Inside the Market’s roundup of some of today’s key analyst actions
Following an “abysmal” performance from Canadian technology stocks in 2022, RBC Dominion Securities analysts Paul Treiber and Maxim Matushansky expects fourth-quarter results to largely fall in line with expectations.
However, they warn annual guidance, forward-looking management commentary and revisions to 2023 consensus estimates “are likely to heavily influence investor sentiment, more so than Q4 results.”
“We believe that companies may provide conservative Q1 and 2023 guidance, given the uncertainty regarding the demand environment,” they said. “Therefore, stocks that do not provide guidance offer better risk-reward around Q4 results, in our view. Moreover, in light of the uncertainty regarding the magnitude of a macroeconomic slowdown, we believe that investor sentiment is likely to favour the consolidators over the secular growth stories in our coverage through the first half of 2023.”
In a research report released before the bell, the analysts predicted companies that provide annual guidance “may experience greater volatility than those that don’t.”
“There are 15 stocks out of the total 22 stocks in our coverage universe that provide annual guidance. Companies that have transaction-based business models, such as [Shopify Inc., SHOP-T], may provide the most conservative guidance, in light of the uncertainty regarding consumer spending. For the remainder of the stocks in our coverage universe, there are some unique challenges with regard to guidance for some companies. For example, [Kinaxis Inc., KXS-T] may provide SaaS revenue growth guidance in line or above consensus, but adj. EBITDA margin guidance may lag consensus on term license cyclicality and new investments. Additionally, [Coveo Solutions Inc., CVO-T] could reduce/narrow annual guidance due to elongating sales cycles. Notably, only two of the six consolidators in our coverage universe provide guidance. Therefore, we believe the consolidators as a group are likely to experience less volatility around Q4 results than other stocks in our coverage.”
Expecting organic growth to trough in the first quarter of the current fiscal year, the analysts think “counter-cyclical consolidators are likely to remain in favour.”
“We believe the consolidators in our coverage are counter-cyclical, in that these companies are likely to deploy greater amounts of capital on acquisitions during periods of economic duress. Q4 results and management commentary, in our view, are likely to strengthen near-term investor sentiment on the consolidators. For example, [Constellation Software Inc., CSU-T] appears likely to have deployed a record amount of capital on acquisitions in 2022. [Enghouse Systems Ltd., ENGH-T] anticipates that the next 2-3 years will be very good for acquisitions, while [Descartes Systems Group Inc., DSG-T] has commented that valuations in the private markets are starting to decline. [Open Text Corp.’s, OTEX-T] Q2 adj. EPS may fall short of consensus due to one month of interest costs associated with the Micro Focus acquisition; however, we believe Q2 will be overshadowed by the likely update in OpenText’s FY23 target model and long-term aspirations for Micro Focus, which we expect will affirm the high (est. 48 per cent) adj. EPS accretion on the acquisition.”
Mr. Treiber raised his targets for Celestica Inc. (CLS-T) and Coveo Solutions Inc. (CVO-T), noting: “Both stocks have experienced an upward valuation re-rating over the quarter, in our view reflecting the modest decline in risk-free rates (10-year U.S. treasury down 76 bps since peaking in October) and likely improved investor sentiment on the fundamentals for these companies.”
His target for Celestica rose to US$14 from US$12 with a “sector perform” rating. The average target on the Street is US$13.57.
“Celestica, in our view, is likely to report Q4 revenue in line with RBC/consensus and toward the high end of guidance,” he said. “Our outlook reflects solid bookings and backlog as of Q3 and sustained hyperscaler demand. Even though we expect Q1 guidance in line with consensus, we believe Celestica is likely to slightly raise its FY23 outlook.”
His Coveo target is now $10, up from $9, with an “outperform” rating. The average is $9.50.
“Coveo’s shares are up 58 per cent since the company reported Q2 on November 7,” he said. “The rally, in our view, reflects Coveo’s consistent quarterly execution and improved shareholder visibility to Coveo’s long-term profitability. For Q3, we expect Coveo to report another solid quarter at or above the high end of guidance. We believe Coveo is likely to reiterate FY23 guidance.”
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Desjardins Securities analyst Doug Young expects “mixed” fourth-quarter results from Canadian insurance companies.
“Higher equity markets should be good, but lower average AUM [assets under management] will put pressure on wealth management results,” he said. “Higher interest rates are good, but lower corporate spreads could weigh on trading gains. The reopening in Asia should be a positive (for MFC and SLF); however, we don’t anticipate an impact until 2023. And we could go on. But the focus likely won’t be on the past, but more on what we should expect under the new accounting guidelines come 1Q23, for which we will hopefully get more information in the coming months.”
