young reduced his target prices for the Big 8 stocks by an average of 3 per cent to reflect those increased economic risks.
“The Big 6 Canadian banks are all trading below their 20-year historical average P/4QF EPS multiples and 15 per cent below historical average P/BVPS multiples on average,” he said. “Over the near term, various concerns such as inflation, potential for a recession, supply chain issues and the impact from the Russia–Ukraine conflict could weigh on bank valuation multiples. On the flip side, we believe a lot of these concerns are already baked into valuations— unless a worst-case scenario were to materialize, which is not our base case call right now.”
In order of preference, his targets are:
- Toronto-Dominion Bank (TD-T, “buy”) to $110 from $113. Average: $107.68.
- Bank of Nova Scotia (BNS-T, “buy”) to $96 from $99. Average: $96.26.
- Bank of Montreal (BMO-T, “buy”) to $159 from $163. Average: $165.89.
- Canadian Western Bank (CWB-T, “buy”) to $44 from $45. Average: $43.13.
- Royal Bank of Canada (RY-T, “buy”) remains $150. Average: $149.55.
- National Bank of Canada (NA-T, “hold”) to $104 from $109. Average: $107.91.
- Canadian Imperial Bank of Commerce (CM-T, “hold”) to $163 from $169. Average: $173.49.
- Laurentian Bank of Canada (LB-T, “hold”) to $47 from $49. Average: $47.18.
“For those worried about the downside, RY has historically held in the best in times of stress,” said Mr. Young.
National Bank Financial analyst Vishal Shreedhar expects “building” macro-economic pressures to increasingly weigh on Canadian Tire Corporation Ltd. (CTC.A-T) results, despite seeing signs of strong consumer demand.
Ahead of Thursday’s release of its “seasonally light” first-quarter results, he reduced his full-year 2022 and 2023 earnings per share projections for the retailer to $18.10 and $19.45, respectively, from $19.36 and $20.77 to reflect that concern. He’s now forecasting a four-year EPS compound annual growth rate of 6.4 per cent, below the company’s guidance of 8.3 per cent.
“While CTC’s Q1/22 performance would have been impacted by the Omicron variant and difficult year-over-year comparisons, investors will be focused on evolving consumer behaviour given concerns regarding a slowing backdrop and numerous business pressures,” said Mr. Shreedhar. “Last quarter, management indicated that it continued to see healthy demand signals in both the retail business and at the bank quarter-to-date (Q1/22). We believe that these trends may have continued throughout the quarter (although unseasonable weather may have impacted the business post Q1). In Q1, we expect CTR revenue growth to be lower than CTR retail sales growth due to dealer de-stocking (this dynamic may persist for a few more quarters). We also anticipate positive same-store sales growth at Mark’s and SportChek.”
“We anticipate that Canadian Tire will continue to face labour disruptions and heightened costs, as well as other inflationary drivers. That said, our view is that Canadian Tire is navigating these challenges relatively well. We look for updates on the call.”
For the first quarter, Mr. Shreedhar is projecting EPS of $1.77, exceeding the consensus estimate on the Street of $1.70 but well last year’s $2.57.
“Our projection of an 31-per-cent year-over-year decline largely reflects tough y/y comparisons, dealer de-destocking and higher costs; retail gross margin expansion (excluding petroleum) and positive same store sales growth (sssg) across banners are expected to serve as partial positive offsets,” he said. “We note that Q1 is a seasonally light quarter, historically representing 8-12 per cent of yearly EPS; this somewhat limits the usefulness of read-throughs to full-year performance, particularly with regards to the retail business.”
“While EPS is anticipated to decline year-over-year, we note strong growth relative to 2019 (representing a pre-pandemic period). Specifically, we project EPS growth of 58 per cent versus Q1/19.”
Reiterating his “outperform” recommendation for Canadian Tire shares, the analyst cut his target to $212 from $236 to reflect his lower estimates and a lower valuation multiple “associated with building macro-economic pressure.” The average on the Street is $226.90, according to Refinitiv data.
Elsewhere, others making target changes include:
* Canaccord Genuity’s Luke Hannan to $203 from $222 with a “hold” rating.
