Inside the Market’s roundup of some of today’s key analyst actions
In reaction to a 7.1-per-cent jump in share price on Monday following the disclosure of an unsolicited acquisition proposal from a third party in July, Industrial Alliance Securities analyst Elias Foscolos downgraded his rating for Badger Daylighting Ltd. (BAD-T).
The market reacted positively to news of the previously undisclosed offer, which came with the resignation of David Calnan from the board of directors. Badger revealed a disagreement over the handling of the proposal was the key reason for Mr. Calnan’s departure.
“Upon receiving the proposal, the Board conducted a three-month review and unanimously came to the conclusion that the proposed consideration was insufficient to warrant continued discussion,” said Mr. Foscolos. “David Calnan, who is a major shareholder in the company with 414,000 shares, outlines in his letter that he believes the proposal was attractive enough to either present to the shareholders or engage in a market check to see if the terms of the proposal could have been improved.
“The key takeaway from the release for the market was the fact that Badger had received an unsolicited offer in July. This tells shareholders what we already believed, that Badger is capable of delivering positive excess returns to shareholders and is worth owning.”
Mr. Foscolos emphasized that the board’s dismissal of the offer points to management’s confidence in the company’s current “strategic direction of increasing value to shareholders through organic growth of its hydrovac business, which has been successful so far as shown by strong year-to-date sector outperformance.”
However, due to the large appreciation in price, Mr. Foscolos moved Badger to “hold” from “buy” with an unchanged target price of $39. The average target on the Street is currently $36.25, according to Bloomberg data.
Despite a lukewarm reaction from the Street, the fourth quarter was “good” for Canadian banks, said Desjardins Securities analyst Doug Young.
“Cash EPS increased 11 per cent year-over-year on average versus our 9-per-cent estimate (consensus 10 per cent),” said Mr. Young in a research report released late Monday. “Organic loan growth has slowed; however, this was offset by good expense trends, benign credit conditions, increases in NIMs on the back of central bank rate hikes and a pickup (albeit marginal) in stock buyback activity. Furthermore, CET1 ratios remain at comfortable levels, with cushions to withstand changes coming in 1Q FY19 in relation to counterparty credit RWA.
“However, the market doesn’t care. We often hear: ‘good quarter, but what about next year?’ Big 6 bank stocks declined by 1.5 per cent on average during the reporting period and underperformed the market. To be fair, there are other bigger-picture issues weighing on markets right now, including a stand-off between the U.S. and China, which Canada has landed in the middle of. But putting that aside, we are arguably closer to the tail end of an economic cycle, and after years of benign credit trends, losses could start to gravitate higher—and as this occurs, we could see more PCL volatility under IFRS 9.”
Mr. Young lowered his target prices for the sector by an average of 3 per cent. His changes were:
Toronto-Dominion Bank (TD-T, “buy”) to $82 from $84. Average: $84.08.
Royal Bank of Canada (RY-T, “buy”) to $108 from $109. Average: $110.41.
Bank of Nova Scotia (BNS-T, “buy”) to $83 from $85. Average: $82.38.
Canadian Imperial Bank of Commerce (CM-T, “buy”) to $125 from $133. Average: $128.40.
Canadian Western Bank (CWB-T, “hold”) to $35 from $37. Average: $32.41.
Bank of Montreal (BMO-T, “hold”) to $104 from $108. Average: $109.66.
National Bank of Canada (NA-T, “hold”) to $62 from $64. Average: $66.50.
Laurentian Bank of Canada (LB-T, “hold”) to $43 from $44. Average: $44.11.
Mr. Young also moved TD Bank to No. 1 in his pecking order. He had previously ranked it as his No. 2 bank.
Royal Bank moved to No. 2 from No. 4, while CIBC, previously his favoured choice, fell to No. 4.
“Going into FY19, we are favouring size and quality over valuation,” he said. “We like TD’s scale, high-quality franchises, higher relative exposure to U.S. markets, higher CET1 ratio vs peers and lower relative exposure to capital markets.”
Pfizer Inc.’s (PFE-N) outperformance thus far in 2018 led JPMorgan analyst Chris Schott to lower his rating for its stock to “neutral” from “outperform.”
