Inside the Market’s roundup of some of today’s key analyst actions
Following the sale of Shopify Inc.’s (SHOP-N, SHOP-T) logistics business earlier this year, Wedbush analysts Scott Devitt and Seth Basham believe the Ottawa-based company is “positioned to see improving revenue growth rates due to normalizing comps and rising margins.”
Also predicting its Shop Pay checkout service will drive upside for its shares as “platform democratization” continues to expand total addressable markets (TAMs) across the sector, they assumed coverage with an “outperform” recommendation on Tuesday.
“Shopify accounts for over 10 per cent of U.S. eCommerce and powers millions of brands online ranging from SMBs [small and medium-sized businesses] to large retailers,” they said. “Given its scale (approximately $230-billion in 2023 estimated GMV [gross merchandise volume]) and strong competitive positioning, Shopify has the opportunity to upsell merchants with new products and services leading to take rate expansion over time. The company recently decided to sell its logistics business to Flexport and can now focus on its core competency: providing asset -light eCommerce and payments solutions spanning online and offline payment processing, cross -border transaction services, merchant credit, and advertising tools. Shopify is also expanding its services to non - Shopify merchants through Shopify Commerce Components, which gives enterprises the flexibility to adopt Shopify services that meet their specific needs. This strategy has expanded Shopify’s addressable market and presents incremental monetization opportunities, in our view, particularly for the company’s core payments offering.
“With $230-billion in GMV and millions of eCommerce merchants, we believe the potential for Shopify to deepen monetization is multi -faceted with continued payments adoption (we expect GPV penetration to rise from 57.6 per cent of GMV today to 70 per cent by 2030) in addition to off -platform opportunities and other merchant services growth (Capital, Markets, Audiences, etc.) that should drive sustainable take rate expansion for the foreseeable future.”
In a research report titled Up, Up and Away, Wedbush analysts initiated coverage of the Internet eCommerce and Digital Advertising sector, believing growth trends are “stabilizing/improving” and expecting to see margins rise in 2024 following recent labour force reductions and tighter cost controls.
“The past few decades for internet investors have averaged 2 bad years for every 8 good years,” the firm said. “We seem to be 1-year removed from 2 bad years. Is it possible we are in for 5-7 more good years ahead? We think so. eCommerce and advertising post-COVID growth rates are bottoming and the underlying secular growth trends underpinning the industry should re-appear in coming quarters. Most internet companies have reset workforce and cost structure so that industry-level margins should rise, as growth recovers. We expect global eCommerce growth to return to 10-per-cent-plus levels and digital advertising to a similar 10-12 per cent in the coming year. In addition, we expect AI to become a growth stimulant for consumer technology over the next 2-5 years.
“Across our coverage, we endeavor to identify the highest-quality companies within the multi-category internet sector that can be purchased, closely monitored, and held. Within eCommerce and advertising, six meet our criteria – Alphabet, Amazon, MercadoLibre, Meta, Sea Limited, and Shopify. The six share important characteristics – competitively -advantaged, rising market share, rising or already high margins, and strong free cash flow (in the case of MercadoLibre and Sea, a path to it).”
The analyst set a target price of US$62 for Shopify shares. The average target on the Street is US$66.51, according to Refinitiv data.
The firm also added Amazon.com Inc. (AMZN-Q) to the “Wedbush Best Ideas List.” Analysts Michael Pachter and Seth Basham assumed coverage with an “outperform” rating and US$180 target, exceeding the US$169.29 average.
“We believe the strength of Amazon’s core retail business is underappreciated following (1) a period of weak growth against challenging pandemic comps, and (2) operating margin compression due in part to lower fulfillment utilization after Amazon more than doubled the size of its network in just three years to 541 million square feet.,” they said.
“With comp issues fading and capacity utilization rising, Amazon’s core business is now well positioned with an industry-leading fulfillment infrastructure delivering 4x times as many same-day or next-orders in the U.S. versus 2019. AWS growth has stabilized and is poised to reaccelerate in 2H23 and into 2024; while advertising services should benefit from the improving advertising backdrop (and with EBIT margins significantly higher than AWS). The combination should support operating margin expansion while funding growth initiatives across grocery, healthcare, autonomous vehicles, and Kuiper.”
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CIBC World Markets’ Paul Holden said he’s remains “cautious” on Canadian banks ahead of the start of quarterly earnings season on Thursday.
“We have revised our FQ3 EPS estimates lower based on core earnings trends – funding cost pressures, slowing loan growth, soft conditions for fee income and still high expense growth,” he said in a report released Tuesday. “While the industry may be avoiding a material increase in credit losses for now, we continue to assume that higher losses will materialize in future quarters. Consensus estimates continue to drop and valuations have not pulled back sufficiently to compensate, in our view.”
