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Inside the Market’s roundup of some of today’s key analyst actions

North American railroad companies are likely to report better-than-expected volume results for the third quarter, according to RBC Dominion Securities analyst Walter Spracklin, pointing to higher grain volumes in Canada and intermodal carloads south of the border.

“We expect Intermodal momentum, especially at the U.S. rails, to continue into Q4 driven by strong consumer demand following the pandemic, but highlight that the rails do not have much visibility into 2021,” he said in a research report released Wednesday.

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“Moreover, we believe that recent Grain strength on the back of an expected record Canadian crop will favourably affect volumes in Q4 and into 2021.”

Heading into earnings season for the sector, Mr. Spracklin said Canadian Pacific Railway Ltd. (CP-T) and Union Pacific Corp. (UNP-N) remain his preferred investment plays.

“We continue to like CP reflecting its operations focused management and attractive valuation,” he said. “We expect Grain and Potash strength to drive volume stability and believe that core pricing will remain in the 3-4-per-cent range. Moreover, we are modelling for continued margin improvement and note that valuation in our view remains attractive. Looking at UNP, we view it as having the most significant opportunity for operating leverage in the potential recovery, which in our view will reflect meaningfully both from an earnings and valuation perspective. We highlight numerous operating improvements that we expect to become evident via improving margins over the next few quarters. We view UNP as having the premier U.S. rail network, and expect this as well as a PSR experienced COO, to drive O/R [operating ratio] to 55 per cent and result in a premium valuation multiple. We view UNP as having the most upside potential relative to the other rails in our coverage.”

For CP, Mr. Spracklin lowered his earnings per share projection for the third quarter to $4.34, or 4 cents below the current consensus on the Street, from $4.43 based on the expectation of lower yields. He did, however, raise his fourth-quarter expectation, leading to a higher full-year forecast ($17.59 from $17.40).

Keeping an “outperform” rating, he raised his target for CP shares to $439 from $408. The average on the Street is $402.51, according to Refinitiv.

“Our unchanged target multiple (21 times) is the highest in the group due to, in our view, CP’s strong operating model and service offering,” he said.

For Canadian National Railway Co. (CNR-T), Mr. Spracklin increased his EPS for the quarter to $1.44, or a penny more than the consensus, from $1.41 based on better-than-anticipated volumes. His full-year estimate rose to $5.42 from $5.29.

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“We are bringing up our Q3 estimates due to higher Grain volumes but expect this to be partly offset by the strike at the Port of Montreal and increased employee count, both of which we believe will unfavorably affect margins,” he said.

With a “sector perform” rating, he increased his target to $145 from $125. The average on the Street is $122.85.

Mr. Spracklin also made the following target price changes:

  • CSX Corp. (CSX-Q, “sector perform”) to US$78 from US$73. Average: US$81.65.
  • Norfolk Southern Corp. (NSC-N, “underperform”) to US$190 from US$172. Average: US$211.09.
  • Union Pacific Corp. (UNP-N, “outperform”) to US$224 from US$194. Average: US$197.50.


Though they are “decidedly bullish” on the outlook for natural gas, Desjardins Securities analyst Justin Bouchard and Chris MacCulloch are taking a much more cautious view on oil in the near-term.

“That said, we firmly believe that the macro backdrop is ultimately setting up for a constructive environment for oil although the timing of that playing out is still likely a few years out,” he said. "As a result, we are generally more constructive on gas-weighted producers in the here and now, but we acknowledge that some of the oil-weighted names are simply too compelling from a valuation perspective to ignore despite our more cautious outlook.

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“Furthermore, while equity performance could be stagnant for oil-weighted producers in the near term, we continue to see significantly more potential upside than downside over the medium term.”

In a research report released Wednesday, the analysts assumed coverage of eight Canadian exploration and production (E&P) companies, emphasizing oil is still facing “several structural headwinds” in the near term.

“The looming prospect of further COVID-19-inflicted damage, the 7.5 million of OPEC+ barrels on the sidelines, elevated global crude inventories and the risk of widening western Canadian differentials as the oil sands begin ramping later this fall are all decidedly bearish for oil prices—at least in the near term,” they said. “But make no mistake, we continue to have a constructive longer-term outlook for oil. The lack of spending on new projects — both within North America and globally — due to low prices coupled with reservoir declines will eventually come home to roost, but that will likely take a few years to materialize.”

Mr. Bouchard assumed coverage of the following companies:

* ARC Resources Ltd. (ARX-T) with a “buy” rating and $9.50 target. The average on the Street is $8.45.

