Inside the Market’s roundup of some of today’s key analyst actions
Citing the uncertainty associated with Tuesday’s announcement that a commercial grain storage bin manufactured by the company and located at a customer’s export terminal in North Vancouver, collapsed on Sept. 11, Raymond James analyst Steve Hansen downgraded shares of Ag Growth International Inc. (AFN-T).
“Given the ongoing investigation into the silo collapse, AGI has yet to provide any indication on the cause or potential cost/liabilities associated with the incident — although we hope to hear something in the coming weeks,” he said.
“I stressed that the downed silo represents anew product line developed specifically for two commercial export projects, including the N.Van site (15 bins) and one other local export terminal (20 bins, erected). In this context,we see this issue as discretely ring fenced to these 35 bins, leaving the rest of AGI’s global franchise unaffected. However, with both these projects reportedly valued at $75-million-plus (per our conversations, the company has not substantiated), the challenge is handicapping: 1) the cost to fix/augment (possibly replace) all the bins; and 2) what quantum of damages/liability(if any) will accrue given the severe business interruption at the associated terminals.”
Mr. Hansen said “red flags were already hoisted” on the North Vancouver project, which has been “riddled with challenges.”
“As a reminder, AGI previously recorded $14-million in equipment ‘rework’ charges over three quarters (3Q19/4Q19/1Q20) at the same site, although we understand this work was primarily related to the terminal exoskeleton (catwalks, conveyors, etc.), not the silos,” he said. “Still, this event clearly re-elevates concern.”
“Quantifying the impact of this event remains impractical given the current void of info, in our view, with the resulting visibility almost as hazy as Vancouver’s skyline following severe U.S. wildfires. Half a dozen industry stakeholders we’ve spoken with share a similar view, although all concurred the cost (& time) to fix will likely be significant. Given these discussions, we’ve temporarily circled a cost estimate range of $25-75-million, although several contacts suggested the lower bound was ‘unlikely’ (too low), and the upper bound could easily be higher.”
Though he said the “fog will lift” and emphasized the storage and handling macro backdrop remains “robust,” Mr. Hansen lowered Ag Growth to “market perform” from “outperform” until greater clarity emerges. His target for its shares slid to $40 from $50. The average on the Street is $41.86.
TFI International Inc.'s (TFII-T) “strategic” US$225-million acquisition of DLS Worldwide “opens the road” for its eventual entry into the U.S. less than truckload freight shipping (LTL) market, said Desjardins Securities analyst Benoit Poirier.
On Tuesday, the Montreal-based company announced it’s signed a definitive agreement to acquire Illinois-based DLS, a business unit of R.R . Donnelley & Sons Company. Over the last 12 months, it generated approximately US$550 million in revenue, primarily from LTL.
“We do not believe this acquisition marks a change in strategy or that it represents a lack of discipline on the part of management — we believe the strategic rationale behind the transaction is compelling as DLS represents TFII’s first major U.S. logistics operation focused primarily on LTL,” said Mr. Poirier. “This business should provide TFII with the necessary market intelligence to successfully enter the asset-based LTL segment through M&A down the road.”
He thinks the U.S. LTL market represents a “compelling” opportunity for TFII, but cautions that a large transaction is necessary to enter it.
“The US LTL market represents an attractive growth opportunity for TFII as the market has undergone consolidation (25 largest players accounted for 90 per cent of total LTL revenue in 2019),” he said. “Such consolidation typically commands pricing discipline from the largest players. On that front, total revenue from the 25 largest US LTL players increased by 0.7 per cent year-over-year in 2019 (vs down 0.2 per cent for the entire U.S. LTL market, implying negative 8.5 per cent for the remaining smaller LTL players) despite the slowdown in U.S. manufacturing and weak TL spot market rates (which resulted in some competition for freight), demonstrating the level of pricing discipline in the industry (no signs of rate discounting to fill trailers similar to what occurred in 2008–09).
"Ultimately, we believe the pandemic and the resulting decline in U.S. industry production (current consensus expectations are for a decline of 8.25 per cent in 2020) could create attractive M&A opportunities for TFII to penetrate this market. Nevertheless, we believe TFII would need to realize a large transaction to ensure that it gains the necessary scale to compete in this consolidated market. This strategic opportunity could be the transformative transaction TFII has been talking about for a few quarters.”
After increased his earnings expectations for both fiscal 2020 and 2021, Mr. Poirier raised his target for TFI shares to $70 from $68, keeping a “buy” rating. The average on the Street is $66.11.
Elsewhere, Laurentian Bank Securities analyst Nauman Satti raised his target to $66 from $65 with a “buy” rating (unchanged).
Mr. Satti said: “We continue to like TFII for its prudent management, ability to rein in costs, focus on value extraction and growth via acquisition strategy. We caution investors that headwinds remain from a muted freight environment which should result in negative year-over-year growth for 2020.”
