Inside the Market’s roundup of some of today’s key analyst actions
Emphasizing the company’s momentum in Piper Sandler’s Spring 2022 Taking Stock With Teens survey, equity analyst Abbie Zvejnieks upgraded Lululemon Athletica Inc. (LULU-Q) to “overweight” from “neutral” on Tuesday.
“In what we view as a tougher and more uncertain consumer environment, we want to point investors to quality,” she said. “We continue to believe LULU has best-in-class product innovation which should drive demand, and we do not believe LULU will have to react as much as peers to the more intense promotional environment.”
Ms. Zvejnieks also believes Lululemon has gained “significant mindshare,” supporting its aspirational nature and ability to attract new generations of consumers, and sees an opportunity to outperform with its outerwear offerings with colder winter and better in-stock levels, which she projects to bring 240 basis points of revenue growth in its third quarter.
She raised her target for Lululemon shares, which are down 26 per cent year-to-date, to US$350 from US$320. The average on the Street is US$385.59.
“After an abundance of ample underperformance,” Credit Suisse’s Andrew Kuske upgraded Algonquin Power & Utilities Corp. (AQN-N, AQN-T) to “outperform” from “neutral.” seeing “sufficient excess potential return” to his unchanged US$15 target price
“For perspective, AQN’s stock performance of negative 15.8 per cent and negative 19.3 per cent for H2 to date and the year-to-date compares to the S&P/TSX Composite and the S&P/TSX Utilities sector returns of negative 2.3 per cent, negative 12.4 per cent and negative 9.4 per cent and negative 9.8 per cent for the same periods, respectively,” he said. “On a relative basis, AQN underperformed the Canadian peer group by 805 bps and 1319 bps over H2 to now and for YTD. With AQN’s business, we consider the performance versus the S&P 500 Utilities sector and in USD terms, the stock delivered negative 22.2 per cent and negative 25.8 per cent on the H2 to date and YTD versus the benchmark’s negative 11.4 per cent and negative 10.1 per cent, respectively. Given a consistent sector valuation methodology, we don’t see the need to compress the multiples for the utilities business or AQN’s renewables segment on a standalone basis.”
The analyst said he now sees “plenty of positives,” noting: “Recently, AQN benefitted from two events: (a) a downward price revision for the Kentucky deal); and, (b) the firm’s first major capital recycling announcement with the potential for more to follow. On the horizon, benefits from the Inflation Reduction Act and the investor day (usually December) could provide positive incremental news flow.”
Mr. Kuske’s US$15 target falls short of the Street average of US$16.33.
However, following the rollout of its “underwhelming” turnover plan for its U.S. Burger King brand, he thinks its investors will be “shakier on macro risks to franchised unit growth” versus competitors McDonald’s Corp. (MCD-N) and Yum! Brands Inc. (YUM-N), the parent company of KFC, Pizza Hut and Taco Bell.
“We would be surprised if the quarter can drive a positive inflection in shares,” he said.
Cutting his 2022 and 2023 earnings per share estimates to US$3.14 and US$3.28, respectively, from US$3.18 and US$3.55 on incremental Burger King investments and the impact of foreign exchange, Mr. Tower lowered his target for Restaurant Brands shares to US$56 from US$66, keeping a “neutral” recommendation.
In summarizing the state of the industry, he concluded: “High frequency data has become more volatile in Aug/Sept, with normal seasonality likely playing a role. However, we expect most companies to strike a cautiously optimistic tone on the consumer and margin backdrop (outsized levels of pricing combined with input inflation rolling over – now down approximately 26 per cent since mid-May peak) heading into year end, which should help the group relatively outperform retail. Looking into 2023, we continue to recommend an uneven barbell approach to the category and see restaurants benefitting from (a) wallet share shifts away from durables and toward restaurants, (b) commodity prices easing with still-elevated levels of pricing vs. history and (c) greater labor availability.”
