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

Though its third-quarter financial results fell short of the Street’s expectations, several equity analysts on the Street remain optimistic about both the short- and long-term outlook for Canadian Pacific Railway Ltd. (CP-T, CP-N).

Before the bell on Tuesday, the railway company reported revenue and adjusted fully diluted earnings per share of $1.863-billion and $4.12 both missed the consensus projections on the Street ($1.874-billion and $4.23).

The earnings difference was due, in part, to a weaker-than-anticipated operating ratio, which is a key measure of a railway’s efficiency. CP’s OR rose to 58.2 per cent from 56.1 per cent during the same period a ago earlier. A lower operating ratio is a sign of improved profitability.

However, the Street maintained its optimism for the fourth quarter and beyond after CP said it expects at least mid-single-digit adjusted earnings growth in 2020.

RBC Dominion Securities analyst Walter Spracklin said the “enthusiasm around outlook was notable.”

“The market appears to have largely shrugged off a weaker than expected Q3 report and instead is focusing (appropriately) on the positive tone and upward guidance revision provided by management in its Q3 report,” he said. “Based on the detail provided on the call regarding this outlook, we are encouraged by the opportunity set ahead of CP as we go into Q4 and 2021.”

Though he narrowly trimmed his fourth-quarter EPS projections, Mr. Spracklin raised his 2021 and 2022 expectations, pointing to “the growth opportunity going forward.”

Keeping an “outperform” rating for CP shares, he raised his target to $451 from $439. The average is $438.69, according to Refinitiv data.

“Despite raising our target on the back of our higher 2022 estimate, we are cognizant of the more muted 10-per-cent implied return to our target,” he said. “This is due to the strong year-to-date performance of the rail group in general and CP in particular (whose 27-per-cent year-to-date return has outperformed its peers). Despite the lower implied return, we highlight this implied return is better than the one-year implied returns we have for peers, and CP remains one of our preferred names among North American peers.”

Citi analyst Christian Wetherbee said he expects CP’s “growth story playing out into 2021.”

“While 3Q fell a bit below expectations, 4Q is off to a good start, and with management targeting a low-56-per-cent OR, we think that the run rate heading into 2021 is strong,” he said. “After tougher comps in 1Q, the addition of the Maersk win and the Detroit tunnel acquisition should boost revenues nicely and puts $20 of 2021 EPS squarely on the table. Ultimately, CP appears to be combining an improving revenue growth trajectory with best-in-class operations to continue to create value. We understand today’s muted reaction but see more upside ahead.”

Mr. Wetherbee kept a “buy” rating and US$355 for CP shares.

“We rate shares of Canadian Pacific Buy as we are constructive on its continuing meaningful operational improvement, which we expect to drive year-over-year improvements in OR in 2020 and 2021 and 2022,” he said. “In addition, we see several actionable revenue catalysts driving strong performance in 2020 and beyond.”

Desjardins Securities' Benoit Poirier raised his target to $456 from $453 with a “hold” rating.

“While the revised guidance is a bit shy of our forecast and consensus, we expect investors to appreciate CP’s ability to grow earnings even during the pandemic. We continue to believe CP is well-positioned to unlock profitable growth in 2021 and beyond (both organically and through rail M&A), although we remain on the sidelines as we believe the stock already reflects these strong fundamentals,” he said.

Other analysts raised their targets included: Raymond James' Steve Hansen to $445 from $438 with an “outperform” rating; TD Securities' Cherilyn Radbourne to $485 from $450 with a “buy” rating; Credit Suisse’s Allison Landry to US$353 from US$336 with an “outperform” rating; JP Morgan’s Brian Ossenbeck to $497, a high on the Street, from $483 with an “overweight” rating and National Bank Financial’s Camerion Doerksen to $433 from $422 with a “sector perform” rating.


Meanwhile, the Street had a much more mixed reaction to the quarterly earnings of Canadian National Railway Co. (CNR-T, CNI-N).

CN’s results also fell below the Street’s expectations. Revenue and adjusted fully diluted earnings per share of $3.409-billion and $1.38 were lower than the consensus expectations of $3.503-billion and $1.45.

