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Inside the Market’s roundup of some of today’s key analyst actions

RBC Dominion Securities analyst Walter Spracklin declared Canadian National Railway Co. (CNR-T, CNI-N) his “winner” for the third quarter in the North American rail sector, calling the direction of investor sentiment toward it “positive.”

“CN had overall a very strong Q3 report,” he said. “CNs EPS growth (at 40 per cent) far outpaced peers (ranged 15-25 per cent) and earnings were notably above expectations for the quarter. CN also raised full year EPS guidance to 25 per cent (from up 15 per cent to 20 per cent); resulting in CN having the highest share price move following the Q3 report. Key is that recent operating performance sets the stage into 2023 and that significant growth in bulk (e.g. Grain) and the ability to backfill potentially weak consumer volumes with other commodities (e.g. Petroleum) insulate the company from a potential slowdown.”

In a report released Tuesday, Mr. Spracklin said Canadian rails have better growth and earnings momentum than their U.S. peers, a trend he expects to continue in 2023.

“Q3 results in our view highlighted the meaningfully different operating environments for the Canadian and U.S. rails,” he said. “In Canada, we view the supply chain as more fluid, which is reflected in our Q4 O/R [operating ratio] estimates for the Class 1′s, with the U.S. rails expected to come in between 58 per cent and 59 per cent versus CN at 57.4 per cent and CP at 55 per cent. Key is that we see this as setting the stage for solid operating performance into 2023. In addition, we view the Canadian rails as less exposed to a macro slowdown reflecting strong Bulk franchises. We point to a Canadian Grain crop expected to be up 36 per cent year-over-year, robust Potash demand and strategic opportunities in Intermodal on the East Coast, each representing a solid growth opportunity less exposed to GDP fluctuations next year in our view. That said, the market is awarding the Canadian rails accordingly; with the Canadian rails trading at their largest premium versus the U.S. rails in almost 10 years.”

He maintained Canadian Pacific Railway Ltd. (CP-T, CP-N) as the No. 1 stock in his pecking order, keeping an “outperform” rating and $115 target. The average on the Street is $111.26.

“Q3 results were in line, but key from the call was the upbeat tone and strong guidance into Q4,” said Mr. Spracklin. “Supported by strong bulk trends and strategic wins, mgmt’s implied volume guidance for Q4 is more than 15 per cent, with Q4 O/R guidance equally impressive at 55 per cent. While we believe this sets CP standalone up well into next year, we expect sentiment in the shares to be driven by KCS approval and further color / initial progress on synergy targets.”

CN is currently Mr. Spracklin’s No. 3 stock, behind CP and CSX Corp. (CSXQ-T). He has a “sector perform” rating and $161 target. The average is $161.21.

“CNR’s results highlighted in our view that CN is well positioned ahead of a recessionary slow-down; benefiting from significant growth in bulk (e.g. Grain) and the ability to backfill weak consumer volumes with other commodities (e.g. Petroleum),” he said. “Moreover, management increased guidance for EPS growth to 25 per cent, from 15-20 per cent, a key positive from the quarter that may end up being conservative. NSC’s results were also well received, with the company delivering solid results relative to expectations from an operational standpoint.”

The analyst made a pair of rating changes on Tuesday:

* He raised Norfolk Southern Corp. (NSC-N) to “sector perform” from “underperform” with a US$237 target, up from US$221. The average is US$241.42.

“We are upgrading NSC today due to solid operating trends (relative to expectations) exiting Q3,” he said. “Combined with a strong pricing environment, we believe the stage is set for EPS growth in the medium term more in line with US peers. And given that the shares are trading toward the bottom of their relative range, we expect the market to reflect in additional upside for NSC going forward.”

* He lowered Union Pacific Corp. (UNP-N) to “underperform” from “sector perform” with a US$187 target, down from US$200. The average is US$215.

