Inside the Market’s roundup of some of today’s key analyst actions
While its fourth-quarter results were “great” and outlook for the first half of 2023 “encouraging,” National Bank Financial analyst Maxim Sytchev now sees the risk-reward profile for Finning International Inc. (FTT-T) as “much more balanced.”
He now thinks it’s time for investors “time to take some profits (unless you think peak EPS will reach much higher levels),” leading him to lower his recommendation for the Vancouver-based industrial equipment dealer to “sector perform” from “outperform” previously.
“We all love momentum because it’s easy to see/understand, operationally and share price-wise,” said Mr. Sytchev. “For cyclical names, the methodology has to be more nuanced as the peak / trough dynamics lead to very different valuation outcomes and in our experience, the best risk-adjusted returns for Finning have been when you are buying into a high multiple and trough EPS. While we fully acknowledge that the market will reward company’s results tomorrow am, we would be back to the same question tomorrow night … has the next peak EPS moved materially upwards from somewhere in the $3.25 range? If the answer is not really, then perhaps taking some chips off the table as we get closer to $40.00 is not a bad approach from a risk management perspective.
“Think about it this way; when it comes to earnings power … if $1.50 is the trough and let’s even say $3.50 is the peak, then median EPS = $2.50 (and we think that number is rather generous as the median would be ABOVE the 2014 peak. What multiple are you ready to apply to this (in a higher interest rate environment, mind you)? Let’s say 15.0 times … target is $37.50 then; to get to $45.00+ level, one needs a normalized P/E of 18x which sounds rich to us. We have also learned from our experience that whenever the sell-side starts to paint lyrically the ‘next paradigm shift’,’ something negatively surprises us. Incidentally, copper / WTI spot pricing also suggests that FTT is closer to being fully valued. Perhaps we could be early for a downshift, but a better entry point might present itself later in 2023 (did you notice the language in the Outlook section that projects growth in H1/23 but not in H2/23?)”
After the bell on Monday, Finning reported net revenue of $2.37-billion, up 34 per cent year-over-year on a consolidated basis and above both Mr. Sytchev’s $2.28-billion estimate and the consensus forecast of $2.13-billion. Adjusted earnings per share of 89 cents also topped expectations (76 cents and 82 cents, respectively).
“Finning once again delivered standout results significantly above consensus and our own expectations on a 52-per-cent year-over-year jump in new equipment deliveries and continued growth in the high-margin Rental (up 22 per cent year-over-year) and Product Support (up 32 per cent year-over-year) verticals,” he said. “Geographically, management sees broad-based strength in the Canadian mining, energy, and construction sectors through 2023. In South America, resilient copper pricing is expected to counteract the uncertainty created by the constitutional reform process and soft construction demand (Argentina demand is expected to be stable, though challenges in the fiscal, regulatory, and currency environments persist). Lastly, the substantial completion HS2 equipment deliveries for the UK and a weak economic environment will constrain new equipment demand, though product support should remain strong given high utilization rates.
“While management appears confident in maintaining momentum through H1/23, the back half of the year will be measured against much tougher comps. Given the very high bar set by recent results and a less than stellar macro outlook, it is difficult to see incremental catalysts to drive earnings (or FTT’s multiple) significantly higher in the near term. As such, we believe this cycle’s peak earnings are approaching and prospects for outsized gains in the share price are somewhat limited.”
Mr. Sytchev maintained a target of $40 for Finning shares. The average on the Street is $41.88.
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Despite its fourth-quarter results coming in “a touch light,” RBC Dominion Securities’ Walter Spracklin expects the 2023 guidance from TFI International Inc. (TFII-N, TFII-T) to garner a positive reaction from investors.
He was one of several equity analysts on the Street to raise their target price for shares of the Saint-Laurent, Que.-based transport and logistics company following the quarterly release after the bell on Monday.
