Inside the Market’s roundup of some of today’s key analyst actions
D.A. Davidson analyst Brandon Rolle upgraded BRP Inc. (DOO-T) on Tuesday after a recent North American off-road vehicle checks revealed the Valcourt, Que.-based manufacturer continues to gain market share.
Also citing “more effective” promotional activity compared to its competition and dealer feedback that indicated used vehicles and China’s CFMoto are “less of a threat to BRP” versus other manufacturers, he moved his recommendation to “buy” from “neutral” previously.
“From conversations with our NA ORV dealer contacts, we estimate BRP’s May ORV retail sales were up a high-teens percentage, outpacing our mid-to-high-single digits growth estimate for PII [Polaris Industries Inc],” said Mr. Rolle in a research note. “We would also note our checks indicate of June ORV retail trends and market share dynamics have continued through mid-June. Given what we’ve seen in our checks since April, it appears market share dynamics have shifted back to what we saw in a normalized pre-pandemic retail environment, where BRP consistently gained the most ORV market share despite not offering the greatest retail incentives. From a mix perspective, dealers continue to indicate entry-level demand has been impacted by the elevated interest rate environment, but more affluent customers are still looking for premium units and multi-line dealers believe BRP’s innovation is driving share gains within the premium segment.”
“We noted in our prior checks that BRP finally introduced select ORV rebates on April 1st with those promotional offers running through the end of May. This promotional support spurred strong market share gains over the last 2.5 months, with dealers continuing to indicate BRP’s interest rate incentives are having a greater impact on consumer demand, when compared to the elevated rebates offered by their competition. BRP’s ability to align their promotional support with consumer preferences, gives us confidence in their ability to continue gaining share. For June, we did not pick up any incremental promotional activity from BRP or PII, which leads us to believe recent ORV market share dynamics are likely to remain for the foreseeable future. As a reminder, BRP’s promotional support is already accounted for in their updated FY24 guidance, with the expectation increased promotional activity would be a 200 basis points headwind to margins this year.”
Mr. Rolle reiterated his second-quarter earnings per share projection of $3, which exceeds the consensus forecast on the Street by 4 cents, seeing BRP “poised to benefit from strong retail trends across multiple segments.”
“Although dealer inventories are back to normalized levels for the most part, we believe BRP could have multiple channel fill opportunities in 2Q24 and 2H24, driven by strong market share gains across the ORV, PWC and pontoon industries,” he added. “Given that limited promotional support has been needed for BRP to drive their strong retail trends, we would expect margins to remain elevated, potentially allowing BRP to exceed investor expectations moving forward.”
“In addition to our favorable view on BRP’s updated FY24 EPS guidance and 2Q24 outlook, we are also more confident in BRP’s ability to achieve their FY25 earnings target. Success with new product introductions in addition to continued market share gains in key categories, without the need of significant promotional support gives us confidence BRP is on the right path to achieving their guidance. Even if BRP were not to achieve their EPS target range of $13.50-$14.50 and there was a severe pullback in retail demand causing BRP to only deliver $10-$11 of earnings in FY25, a reasonable 12 times P/E multiple still values the stock at $120-$132 (vs. our updated $126 PT).”
His target for BRP shares rose to $126 from $111. The average target on the Street is $133.61, according to Refinitiv data.
“We view BRP as the name to own within the ORV industry and one of the cleaner stories both near-term and long-term within our coverage list,” Mr. Rolle concluded.
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After hosting investor meetings with the management team from TFI International Inc. (TFII-T) on Monday, National Bank Financial analyst Cameron Doerksen warned the freight market remains “weak,” however he sees “abundant” opportunities from the M&A market.
“Consistent with the mid-quarter updates from some of its U.S. LTL [less than truckload] peers, TFII is not seeing the normal seasonal uptick in volumes in its U.S. LTL segment in Q2,” he said. “TFI is also seeing volume pressure in its Specialized TL, Canadian TL, and Canadian LTL businesses more recently. With volumes out of its control, TFII is focused on adjusting its cost base to protect margins.”
“TFII is making progress on both its short- and long-term initiatives designed to improve margins in its TForce Freight U.S. LTL operations and eventually reach a target operating ratio of 80-85 per cent (Q1/23 O/R was 95.7 per cent). Shortterm, the company is focused on reducing costs by adjusting its headcount, renewing its truck fleet, and reducing its real estate footprint. Additionally, TForce Freight will fully benefit in 2024 from the end of the UPS transition services agreement (which would save almost $35-million annually). Longer-term, improvements in density and other network adjustments will further drive profitability.”
