Tuesday’s analyst upgrades and downgrades

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

Citi analyst Christian Wetherbee’s outlook for North American railroad companies “remains muted” heading into first-quarter earnings season.

“We think the next move may be to get more constructive on U.S. rails, as volume performance between U.S. and Canada normalizes in 2Q-4Q, and we’re looking for a reason to get positive, but with volume decelerating in March and pointing to a challenging 2Q (likely on pace to miss consensus estimates), we don’t think it’s time to step in yet,” he said. “Carloads decelerated from January to February to March, and April is off to a slow start as intermodal remains under pressure and coal stockpiles are building. As such, we prefer to be tactical and think the set up for Norfolk Southern into earnings is skewed quite favorably as it’s possible the quarter proves to be a clearing event.”

In a research report released Tuesday, Mr. Wetherbee upgraded his models to account for a decline in first-quarter carloads, down 2.2 per cent from his previous projection, and a “sharp fall-off” in traffic, including year-over-year drops of 2.9 per cent in February and 6 per cent in March.

“We are adjusting our 1Q EPS estimates to reflect weaker volumes, partially offset by positive mix, and cost trends (including a favorable benefit from the lag impact of the fuel surcharge mechanism),” he said. “We’ve also generally tempered our 2Q and 2023 volume and earnings expectations to reflect weaker-than-typical March seasonality led by soft intermodal volumes.

“Our 1Q estimate changes are most pronounced for CSX and CP where we are changing our EPS estimates by 10 per cent and negative 4 per cent, respectively. We are now 10 per cent below consensus in 1Q for CP, 4 per cent below for NS, and 3 per cent below for UP. We are in line with consensus for CSX and 1 per cent above for CN.”

His EPS estimate for Canadian National Railway Co. (CNI-N, CNR-T) is now US$1.72, up from US$1.67 previously and 2 US cents higher than the Street’s expectation.

For Canadian Pacific Railway Ltd. (CP-N, CP-T), Mr. Wetherbee is estimating EPS of 85 US cents, down from 89 US cents and below the Street’s projection of 95 US cents.

“We are lowering our 2023 EPS estimates by 1 per cent on average with small tweaks to CP (down 3 per cent), NS (down 2.5 per cent), and UP (down slightly),” he said. “We remain below consensus (by 2 per cent on average) for the group in 2023 as we expect continued margin pressure for the U.S. rails related to headcount additions and volume weakness. CP is now the only rail that we expect to grow volume in 2023.”

Mr. Wetherbee maintained a US$139 target for CN shares with a “buy” rating. The average target on the Street is US$129.74, according to Refinitiv data.

“We expect the company’s currently solid volume ramp-up to stand out relative to the rest of the rails. In addition, we believe CN should perform well on a relative basis, as its guidance seems more achievable post management’s recent reset.”

His CP target is unchanged at US$89 also with a “buy” rating. The average is US$88.51.

“We are constructive on its continuing meaningful operational improvement, which we expect to drive year-over-year improvements in OR [operation ratio] in 2021-2023,” he said. “In addition, we expect a volume recovery and the realization of several actionable revenue catalysts to drive strong performance in 2022 and beyond.”

Mr. Wetherbee opened a “30-day positive catalyst watch” on shares of Norfolk Southern Corp. (NSC-N), while reducing his target to US$226 from US$273 with a “neutral” rating. The average is US$246.04.

“We’re cautiously positioned on UP heading into earnings given challenging volume trends and labor unrest at West Coast ports. Conversely, we see a favorable setup for NS and are neutral on other rails,” he said. “NS shares have declined 20 per cent since February 3rd materially underperforming CSX (down 7 per cent), UP (down 6 per cent) and the S&P 500 (down 1 per cent) over this time. Prior to the derailment in East Palestine, OH NS traded at 16.9 times 2024 EPS, a one turn premium to CSX (15.9 times), given its potential for OR improvement. NS’s current 2024 P/E multiple of 13.7 times has contracted 19 per cent since the accident and now trades at a more than one turn discount to CSX (14.8 times). Investors appear to be pricing in $400-million of additional ongoing costs related to the accident, which feels high. Accordingly, we see the potential for a relief rally as investors get a better sense of NS’s liabilities. While 1Q results will be very noisy and the company could incur up to $150-million of insurance-related costs, we expect NS’s multiple gap to narrow vs. CSX as its network fluidity and volumes relatively improve from current depressed levels.”