Tesla Inc.'s (TSLA-Q) “Battery Day” event next week will “showcase” batteries as “a pillar” of its growth strategy over the next two decades, according to Credit Suisse analyst Dan Levy.
“We expect Battery Day to effectively be ‘Master Plan Part 3,’” he said. “Tesla has talked to long-term battery capacity of 2 TWh – more than 30 times its current capacity. This sharp increase supports growth in three areas: auto, stationary storage, and supply to others. Specifically in auto, battery growth underscores Tesla’s ambition of selling 20mn vehicles/yr, which would make it 2 times the size of Toyota (the world’s largest automaker), and is 40 times Tesla’s volume this year. While we see this as overly aggressive, we nevertheless foresee Tesla reaching 5 million units over time; market share gains of Japanese OEMs in the U.S. in the 1980s/90s serves as a precedent.”
Mr. Levy said the Sept. 22 event, which coincides with the annual shareholder meeting, will highlight the company’s plan to insource its battery manufacturing prices, which he thinks is “central to achieving scale and driving cost down.”
“Even if Tesla provides overly ambitious aspirations at Battery Day, we nevertheless expect the event to reinforce Tesla’s long-term growth narrative – central to the stock, while also reinforcing investor perception that Tesla is ahead of other automakers,” he said.
After raising his 2020 earnings per share projection to US$3.33 from US$2.55, Mr. Levy hiked his target for its shares to US$400 from US$280, noting “an energized growth narrative reinforces Tesla’s elevated stock price, and thus a wide cost-of-capital advantage.” The average target is currently US$303.49.
He maintained a “neutral” rating.
Following FedEx Corp.'s (FDX-N) release of better-than-anticipated quarterly results after the bell on Tuesday, Citi analyst Christian Wetherbee said he thinks COVID-19 has “materially changed the landscape for the parcel carriers, which if permanent should greatly increase the value of each’s network.”
The U.S. bellwether reported total revenues for the first quarter of fiscal 2021 of US$19.32-billion, up 13.3 per cent year-over-year and exceeding Mr. Wetherbee’s US$17.86-billion. Adjusted operating income of US$1.64-billion was a jump of 56.4 per cent and also topped his forecast (US$989-million).
“Coming off FedEx’s earnings call we believe the company is pulling forward peak in two ways,” he said. “First, volume growth is trending at/above peak levels well ahead of the traditional holiday peak, suggesting an even more constructive fundamental backdrop ahead. Second, given the much better than expected results from each of its three operating segments, we believe previous peak earnings have been pulled forward by at least 2 years in our model from F23 to F21. Along those lines, we are increasing our F21 estimate to $15.50, which is higher than our previous F23 estimate of $15.30, and our revised estimate still assumes an anti-seasonal step down in earnings power over the next 3 quarters (typical seasonality applied to F1Q equals $21 of annual earnings potential).”
“As we like simple answers to complex questions, we think the key paradigm shift underway in parcel is that for years the industry had too much capacity and now it doesn’t have enough. This sounds obvious, but it means capacity additions can now be margin/profit accretive vs. dilutive, which has been the case over the last 5 years as customers required elite service even if there wasn’t a requirement to pay for it. Now that networks are full shippers have no choice and incremental volume/capacity additions can generate positive incremental margins, which is a big shift, particularly as the growth is levered to the secular growth of ecommerce. This can all change for the negative if volume slows, and it’s possible that some of the COVID-19 induced tailwinds will ease next year. But we think still solid B2C volume coupled with recovering B2B is enough to keep networks full in C21 and that will keep newly found pricing power intact.”
With the “strong” results, Mr. Wetherbee raised his fiscal 2021, 2022 and 2023 earnings per share estimates significantly to US$15.50, US$16.80 and US$18.90, respectively, from US$11.55, US$14 and US$15.30.
Keeping a “buy” rating for FedEx shares, he hiked his target to US$300 from US$260. The average on the Street is US$254.58
“We believe the sharp decline in EPS estimates that has transpired over time, coupled with stabilizing/improving global trade trends, the surge in ecommerce volume and potentially better parcel pricing suggest that estimates have finally bottomed,” said Mr. Wetherbee. “We believe that a directional change in earnings from a trend of misses and guide downs to meets and then to beats and raises is a powerful catalyst for the stock even if the magnitude of increases was smaller than the decline. We think we are at/near the inflection point to positivity and see a reasonable path toward 60-per-cent gains in earnings power from F20 to F23.”
Echelon Capital Markets analyst Rob Goff expects AcuityAds Holdings Inc.'s (AT-T) new self-service platform to gain significant traction for advertisers and lead to “further market strengthening.” .
On Tuesday, the Toronto-based company announced the launch of its new platform is set for Oct. 1 following a round of beta testing with six “highly established” brands, including a Fortune 50 home renovation retailer, one of the largest U.S. insurance groups, and a large direct-to-consumer mattress company.