“We are downgrading UNP today due to weak operating performance relative to expectations,” he said. “The company has cut its O/R guidance each quarter this year and performance metrics have lagged those reported by peers, with trip plan compliance relatively flat q/ q. We note that persistent network issues are also driving volume underperformance versus expectations. Our view is that network issues will cause EPS growth to lag peers in the medium-term, and with valuation elevated versus CSX and NSC, we see downside risk to relative share price performance”


In response to continued supply chain disruptions in the aerospace industry, Desjardins Securities analyst Benoit Poirier is taking “a more conservative approach” toward CAE Inc.’s (CAE-T) second-quarter 2023 results.

In a research note released Tuesday, he lowered his estimates for the Montreal-based flight simulator manufacturer ahead of its Nov. 10 earnings release.

“Supply chain cost overruns for Boeing’s fixed-price defence programs and issues at Montreal-based aerospace manufacturers provide a read-through for CAE’s upcoming results,” Mr. Poirier said. “CAE could face continued pressure in its defence business as costs mount for other legacy programs.”

Last week, Boeing Co. (BA-N) said its quarterly results were hurt by losses on fixed-price defence development programs.

“The company lost US$2.8-billion in the quarter, driven by higher estimated manufacturing and supply chain costs, as well as technical challenges,” he said. “It is clear that fixed-price contracts are causing pain for many players in the aerospace industry, as inflation and the labour market are in a much different place than just 24 months ago.”

Mr. Poirier also pointed to a late September Reuters report that two Montreal-based aerospace suppliers, Mitchell Aerospace and Leesta Industries, are “wrestling with delays, quality problems, supply chain issues and a lack of workers.”

Given those concerns, he’s now projecting quarterly revenue of $959-million and adjusted earnings per share of 18 cents. His full-year estimates for fiscal 2023 and 2024 also declined.

That led him to cut his target for CAE shares by $1 to $35, reiterating a “buy” recommendation. The current average is $32.92.

Although we are lowering our expectations, our long-term thesis still holds as we continue to believe that CAE’s recent share price weakness offers a decent buying opportunity for long-term investors,” he said.


While its third-quarter results modestly missed expectations, Canaccord Genuity analyst Matthew Lee continued to applaud Cargojet Inc.’s (CJT-T) “defensive qualities,” emphasizing its “balance sheet flexibility, well managed capital spending, and stable growth trajectory in the medium term.”

Shares of the Mississauga-based company rose 2.2 per cent on Monday following the premarket earnings release, which included revenue of $232.7-million and EBITDA of $82.1-million. Both fell narrowly lower than the Street’s expectations ($244.6-million and $84.7-million, respectively).

“Our main takeaway was management’s commentary around its F23 domestic outlook and the improved clarity on Cargojet’s ability to defer or cancel aircraft if needed,” said Mr. Lee. “On the former, management noted its expectation for ‘high single-digit or low double-digit’ domestic growth in F23, which was far above our 2.5-per-cent estimate. On the latter, the firm has updated its deferred capex expectations, now forecasting the ability to cancel or defer upwards of $300-million in future aircraft acquisitions.

“We believe the two data points, in combination, should assuage some investors’ concerns about CJT’s ability to scale down in an economic recession while providing evidence that the firm’s competitive position may allow it to ride out the storm.”

After “modestly” reducing his charter assumptions but increasing his domestic revenue estimate based on “stronger-than-expected performance this quarter and management’s expectation of mid-single-digit plus growth in F23,” Mr. Lee raised his target for Cargojet shares to $200 from $195 with a “buy” rating. The average is $201.18.

“We believe that the company’s positioning as a dedicated freighter, combined with its increasingly valuable B2C contracts, growing fleet, and virtual monopoly in overnight shipping, justify our target and multiple.” he said.

Elsewhere, others making changes include:

* RBC’s Walter Spracklin to $272 from $274 with an “outperform” rating.

“CJT had an inline Q3; maintained their constructive outlook on Q4 peak; and pointed to top line growth that is above expectations. And while we have now factored in a recession into our H1/23, we point to contractual revenue (in ACMI) that should provide support even in a recessionary scenario. Reiterate CJT as our top name in transportation,” he said.