“ARC Resources has long been viewed as a conservatively run company with a track record of strong operational performance and disciplined capital allocation,” he said. “In addition to exemplary disclosure and performance on the ESG side, the combination of manageable corporate declines (27–28 per cent), top-decile capital efficiencies ($8,500 per barrel of oil equivalent per day), high natural gas weighting (with ample AECO upside) and a largely completed multi-year Montney infrastructure build-out checks all the boxes from a ‘compelling investment’ standpoint. Moreover, if commodity prices cooperate, the company has the potential for near-term accretive growth via the Attachie asset (likely starting in 2021) — a high-deliverability liquids rich gas play in northeast BC.”

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* Seven Generations Energy Ltd. (VII-T) with a “buy” rating and $6 target. Average: $6.13.

“Although we are constructive on oil prices in the medium term, the company’s high decline rates, elevated debt levels and surplus natural gas takeaway commitments will require management to tread carefully, although if the moves we have seen since March are any indication, we are confident the team is up to the task,” he said.

* Tourmaline Oil Corp. (TOU-T) with a “buy” rating and $27 target. Average: $22.38.

“In our view, Tourmaline is quickly joining the ranks of the ‘must-own Canadian energy investment club’ given its size and scale — indeed, our view is that the company is a natural consolidator in the space. Simply put, we find it exceedingly difficult to poke any holes in this story,” he said.

Mr. MacCulloch assumed the following stocks:

* Crescent Point Energy Corp. (CPG-T) with a “hold” rating and $2.50 target. Average: $3.45.

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“In the last two years, the newly installed Crescent Point management team has engaged in a successful turnaround strategy which has enabled the company to significantly reduce debt levels and operating costs by focusing on its core light oil plays," he said. “Operational performance and capital efficiencies have also improved on the back of these strategic changes, resulting in more consistent quarterly results — the market recognition for which was poised to occur this year. And then COVID-19 hit, which put Crescent Point on its back foot with a renewed and, frankly, necessary focus on sustainability and financial liquidity to weather the storm. To date, we believe the company has taken all the necessary steps to survive the downturn; however, it will eventually require some help from strengthening oil prices or the execution of further dispositions to right-size the balance sheet — ideally some combination of both. Unfortunately, the timing of either event is still highly uncertain, which drives our cautious outlook for the story,” he said.

* Enerplus Corp. (ERF-T) with a “buy” rating and $4.50 target. Average: $5.09.

“We believe Enerplus is well-positioned to capitalize on our bullish natural gas thesis through its non-operated position in the Marcellus, which should tide it over until oil prices improve," he said.

* Peyto Exploration & Development Corp. (PEY-T) with a “buy” rating and $4.50 target. Average: $3.10.

“While the company bears more than a few scars from the extended downturn, we believe it is poised to relive its past glory by riding the potential upcoming bull market as one of the few remaining Canadian natural gas producers offering scale to investors,” he said.

* TORC Oil & Gas Ltd. (TOG-T) with a “buy” rating and $2.75 target. Average: $2.71.

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" The consistency and predictability of quarterly results is a function of the high-quality asset base, which has been conservatively managed with a view to long-term sustainability. We also anticipate an eventual resumption of the dividend, the potential timeline of which could be accelerated on the back of a strategic acquisition that further reduces debt levels while providing greater scale. Meanwhile, we expect the company to remain disciplined with regard to capital spending plans in response to oil prices while continuing to aggressively pay down debt," he said.

* Whitecap Resources Inc. (WCP-T) with a “buy” rating and $3.75 target. Average: $3.45.

“While we remain cautious on global oil market fundamentals, we believe that Whitecap has established itself as a key go-to name in the Canadian energy sector for investors positioning for an eventual recovery,” he said. “The company has built a sustainable dividend model through a diversified portfolio of waterflood and EOR projects, which has resulted in manageable corporate decline rates.”


Nomad Royalty Company Ltd. (NSR-T) possesses a business model that is “high margin, safe and proven at providing returns,” according to Industrial Alliance Securities analyst Puneet Singh.

Calling it a “fresh face,” he initiated coverage of the Montreal-based precious metals royalty with a “buy” rating on Wednesday.

“The royalty/streaming business model is tried, tested, and confirmed to generate value over time,” said Mr. Singh. “Royalty firms are the best allocation for those looking for safer gold exposure because they don’t face the capital and operating cost risks a traditional miner incurs, and have higher safety margins on ROI [return on investment]. These companies have garnered the highest multiples, not only in a bull gold market but even in a bear gold market because the volume of royalty deals rises during that time as miners have difficulty accessing capital. Over time, most royalty firms have been able to return in excess of 25-per-cent CAGR [compound annual growth rate] since their inception.”

Mr. Singh noted almost three-quarters of Nomad’s portfolio is currently in the production or near-term production stage, and it is already producing gold equivalent ounces from its contracts.

He also emphasized how aggressive it has been in adding new deals.