Elsewhere, Credit Suisse’s Ariel Rosa cut his targets for CN to US$126 from US$128 and CP to US$79 from US$84 with “neutral” recommendations for both.

“Given the East Palestine derailment in early February, we expect safety measures and the associated cost to the industry to be a focal point for 1Q earnings,” she said.. “We have said this risk is likely over-stated given that safety statistics show rail is actually a very safe mode of transportation, but this concern could remain an overhang for some time. With Canadian Pacific and KCS set to complete their merger this Friday, we also expect consideration on the competitive risk to other rails. Rail volumes ended 1Q23 down 3.3 per cent, with intermodal volumes hit hard (down 9.4 per cent), while all other categories were up 2.4 per cent. The valuation spread between US and Canadian rails continues to be too wide in our view (near decade-highs), informing our preference for US rails. CSX appears best positioned to deliver a solid 1Q23 beat in our view given strong improvement in its service metrics and conservative estimates.”

JP Morgan’s Brian Ossenbeck raised his targets for CN to $169 from $168 with a “neutral” rating and CP to $120 from $117 with an “overweight” rating.

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CIBC World Markets analyst Anita Soni upgraded a pair of trio stocks on Tuesday “given their weightings to high-quality assets and their leverage to gold prices.”

“With the gold price above $2,000/oz, M&A a hot topic, and inflation still a concern, we reviewed assets in our coverage universe for overall quality and relative cost positioning, for two opposing reasons. First and foremost, from an M&A perspective (and in general), high-quality assets never go out of style. Tier 1 and Tier 2 assets (depending on the owner’s size) are highly sought. Second, as gold prices rise, investors are on the hunt for companies that could rationalize assets and improve overall positioning. In this report, we provide cost curves for 2022 and costs flexed for life-ofmine (LOM) reserve grade. Overlaying cost data with production size and mine life

Her changes are:

* Centerra Gold Inc. (CG-T) to “outperformer” from “neutral” with a $12 target, up from $10.50. The average is $10.12.

* Kinross Gold Corp. (KGC-N, K-T) to “outperformer” from “neutral” with a US$6.50 target, up from US$4.75. The average is US$5.41.

* Newmont Corp. (NEM-N, NGT-T) to “outperformer” from “neutral” with a US$63 target, up from US$54. The average is US$56.79.

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Citing concerns about “surrounding near-term headwinds” for its business, Raymond James analyst Michael Glen lowered his rating for CCL Industries Inc. (CCL.B-T) to “market perform” from “outperform,” seeing a diminishing potential return to his target price.

“As we think about trends through 1H23, we would (re)iterate concerns we have surrounding CCL Label, which are specifically related to the volume declines that we have seen more recently out of the larger CPG companies / customers (i.e. Procter and Gamble, Unilever, Colgate-Palmolive) and coupled with a very abrupt change in the organic growth trend within Avery Dennison’s Label and Graphic Material segment,” he said. “As such, while CCL did indicate a ‘solid’ 1Q order picture for Label at the 4Q report, we do have some concern that results may underwhelm what appear to be elevated expectations heading into the earnings. Outside the CCL Label, expectations are that Innovia will have another challenging quarter in 1Q (destocking ongoing) and improve thereafter, Checkpoint more or less balanced and Avery showing a better result.

“All in all, thinking back to the communication given at 4Q22, the framing of the year was that 1Q will be a softer quarter, and we will see gradual improvement over the course of the year. Putting all of these variables together, while our forecast is unchanged with this update, we are at the low end of the range for consensus in 2023 (i.e. $3.49 vs. consensus $3.70) with progressively more difficult comps through 3Q23. As such, we believe investors should be more opportunistic / patient in selecting an entry price on the name versus accumulating a position ahead of the quarter.”