Mr. Holden reduced his EPS projections for both the quarter and full-year 2024 by an average of 5 per cent.
“Net interest margin (NIM), non-interest expenses, credit and regulatory capital are the major themes,” he said. “All of these factors have been directional negatives for the banks through F2023 and we expect that will continue to be the case through the end of the year. We expect NIM to be down Q/Q and that it will take longer than previously assumed for NIM to stabilize. Year-over-year noninterest expense growth is expected to be high again this quarter, which will lead to questions about the potential for FQ4 restructuring. While credit losses may only show a marginal Q/Q increase, it is unlikely the overhang for the stocks will be going away. We expect generally neutral updates on capital, but unless current DRIP discounts are lifted, then the market will rightly continue to assume that higher capital requirements are a drag on future profitability.”
With his forecast adjustments, the analyst made a series of reductions to stocks in his coverage universe. They are:
* Bank of Montreal (BMO-T, “neutral”) to $120 from $134. The average target on the Street is $131.02.
* Bank of Nova Scotia (BNS-T, “neutral”) to $64 from $71. Average: $69.52.
* Canadian Western Bank (CWB-T, “neutral”) to $26 from $27. Average: $29.08.
* Laurentian Bank of Canada (LB-T, “outperformer”) to $54 from $60. Average: $43.85.
* National Bank of Canada (NA-T, “outperformer”) to $106 from $108. Average: $104.91.
* Royal Bank of Canada (RY-T, “neutral”) to $129 from $139. Average: $135.88.
* Toronto-Dominion Bank (TD-T, “outperformer”) to $92 from $94. Average: $93.16.
“NA now carries the highest valuation multiple in the group across P/E, P/BV and dividend yield,” said Mr. Holden. “We do have to recognize the premium multiple as a challenge to our Outperformer thesis, even when we think the premium has been earned. TD is once again trading at a premium to the group after a period of outperformance. Valuation discounts for BMO and BNS have not changed significantly since last quarter and we continue to advocate for patience with the value trade. It will have more merit and a higher chance of success when earnings revisions flip from negative to positive.”
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Despite an “operationally strong” second quarter, Stifel analyst Alex Terentiew downgraded First Quantum Minerals Ltd. (FM-T) to “hold” from “buy” based on its recent share price outperformance and a heightened valuation versus peers.
“With one of the strongest management teams in the business and a moderate growth profile, we continue to like First Quantum as a core holding in the sector,” he said. “However, the company’s valuation, we believe, now reflects most of the positive attributes and we see more relative share price upside in some of the company’s peers.”
Mr. Terentiew deemed the company’s earnings report as “neutral” after it delivered in-line copper production results while also maintaining its guidance.
“First Quantum posted a production beat, but a miss on financials owing to higher costs,” he said. “However, the company positively maintained 2023 guidance, while we had been anticipating a downgrade ... On a CuEq basis, First Quantum posted a 7 per cent beat, with all-in costs coming in slightly better than our estimates.
“With guidance re-iterated and better than of our expectations (we anticipated lowering of guidance), we expect a strong H2 and have slightly raised our estimates. The company is also anticipating downward trending cost metrics for the remainder of the year, as prices of consumables (fuel, freight, explosives, acid, reagents, grinding media) are easing.”
Calling it a “premier company in the sector,” he maintained a $39 target for its shares. The average is $36.51.
The analyst also made a trio of target price adjustments:
- Capstone Copper Corp. (CS-T, “buy”) to $8.10 from $8.20. The average is $7.97.
- Freeport McMoran Inc. (FCX-N, “buy”) to US$48 from US$49. Average: US$45.72.
- Hudbay Minerals Inc. (HBM-T, “buy”) to $10.10 from $10.60. Average: $9.88.
“Overall, Q2 didn’t deliver many surprises but Q3 is now set up to be a critical period for most companies to catch up and achieve guidance, offsetting a weaker start to 2023,” he concluded. “Notable sector themes from the quarter include: production generally guided to be 2H23 weighted with most companies producing less than half of annual guidance in 1H23; all-in costs were overall higher than our expectations, but could see some relief in H2 on softening consumable prices; EBITDA missed our estimates for most companies; and reductions to production guidance from other miners continue to remove copper supply, helping to support prices.”
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National Bank Financial analyst Jaeme Gloyn has “strengthening confidence” in the growth prospects for Trisura Group Ltd. (TSU-T) following the completion of its $53-million equity offering,
“We estimate pro forma available capital now stands at a solid $125-million to $135-million (including increased debt capacity),” said Mr. Gloyn, resuming coverage after coming off a research restriction.