“Over the summer, Nomad announced three deals including a 1-per-cent NSR [net smelter return] on the Troilus Mine (PEA stage) in Quebec, a 1-3-per-cent NSR on the Moss Gold mine (operating) in Nevada, and a 1.00-2.25-per-cent NSR on the Robertson deposit (development, satellite to Cortez mine in Nevada),” the analyst said. “We would expect Nomad to continue to remain active trying to source new deals. The Company recently added a $75-million credit facility and will generate $30-50-million in FCF p.a. [free cash flow per annum] starting in 2021.”

He also noted its management team is “well versed” in negotiating royalty deals from its time running Osisko Gold Royalties Ltd. (OR-T), which started at a similar size in 2014.

“We note, since then Osisko’s market cap has grown 4 times,” he said.

Calling Nomad “one to buy in the early days,” Mr. Singh set a target price of $2.30 per share. The average target is $2.25.

“As assets are added, diversification increases, and float (in top shareholders' best interest) and liquidity expand, Nomad will re-rate higher,” he added.


Desjardins Securities analyst John Chu thinks Aurora Cannabis Inc. (ACB-T) remains “a show-me story” as it pivots to focus on the “smaller but substantially more lucrative premium markets.”

After the bell on Tuesday, the Edmonton-based company reported fourth-quarter results that largely fell inline with Mr. Chu’s forecast.

Net sales of $72.1-million was narrowly higher than his $72.0-million and near the consensus of $73.7-million. Adjusted EBITDA of a loss $34.6-million missed the projections of the analyst and the Street (losses of $29.4-million and $26.9-million, respectively), but a “big improvement” quarter-over-quarter (from a loss of $50.9-million).

Though he thinks Aurora “seems on pace” to reach positive EBITDA by the second quarter of its next fiscal year, he did question the change in strategy.

“These segments (flower, pre-rolls, vapes, concentrates, edibles) offer a considerably better gross margin dollar contribution than value products (by up to 10 times), and we believe Aurora does have the existing asset base and premium brands, in Whistler and San Rafael, to support this initiative and excel,” said Mr. Chu. “We also recognize this market segment is much smaller (dollar value and sales volume) than the value brand and competition is increasing.”

After trimming his estimates to reflect the company’s first-quarter guidance he lowered his target to $14 from $20, keeping a “buy” rating. The average on the Street is $14.36.

“We maintain our Buy rating but recognize Aurora needs to demonstrate progress on the execution of its new strategy,” he said.

Elsewhere, ATB Capital Markets analyst David Kideckel trimmed his target to $10.25 from $11.30 with a “sector perform” rating.

Mr. Kideckel said: “Amid a major transformation and with a new CEO, ACB is shifting its strategy to incorporate a CPG approach, with an increased focus on premium products and segments which are margin accretive. The Company aims to reach profitability in Q2/FY21. While ACB’s new strategy is encouraging, considering that the Company has lost market share in the Canadian recreational segment over the last few months, we remain on the sidelines pending management’s execution to move to a more constructive stance on the stock.”

Other firms cutting their targets included Cowen and Co. (to $10 from $11), Piper Sandler (to US$8 from US$10) and MKM Partners ($9 Canadian from $18).


Analysts at Citi remain bullish on gold in the short term and structurally over the medium-term.

In a research note titled “Going for GOLD and why the current bull cycle still has legs,” the firm raised its 2021 base case gold price forecast by US$300 per ounce to US$2,275 and noted US$2,400-US$2,500 per ounce is “in play over the next 8-12 months on a normal bull cycle return distribution.”

“While nominal gold prices have posted fresh records north of $2,000 per ounce in 3Q'20, inflation-adjusted gold prices bouncing around $750-800 per ounce still remain 30 per cent below the 1980 peaks above $1,000 per ounce. Given Fed policy at the ZLB (with STIRT markets pricing no shift in the Fed Funds rate for several years), a bearish US$ environment, and heightened macro uncertainty across the real economy (e.g., high sector dispersion), we believe investors will likely make a push towards record bullion prices in real terms over the next calendar year,” the firm said.

With that view, equity analyst Alexander Hacking raised his forecast for a trio of large-cap gold stocks.

“$2,000 per ounce gold could generate record FCF with the debate shifting to capital allocation,” he said. “Companies continue to espouse a balanced approach ramping up capital returns whist also strengthening balance sheets for prudent reinvestment. This seems sensible and we see no indications yet that the sector will repeat the mistakes of the last cycle. We see the gold price as a bigger investment risk than capital-misallocation at this point.”

“Large-cap gold equities currently discount $1700-1800 per ounce long-term price, in our view; i.e. a discount to spot but narrowing. Spot FCF yields are 4-8 per cent, with NEM most attractive on our models. Our long-term gold price of $1,500/oz that informs our large-cap gold stocks' target prices is unchanged.”