While he did point to several reasons for optimism, including potential benefits from new U.K. banknotes featuring the image of King Charles as well as “a more constructive M&A pipeline and more reasonable transaction multiples,” Mr. Glen maintained his target of $71 per share. The average is $74.70.

“We would also recognize there are a number of attractive defensive characteristics associated with CCL’s business (i.e. CPG end market focus), which provides an opportunity for less cyclical exposure in the Materials index. Investors often use the phrase ‘a good place to hide’ when thinking about the company’s positioning, index classification, and current macro uncertainty,” he said.

“Putting everything together, we see some puts and takes for the stock in the near-term. CCL remains a well-run company with strong track-record, but we continue to believe that the upcoming quarters for CCL will be challenging.”

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In response to the impact of a “steep” drop in gas prices on its free cash flow, Raymond James analyst Jeremy McCrea lowered Birchcliff Energy Ltd. (BIR-T) to “market perform” from “outperform” on Tuesday.

“Given the higher dividend obligation (that some debt is required to fund when including maintenance capex requirements), we believe that investors would likely stay sidelined until we see higher natural gas prices,” he said.

Mr. McCrea’s target for Birchcliff shares slid by $1 to $11. The average is $11.10.

The change coincided with an adjustment to the firm’s commodity price assumptions, which saw an increase to its 2023 and 2024 WTI projections (to US$78 and US$73 per barrel, respectively) and a “meaningful” reduction to its natural gas estimates.

That led to these target price changes:

• Advantage Energy Ltd. (AAV-T, “outperform”) to $11 from $12. The average is $12.85.
• Freehold Royalties Ltd. (FRU-T, “outperform”) to $20 from $21. Average: $20.11.
• Peyto Exploration & Development Corp. (PEY-T, “market perform”) to $15 from $17. Average: $16.84.
• Topaz Energy Corp. (TPZ-T, “strong buy”) to $26 from $28. Average: $27.80.
• Tourmaline Oil Corp. (TOU-T, “strong buy”) to $85 from $90. Average: $85.57.
• Vermilion Energy Inc. (VET-T, “outperform”) to $25 from $31. Average: $29.12.

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After weaker-than-anticipated first-quarter results, National Bank Financial analyst Dan Payne thinks Anaergia Inc. (ANRG-T) “remains an execution story, with a bias towards H2/23 & beyond, when we expect its embedded value profile to be better recognized and appreciated.”

Shares of the Burlington, Ont.-based clean-technology waste processor surged 9.6 per cent on Monday despite announcing revenue of $40.6-million, down 9 per cent from the previous quarter and below the Street’s expectation of $40.8-million. Adjusted EBITDA of a loss of $15.4-million also fell below the consensus projection (a loss of $3.8-million) as gross margins “materially contracted as a result of delayed revenue realization set against cost expansion through the period.”

“The primary driver of results remained its capital sales business, while corporate growth remains largely focused on executing the expansion of its BOO project slate, but which remains universally delayed,” said Mr. Payne. “First, its Rialto project continues to await feedstock ramp & associated monetization of credits (RIN/LCFS registered), to come with the enforcement of local ordinances (and installation of two additional OREX lines; Q2 & Q3), however that is expected to gradually occur through 2023. Second, three of six Italian BOO projects are onstream, with the residual three to come on through YE23. Each (Rialto & Italy) reflecting a delayed timeline relative to expectations.

“That said, management believes its previously stated guidance was heavily risked & conservative, and as a result, it remains unchanged (including its views towards liquidity & funding of projects; including on-going build-out of other North American projects). However, it is evaluating all strategic alternatives as it reassesses the performance and outlook of its flagship Rialto project (as it recently did with its Tonder project). All in, the ANRG story remains one of execution & validation, which remains meaningfully risked & long-dated, with limited near-term visibility to resolution of shareholder value.”

