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

Analysts at Raymond James expected gold and silver producers to report stable quarter-over-quarter margins in the upcoming earnings season, seeing average prices increase just 0.6 per cent and 2.1 per cent, respectively.

“We expect stronger sequential operating results from a number of producers including AEM, DGC, GOLD, K, NEM, OGC and YRI to drive stronger cash flow and earnings results,” said Brian MacArthur and Farooq Hamed in a research note released Tuesday.

“We have adjusted our gold and silver price forecasts to reflect continued strength for the precious metals coming from an expectation that real interest rates will likely persist in a low or negative territory supporting continued demand strength. We have increased our 2021/22 gold forecasts and revised our silver forecasts to maintain a flat gold:silver ratio, while leaving our long-term gold and silver price forecasts unchanged.”

Citing recent price appreciation, Mr. MacArthur lowered his rating for Sandstorm Gold Ltd. (SAND-N, SSL-T) to “market perform” from “outperform” with a US$7 target. The average target on the Street is US$7.88, according to Bloomberg data.

The analysts also made the following target changes:

Agnico Eagle Mines Ltd. (AEM-N, AEM-T, “outperform”) to US$75 from US$74. Average: US$69.20.

Coeur Mining Inc. (CDE-N, “market perform”) to US$6 from US$6.25. Average: US$7.24.

Franco-Nevada Corp. (FNV-N, FNV-T, “outperform”) to US$114 from US$108. Average: US$107.85.

Royal Gold Inc. (RGLD-Q, “market perform”) to US$120 from US$122. Average: US$119.31.


Restaurant Brands International Inc. (QSR-N, QSR-T) shares are poised to “start working again,” according to Deutsche Bank analyst Brian Mullan.

Seeing “multiple ways to win over the next 12 months," he raised his rating to “buy” from “hold" following a decline of almost 20 per cent from August highs.

Though he reduced his same-store estimates for both Tim Hortons and Burger King, Mr. Mullan hiked his expectations for Popeye’s performance south of the border.

He maintained a US$71 target, which falls short of the US$77.17 consensus.


Brookfield Business Partners L.P. (BBU-N, BBU.UN-T) offers investors exposure to an “attractive long-term principal investing story” driven by its “strong” investment track record, according to RBC Dominion Securities analyst Geoffrey Kwan.

Ahead of the release of its fourth-quarter 2019 results on Feb. 6, he raised his rating for its stock to "outperform" from "sector perform."

“We believe BBU can deliver mid-teen NAV [net asset value] growth and, with the units now trading at a 4-per-cent discount to NAV, we view BBU as attractively valued,” he said.

“One potential development in 2020 could be if BBU follows BAM siblings Brookfield Infrastructure Partners and Brookfield Renewable Partners by announcing plans to create an exchange corporation. This implies creating a Canadian corporation existing alongside BBU with BBU distributing a certain number of shares in the exchange corporation on a tax-free basis, with the shares being economically equivalent to and having the ability to be exchanged into BBU’s units. This transaction would have no impact on the underlying businesses, but would be undertaken to potentially attract a wider shareholder base as we think certain investors don’t want to own LP units for various reasons.”

Mr. Kwan increased his target for Brookfield to US$51 from US$47. The average on the Street is currently US$46.80.

“The increased price target reflects incorporating recently completed acquisitions (Genworth MI Canada); a slightly higher valuation multiple (owing to increased valuation multiples for certain peers of BBU investments); and the rolling forward of our valuation,” he said.


Citing its recent performance and a limited upside to earnings, Citi analyst Keith Horowitz lowered his rating for Morgan Stanley (MS-N) in the wake of last week’s release of “solid” fourth-quarter results.

Calling the stock as fairly valued and not seeing enough upside to justify a Buy rating, he moved it to "neutral" from "buy."

"The stock reacted very positively to the return targets outlined in the strategic update with the stock outperforming the BKX by over 600 basis points on earnings day," said Mr. Horowitz. "However, consensus appears to have responded, raising their numbers, and our 2020 EPS estimate now falls out roughly in-line with the Street. We still favor the brokers over the traditional banks given their relatively low exposure to net interest revenue pressures and credit risk."

Mr. Horowitz said the firm's two-year objective of 13-15-per-cent return on return on tangible equity and 28-20-per-cent wealth management pretax margin looks "achievable" and fell in line with his 2021 projection of 14 per cent and 29 per cent, respectively.

