Inside the Market’s roundup of some of today’s key analyst actions
BMO Capital Markets analyst John P. Kim downgraded three U.S. office real estate investment trusts that have high exposure to the tech industry, believing the sector is set for a significant slowdown that will result in job cuts and downward pressure on leasing terms.
JBG SMITH Properties (JBGS-N), Kilroy Realty Corp. (KRC-N) and Vornado Realty Trust (VNO-N) all had their ratings cut to “market perform”. An apartment REIT which has tenants heavily concentrated in U.S. West Coast tech hubs, Essex Property (ESS-N), was also downgraded to a “market perform” rating.
“We have become less optimistic of REITs with high exposure to the tech industry, which have, over the past decade, led the charge in terms of employment growth, office leasing activity, and median wages,” Mr. Kim said in a research note. “Public and private valuations have been reduced, business models scrutinized, and an increasing number of tech firms are reducing headcount.”
Going forward, both fiscal and monetary stimulus are unlikely to work in favour of the companies, he added.
A number of large tech firms have already announced job cuts, including PayPal, Netflix, and Uber. Additionally, tech startup layoffs have nearly doubled in the second quarter of this year from the first three months of 2022, the BMO analyst said.
The bank’s most recent proprietary analysis suggests job listings remained stable in May, but they were still down 3.8% from their December 2021 peak.
“However, a number of large firms have seen sequential declines in listings in May, including Salesforce (-6,190 listings in May vs. April), Amazon (-4,790 listings), and Meta Platforms (-2,084),” BMO said.
Office utilization has been gradually improving to 43.3%, “but overall has been disappointing, leading to deteriorating office rents,” it added.
Mr. Kim believes a recession may actually boost office utilization, as employees could lose leverage when it comes to working from home, making physical ‘face time’ more prominent. However, this may be more than offset by weakening business conditions and lower overall headcounts.
His price targets are as follows: JBD SMITH US$30; Kilroy US$70; Vornado US$40; Essex Property US$320.
Credit Suisse analyst John Roberts initiated coverage of Sherwin-Williams Co. (SHW-N) with an “underperform” rating, concerned that a rising interest rate environment could negatively impact residential and commercial paint demand. He set a price target of US$245.
Sherwin-Williams’ paint products are the most used in the North American pre-applied residential and commercial paint market. It’s also a major provider of do-it-yourself house paint and industrial paint.
“During the pandemic, the drop in pro-applied residential paint was offset by a surge in DIY paint, which is now reversing. The recovery in pro-applied painting may now be at risk,” Mr. Roberts said in a research note to clients.
“While SHW’s balance between pro-applied and DIY residential paint has provided defensiveness during the pandemic, that may not repeat during a non-pandemic period of rising interest rates,” the analyst said. “During most recessions, pro-applied paint (expensive labour) has declined, and DIY (free labor) has remained stable. Residential/commercial building markets are interest-rate sensitive, so earnings could be at risk.”
Mr. Roberts noted that while the stock is already down about 25% from its 52-week high, it’s still up about 35% from its high prior to the pandemic.
The average analyst price target is US$306.32, according to Eikon data.
Raymond James analyst Andrew Bradford believes Secure Energy Services Inc. (SES-T) will beat earnings expectations again when it reports second quarter results, driving the stock price even higher.
Secure’s shares are up 40% so far this quarter, outpacing the 24% gain for the TSX Capped Energy Index. That rally came in the wake of the company beating first-quarter consensus expectations by 9%.
For the second quarter, Mr. Bradford expects Secure to report $105 million in EBITDA, above the average Street estimate of $97 million.
“We think this continued ‘beat and raise’ pattern from Secure combined with strong free cash generation will continue to draw investors,” he said in note.
The analyst maintained a “strong buy” rating and increased his price target to C$8.75 from C$8.50. The average analyst target is C$8.60.
Goldman Sachs analyst Emily Chieng downgraded Steel Dynamics Inc. (STLD-Q) to “neutral” from a “buy” rating given the company’s recent strong performance in the stock market.
Goldman initiated coverage on the stock on April 9th of last year. Since then, Steel Dynamics has risen 72% versus 35% for its U.S. steel peers.
“While we remain constructive on the fundamentals of the business, we see this better reflected in current valuation,” Ms. Chieng said in a note to clients. “In our view, the outperformance can be attributed to balance sheet strength, near-term production and normalized free cash flow growth following the start up of the Sinton mill, and importantly, additional capital returns announced earlier this year.”