Pointing to escalating investor concerns that the Fed’s hawkish approach could trigger a downturn as well as the impact of a weakening Canadian dollar, Scotia Capital analyst Konark Gupta made further notable reductions to his long-term estimates for transportation and aerospace companies in his coverage universe.
“Although the path remains unclear, we are of the view that a potential recession could be less damaging for the aviation sector than freight transportation as consumption is shifting toward services (including travel) from goods coming out of the pandemic. Various industry monitors we track support our thesis,” he said. “This would be unlike the prior cycles where aviation equities underperformed. Thus, we are sticking with AC as our top conviction idea, along with TFII and EIF, all of which offer a good combination of growth visibility and value. TFII and EIF offer attractive shareholder returns.”
Pointing to three factors, Mr. Gupta downgraded Mullen Group Ltd. (MTL-T) to “sector perform” from “sector outperform” with a $16 target, below the $17.35 average.
“First, we believe inflation and rate hikes are likely to weigh on MTL’s largest segment, LTL, over time given its high exposure to consumers, although MTL’s oilfield services business appears more resilient in the strong energy tape, providing an offset,” he said. “Second, the company recently noted that it was slowing down on acquisitions, which pushes out a potential catalyst. Lastly, we see relatively better risk/reward elsewhere as MTL has significantly outperformed year-to-date, although its forward EV/EBITDA valuation is near historical trough.”
Mr. Gupta also cut his 12-month targets for eight other stocks by average 12 per cent. They are:
- Air Canada (AC-T, “sector outperform”) to $25 from $26. Average: $26.53.
- Andlauer Healthcare Group Inc. (AND-T, “sector perform”) to $53 from $57. Average: $55.40.
- Bombardier Inc. (BBD.B-T, “sector outperform”) to $50 from $55. Average: $50.26.
- CAE Inc. (CAE-T, “sector outperform”) to $30 from $37.50. Average: $34.08.
- Chorus Aviation Inc. (CHR-T, “sector outperform”) to $4 from $4.50. Average: $4.84.
- Cargojet Inc. (CJT-T, “sector outperform”) to $180 from $200. Average: $200.91.
- Heroux-Devtek Inc. (HRX-T, “sector outperform”) to $17 from $18. Average: $19.75.
- Transat AT Inc. (TRZ-T, “sector underperform”) to $1.50 from $2.25., Average: $2.45.
Conversely, he “slightly” raised his targets on Canadian rails due to the FX tailwind. His changes are:
- Canadian National Railway Co. (CNR-T, “sector perform”) to $156 from $152. Average: $160.83.
- Canadian Pacific Railway Ltd. (CP-T, “sector perform”) to $100 from $99. Average: $107.66.
“We like SO-rated AC, EIF [”sector outperform” and $58 target] and TFII [”sector outperform” and $160] as top picks for different reasons,” he said. “Other SO-rated stocks – BBD.B, CAE, CHR, CJT, and HRX – also look attractive at current levels. That said, these eight stocks may still have downside risk, on an absolute basis, if the broader market continues the downtrend. We like AC because airlines, especially Canadian carriers, could continue to grow through a potential recession given they are still emerging from the pandemic while forward bookings are trending up, currently led by international travel. Higher-margin corporate travel is also picking up. Similarly, EIF has yet to fully recover organically while its largest-ever acquisition (Northern Mat) will provide growth into the first half of 2023. In addition, EIF’s M&A potential has improved a lot following the recent equity raise while private equity competition is lessening due to rate hikes. Further, EIF is a defensive stock and offers the highest dividend yield (currently 5.6 per cent) in our coverage with a near record-low payout ratio. Similar to AC, TFII screens well on valuation vs. history, while it remains aggressive on buybacks and has a low dividend payout ratio. Most importantly, we believe TFII can surprise on the upside during a potential recession with its self-help story (U.S. LTL integration), improved resilience from the divestiture of U.S. TL dry van business, and potential for larger M&A.”