The New York-based pharmaceutical corporation has jumped 23 per cent year-to-date, versus an 11-per-cent increase in the S&P 500 Pharma index and a 1.3-per-cent decline in the S&P 500 as a whole.
Though he sees further upside stemming from additional pipeline successes and positive new launch momentum, Mr. Schott expects both to come no earlier than 2020.
"We clearly have seen a positive shift in Pfizer's narrative, which is now focused on the re-acceleration of the company's top and bottom line growth beyond 2020," the analyst said.
Mr. Schott maintained a US$46 target for its stock, which exceeds the consensus of US$45.09.
“With the company now trading in line with peers and the broader market, we see this improved core story as better reflected in valuation," he said.
Following recent meetings with its management, Citi analyst Michael Rollins raised his rating for AT&T Inc. (T-N) to “buy” from “neutral,” believing a lower multiple and higher financial estimates has brought a buying opportunity.
“The company outlined a balanced perspective surrounding the opportunities & challenges facing the firm as a number of its operating segments continue to work through business model transitions,” said Mr. Rollins. “Wireless commentary was encouraging for service revenue growth to continue into 2019. The wireline business segment has restructured its sales strategy, while taking a more constructive view on the medium-term pricing environment. Management outlined the path for the entertainment group to manage financial performance for at least the next 12-months. We still would like to see better PF revenue growth from its asset portfolio, while we believe the opportunity for solid C4Q results and to reach its 2019 outlook provide potentially positive catalysts for the stock to trade higher.”
His target for AT&T shares remains US$34, which sits below the average of US$35.11.
“Our upgrade of AT&T incorporates a more positive take on the wireless operating environment as we expect the measured promotional environment to continue for at least another 6-9 months,” said Mr. Rollins. “Meanwhile, valuation multiples don’t seem to fully reflect better wireless sector financial performance. Within our large-cap telecom services, we still rank T-Mobile US Inc. as our top-ranked pick with Buy rating, followed by AT&T as our second-ranked pick, and then followed by Buy-rated Verizon. We expect AT&T to deliver better EPS in C4Q largely from the combination of less seasonal iPhone-launch dilution (as it was partly pulled into C3Q) and amortization of certain subscriber acquisition costs (per ASC-606).”
2019 is likely to be a transition year for Principal Financial Group Inc. (PFG-Q), according to RBC Dominion Securities analyst Mark Dwelle, who downgraded the Iowa-based global financial investment management and insurance company to “sector perform” from “outperform” based on lower-than-anticipated guidance and a “more challenging market for asset flows and portfolio valuations.”
“We appreciate that shares have pulled back significantly over the course of 2018,” said Mr. Dwelle. “Our view isn't valuation driven. Indeed longer-term investors should find the current valuation somewhat attractive. Our rating change reflects near-term earnings growth pressures and our preference for focusing on other ideas in the life insurance space which we view as more timely.”
After lowering his 2019 and 2020 earnings per share estimates to US$5.80 and US$6.35 from US$6.10 and US$6.50, respectively, Mr. Dwelle dropped his target price to US$49 from US$62. The average is now US$56.83.
In a separate note, Mr. Dwelle dropped his rating for The Travelers Companies Inc. (TRV-N) to “sector perform” from “outperform,” believing margin improvement remains a headwind.
“We expect Travelers to increasingly be pressured by weaker-than-anticipated pricing, a slower economy, and adverse loss trends in economically sensitive lines like workers' compensation,” he said. “Catastrophe and non-cat weather losses have also been elevated over the past two years and we think that has weighed somewhat on TRV's valuation.”
Pointing to higher catastrophe losses stemming from the California wildfires as well as Hurricane Michael, he dropped his fourth-quarter EPS projection to US$1.75 from US$3.50.
Mr. Dwelle’s target for the New York-based insurance giant is now US$133, falling from US$143 and lower than the consensus of US$137.50.
“While we continue to view TRV as a well-run insurer with a strong market position, we no longer anticipate significant multiple expansion and prefer other ideas on a relative basis,” he said.
In other analyst actions:
Roth Capital Partners analyst Joseph Reagor initiated coverage of Endeavour Silver Corp. (EDR-T) with a “buy” rating and $2.50 target. The average target is now $4.07.