Wednesday’s analyst upgrades and downgrades

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

Though he says Metro Inc. (MRU-T) continues to exhibit “solid” execution, Desjardins Securities analyst Chris Li sees limited catalysts and valuation concerns, leading him to remain “on the sidelines.”

“MRU delivered another solid quarter when excluding negative labour conflict impact,” he said. “The company continues to leverage its strong financial position to return capital (dividend hikes and share buybacks), which should provide some downside support.”

Before the bell on Tuesday, the company reported first-quarter financial results that largely fell in line with Mr. Li’s expectations, including “strong” food same-store sales growth of 10 per cent.

“Earnings growth will become more challenging next quarter as MRU and the industry begin to lap outsized COVID-19-related sales growth and gross margin gains (banner mix and lower promotional intensity), as well as potential deflationary pressures due to the strong C$,” he said. “We expect EPS growth to slow to 6 per cent in FY21 (from 15 per cent in FY20). Cost reductions and efficiency improvements (ie supply chain and in-store technologies) will be critical to mitigate some of the headwinds.”

Though he called it a “best-in-class grocer,” Mr. Li cautioned that Metro’s valuation is “vulnerable” to sector rotation and slowing earnings growth.

“MRU’s forward P/E [price-to-earnings] has moderated to 16 times (from 18–19 times) — still a premium to L and EMP at 13–14 times,” he said. “We believe investors’ preference for a high-quality company with a strong track record of execution justifies its premium valuation. But, with earnings growth slowing, we expect limited upside unless there is a rotation to defence. Share buybacks backed by MRU’s solid FCF and balance sheet (2.5 times net debt/EBITDA vs 3.0 times target) provide downside support.”

Keeping a “hold” rating, he trimmed his target for Metro shares to $59 from $61. The average on the Street is $62.27.

Others making target changes included:

* ATB Capital Markets’ Kenric Tyghe to $62 from $61 with a “sector perform” rating.

“We believe our recommendation and price target are well supported based on Metro’s strong brick-and-mortar footprint, which is partially offset by its weaker relative current positioning in online and private label,” said Mr. Tyghe.

* CIBC World Markets’ Mark Petrie to $60 from $63 with a “neutral” rating.

“Q1 results reflect continued execution amidst shifting conditions,” he said. “The 5-cent impact from the Jean Coutu distribution centre (DC) disruption was greater than we expected and led to an EPS miss. However, putting aside this nonrecurring issue, which is now resolved, GM% was solid and cost control excellent. Grocers will face a headwind as the pandemic impact eases in H2/2021, but Metro’s balanced assets and exacting operational discipline leave it well-positioned to navigate all circumstances.”

* National Bank’s Vishal Shreedhar to $61 from $64 with a “sector perform” rating.

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In response to the company’s 254-per-cent jump in share price over the 13 days through Tuesday’s close, Scotia Capital analyst Paul Steep downgraded BlackBerry Ltd. (BB-N, BB-T) to “sector underperform” from “sector perform.”

“Our view is that the move in BlackBerry’s shares appears to be overdone in the short-term given fundamentals of the business relative to the movement in the underlying share price,” he said. “We continue to see BlackBerry as holding potential in terms of various areas of the business (e.g., security software, QNX) along with having the balance sheet to navigate through the ongoing pandemic. However, we would need to see a material improvement in the firm’s performance within its software businesses to become more constructive on the shares.”

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Mr. Steep maintained a US$8.50 target, exceeding the US$7.86 average on the Street.

“The recent surge in the value of BlackBerry’s shares appears to be driven by retail investors focused on a handful of stocks using a combination of purchasing near-dated call options and the underlying security,” he added. “In the case of BlackBerry, the confluence of rapid buying interest across various securities and an underlying short interest of 9.4 per cent on U.S. and Canadian exchanges has created an environment for significant share price fluctuations. We note that the shares continue to have the risk of meaningful share price volatility given elevated options activity and short interest.”

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RBC Dominion Securities analyst Walter Spracklin said he’s come to expect a degree of conservatism in Canadian National Railway Co.’s (CNR-T, CNI-N) guidance.

However, he expects the significant disparity between the company’s 2021earnings per share projection of high-single digit growth and the consensus estimate on the Street of a 18-per-cent rise to “weigh on the stock in the near term.”

“Management provided new 2021 guidance, which pointed to capex of $3.0-billion; FCF [free cash flow of $3.0-billion to $3.3-billion and mid-single digit volume growth - all of which were in-line with expectations,” he said. “However, increased pension costs, bonus accrual costs as well as forex were all flagged as key headwinds. These combined to temper expected EPS growth - resulting in management guiding to ‘high single digit growth,’ notably below our and street expectations of 18 per cent. There was a degree of focus during the Q&A around this; however management did point to an O/R [operating ratio] target of less than 60 per cent - which implies a margin improvement that does not entirely align with the high single digit EPS guide. We have opted to go with the less-than 60-per-cent O/R guide, which translates into a 13-per-cent EPS growth rate; above guidance but still lower than our prior expectations.”