Predicting a “messy” third-quarter earnings season for North American railway companies but seeing “opportunity amidst the noise,” Credit Suisse’s Ariel Rosa cut her targets for Canadian National Railway Co. (CNI-N/CNR-T, “neutral”) to US$124 from US$138 and Canadian Pacific Railway Ltd. (CP-N/CP-T, “neutral”) to US$78 from US$88. The averages are US$125.16 and US$80.76, respectively.
“Accounting adjustments for unaccrued labor and benefits expense could result in sizeable adjustments to 3Q22 earnings,” she said. “Nevertheless, we believe investors should look through the noise, as we now see double-digit upside across the rails despite our reduced earnings estimates and target valuations. We continue to prefer U.S. rails given a significant valuation discount to their Canadian peers. For the first time in years, UNP, CSX and NSC now trade near the lower end of their historical valuation ranges. Year-to-date declines have significantly de-risked the investment opportunity in rails, in our view. We note that as a group, the rails have not experienced consecutive yearly declines in well over a decade. Additionally, we do not see the rails facing particularly difficult comps in the year ahead given operating challenges, elevated costs, and relatively weak volume growth over the past 12 months.”
With Canadian manufacturing activity expanding in the third quarter and freight pricing rising in July, RBC Dominion Securities analyst Walter Spracklin concludes there was “a solid operating backdrop” for trucking and diversified industrial companies in the third quarter.
In a research report released Thursday previewing earnings season, he said third-quarter results are likely to be “solid,” however investor sentiment will largely be determined by management commentary, pointing to rising interest rates and the potential impact on consumer and industrial demand.
His earnings per share projection for TFI rose to US$1.96 from US$1.89, falling in line with the Street’s US$1.97 estimate.
“We brought higher our estimate due to read throughs from FedEx, which suggest the LTL pricing and demand backdrop remained solid during the quarter,” the analyst said. “Our 2022 estimate however remains unchanged at $8.10 and in line with consensus $8.11, but above guidance for EPS of $8.00. Our 2023 estimate is also unchanged at $7.90, in line with consensus $7.89. We introduce our 2024 estimate of $8.69, below consensus $8.97, which we note ranges from $8.27 to $10.24. We expect focus into the quarter to remain on the outlook, and with public market valuation multiples depressed, a potential pickup in M&A activity.”
Maintaining an “outperform” recommendation for TFI shares, he trimmed his target to US$113 from US$115. The average on the Street is US$121.38.
For Mullen, his EBITDA estimate is $93-million, up from $90-million previously and above the consensus on the Street of $89-million.
“Key on the call will be colour on pricing and on the outlook given the current macro backdrop,” said Mr. Spracklin, maintaining an “outperform” rating and $17 target. The average on the Street is $17.35.
For stocks he sees as “neutral-positioned” ahead of earnings season, he made these target adjustments:
* Cargojet Inc. (CJT-T, “outperform”) to $274 from $286. Average: $200.91.
“CJT remains our top Transportation idea,” he said. “We are leaving our Q3 EBITDA estimate unchanged at $83-million, roughly in line with consensus $85-million. Our price target decreases to $274, from $286, due to our lower target multiple, which we brought down to 12 times, from 13.5 times.”
* Stella-Jones Inc. (SJ-T, “sector perform”) to $42 from $41. Average: $49.14.
“Our Q3 EBITDA estimate remains unchanged at $105-million and below consensus $110-million. Out year estimates are up on the recent tuck-in acquisition of Texas Electric and all roughly align with consensus; however, our 2024 estimate of $441-million (cons. $444-million) remains ahead of implied guidance of $419-million, which we continue to view as conservative due to recent strength in Utility Pole demand,” he said. “Target price increases to $42 (from $41) as we now value the shares off our 2024 estimate, partly offset by our lower target multiple of 7.5 times (from 8 times).”
* Westshore Terminals Investment Corp. (WTE-T, “outperform”) to $35 from $39. Average: $31.20.