“Management guided to EPS of $7.50 to $7.60 on the conference call, and we expect the guide to be well received,” he said. “Key is that the guide came in above prior consensus $7.37 (RBC prior estimate of $7.40) and does not incorporate M&A or share repurchases. We highlight that management expects to complete $300-million of M&A deals prior to June 2023 and recently announced an NCIB for the repurchase of up to 6.4 million shares (TFII repurchased approximately 900,000 shares in Q4/22). With the balance sheet under 1 times leverage, and management guiding to FCF of $800-million (RBC prior estimate of $1-billion), we see opportunity for management to fully execute on its tuck-in M&A target and NCIB. Moreover, management has historically been conservative in their guidance and pointed to strong trends in January. We therefore view the guide as achievable as well as conservative, and took our 2023 estimate to $7.60 (from $7.40), or to the top end of management’s guidance range.”
For its fourth quarter, TFI reported adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of US$305-million, ahead of Mr. Spracklin’s US$298-million estimate but below the Street’s projection of US$315-million. Earnings per share of US$1.72 also beat the analyst’s forecast (US$1.65) while below the consensus (US$1.73).
The company also disclosed ownership of 1.028 million shares in ArcBest Corp. (ARCB-Q), which is approximately 4 per cent of outstanding shares.
“When we asked management about this on the call, they noted that TForce Freight has a large real estate portfolio and that both companies are unionized carriers, thereby offering potential for strategic collaboration,” said Mr. Spracklin. “While we are not calling for an outright M&A transaction between the two companies (although we wouldn’t rule out that potential either), we will be closely monitoring for further updates. We agree with management on the potential for synergies on real estate and see upside from increased density; we also note that ArcBest delivered a 2022 Asset-based O/R of 87.3 per cent and trades at a 4.6 times consensus NTM [next 12-month] EV/EBITDA multiple, and we’d therefore view the company as an attractive potential strategic target for TFII. We highlight that TFII’s balance sheet looks well positioned for a deal of size with leverage less than 1 times and all of TFII’s debt fixed at a blended rate of 3.5 per cent. We continue to expect a large deal sometime in 2023.”
Raising his 2023 and 2024 earnings estimates to align with the top end of the guidance, Mr. Spracklin hiked his target for TFI shares to US$129 from US$109, keeping an “outperform” rating. The average on the Street is US$119.64.
“While Q4 results were slightly below consensus, the guidance provided was nicely ahead of expectations and does not include acquisitions and M&A - both of which we expect (and mgmt. confirmed) will likely be meaningful in 2023. Accordingly, we remain constructive on the TFII shares and reiterate our OP rating,” he said.
Others making changes include:
* Desjardins Securities’ Benoit Poirier to $189 from $172 with a “buy” rating.
“We view the neutral 4Q results and better-than-expected guidance as a positive sign for investors given current freight dynamics,” he said. “We expect the market to react positively to the US$85-million investment in ARCB and US$300-million tuck-in pipeline. Retailers may still have elevated inventories, but we continue to favour TFI over the rails as it offers multiple avenues of value creation (OR improvement at TForce Freight, M&A, etc), the vast majority of which does not depend on market conditions.”
“We continue to see significant upside potential at TFII as it successfully executes on the optimization of TForce Freight while keeping its M&A strategy active.”
* National Bank Financial’s Cameron Doerksen to $171 from $162 with an “outperform” rating.
“We are encouraged by management’s preliminary 2023 guidance that is higher than our prior forecast, Early 2023 volumes look to be soft across the business, but TFII expects to see some organic growth in H2/23 while margins in the LTL [less-than-truckload] segment should also see tailwinds,” he said.
* Scotia’s Konark Gupta to $175 from $170 with a “sector outperform” rating.
* Credit Suisse’s Ariel Rosa to US$129 from US$122 with an “outperform” rating.
* CIBC’s Kevin Chiang to US$135 from US$125 with an “outperformer” rating.
* JP Morgan’s Brian Ossenbeck to US$133 from US$122 with an “overweight” rating.