“Trial participants reported that the new technology simplified their campaign creation process, generated data-driven analytics, and improved ROI,” said Mr. Goff. “We believe that the product launch will accelerate self-service revenue growth gaining contracts from brands intending to operate their ad campaigns internally. The product launch is strengthened by the inclination of companies to protect their brands by running ad campaigns internally for greater control while they are also focused on improved ROI with marketing budgets in a COVID-19 environment under greater scrutiny.”
“Furthermore, we are encouraged by the recent update by the management that highlighted a $10.0-million 2020 ad campaign project from the client who had spent $4.5-million in 2019, and another one with only $0.09-million in 2018 to spend $3.6-million in 2020. The Company has seen a continued strengthening in the market with recent activity approaching pre-COVID levels.”
Expressing enthusiasm about the “positive” update, Mr. Goff raised his financial expectations for the company. His 2020 and 2021 revenue estimates rose to $108.98-million and $115.40-million, respectively, from $95.94-million and $108.50-million. His adjusted earnings per share estimates increased to 16 cents and 22 cents from 14 cents and 20 cents.
“With greater certainty in a recovery of its financials, we believe that the company is more likely to engage in M&A given the recovery in its shares, its positive FCF along with its cash of $9.1-million at the end of the quarter Q220 and its access to an additional $16.9-million from its credit facilities," said Mr. Goff. "AT’s strengths are looking at a market where prospective targets often have greater financial pressures and limited access to growth capital to achieve scale.”
Keeping a “speculative buy” rating on AcuityAds shares, Mr. Goff increased his target to $4.50 from $2.80. The average on the Street is $3.20.
“We continue to see AT as an attractive acquisition candidate considering the strength of its product/service (measured by its ramping traction) along with its current valuation where an industry acquirer would look for significant technology savings where the acquirer moved onto the AT platform and in light of the pace of consolidation," the analyst said.
A day after its shares fell almost 4 per cent despite a “strong” third-quarter earnings beat and “solid” fourth-quarter guidance, RBC Dominion Securities analyst Mike Dahl raised his rating for U.S. homebuilder Lennar Corp. (LEN-N) to “outperform” from “sector perform.”
“We believe LEN’s strategic price/pace balance and internal initiatives will protect strong margins against cost inflation and drive core HB [homebuilding] returns higher, while upside remains from unlocking value in ancillary businesses (announced SPAC deal for Opendoor should unveil value of LEN’s stake; eventual spin/sale of MF [multifamily] business),” he said.
In response to the better-than-anticipated release, Mr. Dahl raised his 2020 and 2021 earnings per share projections by 3 per cent and 14 per cent, respectivelty, to US$7.36 and US$8.15, respectively, from US$6.63 and US$7.14.
“Importantly, management has strategically forgone some volume in the near term, opting to push price and maintain pace discipline in order to optimize returns and limit overexposure to inflationary pressures from selling too far out given the cost environment and capacity constraints,” he said. "As a result, LEN expects historically strong margins throughout ’21 (23 per cent or more), though this also assumes that lumber prices normalize later in the year (40–50 per cent lower from current).
“While some may focus on other builders' flashier current order growth, we consider LEN’s strategy to be wise in a time when costs are climbing and it will be difficult for others to actually deliver their lengthening backlogs in the near term. Our higher numbers translate into a 16-per-cent ROTE (core HB ROTE: 17 per cent), which should command a higher multiple vs. the current 1.4 times year-end 2021 TBV, especially when considering embedded value of ancillary businesses.”
The analyst raised his target for Lennar shares to US$89 from US$78. The average on the Street is US$84.40.
Elsewhere, Citi’s Anthony Pettinari increased his target to US$90 from US$77, keeping a “buy” rating.
Mr. Pettinari said: “While underlying demand is strong, record lumber costs and tight labor have created an incentive for builders to slow sales pace, dulling the edges of an otherwise sharp V-shaped housing recovery. We think LEN’s focus on returns over volume is prudent, and the stock reaction is overdone (a number of builders saw shares pull back after strong 2Q beats, and then move higher over the following weeks).”
In other analyst actions:
- CIBC World Markets analyst Anita Soni raised New Gold Inc. (NGD-T) to “outperformer” from “neutral” with a $2.60 target, up from $1.85. The average on the Street is $2.56.
- Ms. Soni also upgraded Endeavour Silver Corp. (EDR-T) to “neutral” from “underperformer” with a $7 target, up from $4. The average is currently $5.31.
- Cormark Securities analyst Richard Gray raised SSRM Mining Inc. (SSRM-T, SSRM-Q) to “buy” from “market perform” with a $40 target, up from $36. The average is currently $35.
- Cormark initiated coverage of Stelco Holdings Inc. (STLC-T) with a “buy” rating and a Street-high $16 target. The average target is currently $9.68.
- Peel Hunt initiated coverage of Eco Atlantic Oil & Gas Ltd. (EOG-X) with a “buy” rating.
- Scotia Capital resumed coverage of CES Energy Solutions Corp. (CEU-T) with a “sector outperform” rating and $2 target. The average is $1.55.
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