In a research report released Tuesday titled Oh my God, we’re back again..., Mr. Young said he’s projecting flat core year-over-year earnings per share on average, however that’s based on a “material” increase from IA Financial Corp Inc. (IAG-T) and a decline at the other three lifecos.
“IAG has an easier comp vs last year and also benefited from higher interest rates via new business gains this year vs strain last year,” he said. “We expect further pressures on MFC’s and SLF’s Asia businesses. Additionally, the group’s results will be tempered by lower average wealth or asset management AUM. On a positive note, on an average basis, the US dollar appreciated vs the Canadian dollar (relevant for all lifecos); however, the British pound, euro and Japanese yen all depreciated vs the Canadian dollar (the British pound and euro are relevant for GWO, the Japanese yen is relevant for MFC).
“Our 2022 numbers are based on IFRS 4 whereas our 2023 numbers are loosely constructed on the pending IFRS 17 guidelines. Despite various headwinds, there are several earnings growth drivers for each company for 2023 including: (1) SLF—contribution from the DentaQuest (DQ) acquisition, potential turnaround in Asia and SLC Management; (2) MFC—a potential turnaround in Asia and buybacks; (3) IAG—potential turnaround in US auto sales (implications for its US extended vehicle warranty business), organic growth, digital initiatives, buybacks and leveraging distribution capabilities domestically; and (4) GWO—addition of MassMutual’s and Prudential’s US retirement businesses.”
After adjusted his quarterly forecasts, Mr. Young raised his target prices for the four stocks. In order of preference, his changes were:
- Sun Life Financial Inc. (SLF-T, “buy”) to $73 from $69. The average on the Street is $69.11.
- IA Financial Corp. Inc. (IAG-T, “buy”) to $85 from $83. Average: $84.67.
- Manulife Financial Corp. (MFC-T, “hold”) to $26 from $24. Average: $26.30.
- Great-West Lifeco Inc. (GWO-T, “hold”) to $35 from $31. Average: $33.70.
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Desjardins Securities’ Energy Research team, led by analyst Chris MacCulloch, is shifting away from its previous bullish natural gas thesis “toward a more oil-centric near-term viewpoint.”
“Although we remain bullish on longer-term natural gas fundamentals, we have been taken aback by how rapidly natural gas markets collapsed following one of the mildest winters (to date) in decades and have likewise trimmed price targets across the board for gas-weighted producers,” the group said. “Conversely, we are growing increasingly bullish on oil prices as China begins reopening amid continued uncertainty with respect to Russian supply and have hiked price targets across the board for oil-weighted producers. Despite a bifurcated near-term commodity price outlook, the environment remains stimulative for all producers, many of which are no longer burdened by debt and are now returning more than two-thirds of FCF to shareholders—a proportion that should expand to upwards of 85 per cent in 2024 at current strip prices. The energy rally still has legs in 2023.”
The firm raised its 2023 forecast for WTI to US$90 per barrel (from US$85 previously) and reiterated its 2024 estimate of US$100.
“Both are materially above the current strip, reflecting our belief that the market should have greater clarity on terminal interest rates and much better visibility on the demand impact of the Chinese government’s recent abandonment of its zero-COVID policy as well as the supply impact of the G7 price cap and EU embargo on Russian crude oil and refined products,” Desjardins said. “We also expect WTI‒WCS differentials to narrow to US$20.00/bbl in 2023 as SPR releases wrap up and the inventory glut from last month’s Keystone pipeline outage eases.”
Its 2023 NYMEX forecast dropped to US$4 per thousand cubic feet from US$5.50 to “better reflect the disappointing start to the winter heating season and our expectation for ample U.S. storage levels.”
“Beyond bearish weather conditions, North American natural gas fundamentals were already deteriorating from our perspective; we now believe the market is oversupplied by 1.0–1.5 bcf/d on a weather-adjusted basis although we expect the softer price environment to drive a slowdown in drilling activity, which should result in tighter supply balances moving into 2024,” the analyst said. “As a result, we are increasing our 2024 price forecast to US$4.00/mcf (from US$3.50/mcf), directly in line with the current strip.”
Desjardins did warn the Canadian energy sector’s ability to repeat its “strong” performance of 2021 and 2022 will be “a tall order.”