To reflect “a slower ramp, and lower plateau in 2024, with greater associated risk to execution, and ultimately discounted valuation on the potential outcome,” he lowered his target to $4 from $6, maintaining a “sector perform” recommendation. The average is $7.

Elsewhere, others making changes include:

* Scotia Capital’s Justin Strong to $4.75 from $7.25 with a “sector perform” rating.

“We expect 2023 to be a rebuilding year with respect to investor confidence in the company’s timelines for growth,” said Mr. Strong. “While we still believe ANRG has many positive attributes, we note the importance of near-term growth visibility. As such, in our view, the current investment thesis is more dependent on project execution than the industry fundamentals, which still appear strong.

“While we continue to believe the upside potential in ANRG shares remains significant, we feel compelled to reduce our one-year target.”

* BMO’s John Gibson to $3 from $7 with a “market perform” rating.

“ANRG’s Q4/22 results were below expectations, while its full-year 2022 results also missed previously released guidance,” said Mr. Gibson. “The company reiterated its 2023 financial outlook, although we are now sitting below management’s guidance as its Rioalto Bioenergy Facility (RBF) continues to experience delays. 2023 expectations hinged upon a full ramp in its RBF by year-end, although this is now expected to be delayed until 2024 at the earliest. Post quarter we are decreasing our target price.”

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While he sees “sunny days ahead for energy transition infrastructure,” National Bank Financial analyst Rupert Merer initiated coverage of Atlantica Sustainable Infrastructure PLC (AY-Q) with a “sector perform” recommendation, believing its stock has “baked-in a positive outcome” from its ongoing strategic review.

Atlantica is a London-based Sustainable infrastructure company with “well diversified” assets across Europe, Africa, South America and North America, including a district heating asset in Calgary.

In February, it launched a strategic review to evaluate potential strategic alternatives to “maximize shareholder value.” The move has been supported by its largest shareholder, Algonquin Power & Utilities Corp. (AQN-T), which holds a 42-per-cent stake.

“The review could lead to a sale of AY, although we believe could also end with the conclusion that the company should continue on its current path (with or without new partners),” said Mr. Merer.

While he touted its “strong” balance sheet and “long-term contracted stable cash flow with tail opportunity,” the analyst also pointed to a “relatively high pay-out.”

“AY plans to invest $300-million a year into energy transition infrastructure,” said Mr. Merer. “This could come from M&A, greenfield developments or expansions at its existing operating sites. Repowering opportunities could allow AY to expand its capacity at higher returns, given lower costs to develop brown-field sites. To fund this growth, AY has $445-million in liquidity at the corporate level and $540-million in cash at its operating subsidiaries. It is rapidly amortizing debt (more than $300-million this year), which should lead to refinancing opportunities and longer-term support for CAFD. However, AY’s payout ratio was 89 per cent last year and could see some headwinds from lower power prices.”

He set a target of US$31 per share. The average on the Street is US$33.18.

“With a 16-per-cent total return to target (including a 6.3-per-cent dividend), we are initiating coverage with a Sector Perform rating,” he said. “We believe there could be some additional upside on a takeover scenario, amounting to a further $2 to $3 per share based on our assessment of the potential for operating synergies. However, we do not believe a takeout scenario is a certainty.”

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In a research report released Tuesday titled From Prospecting to Prosperity, Eight Capital analysts Ralph Profiti and Puneet Singh predicted “moderate-to-severe” price spikes for copper over the next 3-5 years following nearly a decade of underinvestment in supply levels.

“Prices are well below the incentive price based on our analysis,” they said. “Unexpected positive demand shocks from China and emerging economies, continuing supply disruptions to existing mines, and a lack of adequate response to bring on new supply after 2026 support our thesis.

“We believe the copper mining industry is entering a prosperity-phase where prices are likely to surprise to the upside, established industry participants react slowly to build new capacity relative to previous cycles, established mining districts face tougher regulatory hurdles, and new entrants emerge during the early stages of a ‘company-making’ phase of the cycle. In our view, the next cycle is likely to drive margin upgrades, and encourage management and consensus estimates to reconsider long-term commodity assumptions that are currently too low to justify a reasonable risk-adjusted return of 20 per cent .. We could see an upside of 20-50 per cent in copper equities compared to current prices.”