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Heading into fourth-quarter earnings season for Canadian property and casualty insurance providers, National Bank Financial analyst Jaeme Gloyn thinks the outlook for the sector “remains robust,” seeing it “well positioned for the near term given hard market conditions and higher interest rates that support improved investment income.”
“We maintain our view that pricing trends will continue to outpace loss cost trends overall, even for Personal Auto lines, as driving behaviour has yet to complete its path to normalization and auto repair/parts price increases still lag U.S. trends,” he said. “In addition, we see continued strong momentum in U.S. specialty lines markets.”
In a research report released Tuesday titled Business as usual, Mr. Gloyn reiterated his view that “there’s something for everyone” from an investing perspective.
“TSU remains at the top of our pecking order given a rapid growth outlook but is also an attractive value play with upside to specialty insurance peer valuations,” said Mr. Gloyn. “Although our best performing insurance stock year-to-date, FFH remains the best value idea in our coverage. FFH also offers investors rapid top-line growth and leverage to a higher interest rate environment. As it relates to IFC and DFY, we continue to believe share price acceleration is contingent on proof of execution. We see no reason to adjust our view that both companies will continue to deliver.”
Pointing to the “strong performance” from insurance peers that have reported quarterly results thus far, Mr. Gloyn raised his targets for the four companies in his coverage universe. They are:
- Definity Financial Corp. (DFY-T, “outperform”) to $47 from $45. The average on the Street is $42.68.
- Fairfax Financial Holdings Ltd. (FFH-T, “outperform”) to $1,200 from $1,100. Average: $1,052.62.
- Intact Financial Corp. (IFC-T, “outperform”) to $240 from $238. Average: $223.23.
- Trisura Group Ltd. (TSU-T, “outperform”) to $69 from $68. Average: $57.93.
“While P&C insurance stocks posted some of the strongest 2022 returns in our coverage, most have lagged the S&P/TSX Financials Index year-to-date (up 8 per cent),” he said. “FFH leads the group at up 8 per cent followed by IFC (up 0.1 per cent), TSU (down 7 per cent) and DFY (down 10 per cent). In our view, fund flows (or ‘risk-on’) is driving some weakness as 2022′s laggards are winning so far this year. We expect another solid quarter of results in Q4-22 to reverse the year-to-date performance, in particular our Top Pick TSU as the company forms a solid track record of massive beats ... As for DFY, we believe consensus is overly punishing the shares for personal auto exposure (given our view risks are manageable) and missing the upside from early CBCA conversion and potential M&A. In fact, our Q4-22 EPS forecast for DFY is 12 per cent above the street (other Q4-22 NBF forecasts are more ‘in line’).”
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Desjardins Securities analyst Doug Young predicts Canadian banks will start fiscal 2023 with “another good quarter,” expecting to see similar trends from the end of last year with “strength in P&C banking offset by weaker wealth and capital markets results.”
In a research report titled Shall we let the good times roll?, he said the focus of the earnings season, which is scheduled to start Feb. 24, will be on net interest margins, loan growth, capital and credit. He’s forecasting a 9-per-cent year-over-year decline in cash earnings per share, “mainly driven by higher performing loan PCLs (vs releases last year) and weaker capital markets results (tough year-over-year comp).”
“More importantly, we expect adjusted PTPP earnings to increase 1 per cent year-over-year on average, fuelled by strong P&C banking results (Canada and U.S.), partially offset by weakness in capital markets and wealth management,” he said. “At the consolidated level, we expect higher net interest income to be partially offset by lower non-interest income and higher non-interest expenses.”
“Expense pressures likely persisted, and we are forecasting a 165 basis points year-over-year increase on average in NIX ratios and negative operating leverage for the group.”
While he remains “overweight” on Canadian bank stocks, Mr. Young predicts “we could perhaps be in for a bumpy ride over the next few months as we veer into a widely expected recession.”