According to Mr. Doerksen, the Montreal-based company sees the current M&A environment as “the best they’ve seen in a while.” He thinks the company has the ability to complete a transaction without financial contingencies unlike some private equity buyers “as its balance sheet is well-structured, and it generates significant free cash flow.”
“We suspect TFII will do more than the previously targeted $300-million in tuck-in M&A by the end of the year,” he said.
“TFII completed four tuck-ins in Q1 and in early May announced the acquisition of Saskatoon-based LTL carrier Siemens Transportation Group ($150-million in revenue) and a small U.S. LTL company based in Wisconsin. Based on what appears to be a robust pipeline, we believe the company will deploy more than the targeted $300 million in tuck-in M&A in 2023. As for a larger deal, the market has been focused on publicly traded ArcBest as TFII disclosed that it had acquired a stake in the company (now 4 per cent of ARCB shares) earlier this year. However, we suspect that ArcBest is potentially a lower likelihood target for TFII as it focuses on easier-to-complete deals. We do not expect a larger-scale deal to be completed this year and absent any larger M&A, the company’s NCIB is likely to remain active.”
Pointing to “less optimistic industry trends, particularly in its U.S. LTL segment,” Mr. Doerksen trimmed his financial estimates with his 2023 earnings per share forecast sliding to $6.56 from $6.90, below the management guidance of $7-$7.25, He’s now assumed a rebound in freight will come 2024 instead of later this year.
That view led him to reduce his target for TFI shares to $165 from $173 with an “outperform” recommendation. The average on the Street is $155.61.
“While the freight market looks to remain challenging for longer, we nevertheless maintain our Outperform rating on TFII shares as we remain positive on the company’s prospects over the longer-term with expected margin expansion in the LTL segment in 2024 and ongoing small and medium-sized M&A to continue,” he concluded.
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BMO Nesbitt Burns analyst Fadi Chamoun sees “muted” demand across his Canadian freight transportation coverage universe, leading him to reduce his forecast for both 2023 and 2024.
“Over the past several days, we have reviewed quarter-to-date (QTD) demand including rail traffic, LTL tonnage, as well as flight hour activities, and spoken to management teams and examined macro data,” he said. “The demand environment remains challenging with volumes trending lower than our prior forecasts across much of our freight transportation coverage. Within the rails, the deepest volume declines on an absolute basis and relative to consensus expectations have been among the Canadian rails of CNR and CPKC, which we attribute to difficult comps and company-specific headwinds such as weaker U.S. imports into Canadian ports. We sense also that wildfires, particularly in western Canada, may have modestly contributed to the weakness in volumes.”
“2024 is looking increasingly mixed with consumer end markets potentially stabilizing while a rebound in manufacturing/industrial related freight appears unlikely before H2/24. BMO economics team forecasts another rate increase of 25bps in July, which would bring the fed funds range to 5.25-5.50 per cent. With manufacturing PMI historically troughing 8 to 11 months post-peak rates, and with banks reducing credit availability, we believe the demand environment may remain soft until mid-2024.”
Given that view, Mr. Chamoun said he’s “maintaining a cautious view on the outlook for the freight cycle as visibility into a positive inflection in demand remains limited. For investors, he continues to recommend “selective exposure.”
“Demand headwinds and a more muted volume outlook extends to all modes of freight transportation,” the analyst said. “On a relative basis, we continue to favor the railroads, which remain well positioned to benefit from diverse end markets, improving service levels, and strong pricing power to offer more predictable earnings in the immediate term with positive operating leverage and EPS acceleration once demand begins to recover. Our top picks within freight transportation are CPKC and XPO which both offer multi-year idiosyncratic EPS compounding opportunities. We also rate CNR, UNP, and CSX Outperform reflecting generally positive risk/reward from current levels.”
He made a pair of target reductions on Tuesday. They are:
* Canadian National Railway Co. (CNR-T) to $177 from $180 with an “outperform” rating. The average is $166.14.
“Much like its peers, CNR is facing broad demand headwinds as the economy slows down including in energy & chemicals, metals & minerals, and forest products. We note that domestic intermodal volumes have also been decelerating in recent months after having held up well throughout much of 2022 and early 2023. We believe that weak underlying demand and greater competition from trucking are some of the main drivers behind the weakness,” he said.
“CNR Q2/23 is lowered by 6 per cent reflecting weaker-than-anticipated volumes quarter-to-date ... Weaker intermodal and several industrial markets including petroleum, chemicals, and forest products drive the lowered earnings. The weakness in volumes is partially offset by stronger Canadian regulated grain pricing which helped mitigate the impact on our F2023 and F2024 estimates.”