Believing a transition to market deficits could come as early as 2025, the analysts see the potential for “significant upside” in equities.

“The intermediate group of copper producers trade at a 28-per-cent and 42-per-cent discount to the senior copper group on NTM and STM EV/EBITDA estimates, respectively,” he said. “We believe a multiple closer to 6.0-7.0 times is more realistic given higher long-term commodity assumptions, the lack of supply response beyond 2023, growing demand from China and energy-transition catalysts, and the high barriers to entry for new players amid structurally higher costs associated with building new capacity.”

The analyst named six stocks as their “top sector picks” moving forward. They are:

* Capstone Copper Corp. (CS-T, “buy”) with a $8.50 target. The average on the Street is $7.44.

Analysts: ““The recently announced combination with Mantos Copper transforms Capstone into a multi-asset, Americas-focused (Mexico, Arizona, Chile) growth story with high copper leverage, a long aggregate mine life, and major project optionality (Santo Domingo), making Capstone an ideal core holding for copper exposure.

* Foran Mining Corp. (FOM-X, “buy”) with a $5.25 target. Average: $4.29.

Analysts: “We believe Foran presents investors with a unique opportunity to capture an emerging VMS story with a premium-valuation warranted based on resource growth and discovery potential, scalability in the mine plan, strong financial partners to reduce execution risk, favorable jurisdiction (Saskatchewan), continuing high-grade intercepts within the McIlvenna Bay resource model, exploration prospectivity at satellite targets (Tesla), and emerging scarcity value. We remain confident in the potential for increases in total resources as the McIlvenna Bay and Tesla deposits remain open in all directions down-plunge.”

* Freeport McMoRan Inc. (FCX-N, “buy”) with a US$50 target. Average: US$45.83.

Analysts: “We remain constructive on Freeport’s strategic position within the copper peer group based on: (1) its strong balance sheet and liquidity; (2) its positive free cash flow generation at lower than consensus copper prices; (3) its technical success with the ramp-up of Grasberg underground; (4) its FY23 copper and gold sales growth of flat year-over-year and down 7 per cent year-over-year, respectively; and (5) the realization of optionality in the project pipeline.”

* Hudbay Minerals Inc. (HBM-T, “buy”) with an $11 target. Average: $9.39.

Analysts: “Hudbay is an established copper and gold producer, with 10-per-cent year-over-year growth in copper production and 30-per-cent year-over-year growth in gold production in 2023. Hudbay’s organic growth pipeline offers medium-to-long term copper production optionality through Copper World.

* Solaris Resources Inc. (SLS-T, “buy”) with a $23.50 target. Average: $19.58.

Analysts: “Long-term, we believe Warintza is ideally suited as an M&A target, offering exposure to high-grade, district-scale porphyry potential with access to necessary infrastructure, including water, power, and transportation networks. We believe large-scale copper porphyry deposits that are not already owned by major miners hold strategic value due to their scarcity, size, and economies of scale, polymetallic characteristics, and amenability to large-scale conventional open-pit mining.”

* Teck Resources Ltd. (TECK.B-T, “buy”) with a $70 target. Average: $66.20.

Analysts: “Under Teck’s proposed separation, Teck Metals (TMC) will emerge as a top-tier base metals company with an undervalued copper development portfolio and more than 2.0 times ND/EBITDA. With QB2 set to reach full capacity by YE23, TMC will double copper production to more than 600Kt in 2025 (our estimate). In addition, a robust pipeline of copper projects includes San Nicolas copper/zinc/gold/silver JV with Agnico (FS in Q1/24), QB Mill Expansion, Zafranal copper/gold in Peru, New Range Copper-Nickel JV with Polymet (NorthMet sanctioning in H1/24, followed by advancement of Mesaba), Galore Creek copper/gold/silver in B.C., mine-life extensions at HVC and Antamina, Nueva Union copper/gold/silver/moly in Chile, and Shaft Creek copper/moly/gold/silver in B.C.”