“Turning to the stocks, well, that was an interesting start to the year, with the banks outperforming what has been a robust market move in general,” he added. “This was contrary to our call, as well as historical trends, for a slow start to the year as the market anticipated a recession, with the market starting to look through pending headwinds around mid-year.”
While he did warn of a slowing economic backdrop, Mr. Young raised his target prices for seven of the eight banks in his coverage universe.
In order of preference, they are:
- Toronto-Dominion Bank (TD-T, “buy”) to $106 from $105. The average on the Street is $101.63.
- Bank of Montreal (BMO-T, “buy”) to $146 from $143. Average: $142.70.
- Royal Bank of Canada (RY-T, “buy”) to $147 from $145. Average: $141.78.
- Canadian Western Bank (CWB-T, “buy”) to $35 from $30. Average: $30.93.
- National Bank of Canada (NA-T, “hold”) to $102 from $99. Average: $103.54.
- Bank of Nova Scotia (BNS-T, “hold”) to $78 from $76. Average: $78.01.
- Canadian Imperial Bank of Commerce (CM-T, “hold”) with an unchanged $66 target. Average: $64.44.
- Laurentian Bank of Canada (LB-T, “hold”) to $37 from $35. Average: $40.62.
Elsewhere, RBC Dominion Securities’ Darko Mihelic “modestly” reduced his first-quarter estimates by an average of 2 per cent in a research report released Tuesday.
“We expect core EPS to increase 5 per cent quarter-over-quarter on average,” he said. “We expect the banks’ CET 1 ratios to land above the 11.0-per-cent regulatory minimum and going forward, we expect the banks’ capital management to remain conservative. We expect core NII and loans to grow modestly quarter-over-quarter. We do not expect to see significant deterioration in underlying credit quality, and therefore we have shifted our PCL estimates to have slightly more stage 2 PCLs.”
For investors, Mr. Mihelic continues to think Toronto-Dominion Bank (TD-T) and Bank of Montreal (BMO-T) will “be differentiated enough this year because of accretive acquisitions” and expects their stocks will “outperform longer term both on earnings growth and some multiple expansion.”
“Shorter term, some upside may still exist for BNS and CM as both banks prove they will not need to raise equity,” he added. “Looking beyond Q1/23 results, we still view BNS and CM as unlikely to close the valuation gap. We think BNS may still retool its strategy, and without knowing the extent, it is hard to ascribe incremental value. We continue to believe CM’s market position is good but unlikely to become meaningfully better longer term. With competitors growing more meaningfully via acquisitions (excess capital deployment), CM’s relative returns may become challenged over time.”
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Scotia Capital analyst Orest Wowkodaw expects North American miners to post “stronger” fourth-quarter financial results “driven by improved commodity prices and positive provisional pricing (PP) adjustments, partially offset by the lag affect of higher costs.”
“Our estimates appear somewhat mixed relative to consensus expectations,” he said in a research report released Tuesday. “While 2023 guidance risks remain skewed to the downside given a tough operating environment and ongoing inflationary pressures, most miners have gotten in-front of this disappointing news cycle by pre-releasing. Although balance sheets remain strong, we forecast the majority of miners to generate negative FCF this quarter.”
" Among the mid- to large-cap producers, we forecast ANTO-L, HBM-T, and LUN-T to beat consensus EBITDA expectations this quarter. On the other hand, we anticipate IVN-T and TECK.B-T to miss consensus. We anticipate largely in-line EBITDA for CS-T, ERO-T, FM-T, and NEXA-N. On an EPS basis, we forecast below consensus results for FM-T, HBM-T, IVN-T, and TECK.B-T. We do not view results for CCO-T as particularly relevant. We profile our quarterly EPS, EBITDA, and guidance performance vs. consensus tracker ... and note that ANTO-L, FCX-N, and TECK.B-T have the best track record of meeting expectations over the past four quarters; conversely, CMMC-T, ERO-T, S-T, and TKO-T have the weakest.”