He expects the proceeds from the deal to help fund an acceleration in growth of the specialty insurance provider’s U.S. Surety strategy, including establishing a dedicated balance sheet, and also sees it poised to benefit from stronger-than-anticipated growth in its business both in Canada and the United States.
“While less tangible than the former two points, but equally important given recent industry events and TSU’s isolated issue with a struggling program, we believe the equity raise enhances the Trisura narrative with key stakeholders, e.g., MGAs, reinsurers and rating agencies,” said Mr. Gloyn. “Moreover, we believe the raise further strengthens TSU’s competitive position relative to U.S. Fronting peers, given the company’s larger balance sheet (US$50-million shy of becoming only the second fronting carrier to reach category Size 10) and greater operational diversification (i.e., not just a fronting company).”
The analyst reiterated an “outperform” recommendation and $60 target for Trisura shares. The average is $54.
“Our adjusted diluted EPS of $2.19 in 2023 (was $2.20), and $2.47 in 2024 (was $2.53) reflect the modest 3.5-per-cent share count dilution, partially offset by attractive investment returns on the capital raised (we did not revise growth forecasts),” he said.
“Trading at approximately 12 times on consensus 2024 EPS suggests significant upside to peers trading at 23 times.”
Elsewhere, TD Securities’ Marcel McLean resumed coverage with a “buy” rating and $57 target, while BMO’s Tom MacKinnon trimmed his target by $1 to $49 with an “outperform” recommendation.
“Updated forecast reflects dilution, partially offset by increased investment income; net result is a 2-per-cent decline in operating EPS and 2-per-cent reduction in target price,” said Mr. MacKinnon. “This is a positive development in that it helps de-risk the regulatory approval process for recently announced acquisition of a U.S. Surety Treasury-listed platform, demonstrates commitment to growing expanded distribution partners, and supports continued growth in Canada/U.S.”
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Following the second-quarter earnings season in Canada’s energy sector, Desjardins Securities analyst Chris MacCulloch thinks valuations are “becoming increasingly stretched,” however he still sees “upside from accelerated capital returns and strategic M&A.”
“Production shortfalls due to wildfire-related disruptions were the key theme for most producers under coverage,” he said. “Although there were limited changes to annual production targets, due in part to robust well results from winter drilling programs, several producers refined expectations toward the lower end of their respective guidance range. Notably, nearly every producer facing wildfire-related disruptions has since fully restored field operations and their respective capital program; this is expected to drive a modest production uplift through the balance of the year. Meanwhile, oil sands operators have also largely wrapped up planned maintenance turnarounds. There were a few notable ‘winners’ during the quarterly reporting session, with NVA, SDE, TOU and WCP all reporting strong cash flow generation which exceeded Street estimates. However, there were also a few ‘losers’, namely CVE and VET, which posted slightly disappointing CFPS relative to consensus expectations.
“As previously noted, capital returns across the sector are still gradually accelerating as corporate net debt targets are achieved and/or as companies gain scale, the latter of which resulted in dividend increases during 2Q23 reporting from ERF and TPZ. However, most producers continue prioritizing share buybacks for incremental capital returns, with a few even tapping revitalized balance sheets to accelerate repurchases prior to the renewal of NCIB programs. Going forward, we believe that sector consolidation will remain the key to unlocking accelerated capital returns as operational synergies are realized and improved efficiencies directly benefit shareholders. Following a relatively sleepy summer on that front, with a few notable exceptions, we believe M&A will dominate headlines going down the home stretch of 2023 as industry sentiment continues on the back of strengthening commodity prices.”
In a research report released Tuesday titled “After the boys of summer have gone”, Mr. MacCulloch reiterated his top picks for the sector. They are:
Integrated oil: Cenovus Energy Inc. (CVE-T) with a “buy” rating and $31 target. The average on the Street is $29.78.
Large-cap natural gas: Arc Resources Ltd. (ARX-T) with a “buy” rating and $25 target. Average: $23.53.
Mid-cap oil: Crescent Point Energy Corp. (CPG-T) with a “buy” rating and $14 target. Average: $13.96.
Small-cap natural gas: Advantage Energy Ltd. (AAV-T) with a “buy” rating and $13.50 target. Average: $11.95.
Royalty: Freehold Royalties Ltd. (FRU-T) with a “buy” rating and $19 target. Average: $19.02.
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While acknowledging investors “remain concerned” about macroeconomic conditions, National Bank Financial analyst Cameron Doerksen sees BRP Inc. (DOO-T) “well positioned for growth” ahead of the Sept. 7 release of its second-quarter 2024 financial results.
“While retail demand for powersports in Q2 looks to be solid, we expect some softening as we move into H2 but also expect the company to outperform the industry supported by ongoing market share gains and tailwinds from new product introductions,” he said.