* Scotia Capital’s Konark Gupta to $185 from $180 with a “sector outperform” rating.

“CJT reported continued strong growth in Q3, although results slightly missed due to weaker-than-expected revenue in lower-quality streams,” said Mr. Gupta. “Management is not witnessing any signs of a major slowdown, based on customer feedback and demand for aircraft. It expects a controlled peak season in Q4 and better-than-expected growth in Domestic and ACMI segments in 2023. In addition, the company has now deferred one B777 delivery due in 2026 by one year to reduce the commercial risk, while noting that it has flexibility to defer or cancel up to $300-million capex (double the amount disclosed at the investor day). We have slightly trimmed our Q4 expectations to reflect the Q3 trends and uncertainty in the adhoc charter business.”

* Acumen Capital’s Nick Corcoran to $220 from $240 with a “buy” rating.

“Despite potential macro headwinds, CJT remains well positioned with an industry leading position in the domestic air cargo market, expanding relationships with international freight carriers that are expected to drive international revenue growth well into the future, and a strong balance sheet to execute on the fleet plan,” he said.


Following better-than-anticipated third-quarter results and a raise to its 2022 guidance, National Bank Financial analyst Patrick Kenny sees Capital Power Corp.’s (CPX-T) “clean” balance sheet “gearing up” for its proposed Genesee carbon capture and sequestration (CCS) project in Alberta.

The Edmonton-based power producer announced in late June that it has partnered with Mitsubishi Heavy Industries Group and Kiewit Energy Group on a front-end engineering and design (FEED) study for the $2-billion project, advancing the commercial application of CCS technology at its Genesee Generating Station. A final investment decision is expecting by the middle of 2023.

“Following its Midland Cogen acquisition in Michigan, CPX is eyeing additional synergistic growth opportunities in Ontario,” said Mr. Kenny. “On the regulatory front, both Alberta and Ontario are reviewing the electricity performance standard, with expectations for drawing down from the current 0.37 t/MWh. Of note, CPX is largely protected in Ontario through contract provisions at its three facilities, while the company had previously anticipated a decline when assessing the economics for its $2-billion Genesee CCS project. That said, CPX continues to work with Mitsubishi & Kiewit as they conduct a FEED study for the proposed $2-billion CCS project. Lastly, CPX continues to await clarity regarding long-term carbon pricing (i.e., government-backed contract-for-differences) prior to making an FID in 2023.”

Before the bell on Monday, Capital Power reported third-quarter earnings before interest, taxes, depreciation and amortization (EBITDA) of $383-million, exceeding both Mr. Kenny’s $364-million estimate and the consensus projection on the Street of $356-million. The analyst said the beat reflected “stronger realized Alberta power pricing and asset optimization.”

Citing “outstanding performance across the fleet” thus far this year and a strong forward power price curve, it increased 2022 annual financial guidance for adjusted EBITDA to $1.3-billion to $1.34-billion (from $1.11-billion to $1.16-billion) and adjusted funds from operations to $770-million to $810-million (from $580-million to $630-million)

With the power price outlook for Alberta improving, Mr. Kenny increased his near-term estimates, leading him to raise his target for Capital Power shares by $1 to $49 with an “outperform” rating. The average on the Street is $51.

“We continue to highlight 15-per-cent valuation upside related to the potential CCS project at Genesee and a $5/MWh increase to our long-term Alberta power price assumption of $65/MWh, in line with 2024 forward prices of more than $70/MWh,” he said. “As such, we reiterate our Outperform rating with a 12.4-per-cent total return opportunity.”

Elsewhere, others making changes include:

* Desjardins Securities’ Brent Stadler raised his target to $56 from $55 with a “buy” rating.

“CPX reported another strong quarter,” he said. “All significant segments are generating solid results on the back of increased facility dispatches and higher pricing as natural gas assets continue to prove they are a critical fuel for grid reliability. CPX remains extremely well-positioned to continue to take advantage of an expected strong Alberta power market, which should provide a tailwind for future results. In light of the quarter, we have increased our estimates and bumped our target.”