“Our target represents a combination of our updated sum-of-the-parts valuation, which separately values Canadian Tire’s Retail and CTFS divisions, and the company’s ownership of CT REIT, and a peer comparable analysis. We have decreased our target multiple for Canadian Tire’s Retail segment to reflect a more cautious outlook on the potential for near-term earnings growth from the segment,” said Mr. Hannan.
* CIBC’s Mark Petrie to $220 from $224 with an “outperformer” rating.
After a “huge” first-quarter beat, National Bank Financial analyst Jaeme Gloyn sees a “great setup” for Element Fleet Management Corp. (EFN-T), touting its “confidence inspired” guidance upgrade.
“EFN upgraded its 2022 guidance for net revenue (up 4 per cent comparing new vs. old mid-point), EPS (up 6 per cent) and FCF/share (up 6 per cent),” he said. “The upgrade reflects management’s confidence in i) sustained success on organic growth initiatives (as noted above); ii) service utilization back to, or above, pre-pandemic levels (e.g., maintenance, accident repair, tolls/violations, rental activity in both service AND sales fleets); and iii) tailwinds from inflation and an interest rate agnostic business model as discussed in our Q4-21 investor meetings. Furthermore, given the early results and upgraded 2022 guidance, we view 2023 results as significantly de-risked. As OEMs continue to increase production capacity, EFN will derive significant tailwinds from its $2.9 billion order backlog.”
After the bell on Monday, the Toronto-based company reported revenue of $261-million, exceeding both Mr. Gloyn’s $239-million estimate and the consensus forecast of $239-million. With in-line operating expenses, adjusted earnings per share came in at 24 cents, exceeding the 20-cent forecast of both the analyst and the Street.
“While we acknowledge the stock still hinges on OEM production delays resolving in line or ahead of management’s mid-2023 assumption, strong Q1-22 results and increased 2022 guidance significantly de-risk our earnings forecast,” said Mr. Gloyn. “We reaffirm our view that EFN will deliver consistent double-digit EPS (12 per cent year-over-year in 2023) and FCF per share (14 per cent year-over-year in 2023) growth over the medium term, driving significant FCF yield compression from the current 11-12-per-cent yield on our 2022/2023 estimates.”
Reaffirming his “outperform” rating, Mr. Gloyn raised his Street-high target by $1 to $20. The average is currently $15.58.
“Our $20 target price ... implies an FCF Yield of 6 per cent and 7 per cent on 2022 and 2023 FCF estimates, respectively, in line with Canadian Financial peers that share similar fundamental attributes (e.g., defensiveness, organic revenue growth, expanding profitability, solid FCF generation, low credit risk and barriers to entry),” he said. “The increased target price reflects our improving confidence EFN will deliver on its financial guidance.
“Moreover, we see significant free cash flow per share and valuation upside beyond 2023 as EFN executes on robust organic growth initiatives in line with its stated guidance. Trading at a 10-11-per-cent FCF yield on consensus 2022/2023 estimates not only provides investors with meaningful downside protection as uncertainty related to OEM production delays persists, but also as recessionary risks increase. Crucially, EFN’s massive order backlog will allow the company to deliver rapid growth independent of the prevailing economic backdrop. Therefore, we view EFN’s near-term to medium-term setup very favourably. With an 85-per-cent total return to our target, we reaffirm our Outperform rating.”
Others making changes include;
* Raymond James’ Stephen Boland to $14 from $13.25 with a “market perform” rating.
“Inflation is positive for EFN’s revenue in the Net Financing and Service segments,” he said. “And since EFN has matched funding, there is no margin compression/expansion when rates do increase. The increased guidance is positive, and we remain comfortable with our Market Perform rating.
*BMO’s Tom MacKinnon to $13.50 from $14.50 with a “market perform” rating.
“As management continues to guide to longer-than-expected OEM production delays, we see an important catalyst to the story, namely the clearing of the backlog, being pushed out at least a year, which, when combined with a fairly rich valuation at 12 times 2022 estimated operating EPS, gives us pause,” said Mr. MacKinnon.
Despite pushing the initial launch of its WorldView Legion satellites back further to September, Maxar Technologies Inc.’s (MAXR-N, MAXR-T) fundamentals appear to support capacity expansion following a “relatively strong” first quarter, according to RBC Dominion Securities analyst Ken Herbert.