“Our Q3 EBITDA estimate decreases to $31-million (from $46-million; cons. $46-million) due to the impact of the current work stoppage,” he said. “We also brought lower our 2022 estimate to $155-million (from $180-million; cons. $181-million), and assume the work stoppage ends during the middle of October, although at this point we have no visibility as to the timing of a potential resolution.”
National Bank Financial analyst Vishal Shreedhar sees trends remaining “solid” for MTY Food Group Inc. (MTY-T) after its third-quarter results fell largely in line with his expectations.
However, as exhibited by a 6.8-per-cent share price drop on Friday following the earnings release, he warned macroeconomic “uncertainty” is likely weigh on the Quebec-based restaurant operator and franchisor moving forward.
“Despite macroeconomic concerns, MTY noted that trends were consistent through the quarter; traffic remained resilient post quarter, though price sensitivity remains heightened,” Mr. Shreedhar said in a research note released Tuesday. “MTY opened 63 new locations during Q3/ F22; however, store closures of 117 (58-per-cent street front; 21 per cent malls/office towers; 21 per cent other non-traditional formats) were higher than expected. A significant number of stores (more than 150) are under construction due to extended timelines (longer permitting, longer inspections, supply chain).”
MTY, which brands include Cold Stone Creamery, Manchu Wok and Thai Express, reported revenue for the quarter of $171.5-million, up from $150.8-million during the same period a year ago and above Mr. Shreedhar’s $165.2-million projection. Adjusted EBITDA rose to $50.6-million from $49.7-million, also narrowly topping his estimate of $49.4-million as system sales were higher than expected.
Following the earlier-than-anticipated close of its US$200-million acquisition of BBQ Holdings Inc., the analyst raised his full-year fiscal 2022 and 2023 revenue and earnings expectations, but he cautioned that capital allocation will be a focus moving forward.
”MTY’s balance sheet remains adequate; management previously indicated pro forma leverage of 2.4 times after the BBQ acquisition (excl. leases),” he said. “As target valuations are improving, MTY’s priority for capital allocation will shift back to M&A while remaining financially prudent. We consider resumption of acquisition growth to be a key driver for MTY.
“We remain constructive on MTY given attractive valuation, expectations of improving operational performance (digital sales, menu innovation, marketing, data analytics) and supportive capital allocation outcomes such as acquisitions. That said, we also acknowledge heightened risk related to inflation, supply chain, labour and general macroeconomic concerns.”
Keeping an “outperform” recommendation for MTY shares, Mr. Shreedhar trimmed his target to $63 from $68 after a reduction to his valuation multiple to reflect broader economic concerns facing consumers. The average on the Street is $67.43.
Other analysts making target adjustments include:
* TD Securities’ Derek Lessard to $65 from $70 with a “hold” rating.
“The stock’s negative reaction on Friday supports our view that with the sales recovery now done, investor focus has firmly turned back to the potential upcoming headwinds, including tougher comps, labour shortages, construction delays, and increasing competition (Papa Murphy’s sales, which account for 25 per cent of the consolidated, fell by mid-single-digits),” said Mr. Lessard. “More importantly, although we would argue that there is still a healthy pent-up demand for out-of-home entertainment, sharp price increases in consumer essentials (e.g., groceries and gasoline), increased debt-servicing obligations, and menu inflation are likely to pressure restaurant spending by price-conscious consumers.”
“Our current HOLD recommendation is predicated on a more cautious stance in the face of rising interest rates and elevated recession risk (and the impact on Papa Murphy’s and Cold Stone Creamery, MTY’s largest banners, in particular, as well as increased exposure to the more economically sensitive fast casual concepts).”
* Scotia Capital’s George Doumet to $64 from $68.50 with a “sector perform” rating.