* BMO’s Ben Pham to $52 from $55 with a “market perform” rating.

.”CPX shares initially underperformed power and utility peers likely due to new disclosure that its Alberta emissions expense will pressure 2022 results by $50-million (i.e., Q4/22 Street estimates likely moving lower by at least 10 per cent),” said Mr. Pham. “However, the shares ended up recovering with slight 20 bps outperformance as this optimization of unused inventory credits will incrementally benefit its 2023 results.”

* TD Securities’ John Mould to $56 from $57 with a “buy” rating.

“Capital Power’s financial results continue to benefit from a strong Alberta power pricing environment, resulting in the second consecutive increase in 2022 guidance. We view Capital Power as well-positioned to benefit from a robust power-pricing environment in Alberta. The company’s natural-gas repowering strategy for Genesee 1+2 (completion expected in 2024) is expected to produce the most efficient combined-cycle units in Canada. CPX is also working to complement its fleet with additional renewable power development projects in both Alberta and the U.S. We believe that these initiatives will support CPX’s annual dividend growth target of 6 per cent through 2025, further diversify its operations, and complement the company’s highquality asset portfolio in Alberta,” said Mr. Mould.


National Bank Financial analyst John Shao expects a “tough” third-quarter EBITDA result from Converge Technology Solutions Corp. (CTS-T), lowering his estimates based on a “temporary cost headwind related to the heightened M&A integration activities.”

“While FQ3 seemed to be a light quarter with only one M&A announcement – the Newcomp Analytics, we believed the Company had been busy integrating the previously announced deals, including TIG and GfdB IfmB & DEQSTER, which collectively accounted for 25 per cent of this year’s total deployed capital,” said Mr. Shao. “For Converge, the cost synergy has indeed been one of the primary considerations in its M&A play book – but in reality, we believe that synergy follows a “J-Curve” as the first couple of months will see the Company incur additional costs to retain key personnel to stabilize/strengthen the client relationship, after which it will start cutting the non-strategic or duplicate positions to realize the cost benefits. In our view, the past FQ3 is no exception when considering the scale of those targets. As such, we’re increasing our estimated FQ3 SG&A expense by $6-million, and in accordance with this move, reducing our FQ3 adj. EBITDA estimate by a similar amount.

“From a financial reporting perspective, we believe those additional costs were not part of the post-M&A restructuring and as such, would still be included in the adj. EBITDA calculation for FQ3. When it comes to how long this headwind would last, our view is that FQ4 could see a cost spillover which could potentially be offset by margin improvement as we head into a relatively quiet period of M&A activities.”

The analyst is now projecting adjusted EBITDA for the quarter of $34-million, down 15.5 per cent from his previous estimate of $40-million. His fourth-quarter forecast fell by 6.5 per cent to $52-million with his full-year expectation sliding 6.0 per cent to $154-million. He maintained a 2023 estimate of $230-million.

Though he continues to see the Toronto-based software-enabled IT and Cloud Solutions provider as “undervalued for its M&A prowess and organic growth potential,” Mr. Shao lowered his target to $10 to $12, reiterating an “outperform” recommendation. The average on the Street is $10.27.


In other analyst actions:

* BMO’s Rene Cartier initiated coverage of Arizona Metals Corp. (AMC-T) with an “outperform” rating and $6.50 target. The average is $8.50.

“Arizona Metals has opportunities for positive news flow as it progresses permitting, as new project resources and studies are released, and potentially as the project is developed. In our view, exploration success at Kay, and throughout the property, including the Central and Western targets, will support a sizeable VMS-style resource driving a low-capital intensity development project,” he said.

* Seeing it in the “early innings of a long-term growth and margin improvement story,” RBC Dominion Securities’ Sabahat Khan assumed coverage of ATS Automation Tooling Systems Inc. (ATA-T) with an “outperform” rating and $55 target. The average is $58.20.

“We believe the company is well positioned to deliver strong top-line growth and margin improvement, driven by its defensive/less cyclical end-market exposure and evolving (higher-margin) business mix,” he said. “We also expect the company to remain active on M&A, which would drive upside to our forecasts.”