“Longer term, we see a path to improving returns with a wealth management pretax margin over 30 per cent and ROTEs in the 15-17 per cent, embedded in our target price,” he said. “While we think investors responded favorably to the new targets, we were already there … so not much is changing in our forecast.”

Mr. Horowitz raised his target price for Morgan Stanley shares to US$60 from US$58. The average on the Street is US$61.28.


In a separate note, Mr. Horowitz raised his rating BNY Mellon Corp. (BK-N) to “buy” from “neutral,” seeing the reaction of its stock following the release of “soft” fourth-quarter results as creating an “attractive” entry point for investors.

"We think BK’s underperformance since earnings is overdone given less than 5-per-cent decline in estimates on higher expenses," he said. "We think 2020 will be the low point on pre-tax margin and operative leverage, with 100 basis points of positive operating leverage in 2021 and more in 2022. With fundamentals likely to improve from here, and the highest cost of equity in the group, we see an attractive entry point to a very well-managed franchise with the ability to sustainably earn 20-per-cent-plus returns. Additionally, BK has excess capital and thus can benefit from the recent pullback in the shares through buybacks."

After lowering his 2020 and 2021 financial projections due largely to higher expenses, Mr. Horowitz reduced his target to US$53 from US$55. The average is currently US$53.17.

“Admittedly our upgrade is largely a valuation call,” he said. “We would expect the cost of equity to decline over time to better reflect, what we view as a high quality franchise with sustainable 20-per-cent-plus returns. As pre-tax margins and core PTPP growth stabilize in 2H20, we think the market will eventually look past near-term challenges, as NII headwinds abate in the second half of the year, on decent performance in many of their core businesses, and the possibility of upside to expenses estimates, particularly as efficiency saves start showing through. In addition, we think clarity around the final CEO would remove one of the overhangs of the stock; as we wrote when [Todd] Gibbons was originally appointed interim CEO, we think he is a very good choice.”

Elsewhere, Credit Suisse analyst Susan Roth Katzke raised the stock to “outperform” from “neutral” with a US$54 target (unchanged).

Ms. Katzke said: “Best we can tell, the selloff tied to dissatisfaction with the forward guide, including investment spending without the promise of short term positive operating leverage. Reality is, our 2020 estimate never anticipated positive operating leverage. If this year’s investment spending supports sustainable pretax margins and modest organic revenue growth it will be money well spent.”


RBC Dominion Securities analyst Mark Mihaljevic downgraded Coeur Mining Inc. (CDE-N) based on ongoing operational challenges at its Silvertip mine in British Columbia as well as weaker results at Rochester mine in Nevada and the expectation of an imminent rise in capital spending.

“We also find shares to be fairly valued after outpacing peers over the past year, even after the recent pullback,” said Mr. Mihaljevic, moving the Chicago-based company to “sector perform” from “outperform.”

“We expect 2019 to have been a trough year for Coeur’s silver and gold production as well as a peak year for costs. We expect gains into 2020 and 2021 from (1) the benefit of HPGR and higher silver grades at Rochester, (2) ongoing ramp-up of Silvertip, and (3) rebounds at Palmarejo and Wharf. That being said, we believe the company still has significant work ahead of it to demonstrate that it can achieve these targets.”

The analyst lowered his target to US$6 from US$7. The average is US$7.24.

“While shares have materially underperformed peers to start 2020, shares have still outpaced the Silver Miners Index (SIL) over the past 12 months (up 31 per cent vs. up 24 per cent),” he said. “We estimate that shares are trading at a 10-per-cent premium to Silver/Intermediate peers on P/NAV and EV/EBITDA. Given ongoing operational challenges and increasing capital expenditures, we do not believe the current valuation is sufficiently compelling.”


After refreshing his financial model to reflect the sale of $1-billion sale of MacDonald, Dettwiler and Associates Inc. as well as recent debt financing and real estate sale-and-lease-back, Canaccord Genuity analyst Doug Taylor hiked his target price for shares of Maxar Technologies Ltd. (MAXR-N, MAXR-T).

“The transactions have the effect of significantly reducing near-term leverage and liquidity concerns; this has produced a sharp re-rating of the multiple and valuation of the equity component of the capital structure,” he said. “While the pro-forma balance sheet is significantly improved, hiving off a solid cash flow business and increasing the effective interest rate will constrain the projected re-inflation of operating and free cash flow which we think is critical to improving sentiment on the name further.”