“Q3 results were largely in line with our/Street expectations as Canadian system sales continued to benefit from reopening,” said Mr. Doumet. “Company commentary points to continued consumer demand across most banners (except for Papa Murphy’s at 30 per cent of system sales) and increasing deal flow and appetite for M&A. We see further runway for additional M&A (and balance sheet capacity of 1 turn) – that said, MTY’s public/private multiple differential (especially vis-à-vis U.S. targets) has shrunk (with shares trading at 8.7 times EV/EBITDA 2023E).”
* RBC Dominion Securities’ Sabahat Khan to $59 from $67 with a “sector perform” rating.
“Looking ahead, we expect sustained year-over-year top-line growth as MTY’s markets benefit from more employees returning to office; however, margins could be impacted over the near- to medium-term by the inflationary backdrop,” he said.
* CIBC World Markets’ John Zamparo to $70 from $75 with an “outperformer” rating.
“The environment for consumer discretionary stocks is far from ideal, but we view MTY as an attractive place for investors to hide in uncertain times. The business generally benefits from inflation, is neutral to consumer trade-down, and Canadian operations still have room to recover. Furthermore, FCF conversion remains highly attractive, M&A prospects have returned, leverage is relatively low and valuation is compelling at 11 times F23 EPS and 10-per-cent FCF yield. Net unit growth may not occur until 2024, but this could re-rate the stock,” said Mr. Zamparo.
IA Capital Markets analyst Sehaj Anand thinks Quebec is a “Tier 1″ jurisdiction for metals, calling it “a miner’s Shangri-La.”
“What is the recipe for a mining-friendly jurisdiction? And what makes a region/jurisdiction stand out from other jurisdictions? In our view, some of the basic factors that make a mining-friendly jurisdiction include a well-defined regulatory framework, infrastructure, skilled workforce, political and social stability, and last but not least, social acceptance towards mining, which in turn feeds into the Social License to Operate (SLTO),” he said. “On top of the aforementioned factors, there is an additional layer of factors that further distinguishes a jurisdiction. This includes a favourable taxation policy, clear framework on rights for Indigenous communities, efficient permitting process, government support in building infrastructure, and financing of the projects, to name a few. Mining has played an important role in Quebec’s economic development, and it continues to be a significant portion of the province’s GDP to date, especially in the region of Abitibi- Témiscamingue. As per Fraser Institute’s 2021 Mining Survey, Quebec stands among the top 5 mining jurisdictions in the world and is the second-best jurisdiction in Canada after Saskatchewan. In terms of the 2021 Policy Perception Index (PPI), Quebec stands among the top 5 mining jurisdictions in the world and the best in Canada. Owing to its long mining history, top-notch regulatory framework, infrastructure, skilled workforce, and various other governmental support programs, Quebec is a premium jurisdiction for the mining industry in Canada and the world.”
In a research report released Tuesday, Mr. Anand initiated coverage of three junior gold developers and explorers based in the province.
* Osisko Mining Inc. (OSK-T) with a “buy” rating and $5.75 target. The average on the Street is $5.70.
“Osisko Mining is currently focused on advancing its Windfall Gold Project located in the prolific Abitibi Belt,” he said. “The Windfall Gold Project is one of the highest-grade underground gold projects in the world. The Company published an updated resource estimate(in August 2022) featuring a total resource base of 7.4 million ounces Au grading 9.83 grams per ton. Post the mineral resource update in August 2022,the Company plans to release its highly anticipated Windfall feasibility study (FS) by year-end 2022. We model an operational scenario of 282Koz/annum gold production at a very robust US$669 per ounce AISC [all-in sustaining cost] for an 16-year mine life. Overall, the stock provides an attractive entry point into a high-quality, advanced-stage gold project in a Tier 1 jurisdiction.”
* Probe Metals Inc. (PRB-X) with a “buy” rating and $3 target. Average: $2.78.