“The company indicated that it discovered a test anomaly during environmental testing on the second satellite,” he said. “We do not believe investors are too surprised by the push to September for the first launch, but the delays do add to risk associated with timing of the initial and subsequent launches. The company expects to have 3 satellites ready by September for launch, but it continues to expect three launches (2 satellites each) paced 3 months apart. The company has started to procure long-lead items for WV Legion 7 and 8, which will eventually replace the Legion 3 satellite, highlighting the strong Earth intelligence demand environment.”
After the bell on Monday, Colorado-based Max reported sales for the quarter of US$405-million, up 3 per cent year-over-year and above Mr. Herbert’s projection of US$400-million. An adjusted earnings per share loss of 10 cents also topped his estimate (a 14-cent loss).
“The company largely kept its 2022 guidance unchanged, with a slight adjustment to its Space Infrastructure segment,” he said. “The company has not updated its 2023 outlook. The headline of another pushout in the WV Legion timing is disappointing, but we view the Earth intelligence demand environment as strong, and believe the eventual launch of the first two WV Legion satellites will be a strong positive catalyst.”
Keeping an “outperform” rating, Mr. Herbert trimmed his target to US$44 from US$48. The average is US$44.71.
“The continued delays in the potential catalysts (EOCL and WV Legion) are disappointing, but we believe the 2023 targets remain on track and well positioned in key space markets. We expect incremental upside due to the invasion of Ukraine, but the business mix in the Space Infrastructure segment to more government work will likely continue to lag expectations,” he said.
Elsewhere, believing its shares are now unvalued Canaccord Genuity’s Austin Moeller upgraded the stock to “buy” from “hold” with a US$38 target, up from US$42.
“The considerable stock market turmoil this week now has the stock trading at 8.5 times NTM [next 12-month] EBITDA, which we view as pretty inexpensive considering the average 3-year multiple of 9.4 times,” he said. “Considering that 50 per cent of the Legion constellation is nearing mission readiness now, we believe it is time to do a little clearance shopping considering the company’s robust fundamental backdrop (Legion, EOCL, Ukraine).”
BMO’s Thanos Moschopoulos cut his target to US$32 from US$33, keeping a “market perform” rating.
“We remain Market Perform on MAXR and have modestly trimmed our FY2022/23 estimates following Q1/22 results — which were below consensus due to deal timing within the EI segment, while management reiterated FY2022 guidance, despite an incremental delay in Legion,” he said. “We believe the stock is looking more attractive as Legion draws nearer (particularly given the strong demand backdrop for satellite imagery), but would like better comfort on MAXR’s ability to replenish the Space Infrastructure backlog as we look towards FY2023.”
Barclays analyst David Joyce sees Telus Corp. (T-T) possessing “among the strongest growth in telecom.”
However, believing its shares “largely reflect it” that view, he lowered his recommendation to “equal-weight” from “overweight” with a $33 target, up from $32. The average is $34.73.
“Due to Telus’ network investments and forward-thinking foray into numerous digital adjacencies, the company’s high-single-digit financial and capital returns trajectories have made TU shares an attractive port in the storm, but we think the valuation reflects this,” said Mr. Joyce.
In other analyst actions:
* Upon assuming coverage, National Bank Financial’s Dan Payne cut the firm’s target for Anaergia Inc. (ANRG-T) to $14 from $17., keeping a “sector perform” rating. The average is $24.17.
“A first-mover in the renewable natural gas space, its business is in the midst of a significant transition & growth phase, towards a build-own-operate model that offers a substantial backlog for growth of a reliable stream of high-margin EBITDA. The stock’s multiple has significantly re-rated, and we believe that with operational execution and associated EBTIDA expansion, its technology & infrastructure-oriented stance should be validated in support of its valuation to drive the stock higher,” he said.
* Scotia’s Mario Saric raised his Artis REIT (AX.UN-T) target to $14 from $13.50, maintaining a “sector perform” rating. The average is $13.72.
* ATB Capital Markets’ Frederico Gomes lowered his target for Aurora Cannabis Inc. (ACB-T) to $4 from $5, reiterating an “underperform” rating. The average is $5.54.