Mr. Wowkodaw made a series of target price changes to stocks in his coverage universe. They are:
- Copper Mountain Mining Corp. (CMMC-T, “sector outperform”) to $2.75 from $3. The average on the Street is $2.51.
- First Quantum Minerals Ltd. (FM-T, “sector outperform”) to $35 from $36. Average: $30.41.
- Hudbay Minerals Inc. (HBM-T, “sector outperform”) to $10 from $11. Average: $9.78.
- Sherritt International Corp. (S-T, “sector perform”) to 70 cents from 80 cents. Average: $1.02.
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Expecting a fourth quarter of 2022 “full of restructuring, delays, and other accounting noise,” Raymond James analyst Andrew Bradford downgraded Enerflex Ltd. (EFX-T) to “outperform” from “strong buy” on Tuesday.
“It’s reasonable to expect the anticipation of noise surrounding the 4Q Exterran acquisition and related matters will weigh on equity performance over the next few weeks,” he said.
“That is the tactical consideration. From a core, fundamental viewpoint, we believe Enerflex (a) trades at too low a multiple still (4.5 times ‘23 estimated EBITDA vs 7.3 times over 8-year average and 6.5 times over the last two years), (b) will screen attractively for its debt reduction through 2023, and (c) can articulate a multi-year strategy to add to its portfolio of long-term contracted capacity. Balancing the tactical considerations with the mid/longer-term fundamentals, we are lowering our rating.”
The analyst said he’s worried about the potential impact of “IFRSification” of the assets acquired from Exterran on the company’s results.
“We’ve long highlighted that the application of finance lease accounting to certain of Enerflex’s international Build, Own, Operate, Maintain (“BOOM”) assets resulted in a chronic understatement of going-concern EBITDA in favour of notional one-time EBITDA bullets upon each project’s commissioning,” said Mr. Bradford. “Moreover, the accounting gymnastics that finance lease accounting requires for EFX bears no resemblance to true going concern cash flow. Our view has been the market will tend to normalize the one-timers and annualize the resulting lower going concern EBITDA. This hasn’t yet been a significant issue for Enerflex – though our contention has been that as it grows its international business, the chronic understatement will become increasingly meaningful.
“We’re concerned some assets acquired from Exterran might be subject to this accounting change, though we cannot be certain of this or what the quantum might be. Our view remains that the issue – should it become significant – can be effectively addressed in the MD&A.”
Ahead of the scheduled March 1 earnings release, Mr. Bradford lowered his adjusted EBITDA estimate for the quarter to $102-million from $114-million. However he said he’s “adding much of this displacement back into our 2023 estimates.”
“Enerflex has guided that 2023 EBITDA should fall in the US$380-million to US$420-million range,” he said. “Our $535-million figure is roughly at the midpoint of that range, though we’d be surprised if Enerflex didn’t update this guidance along with its 4Q disclosure.”
Mr. Bradford maintained a target of $15 for the company’s shares, topping the average on the Street of $12.69.
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In other analyst actions:
* Barclays’ Brandon Oglenski raised his target for Canadian Pacific Railway Ltd. (CP-T) target to $120 from $115 with an “overweight” rating. The average is $116.55.
* Ahead of the Feb. 16 release of its quarterly results, Canaccord Genuity’s Luke Hannan trimmed his Canadian Tire Corp. Ltd. (CTC.A-T) to $181 from $182 with a “buy” rating, while RBC’s Irene Nattel cut his target to $222 from $234 with an “outperform” rating. The average is $184.30.
“For the quarter, we are forecasting consolidated revenue of $5.16 billion, below the consensus estimate of $5.24 billion and flattish year-over-year,” said Mr. Hannan. “Further, we are forecasting adjusted EPS of $7.59, slightly below the consensus estimate of $7.65, representing a 10-per-cent decline YoY.”