“Probe Metals is currently focused on advancing its flagship Val-d’Or East (VDE) Project located in the Val-d’Or Camp,” he said. “With an open-pit resource base of 2.5Moz grading at 1.63g/t Au, Probe’s VDE is among the highest-grade open-pit deposits in North America. For VDE, we model a conceptual scenario of 202Koz/annum gold production at a robust US$1,018/oz AISC. Given the strategic location and operational flexibility of VDE, we view Probe as a potential M&A target going forward. Upcoming catalysts include assay results from the ongoing exploration drill program, updated resource estimate from Monique (YE 2022), Pascalisand Courvan (Q1/23), and VDE’s prefeasibility study expected in H2/23. The Company exited Q2/22 with a cash balance of $41-million and had $38-million in the till by early September and is well-funded for the near term, a competitive advantage in the current market turmoil.”
* Amex Exploration Inc. (AMX-X) with a “speculative buy” rating and $3.75 target. Average: $3.67.
“Amex Exploration is currently focused on advancing its flagship Perron Gold Project located in the Chicobi Gold Belt in Quebec, he said. “Amex has completed over 300,000 metres of drilling at Perron since 2018 and an additional 60-70,000 metres is expected to be completed by the end of 2022. Based on our analysis of the drill results published so far, we estimate Perron’s resource potential to be 2.9Moz,anchored around Denise and High-Grade Zone (HGZ). The Company exited Q2/22 with a cash balance of $42-million and is well-funded for the next 18 months. Overall, the stock provides an attractive entry point into a soon-to-be M&A target given its decent sized resource potential, exploration upside, infrastructure, and mining-friendly jurisdiction. Upcoming catalysts include assay results from the ongoing exploration drill program and a maiden resource estimate from Perron.”
In an earnings preview for Canadian telecommunications companies, Scotia Capital analyst Maher Yaghi said he’s “doubling down on wireless,” making further increases to his subscription forecast for the remainder for the year.
“Back in early September, we made a sizable increase in our subscriber estimates to account for increasing immigration and population growth,” he said. “At the time our estimates were 30 per cent higher than consensus for Q3 and Q4. Given the continued momentum we have seen since then we have increased our estimates again mostly for Rogers and BCE. Overall we expect results for larger Canadian telcos to exhibit good growth helped by their wireless business. We expect Rogers’ results to show very strong momentum but overshadowed by one time credit adjustments due to the outage. Overall TELUS is likely to show the best YoY EBITDA growth supported by a multi pronged strategy with focus on wireless, IT and Health.”
Despite those adjustments, Mr. Yaghi warned of the risingcost of capital “pushed upward by the increasing cost of debt.” That led him to trim his target prices for stocks in the sector.
His changes are:
* BCE Inc. (BCE-T, “sector outperform”) to $65.50 from $69. Average: $68.10.
“BCE is likely to exhibit strong subscriber loading in both wireless and wireline while EBITDA might not mirror that strength due to tougher comps (wireline & media), weakening fundamentals (radio), inflationary cost items (wireline). We expect the company to sound positive on the outlook given the underlying strength in subscriber growth and medium term improvement in capital costs,” he said.
* Cogeco Communications Inc. (CCA-T, “sector outperform”) to $102 from $112.50. Average: $104.11.
“CCA’s results are expected to continue to benefit from recent acquisitions and favourable USD exchange rates. We do expect subscribers in the U.S. to show a weaker profile year-over-year similar to our expectations for the other US cable companies such as Comcast. As a reminder, Cogeco is still reporting its Canadian subs including wholesale which is not the case for BCE and Rogers. Removing those subs will likely provide a better view of underlying trends,” he said.
* Quebecor Inc. (QBR.B-T, “sector perform”) to $31.25 from $32.25. Average: $34.44.
“Wireless will be an important driver of performance for QBR as we expect wireline results to be pressured by market share loss and pricing pressure vs BCE. We continue to believe that the company’s focus to buy Freedom is the right approach longer term to gain needed scale in wireless. For now results are likely to be subdued,” he said.
* Rogers Communications Inc. (RCI.B-T, “sector outperform”) to $69.50 from $72.50. Average: $74.50.