“While it did not reintroduce 2020 guidance, management intends to provide its 2021 outlook with 4Q results,” said Desjardins Securities' Benoit Poirier. “CN remains confident that it can generate more than $2.5-billion of FCF in 2020, although the NCIB was not reinstated as management remains focused on protecting the balance sheet in the near term.”

Though he said he continues to like CN in the long term, Mr. Poirier thinks “healthy volume recovery is already reflected in the stock’s rich valuation."

Keeping a “hold” rating, he trimmed his target to $153 from $156 after lowering his earnings expectations for 2020 and 2021. The average on the Street is $129.52.

Looking for operating leverage to improve, RBC Dominion Securities' Walter Spracklin cut his target by a loonie to $144 with a “sector perform” rating.

“Q3 results were only slightly below expectations and management characterized its outlook as ‘cautiously optimistic’ (though it did not reinstate guidance with only one quarter remaining),” he said. “We believe operating leverage, which was somewhat lacking in Q3, will be the main focus for investors in CN as we head into 2021. We are confident that after several years of greater than 61-per-cent O/R, management will deliver on a sub-60 O/R in 2021, which we have built into our forecasts. With rail sector multiples at all-time highs, we remain cautious on the sector.”

“With the rail group rallying significantly to neverbefore-seen valuation levels, we do not see much in the way of outsized performance for any of the North American majors. CN is leading the pack in terms of valuation, at a 2021 P/E of 23.3 times versus a peer average of 20.9 times. We value CN at 21 times our 2022 EPS estimate and do not see much room for multiples to expand beyond that level in the near term. Accordingly, we maintain our Sector Perform rating on the shares.”

Others lowering their targets included JP Morgan’s Brian Ossenbeck $150 from $154 with a “neutral” rating.

Conversely, several analysts raised their targets for CN shares, including: TD Securities' Cherilyn Radbourne to $165 from $155 with a “buy” rating; Credit Suisse’s Allison Landry to US$117 from US$112 with an “outperform” rating and Cowen and Co.'s Jason Seidl to US$116 from US$111 with an “outperform” rating and Stephens' Justin Long to US$109 from US$108 with an “equal weight” rating.


Credit Suisse analyst Andrew Kuske thinks Northland Power Inc. (NPI-T) “possesses rather interesting exposure in offshore wind that should drive future growth in the years ahead.”

However, he initiated coverage of the Toronto-based company with a “neutral” rating, saying “generation mix and some financial constraints hold us back from being more constructive.”

“As with a number of others, NPI is a well-established participant in the Canadian renewable power market with a growing asset base in offshore wind in Europe and Asia,” said Mr. Kuske in a research report. “In total, NPI has 2,681 megawatts of generation capacity as of Q2 2020 and a visible pipeline of growth that includes 1,174 megawatts of projects in the stage of advanced development. Unlike some of the others in the sector, NPI owns some legacy fossil fuel generation (973 megawatts at Q2 2020) along with a relatively recently acquired Colombian utility business. Rather interestingly given NPI’s size, the company is one of the larger participants in offshore wind (albeit much smaller than the biggest) which is an attractive area for growth.”

“In our view, there are three major areas of focus with NPI: (a) platform progress; (b) partnership potential; and, (c) pondering purity. Very simply, NPI made significant strides in the last few years in building out both European and Asian platforms. In light of NPI’s positioning, the company is well positioned for partnership that could result in accelerated growth – beyond our expectations. Finally, various strategies could be used to ‘purify’ the overall asset base that may result in valuation expansion.”

The analyst set a target price of $46 per share. The average is $41.82.


Seeing limited upside due to the pending U.S. Department of Commerce decision on its claim that Russia and Morocco dumped low-cost phosphates on the United States, Citi analyst P.J. Juvekar lowered Mosaic Co. (MOS-N) to “neutral” from “buy.”

“[We] move to the sidelines on MOS as phosphate (DAP) price upside is likely capped,” he said. "DAP prices have risen more than 30 per cent to $360 per ton after MOS filed its countervailing duty (CVD) petitions on June 26. The duties have effectively eliminated Morocco/Russia imports, and the world trade balance is now sorting itself out. Our Ag consultant Glen Buckley believes MOS will win the case, but what will the duty be?