* In a research report titled Greenhouse Advantage, Green Light For Growth, ATB Capital Markets’ Frederico Gomes initiated coverage of B.C.-based Village Farms International Inc. (VFF-Q) with an “outperform” rating and US$3.50 target, below the US$6.03 average.

“VFF entered the Canadian cannabis market in 2018 and, supported by years of cultivation experience, is now one of the lowest-cost LPs in the country, ranking fourth in market share,” he said. “Produce still accounts for over 55 per cent of total sales, but VFF is focused on growing its cannabis segment while maintaining optionality to convert produce greenhouses into cannabis (in Canada and the US). We believe VFF will remain one of the leading LPs in Canada due to its low-cost advantage and that it will gain market share as it expands its brand and product portfolio. In our view, the current valuation is attractive, as the market neglects the real option value of U.S. THC expansion and the value of the legacy produce business.”

* Raymond James’ Brad Sturges initiated coverage of Vancouver-based Parkit Enterprise Inc. (PXT-X) with a “market perform” rating and $1.10 target, below the $1.27 average.

“Parkit has been disciplined in its executed acquisition activity, generally buying industrial assets at attractive psf valuations,” he said. “However, we view Parkit as fairly valued at current levels until it further builds out the size and scale of its Canadian portfolio through additional executed acquisition activity that also reduces its above-average exposure to non-stabilized assets held within its identified near-term development pipeline. Given the small size of Parkit’s Canadian industrial facility platform, an accelerated pace of external acquisition growth that is funded on a financial leverage neutral basis of shorter duration, value-add Canadian industrial assets can have an outsized impact on potential AFFO/share accretion during Parkit’s very early growth phase.”

* CIBC World Markets’ Kevin Chiang cut his target for Airboss of America Corp. (BOS-T) to $18 from $22, below the $19.42 average, with an “outperformer” rating.

“BOS provided a disappointing Q3 update, with adj. earnings below expectations. It announced it would be taking a $57-million non-cash inventory write-down. The company’s share price is down 84 per cent year-to-date, reflecting the lack of major contract wins this year. The key for the stock remains its ability to convert on its bidding pipeline, which remains more than $1.5-billion. We remain optimistic the company will be awarded a more sizable contract over the next six to nine months, which keeps us at Outperformer,” said Mr. Chiang.

* Following Monday’s earnings release, CIBC’s Bryce Adams lowered his target for Capstone Copper Corp. (CS-T) to $5 from $5.50 with an “outperformer” rating. Other analysts making changes include: National Bank’s Shane Nagle to $4.50 from $4.75 with a “sector perform” rating, BMO’s Rene Cartier to $5 from $5.25 with an “outperform” rating, Scotia Capital’s Orest Wowkodaw to $4.75 from $5 with a “sector outperform” rating and Canaccord Genuity’s Dalton Baretto to $6 from $6.50 with a “buy” rating. The average is $5.80.

“CS released weaker-than-anticipated Q3/22 results due to higher negative PP adjustments,” said Mr. Wowkodaw. “However, 2022 guidance was reaffirmed and all of the company’s major growth initiatives remain on track. Overall, we view the update as mixed for the shares.

“We rate CS shares SO based on peer-leading Cu growth and leverage, several catalysts, and an attractive valuation.”

* RBC’s Sam Crittenden reduced his Champion Iron Ltd. (CIA-T) target by $1 to $7 with an “outperform” rating. The average is $6.69.

“Soft iron ore prices have helped keep the window open for investors to take part in the rerating we expect as the Bloom Lake Phase 2 ramps up, and we continue to like the shares at current levels. As Phase 2 continues to derisk we see a more compelling risk/reward trade off, even in a weaker iron ore market. Following FQ2 results we have revised our estimates, increasing opex and sustaining capex to reflect inflation which resulted in a reduction to our Price Target,” said Mr. Crittenden.