“Topline results for Rogers will be greatly affected by the Q3 credit provided to clients for the outage. Investors will need to peel back that one time credit to better appreciate the strong operational results that we expect to see especially in wireless,” he said.
* Telus Corp. (T-T, “sector outperform”) to $31.50 from $34.50. Average: $33.83.
“We expect TELUS to report the best year-over-year growth in revenues and EBITDA across the sector in Canada. We see strength both in wireline, wireless and Health revenues providing equal strength on earnings growth. Subscriber loading might be a tad weaker than recent results due to a more dynamic performance by Shaw in Western Canada,” he said.
“Repricing for higher rates,” CIBC World Markets’ energy infrastructure analyst Robert Catellier made a series of target price reductions to stocks in his coverage universe on Tuesday.
“The rising rate environment causes us to reprice our DCF models with a negative impact to valuations. The current environment may cause investors to prioritize capital preservation and income, placing a premium on sustainable dividends with a clear dividend growth policy. In this environment we prefer companies with structural ability to pass through interest expense, including AltaGas, Enbridge, Brookfield Infrastructure and TC Energy,” he said.
His changes include:
- AltaGas Ltd. (ALA-T, “outperformer”) to $32 from $33. The average on the Street is $34.42.
- Gibson Energy Inc. (GEI-T, “neutral”) to $25 from $26. Average: $26.18.
- Keyera Corp. (KEY-T, “outperformer”) to $34 from $36. Average: $36.35.
- Pembina Pipeline Corp. (PPL-T, “neutral”) to $47 from $50. Average: $52.19.
- Superior Plus Corp. (SPB-T, “outperformer”) to $12.50 from $13.25. Average: $13.44.
- TC Energy Corp. (TRP-T, “outperformer”) to $68 from $75. Average: $68.95.
- Tidewater Midstream and Infrastructure Ltd. (TWM-T, “outperformer”) to $1.60 from $1.75. Average: $1.79.
- Tidewater Renewables Ltd. (LCFS-T, “outperformer”) to $21 from $24. Average: $21.70.
In other analyst actions:
* Despite better-than-anticipated third-quarter results, TD Securities’ Meaghen Annett downgraded Richelieu Hardware Ltd. (RCH-T) to “hold” from “buy” with a $45 target based on share price appreciation. The average on the Street is $49.
“The valuation of RCH shares has recently expanded and the return to our target price no longer warrants a BUY recommendation,” she said. “We continue to like RCH’s leadership position and balance-sheet strength. We see these as attributes that should enable it to mitigate a challenging macro environment. Until investor sentiment toward RCH’s end-markets improves, these attributes could remain underappreciated and thus limit further multiple expansion. We would revisit our recommendation upon a pullback in the share price.”
* Ms. Anett lowered her Sleep Country Canada Holdings Inc. (ZZZ-T) target to $33 from $39, below the $33.67 average, with a “buy” rating.
“We are revising our Q3/22 (and 2022/2023) financial outlook,” she said. “We are taking a conservative approach to SSSG [same-store sales growth] in light of recent industry data, the macro environment, and a shift in sales in Q3/21. Sleep’s partnerships and Q1/22 price increases should bolster the top-line in Q3/22, to a degree. As management looks to maintain/grow its industry-leading market share in this macro environment, we believe year-over-year growth in media/advertising expenses will weigh on the Q3/22 EBITDA margin. This drives about half of the reduction in our Q3/22 EPS forecast to $0.99 from $1.24. Our EPS forecast is modestly below current consensus of $1.02.
“Admittedly, the revisions this morning are partly to adjust our model for pre-/post-pandemic dynamics that we were not adequately capturing. As Sleep’s consumers, high- and low-end, are not immune to inflationary pressure, we are further taking a cautious approach to growth. That said, we maintain our view that Sleep will leverage its industry-leading position to maintain or gain market share in this environment. This could include an acceleration of brand advertising over our forecast horizon.”