“In our view, anything less than a 25-per-cent tariff would disappoint the market.”

After trimming his forecast for 2021 and 2022, Mr. Juvekar lowered his target to $20.50 from $23. The average is currently $21.83.

“We want to emphasize that we are moving to the sidelines on MOS based on our upside/downside scenario, not because of management execution, which has improved materially over the last two years,” he said. "MOS has done a great job lowering structural costs, such as phosphate rock ($36/t) and potash costs ($65/t), in our view. MOS is also succeeding in its strategy faster than anticipated, as in 2Q20, the company exceeded five of seven of its 2021 cost targets. MOS has also accelerated the ramp up of its Esterhazy K3 potash project, which will help completely eliminate brine management costs ($85-million) by 2023.

“We expect MOS to continue running operationally well and reach its remaining efficiency targets; however, given the stock’s high correlation to DAP prices, we move to the sidelines.”


Ely Gold Royalties Inc. (ELY-X) has a “compelling valuation for a growth-focused gold royalty company,” according to Laurentian Bank Securities analyst Jacques Wortman.

In a research report released Wednesday, he initiated coverage of Vancouver-based company, which is focused on a portfolio of royalties at three of Nevada’s largest mines, with a “buy” rating, seeing it come through a “significant” growth phase and remaining in acquisition mode.

“ELY is a relatively new player in the precious metal royalty space and has been aggressively building its asset base over the last two (2) years,” said Mr. Wortman. “With investor focus on the larger and intermediate royalty companies, we believe that there has been somewhat limited market awareness. As a result the stock trades well below its peers on the basis of P/NAV. In our view, this valuation delta will shrink as ELY continues to grow its asset base, as we believe the market will better recognize: 1) the quality and value of the current royalty portfolios, 2) the strength of the operators that control the underlying assets on which ELY holds royalties, and 3) the upside potential that exists across the portfolio of underlying assets. Based on our conservative assumptions, ELY royalty revenue should trend higher from 2021–2024, with significant royalty revenue starting in 2025. We believe that any acquisition of a royalty that provides revenue sooner, although potentially expensive, could bolster near-term revenue and further increase market awareness.”

The analyst set a $2 target for Ely shares. The average is $1.70.

“ELY trades at 1.0 times NAV [net asset value], compared with the senior comps that trade at an average consensus P/NAV multiple of 2.4 times and small to intermediate cap peers that trade at an average consensus multiple of 1.6 times NAV," he said. "We believe the deep discount that ELY trades at relative to its peers largely reflects both: 1) a general lack of market awareness, and 2) peak royalty revenue generation starting in 2025, based on our conservative assumptions. That said, we consider ELY’s Key Asset portfolio to be of high quality with strong operators controlling the underlying assets. Additionally, the Key Asset portfolio has significant upside value optionality and exploration potential.”


Following a "solid run, Scotia Capital analyst Phil Hardie sees further positive catalysts on the horizon for Element Fleet Corp. (EFN-T).

“Element Fleet has been one of the top performers within our coverage universe, having significantly outperformed the S&P/TSX Financials Index,” he said. "This follows solid stock performance last year, as well as a strong rally from the March lows. The Q2/20 earnings release proved to be a solid catalyst for the stock as it demonstrated the relative resilience of the business model in the face of an unprecedented economic shock and challenging operating environment.

“We expect a further demonstration of resilience and a re-acceleration of growth starting Q4/20 and into 2021 to help drive the stock over the next 12 months, and see a number of catalysts potentially materializing as early as the Q3/20 earnings release.”

Mr. Hardie pointed specifically to two potential catalysts that could bring gains as early as this quarter: its growth trajectory and its capital allocation strategy.

“Management is expected to share an update from the Board related to its capital allocation strategy,” he said. "We believe revisiting the dividend policy to target a payout ratio in the 35-per-cent to 45-per-cent range would represent a positive surprise.