* Scotia’s Phil Hardie raised his Element Fleet Management Corp. (EFN-T) target to $20 from $17.50 with a “sector outperform” rating. The average is $20.67.

“Following a sell-off earlier in the year, EFN stock has rebounded 62 per cent from its low and is now up roughly 40 per cent year-to-date. A key investor quandary is what lies ahead,” said Mr. Hardie. “We expect further upside and remain positive on the stock.

“We believe Element Fleet has demonstrated its relative resilience through the pandemic and has successfully navigated various dislocations in credit markets. The next leg up for the stock is for a “sustainable growth thesis” to play out in the coming years. We expect mid-single-digit top-line growth combined with operating leverage to drive double-digit earnings growth. Strong free cash flow, benefits from a tax shield, and an evolution toward a more capital-light business model are likely to support the return of excess capital through dividend increases and regular share buybacks. We believe these buybacks could augment the underlying earnings growth and potentially support EPS growth in the low teens.”

* Raymond James’ Rahul Sarugaser raised his target for shares of Eupraxia Pharmaceuticals Inc. (EPRX-X) to $9 from $7, exceeding the $6.75 average, with an “outperform” rating.

* Raymond James’ Michael Shaw raised his Gibson Energy Inc. (GEI-T) target to $27, above the $25.43 average, from $26.50 with a “market perform” rating.

* Mr. Shaw also hiked his target for Imperial Oil Ltd. (IMO-T) to $75 from $70 with a “market perform” rating. The average is $75.41.

* Mizuho’s Christopher Parkinson lowered his Nutrien Ltd. (NTR-N, NTR-T) target to US$113 from US$124, remaining above the US$110.47 average, with a “neutral” rating.

* Raymond James’ Andrew Bradford moved his Precision Drilling Corp. (PD-T) target to $140 from $115, keeping a “strong buy” rating. The average is $140.30.

* BMO’s Stephen MacLeod cut his Premium Brands Holdings Corp. (PBH-T) target to $120, below the $127.50 average, from $138 with an “outperform” rating.

“We are lowering our Q3/22E estimates to reflect near-term inflationary and acquisition-related headwinds,” said Mr. MacLeod. “While market conditions are normalizing from the pandemic, pricing pass-through delays and freight-related inflation are likely to persist in the near term. Ultimately, we believe these issues are transitory and Premium Brands’ ongoing investments should lead to the company exceeding its 2023E revenue and EBITDA targets. The long-term outlook remains positive in light of PBH’s growth opportunities in protein, seafood, and sandwiches, both organic and acquisitions.”

* Guggenheim’s Gregory Francfort cut his Restaurant Brands International Inc. (QSR-N, QSR-T) target to US$58 from US$60 with a “hold” rating. The average is US$64.

* Prior to Friday’s release of its quarterly results, RBC’s Sabahat Khan cut his Sleep Country Canada Holdings Inc. (ZZZ-T) target to $28 from $34, below the $32.33 average, with a “sector perform” rating.

“We are revising our forecasts lower heading into Q3 reporting to reflect the weakening macro backdrop (including the moderation in housing activity/pricing),” he said. “The sizable top-line and earnings growth in Q3 2021 reflected the reopening of a significant number of stores in Q2 2021 (leading to a surge in sales in early Q3), which we believe will lead to a tougher comparable. Although management noted at Q2/22 reporting that the negative impact of the macro backdrop at that point was being felt primarily on lower price point items, we believe that the macro environment has weakened further since (e.g., the number of non-seasonally adjusted national home sales in Canada was down 32.2 per cent year-over-year and down 3.9 per cent month-over-month in September 2022, according to the Canadian Real Estate Association). We believe the weaker operating backdrop is likely to have a negative impact on demand for bigger ticket discretionary goods (e.g., mattresses) over the coming quarters. As such we are revising our forecasts (for the near-to-medium term) and valuation multiple to reflect this cautious view.”

* Stephens’ Jack Atkins lowered his TFI International Inc. (TFII-N, TFII-T) to US$120 from US$130, keeping an “overweight” recommendation. The average is US$117.36.

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