Keeping a “hold” rating “pending better visibility on projected free cash flow in 2021 and beyond," Mr. Taylor raised his target to US$22 from US$11. The average is US$18.34.

“The swings in the equity valuation are amplified by the significant component of debt in the capital structure,” he said.


People Corp. (PEO-X) is a “growth story with defensive attributes,” said Desjardins Securities analyst Gary Ho.

“PEO reported 1Q FY20 results which were slightly below our estimates; however, organic revenue growth remains strong (up 8.3 per cent) and we expect lower AIR costs in 2Q,” said Mr. Ho in a research note. “We maintain our positive thesis given PEO’s defensive attributes, secular industry tailwinds and a track record of sustained organic revenue growth, supplemented by a healthy M&A pipeline.”

Maintaining a “buy” rating, he increased his target for shares of the Winnipeg-based management consulting company to $12 from $11.25. The average is $11.83.

“Our investment thesis is predicated on the following: (1) favourable industry tailwinds have been providing stable organic growth; (2) PEO has a proven acquisition history and if excess capital is put to work, this could provide upside to our target; (3) its TPA platform presents a unique value proposition; and (4) over the medium to long term, PEO is primed to be a takeout candidate," he said.

Elsewhere, Canaccord Genuity’s Scott Chan increased his target to $11.50 from $11 with a “buy” rating (unchanged).

Maintaining a “buy” rating, he increased his target for shares of the Winnipeg-based management consulting company to $12 from $11.25. The average is .eline remains full).”


Valens Groworks Corp. (VLNS-X) is “built to lead Cannabis 2.0,” according to M Partners analyst Paul Piotrowski.

He initiated coverage of the Kelowna-based cannabinoid company with a “buy” rating.

“Valens has several extraction and white label agreements in place, providing clear revenue and cash flow visibility for 2020," he said. "With 11 extraction and 11 white label agreements comprising over 240,000 kg in contracted demand, near term forecasts are de-risked. Contracted demand is recurring and diversified, with a customer base that includes Shoppers Drug Mart, Iconic Brewing Co., BRNT Ltd. and several large-cap LPs. Even under the assumption that VLNS’s entire contracted demand is for pure toll extraction services, the Company is set for $144-million in revenue in 2020 ($0.60 per gram tolling fee). Though as volumes have been shifting to higher revenue white label services, we anticipate a top-line of $160.8M in 2020.

“VLNS runs a very high margin business model and is one of the few profitable cannabis companies. Valens generated gross margin of 38 per cent in Q1/19, 58 per cent in Q2/19 and 78per cent in Q3/19. Last quarter, the Company posted a 59-per-cent EBITDA margin, net income of $5.9-million and FCF of $3.0-million. Toll extraction services currently remain a high margin business and while margin compression is anticipated, VLNS’s transition towards the more defensible white labeling is well underway.”

Mr. Piotrowski target of $7.80. The average on the Street is $8.56.

“Valens continues to trade at a discount to its peers, while in our view being the best equipped to succeed in Cannabis 2.0,” the analyst said. “Valens trades at 6.2 times 2020 EBITDA vs. peers at 16.5 times 2020 EBITDA. We believe the discount is unwarranted as Valens has consistently reported strong revenue growth and margins and is the only cannabis company in Canada generating free cash flow. As Valens continues to report strong quarters, shares should rerate closer to its peers.”


In other analyst actions:

* Cormark Securities initiated coverage of Perseus Mining Ltd. (PRU-T) with a “buy” rating and $1.15 target, exceeding the 94-cent average.

* Wells Fargo Securities analyst Jim Birchenough raised Imv Inc. (IMV-Q, IMV-T) to “overweight” from “equal-weight” and increased his target to US$6 from US$3. The average is US$8.40.

* Ahead of the Jan. 29 release of its quarterly results, RBC Dominion Securities analyst Alex Zukin increased his target price for shares of Microsoft Corp. (MSFT-Q) to US$180 from US$163 with an “outperform” rating. The average is currently US$172.06.

Mr. Zukin said: “Our conversations lead us to believe in another strong quarter of Azure demand and a potential resurgence of Dynamics with the potential for chip supply issues to slightly dampen EPS outperformance.”

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