“Investors will also likely be looking at key underlying operating metrics in the quarter to help judge the current earnings growth trajectory, with stronger-than-expected origination volumes or growth in service fees being a source of potential upside. Finally, we believe we could see a potential update to targeted EPS and revenue growth expectations for the coming years.”

Keeping a “sector outperform” rating, Mr. Hardie increased his target to $13.50 from $12. The average is $13.22.

Meanwhile, CIBC World Markets' Paul Holden raised his target to $14 from $13 with an “outperformer” rating.

“We expect EFN to post a rebound quarter for originations and earnings with potential to beat consensus estimates,” he said. “The introduction of a capital plan based on excess cash flow should also be a positive.”

“We continue to think the shares can re-rate higher based on the performance of the business through the pandemic, accelerating top line growth and a return of capital plan.”


Despite the spotlight for Netflix Inc.'s (NFLX-Q) third-quarter earnings being placed on weaker-than-anticipated paid subscriber additions, RBC Dominion Securities analyst Mark Mahaney said he’s maintaining his long-term thesis of 500 million subs by 2020 and a close to 30-per-cent earnings per share compound annual growth rate.

After the bell on Tuesday, the company said it added 2.2 million subscriptions globally during the quarter, missing the Street’s projection of 3.4 million. That result overshadowed a revenue and operating income beat.

“Though the Q3 Sub Adds were disappointing, we believe the NFLX Long Thesis is well intact,” said Mr. Mahaney. “Three key points from our extensive survey work remain: 1) Consumers are increasingly purchasing Streaming Bundles of 2 or 3+ services, and Netflix is almost always one of those services; 2) Netflix continues to enjoy higher Customer Sat scores outside the U.S. – due to the relative dearth of in-home entertainment options, we believe – which suggests the potential for higher International penetration; and 3) Netflix is demonstrating consistent success with LLOs (Local Language Originals), which supports 2). What’s incremental from Q3 is: a) lots of Marketing spend leverage, b) clear evidence of Op Margin expansion capability, c) a clear FCF inflection point, d) COVID Cohort characteristics are very consistent with prior cohorts, and e) Production is pretty much back to normal and the ’21 content slate will be very robust.”

Calling the results “mixed” overall, he raised his target for Netflix shares to US$630 from US$610, keeping an “outperform” rating. The average is US$538.81.

“We believe that Netflix has achieved a level of sustainable scale, growth, and profitability that isn’t currently reflected in its stock price. This conclusion is based on our assessment of Netflix’s 60+ million U.S. Subscriber and 100+ million International Subscriber bases, which makes Netflix one of the largest global Entertainment subscription businesses,” said Mr. Mahaney. "We also view Netflix as one of the best derivatives off the strong growth in online video viewing and in Internet-connected devices (tablets, smartphones, Internet TVs), with our proprietary survey data tracking significantly improved customer satisfaction levels.

“Finally, we view the steady expansion in U.S. contribution margins as demonstrating the company’s profitability, with its fixed-cost content nature and historically declining churn rates suggesting further margin expansions.”

Others raising their targets for Netflix included BMO’s to US$700 from US$625 with an “outperform” rating; Piper Sandler’s Yung Kim to US$630 from US$534 with an “overweight” rating; Wedbush’s Michael Pachter US$235 from US$230 with an “underperform” and Bernstein’s Todd Juenger to US$591 from US$573 with an “outperform” rating.

Analysts cutting their targets included JP Morgan’s Doug Anmuth to US$615 from US$625 with an “overweight” rating and Benchmark’s Matthew Harrigan to US$380 from US$420 with a “sell” rating.


Canaccord Genuity analyst Luke Hannan expects Gildan Activewear Inc. (GIL-N, GIL-T) to show sequential improvements when it reports third-quarter results on Oct. 29.

However, he cautions COVID-19-related demand weakness persists, projecting a year-over-year revenue decline of 36 per cent to US$474-million. His EBITDA and earnings per share estimates of US$58-million and 1 US cents sit below the consensus of US$65-million and 7 cents.