“We have modestly bumped our target multiple for Canadian Tire’s 2023 Retail segment earnings to reflect defensiveness in both Automotive and loyalty spend, though we note the multiple remains well below peer averages. We have also lowered our 2023 Retail pre-tax earnings estimates to reflect softness in other areas of CTC’s retail portfolio. As the company begins to cycle easier comps and visibility into earnings growth improves, we expect the valuation gap vs. peers will begin closing.”
* TD Securities’ David Kwan raised his Coveo Solutions Inc. (CVO-T) target to $13 from $11, exceeding the $10.81 average, with a “buy” rating. Others making changes include: RBC’s Paul Treiber to $11 from $10 with an “outperform” rating and Scotia’s David Weiss to $12 from $9 with a “sector outperform” rating.
“Coveo Solutions reported Q3/23 results ahead of our and Street expectations along with management’s prior guidance on revenues and adj. Operating Loss,” said Mr. Weiss “This marks the 4th consecutive quarterly beat on both revenue and adj. operating income. The company increased its FY2023E revenue and adj. Oper. Income guidance further as it saw continued expansion with new and existing customers while achieving further operational efficiencies.
“We believe Coveo shares offer investors a way to benefit from the trend for organizations to provide all stakeholders with more relevant and timely information through digital search and relevance. We view shares as attractive overall based upon (1) ongoing strong growth and performance from a leading AI-based solution, (2) a resilient and diversified enterprise customer base, (3) strong progress toward profitability, and (4) an attractive valuation profile.”
* Raymond James’ Farooq Hamed trimmed his First Quantum Minerals Ltd. (FM-T) target to $30 from $34 with a “market perform” rating. The average is $30.41.
* Noble Capital Markets analyst Michael Heim initiated coverage of Largo Inc. (LGO-T) with an “outperform” rating and US$11 target. The average is $14.40 (Canadian).
“We believe Largo, Inc. offers investors an attractive way to play an expected growth in the demand for vanadium due to its use in large-scale energy storage,” he said. “Largo is the largest producer of vanadium outside of China and Russia. The high vanadium concentration of is Maracas Menchen Mine in Brazil makes Largo one of the lowest-cost producers of vanadium in the world.”
* Jefferies’ Laurence Alexander raised his Methanex Corp. (MEOH-Q, MX-T) target to US$58 from US$47 with a “buy” rating. The average is US$50.91.
* RBC’s Luke Davis raised his PrairieSky Royalty Ltd. (PSK-T) target to $26 from $25 with a “sector perform” rating. The average is $25.60.
“PrairieSky’s Q4/22 results highlight continued momentum in leasing activity laying the groundwork for a strong 2023,” he said. “The company closed out 2022 with a material reduction in debt (down $320 million year-over-year), setting the stage for incremental shareholder returns. PrairieSky remains well-positioned to generate material FCF through 2023 alongside insulation from industry cost inflation, which we believe warrants a premium multiple”
* RBC’s Geoffrey Kwan cut his TMX Group Ltd. (X-T) target to $168 from $173 with an “outperform” rating. Others making changes include: National Bank’s Jaeme Gloyn to $148 from $150 with a “sector perform” rating and Scotia Capital’s Phil Hardie to $160 from $164 with a “sector perform” rating. The average is $152.86.
“TMX Core Adj. EPS came in ahead of expectations, however, the beat was driven largely by what we believe to be an unusually low tax which offset higher-than-anticipated operating expenses with the top line coming right in line with our forecast,” said Mr. Hardie. “A positive surprise was that the company announced a number of pricing changes including a CPI adjustment of 7 per cent to 8 per cent across its Trayport segment. That said, on net, our 2024 estimates move down by roughly 3 per cent.
“We believe investors are recognizing TMX for its resilience, and the next leg up for the stock is to gain improved recognition for its growth potential. That said, TMX faces tough year-over-year comparables, and likely a reduced benefit of operating leverage in the near term.”