“However, producers have remained steadfast in their commitment to capital returns, and the commodity price environment remains highly stimulative within a historical context, even for natural gas producers,” it said. “That said, we believe the current market requires an increased focus on differentiation, with most of the easy gains from the commodity reflation story now in the rear-view mirror. Our best ideas are SU (integrated oil), TOU (large-cap natural gas), CPG (mid-cap oil), AAV (small-cap natural gas), SDE (liquids-rich natural gas) and FRU (royalty).”
With that view, Mr. MacCulloch made a series target price adjustments for stocks in his coverage universe.
For large-cap companies, his changes were:
- Arc Resources Ltd. (ARX-T, “buy”) to $25 from $26. The average on the Street is $24.63.
- Canadian Natural Resources Ltd. (CNQ-T, “buy”) to $100 from $94. Average: $91.95.
- Cenovus Energy Inc. (CVE-T, “buy”) to $35 from $33. Average: $33.06.
- Imperial Oil Ltd. (IMO-T, “hold”) to $82 from $80. Average: $78.18.
- Suncor Energy Inc. (SU-T, “buy”) to $58 from $57. Average: $53.42.
- Tourmaline Oil Corp. (TOU-T, “buy”) to $90 from $97. Average: $93.77.
For dividend-paying stocks, his changes were:
- Crescent Point Energy Corp. (CPG-T, “buy”) to $16 from $15.50. Average: $13.94.
- Enerplus Corp. (ERF-T, “buy”) to $25 from $22. Average: $24.42.
- Headwater Exploration Inc. (HWX-T, “buy”) to $10 from $9.75. Average: $9.56.
- Peyto Exploration & Development Corp. (PEY-T, “buy”) to $17 from $19. Average: $17.63.
- Pine Cliff Energy Ltd. (PNE-T, “buy”) to $2 from $2.15. Average: $1.98.
- Tamarack Valley Energy Ltd. (TVE-T, “buy”) to $7.25 from $6.25. Average: $7.16.
- Vermilion Energy Inc. (VET-T, “buy”) to $31 from $35. Average: $33.92.
- Whitecap Resources Inc. (WCP-T, “buy”) to $14.50 from $14. Average: $14.47.
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Expecting its earnings to slow, Bernstein’s Aneesha Sherman downgraded Lululemon Athletica Inc. (LULU-Q) to “underperform” from “market perform,” pointing to diminishing demand, a cautious consumer outlook and negative margins.
She thinks negative mix effects from non-core category expansion, less productive international stores and higher marketing spends are all structural headwinds for the Vancouver-based company.
Ms. Sherman cut her target to US$290 from US$340, below the US$377.89 average.
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In reaction to recent share price depreciation, Credit Suisse’s Andrew Kuske upgraded West Fraser Timber Co. Ltd. (WFG-N, WFG-T) to “outperform” from “neutral” on Tuesday.
“From the summer stock peaks (July 20th), West Fraser Timber Co. Ltd. (WFG) shares delivered a roughly 25-per-cent negative capital return versus 9 per cent and 1% per cent for the S&P/ TSX Composite and the S&P 500, respectively,” he said. “With sufficient total potential return to a US$95 (was US$100) target price, we upgrade WFG to Outperform from Neutral.
“We fully acknowledge some housing market headwinds; however, the rate debate, housing market trends in H2 2023 and industry actions collectively provide an interesting risk-reward for WFG’s shares, in our view. Continued deceleration of housing market trends, weaker lumber prices and, in some cases, higher underlying cost structures (for now) are motivating a collection of curtailments. Such actions will help re-balance parts of the market and are broadly supportive of our upgrade to Outperform thematically.”
Mr. Kuske made the move despite lowering his 2022 and 2023 earnings per share projections to US$20.41 and US$3.65 from US$20.77 and US$5.97, respectively, based on “a series of operational and forecast changes.”
His US$95 target, down from US$100, is below the average on the Street of US$106.67.
“Forest product stocks are notoriously cyclical and often with rather accentuated moves – in both directions; the ‘perfect timing’ is typically elusive,” he said. “Industry curtailments (~400Mbf of capacity) and market structure should be helpful this cycle. Rate moves in H2 2023 (potentially declining) along with the current housing price compression bode well for affordability and return to improved prices and solid wood demand.”
“We believe West Fraser has an enviable position in both lumber and OSB markets, however, pricing and housing dynamics are not currently supportive.”
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Canadian railway companies continue to benefit from “healthy” traffic and pricing in the fourth quarter of 2022, according to Raymond James analyst Steve Hansen.