Goldman analysts led by Ms. Chieng commented that the steel industry remains in a strong position, even though concerns have been growing about an economic downturn that would dent demand.
“Despite these fears around a potential slowdown and perhaps reflecting limited visibility into the remainder of the year, we have not yet seen any indication of impending weakness,” she said.
Ms. Chieng added that steel producers and service centers are likely better positioned today than they have been in the past - including during the Great Recession - thanks to consolidation in the sector which has led to better supply discipline.
She lowered her price target on Steel Dynamics to US$92 from US$114, a reflection of changes made to her earnings estimates owing to the latest trends in commodity prices and lower shipments at the company’s steel mills and fabrication segment.
The average analyst target is US$100.10.
Piper Sandler analyst Charles Neivert raised his price targets on CF Industries Holdings (CF-N), Nutrien Ltd (NTR-N) and Mosaic Company (MOS-N), believing that fertilizer stocks will continue to benefit from increasing grain prices.
The price target hikes “are tied to our belief that grain prices will both remain elevated and reset the standard for midcycle levels going forward,” the analyst said
“Our prior fertilizer price estimates, especially for 2023, were tied to corn prices around $5.75/ bu to $6/bu. Our current thinking is that $6.50/bu to $7/bu for 2023 is now the more likely outcome. As such our price deck for the basic nutrient products is raised. We further believe the range around our corn price estimate skews more upward than downward,” he added
He raised his price targets on CF Industries, Mosaic and Nutrien to US$132, US$85 and US$125, respectively.
TD analyst David Kwan initiated coverage on Coveo Solutions Inc. (CVO-T) with a “buy” rating and C$9.50 price target.
Coveo Solutions is a provider of an AI-powered relevance platform.
“Although the current market backdrop is challenging for many technology companies, particularly ones that are unprofitable, we believe Coveo is attractively valued at 2.5x estimated 2023 revenue, given its attractive growth profile, +90% SaaS subscription revenue mix, and cashed-up balance sheet that should help it further strengthen its leading position in the AI-driven relevance market,” Mr. Kwan said.
His target is well below the Street average of C$14.75.
In other analyst actions:
Airbnb Inc (ABNB-Q): Jefferies cuts target price to US$170 from $225
Amazon.com Inc (AMZN-Q): Jefferies cuts target price to US$3250 from $3700
Etsy Inc (ETSY-Q): Jefferies cuts target price to US$115 from $150
Expedia Group Inc (EXPE-Q): Jefferies cuts target price to US$135 from $200
Conocophillips (COP-N): Mizuho raises target price to US$157 from $150
Devon Energy Corp (DVN-N): Mizuho raises target price to US$92 from $89
Lyft Inc (LYFT-Q): Jefferies cuts target price to US$20 from $34
Uber Technologies Inc (UBER-N): Jefferies cuts target price to US$50 from $65
Yelp Inc (YELP-N): Jefferies cuts target price to US$30 from $35
Snap Inc (SNAP-N): Credit Suisse cuts target price to US$59 from $77
Big Lots Inc (BIG-N): BofA Global Research cuts price objective to US$20 from $25; Deutsche Bank cuts target price to US$23 from $31; Telsey Advisory Group cuts target price to US$30 from $32
American Eagle Outfitters (AEO-N): Barclays cuts target price to US$13 from $19; Morgan Stanley cuts target price to US$8 from $22; Morgan Stanley cuts to underweight from equal-weight
Chevron Corp (CVX-N): Barclays raises target price to US$196 from $183
Exxon Mobil (XOM-N): Barclays raises target price to US$111 from $98
Costco Wholesale Corp (COST-Q): Raymond James cuts target price to US$560 from $645
Eastman Chemical Co (EMN-N): Credit Suisse starts with outperform rating; price target US$130
Gap Inc (GPS-N): B. Riley cuts target price to US$12 from $13; Cowen and Company cuts target price to US$12 from $16
BlackRock Silver (BRC-X): PI Financial initiates with buy rating; target price C$1.2
Converge Technology Solutions (CTS-T): Berenberg cuts target price to C$14 from C$18.25
Eguana Technologies Inc (EGT-X): Stifel GMP raises target price to C$0.7 from C$0.65
Sigma Lithium Corp (SGML-X): Cormark Securities raises target price to C$27.50 from C$24
With files from Reuters
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