Despite forecasting earnings per share of $2.79, which is “modestly” below the Street’s $2.95 expectation, Mr. Doerksen thinks the retail backdrop for the Valcourt, Que.-based company is favourable and expressed excitement about its new product lineup.
“Based on peer group results for calendar Q2, we expect to see solid retail results for BRP in fiscal Q2, noting that the comparable in the quarter is a relatively easy one as North American retail sales for the company were down 14 per cent year-over-year in Q2 last year,” he said. “Recall also that when BRP reported its fiscal Q1 results, management highlighted that retail growth in May (the first month of BRP’s fiscal Q2) was up significantly both y/y and versus fiscal 2020 (calendar 2019). In addition, BRP’s largest competitor, Polaris, reported that its calendar Q2 ORV retail was up 14 per cent year-over-year.”
“BRP is holding its annual dealer show this week and on Sunday unveiled its model year 2024 product lineup. The main highlight was the introduction of an all new Can-Am side-by-side called the Maverick R, which sits at the high end of BRP’s SxS model range (MSRP of $44k) but is now the most powerful SxS in the industry with 240hp and Dual Clutch Transmission.”
Seeing its current valuation as “attractive,” Mr. Doerksen maintained an “outperform” recommendation and $143 target for BRP shares. The average is currently $133.89.
“On our F2024 estimates, BRP is trading at 6.0 times EV/EBITDA, below the stock’s historical (5-year) forward average of 7.8 times,” he said. “On P/E, DOO is trading at 8.4 times earnings versus its historical (5-year) average multiple of 14.1 times. If we were to assume that the stock should trade at its historical average EV/EBITDA multiple (7.8 times) in a downturn scenario, the current share price would imply an EBITDA of $1.3-billion in F2025, which would be a 31-per-cent decline from the midpoint of management’s F2024 guidance. We believe this is an overly pessimistic scenario even if the powersports market does soften.”
Elsewhere, BMO’s Tristan M. Thomas-Martin kept an “outperform” rating and $154 target.
“Over the weekend we attended Club BRP 2024 in Atlanta,” he said. “At the event, BRP released numerous new products including the 240hp Maverick R, the 325hp Sea Doo RXPX/ RXTX, and the Manitou Explore Max pontoon featuring dual 150hp Rotax engines. Similar to what we heard at PII’s dealer event, dealers commented that retail has been slow again in August due to poor weather, a return to normal seasonality, economic headwinds, and interest rates taking a toll on consumers. However, we think DOO’s brands are continuing to outperform.”
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In other analyst actions:
* Credit Suisse’s Andrew Kuske raised his Boralex Inc. (BLX-T) target to $47, exceeding the $44.92 average on the Street, from $44 with an “outperform” rating (unchanged).
“On August 14th , Boralex Inc. reported headline EPS and a self-defined combined EBITDA that beat Street expectations,” said Mr. Kuske. “In the context of one of the weaker quarters for renewable generation production versus Long-Term Averages that we observed in about 25 years, the performance was admirable even with declining estimates into the print. With the continued and rather systematic addition of projects (369MW in Q2 of early stage) along with 420MW of projects selected under (already disclosed) various requests for proposals, BLX continues making progress towards rather ambitious (albeit likely achievable) MW growth. In our view, returns are more important than MW growth – a view that is also shared by recent management statements. An expanded portfolio along with a resurgence of activity in the core Québec market may be an underappreciated aspect of the company’s evolution and expansion prospects.”
“Given the company’s size, individual project wins can translate into a significant valuation impact, in our view. The team’s positioning, duration and credibility combined with an overall favourable backdrop for many renewable developers should collectively be supportive of value creation potential.”
* JP Morgan’s Tien-Tsin Huang raised his Lightspeed Commerce Inc. (LSPD-T) target to $23 from $22 with an “overweight” rating. The average is $21.08.
* TD Securities’ Aaron Bilkoski initiated coverage of Logan Energy Corp. (LGN-X) with a “buy” rating and $1.40 target, which is below the $1.64 average.
* Scotia Capital’s Tanya Jakusconek resumed coverage of Osisko Gold Royalties Ltd. (OR-T) with a “sector perform” rating and $22 target. The average is $25.46.
“OR’s Americas precious metal focused portfolio is expected to grow over the next five years, which would help to drive GEO and cash flow growth,” she said. “This combined with the streamlining of its investment portfolio and lowering of debt should lead to a higher valuation over the longer term. Short term, the abrupt departure of the CEO (replaced with an outside interim CEO) and adjustment of the Chairman role has led to uncertainly in the shares. We believe this will weigh on the shares until a permanent CEO is in place.”
David Leeder