“Following a firming cadence last summer, Canadian rail traffic demonstrated further momentum in 4Q22, largely underpinned by sustained bulk tailwinds and a pair of easy comp events that amplified results (BC Floods, frigid Dec.),” he said. “Looking forward, while similar tailwinds are expected to persist near-term (1Q23), we ultimately expect growth to dissipate as one-time/seasonal comp events pass and incremental macro headwinds levy pressure on consumer-sensitive categories.”
Mr. Hansen thinks both Canadian National Railway Co. (CNR-T) and Canadian Pacific Railway Ltd. (CP-T) benefited from “sustained tailwinds and easy comps” and are now enjoying a “brisk” start to 2023.
“CN and CP 4Q22 traffic (revenue ton miles) increased 7.6 per cent and 8.0 per cent respectively, with CN landing in-line and CP notably underperforming our prior forecasts (7.4 per cent and 14.8 per cent respectively),” he said. “Consistent with the prior quarter, 4Q22 traffic growth was broadly underpinned by Grain (strong CDN harvest, low Mississippi), Auto (prod’n recovery), and a pair of brutal weather events last year (BC floods & acute winter temps), offset in part by common headwinds in Forest Products (weak lumber/housing). CN’s outperformance was largely consistent with this pattern, although we highlight continued outsized tailwinds in Coal (new Teck biz, exports) and Auto, while Intermodal (contract loss) lagged. Comparatively, CP enjoy outsized tailwinds in Intermodal (new contracts) and ECP (Drubit & IPL start-up), while Coal proved a major drag (Teck Elkview outage, now resolved), and Potash modestly underperformed.”
“Looking forward, both carriers are expected to commence 2023 running at a brisk pace, largely owing to a string of easy comps associated with acute winter weather last year – a pattern reflected in quarter-to-date (first 3 weeks) traffic for both carriers (CN: up 14.7 per cent / CP: up 22.3 per cent),” he said. “That said, we also expect growth to throttle down as these same winter comps fade (late-1Q23) and macro pressures exert further influence on economically sensitive categories (International Intermodal, Forestry). Prior expectations for sustained potash tailwinds have also been reigned in, largely owing to protracted international contract negotiations and buyers flocking to the sidelines. Unique factors that will combat this slowdown (in part) include a recovery in Teck’s Elkview production (CP coal), and a short strike comp for CP in late 1Q23.”
After introducing his 2024 forecast, Mr. Hansen raised his target for CN shares to $190 from $175 and CP shares to $115 from $105, keeping “market perform” ratings for both. The averages are $161.54 and $114.74, respectively.
“Notwithstanding these revisions, we reiterate our neutral (MP3) ratings on both carriers in light of near-term term macro concerns and elevated valuations,” he said. “While CP’s forthcoming merger approval is likely to provide added support and good reason to cast investor attention beyond 2023/24, we still believe near-term macro conditions warrant caution, leaving us to conclude the current risk/reward opportunity is well-balanced at current levels.”
Elsewhere, Berenstein’s David Vernon raised his targets for CN to $178 from $172 with an “outperform” rating and CP to $110 from $99 with a “market perform” rating.
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National Bank Financial analyst Cameron Doerksen thinks Cargojet Inc.’s (CJT-T) valuation is “interesting,” however he does not see any near-term catalysts to push its shares higher.
In a research report released Tuesday previewing the Mississauga-based company’s fourth-quarter earnings release, Mr. Doerksen said air freight indicators are now “flashing caution,” believing they will “weigh on sentiment that may preclude valuation multiple expansion for CJT in the near-to-medium-term.”
“We believe the Q4 peak demand came in more muted than expected, and we also see ecommerce growth slowing in 2023 as the post-pandemic normalization continues and as overall retail softness weighs,” he said. “We also note that the international air cargo market is now in an over-supplied situation which could pressure charter rates downward.”
That “softer” demand led the analyst to lower his full-year 2023 revenue forecast, despite expecting “solid” year-over-year growth in its ACMI (Aircraft, Crew, Maintenance and Insurance) segment from its long-term strategic agreement with DHL Network Operations Inc.
“Cargojet will see some cost offsets from lower overtime and training expenses in 2023 versus 2022, and we believe the company can largely protect margins by consolidating volumes on fewer flights if required. We also anticipate that the company will seek to defer some planned 2023 capex to later periods,” said Mr. Doerksen.
For the fourth quarter of 2022, he’s now projecting revenue and adjusted earnings per share of $268-million and $2.27, respectively, down from $295-million and $2.83. His full-year 2023 forecast fell to $954-million and $7.06 from $1.014-billion and $8.