“We understand Gildan continues to be aggressive in its pricing strategy with distributors, with broad-based discounts (approx. 10 per cent on average) across its core products,” he said. "Although the move should help the company take share from those who cannot compete on price, we note 65 per cent of Gildan’s imprintables business is exposed to live events and corporate promotional spending, areas which remain challenged in Q3/20 and are expected to remain challenged closing out the year and heading into 2021.

“Furthermore, we believe distributors continue to tightly manage inventory in the face of an uncertain demand environment. Accordingly, we are forecasting Activewear sales to decrease 40 per cent year-over-year. Having said that, we expect continued strength in Gildan’s private label men’s underwear program in the mass channel will partially offset weakness in sock sales. Consequently, we are forecasting Hosiery & Underwear sales to decrease 15 per cent year-over-year.”

Keeping a “hold” rating, Mr. Hannan raised his target for Gildan shares to US$18 from US$13. The current average on the Street is US$20.50.

“Our target represents 16.2 times our 2021 EPS estimate of $1.11 (previously 13.6 times our 2021 EPS estimate of $0.96),” he said. “We have increased our target multiple to reflect sector-wide multiple expansion while also increasing our 2021 sales estimate, which we note remains one of the lowest on the street. While we continue to like the longer-term prospects for Gildan, particularly given its clean balance sheet, demand weakness due to COVID-19 leads us to remain on the sideline.”

Elsewhere, Stifel analyst Jim Duffy raised his target to US$26 from US$20 with a “buy” rating.


In other analyst actions:

* National Bank Financial analyst Rupert Merer downgraded TransAlta Renewables Inc. (RNW-T) to “sector perform” from “outperform” with an $18 target, up from $17.50. The average on the Street is $16.92.

* National Bank’s Jaeme Gloyn raised his target for Intact Financial Corp. (IFC-T, “outperform”) to $168 from $165. The average is $158.

* Scotia Capital analyst Cameron Bean raised its target for Tourmaline Oil Corp. (TOU-T, “sector outperform”) to $30 from $24. The average is $23.34.

“We are off restriction on TOU following the release of the final prospectus for the Topaz Energy Corp. (Restricted) IPO,” said Mr. Bean. “In our view, the proceeds from the offering and the Banshee plant drop down, combined with TOU’s free cash flow generation profile position the company to take advantage of acquisition opportunities and bolster its already strong asset base. We believe TOU already screens as the best investment opportunity in the sector; nevertheless, if successful at rolling up quality assets at discounted prices, we believe it will push itself into the conversation as one of the top three upstream producers in Canada. The current top three (by adjusted market cap: CNQ, SU, and CVE) trade at an average of 7.3 times their 2021E DACF. TOU trades at just 3.0 times and trails CVE by less than $600 million of adjusted market cap. While passing CVE for third spot certainly does not guarantee multiple expansion, we believe the gap will be even harder to justify as TOU continues to ascend. TOU continues to be our top pick.”

* JP Morgan analyst Kenneth Worthington increased his target for Brookfield Asset Management Inc. (BAM-N/BAM.A-T, “overweight”) shares to US$48 from US$46. The current average is US$42.14.

* RBC Dominion Securities analyst Steve Arthur raised its target for Boyd Group Services Inc. (BYD-T) to $222 from $218 with a “sector perform” rating, while TD Securities' Daryl Young trimmed his target to $240 from $245 with a “buy” rating. The average is $237.07.

* TD Securities analyst Graham Ryding raised target for Home Capital Group Inc. (HCG-T, “hold”) to $27 from $26, exceeding the $26.25 average.

* Mr. Ryding also increased his target for First National Financial Corp. (FN-T, “buy”) to $38 from $37. The average is $34.

* Credit Suisse analyst Kevin McVeigh raised his target for Thomson Reuters Corp. (TRI-N/TRI-T, “outperform”) to US$95 from US$90. The current average is US$78.79.

* Cormark Securities analyst Gavin Fairweather increased its target for Vitalhub Corp. (VHI-X, “buy”) to $4 from $3. The average is $3.73.

* National Bank Securities analyst Shane Nagle bumped his target for Josemaria Resources Inc. (JOSE-T, “sector perform”) to $1.15, or 2 cents below the consensus, from 85 cents.

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