* Calling it “a compelling turnaround story,” Canaccord Genuity’s Yuri Lynk initiated coverage of Shawcor Ltd. (SCL-T) with a “buy” rating and $13.50 target. The average is $12.36.
“We see considerable upside potential in Shawcor shares as management looks to divest the cyclical oilfield business to focus on its growing infrastructure and industrial solutions that leverage the company’s materials technology heritage,” he said. “The pro forma company would derive nearly three-quarters of its revenue from diversified end-markets that are less cyclical with higher full-cycle margins and attractive growth profiles. To reflect this wholesale change in strategy, management is seeking approval to change the company’s name to Mattr.
“Proceeds from the oilfield business sale, which we estimate could range between $130 million and $240 million, would materially reduce Shawcor’s Q2/2022 net debt position of $163 million. This would boost the company’s total liquidity of $383 million, positioning it to enhance its growth profile via organic and inorganic investments while also being shareholder friendly. As such, we think Shawcor looks inexpensive at 3.3x 2023E EBITDA. Comparable companies trade at 8 times. On our 2023 and 2024 FCF/share estimates, Shawcor yields 23 per cent and 20 per cent, respectively. We derive our target using a sum-of-the-parts approach for a blended multiple of 5.0 times applied to our 2024E EBITDA less our Q4/2023 net debt estimate.”
* Wolfe Research’s Myles Walton initiated coverage of Bombardier Inc. (BBD.B-T) with an “outperform” rating and $38 target. The average target on the Street is $50.54.
* Scotia Capital’s Michael Doumet lowered his AutoCanada Inc. (ACQ-T) target to $37.50 from $40, below the $49.52 average, with a “sector outperform” rating.
“To us, ACQ remains undervalued and has a FCF profile and B/S supportive of shareholder friendly capital allocation,” said Mr. Doumet. “While the recent KMX-US miss put a spotlight on weakening used vehicle demand amid a more challenged consumer backdrop, it is not a direct read-through for the franchise dealers. We remain confident that ACQ can hit Street estimates for 2H22, despite higher floorplan financing costs.
“While the market remains focused on the ‘over-earning’ dynamic for ACQ, we continue to believe there’s an underappreciation for its earnings power (i.e. it trades at a 50-per-cent discount on EV/Sales vs. US peers because it is not ‘over-earning’ to the same extent). Furthermore, its current enterprise value implies a value of $11 million per franchise dealership (assuming no value for its collision and used digital business) – that is 30 per cent below its historical average and the price paid for its recent acquisitions.”
* CIBC World Markets’ Anita Soni cut her targets for Barrick Gold Corp. (GOLD-N/ABX-T, “outperformer”) to US$26 from US$27 and Agnico Eagle Mines Ltd. (AEM-N/AEM-T, “outperformer”) to US$65 from US$67, while she raised his Kinross Gold Corp. (KGC-N/K-T, “neutral”) target to US$5 from US$4.75. The averages on the Street are US$22.90, US$63.01 and US$5.88, respectively.
“Well, that escalated quickly; from ‘peak’ to below mid-cycle in ~5 quarters for most commodity chemicals,” he said. “Accelerated declines in Europe, weakening consumer, rising rates + FX, energy inflation, and increasing availability/competitiveness of imports have driven roughly a dozen negative preannouncements in the space over the past month. We are 8 per cent below 3Q consensus EPS for our coverage (biggest gap on polyethylene names), and the end-of-year trajectory leads us to being 10 per cent below FY’23 consensus EPS for our coverage.”
“All that said, we think most of our stocks already reflect that reality: our coverage underperformed the SPY by 11 per cent in 3Q, a number of our names now price in a deep trough, and investor sentiment is mostly bearish. Even for the optimistic, there is general unwillingness to buy into a likely double-digit percentage cut to NTM numbers, which leads to our hope for 3Q earnings serving as a clearing event for buyers to follow behind, instead of an elongated drift lower of forward projections.”
With a file from Bloomberg