Citing “greater uncertainty around out-year estimates,” Mr. Doerksen trimmed his target for Cargojet shares to $147 from $158, maintaining a “sector perform” rating. The average target is $189.55
“We remain positive on Cargojet’s longer-term growth prospects supported by aircraft additions under contract with DHL and secular growth in e-commerce volumes,” he said. “We also like the fact that the company’s largest customers are under longterm contract with its largest customer, Canada Post/Purolator, recently extending its contract to 2029 with options still in place to 2031. Relative valuation on the stock has also become more interesting ... However, with most indicators pointing to a macro-economic slowdown, a slowing of e-commerce growth that has been a key driver for the stock in recent years, and what looks to be an over-supply of capacity in the international air cargo market, we do not see an obvious catalyst for valuation multiple expansion for Cargojet shares in the short-to-medium-term. Indeed, while we still expect a solid Q4 from Cargojet, consistent with commentary across the package & courier and broader freight industry, we expect that peak period volumes (December) at Cargojet’s core customers fell short of initial expectations.”
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CIBC World Markets’ Diversified Financials analyst Nik Priebe made a series of target price adjustments to stocks in his coverage universe on Tuesday.
His changes included:
- AGF Management Ltd. (AGF.B-T, “neutral”) to $8 from $6.75. The average on the Street is $8.32.
- ECN Capital Corp. (ECN-T, “outperformer”) to $4.50 from $6. Average: $4.75.
- Fairfax Financial Holdings Ltd. (FFH-T, “outperformer”) to $1050 from $950. Average: $985.12.
- Fiera Capital Corp. (FSZ-T, “neutral”) to $9.50 from $9. Average: $9.79.
- First National Financial Corp. (FN-T, “neutral”) to $40 from $38. Average: $36.
- IGM Financial Inc. (IGM-T, “outperformer”) to $50 from $44. Average: $43.
- Onex Corp. (ONEX-T, “neutral”) to $75 from $80. Average: $90.80.
- Power Corp. of Canada (POW-T, “neutral”) to $37 from $35. Average: $36.81.
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In other analyst actions:
* Baird’s Jonathan Komp downgraded Canada Goose Holdings Inc. (GOOS-T) to “neutral” from “outperform” with a $29 target. The average is $27.07.
* TD Securities’ Arun Lamba raised Orezone Gold Corp. (ORE-T) to “buy” from “speculative buy” with a $2.25 target. The average is $2.33.
* KBW’s Michael Brown raised his targets for Brookfield Corp. (BN-N, BN-T) to US$45 from US$41 with an “outperform” rating and Brookfield Asset Management Ltd. (BAM-N, BAM-T) to US$35 from US$31 with a “market perform” rating. The averages are US$48.53 and US$34.72.
* Wells Fargo’s Zachary Fadem initiated coverage of Restaurant Brands International Inc. (QSR-N, QSR-T) with an “equal-weight” rating and US$70 target, exceeding the US$68.07 average.
* After Ritchie Bros. Auctioneers Inc. (RBA-T) revised its multibillion-dollar takeover offer for IAA Inc., Raymond James’ Bryan Fast bumped his target for its shares to US$60 from US$55 with a “market perform” rating. The average is US$65.36.
“We have increased our target price to reflect an increase in our estimates and to account for an earlier than expected close of transaction. However, as the shares likely trade range bound until the deal closes, we remain market perform as we view the stock fairly valued at these levels,” he said.
* With the completion of its MMX acquisition, Raymond James’ Brian MacArthur increased his Triple Flag Precious Metals Corp. (TFPM-T) target by $1 to $22 with an “outperform” rating, while CIBC’s Cosmos Chiu bumped his target to $22.50 from $21 with a “neutral” rating. The average is $22.43.
“We believe TFPM’s high-margin, scalable business model offers investors exposure to precious metals while mitigating risk. Triple Flag has a high-quality, diversified asset base with a favorable mine life and jurisdictional risk. The company also has near-term growth, longer-term growth optionality, as well as a flexible balance sheet to support future investments and its dividend,” said Mr. MacArthur.
* National Bank’s Don DeMarco cut his Wesdome Gold Mines Ltd. (WDO-T) target to $9.50 from $11.25 with an “outperform” rating. The average is $11.03.
“Our thesis considers exploration upside at Eagle and Kiena, with outlook for FCF harvesting in 2024, spare mill capacity at both mills meaning exploration can deliver immediate returns, production growth, FX tailwinds all Canadian, and as a U/ G mine, tempered by operational challenges, near-term cash burn, labour cost escalation and now deleveraging,” said Mr. DeMarco.