Mr. Hacking raised his target price for shares of Barrick Gold Corp. (GOLD-N/ABX-T, “neutral” rating) to US$30 from US$27. The average is US$33.33.

“We raise our target P/NAV multiple on GOLD to reflect the recent upward re-rating after it was announced that Berkshire Hathaway had taken a position in the stock,” he said.

He maintained a US$70 target for Newmont Corp. (NEM-N/NGT-T, “buy”). The average is US$78.04.

“Positive factors include low operating costs, a stable balance sheet, management with a strong operating track record, potential upside from synergies at the new Nevada JV and legacy Goldcorp issues,” he said. “Negative factors include some challenging legacy Goldcorp assets, geopolitical risk, challenges to grow production from such a large base. On balance we see more upside than downside at current levels.”

He also kept a US$80 target for Agnico Eagle Mines Ltd. (AEM-N/AET-T, “neutral”). The average is US$87.75.

“Agnico is an excellent company in our view, with high quality assets and a strong operational track record,” said Mr. Hacking. “The company has grown from one to eight mines in 8 years and has avoided major mistakes common to peers in the industry. However, we believe all of this is already reflected in AEM’s valuation which is at a substantial premium to its peers at more than 2 times NAV.”


Jefferies analyst Christopher LeFemina raised his earnings expectations for major North American gold miners on Wednesday in response to an increase in the firm’s bullion price projections.

The rise in its near- and medium-term gold prices was made in reaction to a persistent low interest rate environment and the potential for further greenback weakness. It expects price appreciation in 2021 with a peak annual average of US$2,200 per ounce.

The analyst raised his target for Newmont Corp. (NEM-T, NGT-T), his preferred major, to US$70 from US$68 after raising his EBITDA projections for the second half of 2020 and 2021 by 20 per cent and 37 per cent, respectively. The average target on the Street is US$78.04.

His target for Barrick Gold Corp. (GOLD-N, ABX-T), which closely follows on his pecking order, rose to US$32 from US$30 after EBITDA increases of 14 per cent and 29 per cent. The average is US$33.33.

He also lifted his target for Kinross Gold Corp. (KGC-N, K-T) to $9.50 from $8 and Freeport-McMoRan Inc. (FCX-N) to US$24 from US$23. The averages on the Street are US$11.57 and US$16.76, respectively.


Inter Pipeline Ltd.'s (IPL-T) $715-million sale of the majority of its European bulk liquid storage business to Madrid-based CLH Group “meaningfully” bridges its capex and dividend commitments through the end of 2021, said Desjardins Securities analyst Justin Bouchard.

Keeping a “hold” rating for its shares, he raised his target to $14 from $12, which is 78 cents short of the consensus.


In other analyst actions:

* Raymond James analyst Michael Glen initiated coverage of Montreal-based NanoXplore Inc. (GRA-X) with an “outperform” rating and $2.25 target. The average on the Street is $3.41

“The basis for our investment thesis on NanoXplore Inc. is substantially focused on the market penetration of graphene, and the degree of success that NanoXplore will have in terms of marketing, selling and distributing graphene,” he said. "With its recently completed (July 2020) facility that can produce up to 4,000-metric tons/year of graphene powder, NanoXplore is now the largest manufacturer of graphene globally. With capacity now in place, GRA is now scaling production, with the ultimate goal to substantially lower the production cost of graphene, which has been a significant inhibitor to broader commercial adoption.

“Specifically, NanoXplore is looking to produce graphene at a cost profile that will make the material cost-competitive with a range of substitute/incumbent materials, with the most significant being certain/specialized segments of the carbon black market (i.e. plastics, composites, etc.). These materials are currently less expensive to produce, with current market pricing for graphene typically north of $50 per kilogram versus carbon black at $1-3 per kilogram and carbon fiber at $10-15 per kilogram. NanoXplore is looking to lower the cost of graphene production into the $3-4 per kilogram range with a selling pricing ranging between $6-8 per kilogram. NanoXplore views such a selling price as offering access to a smaller (specialty) subset of the carbon black market estimated at 100,000 metric tons (1 per cent of the total carbon black market).”

* Citing “an improving outlook for the toy industry, benefits from stay-at-home, good brand positioning in an uncertain environment, and the attractiveness of toy stocks in a time of uncertainty,” BMO Nesbitt Burns analyst Gerrick Johnson raised Hasbro Inc. (HAS-Q) to “outperform” from “market perform” and hiked his target to US$90 from US$69. The average on the Street is US$89.71.

“The Entertainment One (eOne) acquisition has added a layer of complexity and confusion, and is still a concern for us. However, now that live action production has restarted, we believe news flow will only be improving,” said Mr. Johnson.

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