* Cowen and Co.’s Jeffery Osborne reduced his Ballard Power Systems Inc. (BLDP-Q, BLDP-T) target to US$7.75 from US$12 with a “market perform” rating. Others making changes include: CIBC’s Hamir Patel to US$9 from US$12 with a “neutral” rating, Raymond James’ Michael Glen to US$9 from US$14 with a “market perform” rating. National Bank’s Rupert Merer to US$13 from US$14 with an “outperform” rating, BMO’s Jonathan Lamers to US$8 from US$10 with a “market perform” rating and Susquehanna’s Biju Perincheril to US$7.50 from US$11 with a “neutral” rating. The average is US$14.45.
“The fuel cell industry should gather momentum over the next couple of years. With BLDP’s $1.1-billion nest egg, we believe it has enough liquidity to fund its operations until its markets grow. However, with lower forecasted sales in China and other model tweaks, our DCF (9.5-per-cent discount rate) now returns a US$13 per share target,” said Mr. Merer.
* Following a “massive” first-quarter beat, Desjardins Securities’ Gary Ho raised his Chemtrade Logistics Income Fund (CHE.UN-T) target to $11 from $9.50, keeping a “buy” rating. The average is $9.61.
“Given the positive outlook for most chemicals, including continued strength in caustic soda prices, the revised guidance appears conservative,” he said.
“Our positive view is based on: (1) rally in chemicals and reopening will drive EBITDA growth; (2) tremendous ultra-pure and hydrogen opportunities; and (3) management change leading to a valuation re-rate.”
* Canaccord Genuity’s Matt Bottomley cut his Curaleaf Holdings Inc. (CURA-CN) target by $1 to $14.50 with a “buy” rating. Other changes include: MKM Partners’ William Kirk to $14 from $15 with a “buy” rating and Stifel’s Andrew Partheniou to $24 from $25 with a “buy” rating. The average is $19.38.
“On Monday evening, Curaleaf reported Q1/22 financial results that on the whole were below our expectations,” Mr. Bottomley said. “Although growth headwinds were anticipated given recent inflationary pressures and what is typically a seasonally slower period, the company saw a notable decline in its wholesale contribution in Q1 on the back of what management described as lower demand/re-ordering from 3rd party dispensaries in January and February and lower pricing in certain markets.”
* RBC’s Keith Mackey raised his Ensign Energy Services Inc. (ESI-T) target to $6.50, above the $5.39 average, from $6 with an “outperform” rating, while Stifel’s Cole Pereira bumped his target to $5.75 from $5.50 with a “buy” rating.
* Canaccord Genuity’s Christopher Koutsikaloudis lowered his Inovalis Real Estate Investment Trust (INO-UN-T) target by $1 to $8 with a “hold” rating. The average is $9.21.
“While we are encouraged by initial signs that management has shifted the REIT back into “growth mode”, investor sentiment has deteriorated meaningfully over the past month. In this context, we do not believe Inovalis is likely to trade in line with its NAV in the near term, given the REIT’s elevated payout ratio (167 per cent based on 2022 estimated AFFO), low liquidity, and continued uncertainty regarding future office demand,” he said.
* CIBC’s Dean Wilkinson lowered his Morguard Corp. (MRC-T) target to $165 from $180, which is the current consensus. He kept an “outperformer” rating.
* Scotia’s Phil Hardie trimmed his Power Corp. of Canada (POW-T) target to $43.50 from $45.50, below the $45.06 average, with a “sector perform” rating.
* National Bank Financial’s Mike Parkin cut his target for shares of SSR Mining Inc. (SSRM-T) to $32.50 from $33, keeping a “sector perform” rating. The average is $35.73.
“On May 3 SSR reported its Q1 financial and operating results, posting an Adj EPS of US$0.30, a beat to both NBF and consensus driven primarily by a strong beat at Seabee,” he said. “We updated our model for the Q1 beat and adjusted our estimates for the remainder of the year to better reflect guidance and management commentary. We remain above the midpoint of production guidance and well-aligned to the midpoint of cost guidance. We have moved to expect an outperformance (relative to guidance) from Seabee based on its strong Q1 performance.”