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In other analyst actions:

* RBC’s Greg Pardy raised Baytex Energy Corp. (BTE-T) to “outperform” from “sector perform” with a $9 target, exceeding the $7.61 average on the Street.

“Baytex’s recently announced US$2.5 billion cash and stock acquisition of Ranger Oil shifts the company out of second gear and is aimed squarely at building quality scale over time,” said Mr. Pardy.

“The Ranger deal represents good value in our eyes, establishes a solid operating platform for Baytex in the United States, and opens the door to other accretive acquisition opportunities.”

* In a earnings preview for the industrial sector, National Bank’s Maxim Sytchev raised his Aecon Group Inc. (ARE-T) target to $14 from $13 and lowered his Ritchie Bros. Auctioneers Inc. (RBA-N, RBA-T) to US$61 from US$62 with a “sector perform” rating for both. The averages are $16.20 and US$67.07, respectively.

‘The thematic tailwinds of supply chain onshoring, focus on ESG-related initiatives, and government investment in infrastructure across many OECD markets remain highly pertinent,” said Mr. Sytchev. “As such, we reiterate our preference to maximize exposure to these key structural trends, maintaining our conviction on STN, WSP, and ATS (+ TIH/AFN in equipment group). For value-oriented investors looking to add to a quality business, we also recommend CIGI as the market appears to lump the share with those of office REITs (not the same animal). We see risk to STLC, ABCT and ACQ earnings. FTT/ SJ/STN/WSP/NOA are in our “good” visibility bucket.”

* Needham initiated coverage of Shopify Inc. (SHOP-N, SHOP-T) with a “hold” rating.

* Goldman Sachs’ Noah Poponak raised his Bombardier Inc. (BBD.B-T) target to $81, above the $76.94 average, from $78 with a “buy” rating.

* Mr. Poponak also hiked his CAE Inc. (CAE-T) target to $37 from $35 with a “buy” rating. The average is $36.42.

* KBW’s Sanjay Sakhrani increased his Nuvei Corp. (NVEI-Q, NVEI-T) target to US$50 from US$45 with an “outperform” rating. The average is US$58.67.

* Credit Suisse’s Andrew Kuske lowered his target for TC Energy Corp. (TRP-T) to $59.50, below the $60.97 average, from $60.50 with a “neutral” rating.

“With TRP’s share price performance lagging peers and the market on multiple timeframes, elements of clear market dissatisfaction exist,” he said. “Positively, on many of TRP’s own relevant valuation metrics, the stock looks relatively inexpensive – often greater than by one standard deviation on a 10-year basis of calculation. Plan delivering and the rekindling of higher quality executable growth would look to help restore confidence and set the stage for a potential re-rate of the stock. We come back to a legacy TRP slogan ‘in business to deliver’ – that will be critical as a show me story.

“TRP looks very well positioned for ongoing growth across the asset base with key competitive advantages across multiple natural gas basins and other parts of the asset network. The renewed focus on the balance sheet (with some accelerated sales), the longer-term sustainability of capital growth combined with dividend growth that should eventually translate into a self-funding model with (over time) re-rate potential, in our view.”

* Credit Suisse’s Ariel Rosa lowered her target for TFI International Inc. (TFII-N, TFII-T) to US$137 from US$144 with an “outperform” rating. The average is US$136.62.

* BMO’s Étienne Ricard raised his TMX Group Ltd. (X-T) target to $155 from $153 with a “market perform” rating. The average is $150.57.

“TMX is executing on self-help revenue growth initiatives, with the Montreal Exchange recording record quarterly volume as interest rate derivative trading picks up across the curve,” he said. “Despite continued softness in Capital Formation, TMX appears well positioned to sustain mid-single digit percentage point topline growth in 2023. Our Market Perform remains valuation-based with: i) absolute valuations near (but off) cyclical highs, and; ii) the relative valuation gap to global exchange peers nearly closing.”