* Cargojet Inc. (CJT-T) to a Street-low $110 from $115 with a “market perform” rating. Average: $151.25.
“CJT forecast was lowered reflecting weaker demand in the domestic market, which we believe is tracking down in the high-single-digit range from a volume perspective. Weaker international freight rates are likely to be a source of pressure on margins as well. The estimates are lowered through F2024 as we now assume the B777 aircraft deliveries get pushed out fully into F2025,” he said.
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Canaccord Genuity analyst John Bereznicki thinks Anaergia Inc.’s (ANRG-T) “appointment of a new CFO with meaningful renewable energy sector experience should help alleviate some uncertainty for the company as it seeks to appoint a new auditor.”
After the bell on Monday, the Burlington, Ont.-based company appointed Andrew Spence to the role. He previously held the same position at both Aria Energy LLC, now part of BP, and Ameresco (AMRC-N).
In late May, the waste treatment firm said that one of its units, Rialto Bioenergy Facility, initiated voluntary Chapter 11 restructuring proceedings in the U.S. Bankruptcy Court for the Southern District of California. It expects RBF, which is 51-per-cent owned by wholly owned subsidiary Anaergia Services LLC, to continue to operate its multi-feedstock bioenergy facility in Rialto, California during the restructuring proceedings.
Last week, it announced it has signed a contract to provide technologies that will enable Monterey One Water, the wastewater utility of northern Monterey County, California, to make renewable energy from food waste as well as wastewater.
“While we don’t view Anaergia’s recently announced technology sale to the Monterey One Water’s Regional Treatment Plant (RTP) as particularly material to our financial outlook, we nonetheless believe it does underscore the company’s relevance despite a challenging fundamental backdrop,” said Mr. Bereznicki.
Reiterating a “buy” rating, he raised his target for Anaergia shares to $1 from 75 cents. The average on the Street is $2.84.
“We nonetheless reiterate our HOLD recommendation as we await progress on the Rialto Chapter 11 process and look for tangible signs Anaergia is generating adequate returns from its existing BOO portfolio,” he concluded.
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Despite a cut to Clean Air Metals Inc.’s (AIR-X) resource outlook for its Thunder Bay North project in late May, Hannam & Partners analyst Jonathan Guy continues to see it as “a compelling M&A target given its strategic location in an active region .... as surrounding PGM operations will need to source additional ore to feed their plants.”
On May 4, the Thunder Bay, Ont.-based company released an updated Indicated and Inferred Mineral Resource estimate, which saw a reduction in resource tonnage. That was followed by a management shakeup that saw Abraham Drost depart as chief executive officer and director.
“Clean Air Metals has faced a significant headwind from the restatement of the resource for the Thunder Bay North project in May, with the CEO subsequently stepping down,” said Mr. Guy. “While the updated resource is smaller, it remains high-grade and in our view the deposit is still attractive. Management is now focused on re-cutting the project to take into account the resource while continuing with exploration to test the depth potential. Jim Gallagher, who is also the previous Executive Chair, has taken on the CEO role. Mr Gallagher is a very experienced mining engineer who was previously CEO of North American Palladium prior to its acquisition by Impala and is well equipped to move the project forward through this period. He is replaced as Chair by Dean Chambers, who was previously CFO of Sherritt and Chair of North American Palladium. We have adjusted our model to reflect the new resource and recoveries, assumed lower throughput and later first production.”
In a research report titled Riding through the turbulence, Mr. Guy assumed coverage of the stock and reduced the firm’s target to 15 cents from 60 cents without a specific rating. The average is 40 cents.
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In other analyst actions:
* TD Securities’ Tim James upgraded Andlauer Healthcare Group Inc. (AND-T) to “buy” from “hold” with a $58 target, exceeding the average on the Street of $56.25.
* Resuming coverage following its U.S. initial public offering, RBC’s Sabahat Khan reaffirmed an “outperform” rating and $69 target for ATS Corp. (ATS-T). The average is $69.71.
“The equity offering improves the company’s balance sheet position and sets up ATS well to execute on its M&A strategy, which has created meaningful value for shareholders in recent years,” he said. “Overall, ATS has performed well since Andrew Hider was appointed as CEO in 2017 (e.g., strong organic growth, margin improvement, prudent capital allocation), and we believe this equity offering positions the company well for the next leg of its journey.”
David Leeder