After the bell on Tuesday, CN reported fourth-quarter 2020 results that largely met the Street’s expectations. Adjusted earnings per share of $1.43, exceeded the consensus estimate by a penny and Mr. Spracklin’s projection by 3 cents. Operating ratio of 61.4 per cent topped his 62.7-per-cent forecast.

However, based on the guidance, Mr. Spracklin lowered his EPS estimates for 2021 and 2022 to $6.01 and $6.62, respectively, from $6.23 and $6.76.

Keeping a “sector perform” rating for CN shares, he cut his target to $139 from $155. The average on the Street is $131.47.

“With guidance coming in so far below consensus, we expect the market reaction to be negative today,” he said. “We expect that negative sentiment to prevail for some time until a (potential) catalyst emerges. Reflecting this sentiment, we are bringing down our target multiple to 21 times (from 23 times), which is still a premium to the peer range of 18-20 times.”

Elsewhere, Cowen and Co. analyst Jason Seidl lowered CN shares to “market perform” from “outperform” with a US$107 target, down from US$116.

Others making target price changes included:

* Desjardins Securities’ Benoit Poirier to $146 from $150 with a “hold” rating.

“While management is optimistic about volume growth in 2021, it introduced weaker-than-expected 2021 guidance as a few headwinds (higher D&A, bonus accruals and FX) will impact EPS growth,” said Mr. Poirier. “Management is targeting EPS growth in the high single digits, below our forecast of 15 per cent and consensus of 18 per cent, which will disappoint investors and weigh on the share price.”

* Scotia Capital’s Konark Gupta to $140 from $144 with a “sector perform” rating.

“We see CNR’s increasing focus on yield and some conservatism (skewed to the near term) as key reasons behind a weaker-than-expected traffic guidance,” he said. “At the high end of the guidance range, this year’s EPS would be 7 per cent below consensus (heading into the quarter), but we think there is some upside risk to guidance and so we would not expect consensus to come down by 7 per cent. We were already below consensus (by 2.5 per cent) and have further reduced our expectations (still above guidance). As a result, our target goes down ... We recently turned more cautious on Canadian rails due to their rich valuations in light of high market expectations. We would wait for a more compelling valuation or much stronger conviction in upside risk to guidance before getting more constructive.”

* TD Securities’ Cherilyn Radbourne to $160 from $165 with a “buy” rating.

* CIBC World Markets’ Kevin Chiang to $142 from $153 with a “neutral” rating.

* National Bank’s Cameron Doerksen to $137 from $141 with a “sector perform” rating.

* JP Morgan’s Brian Ossenbeck to $145 from $150 with an “outperform” rating.

* Credit Suisse’s Allison Landry to US$117 from US$124 with an “outperform” rating.

* Bernstein’s David Vernon to $156 from $168 with an “outperform” rating.

* Evercore’s Jonathan Chappell to US$119 from US$121 with an “in-line” rating.

* Stephens’ Justin Long to US$108 from US$109 with an “equal-weight” rating.

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In a research report titled To 2023 and Beyond: A Look at Utility Growth and Valuations, Scotia Capital analyst Robert Hope upgraded Emera Inc. (EMA-T) to “sector outperform” from “sector perform” with a $64 target. The average on the Street is $61.64.

“We upgrade Emera to Sector Outperform given its: 1) top-tier growth outlook out to 2023; 2) strong and improving ESG profile; and 3) attractive absolute and relative valuation,” he said. “Based on our 2023 estimates EMA’s P/E is the lowest in the group and a 0.5-times discount to Fortis, 2.6-times discount to Hydro One, and 5.3-times discount to Algonquin. Based on what we expect will be a relatively benign rate environment, we believe there is valuation upside for the utilities and that Emera’s discount to Fortis should narrow.”

Mr. Hope also made these target changes:

• Algonquin Power & Utilities Corp. (AQN-N, AQN-T) to US$17 from US$16 with a “sector perform” rating. Average: US$16.86.
• AltaGas Ltd. (ALA-T) to $24 from $22 with a “sector outperform” rating. Average: $22.06.
• Fortis Inc. (FTS-T) to $61 from $63 with a “sector outperform” rating. Average: $59.38.

“We introduce our 2023 estimates for the Canadian utilities and provide perspective on our outlook for the group and valuations relative to U.S. peers,” said Mr. Steep. “In 2021 to 2023, we forecast a 6-per-cent EPS CAGR [earnings per share compound annual growth rate] for the group, which is in line with expected rate base growth and the expected growth from the U.S. utilities under coverage by our colleague Andrew Weisel.

“Looking at valuation we see upside for the group as we do not believe the market is appropriately reflecting the utilities’ growth outlook and interest rate environment. We upgrade Emera to Sector Outperform and our favourite utility picks are AltaGas, Emera, and Fortis.

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“The outlook for renewable power development is as good as it’s been in years,” according to Raymond James analyst David Quezada.

“With recently extended tax credits for wind and solar, the 30-per-cent ITC [investment tax credit] now applicable to offshore wind and a now supportive political backdrop in the U.S., we believe the outlook for renewable power developers is as good as it has been in years,” he said. “While we do not expect a broad federal climate policy such as a nation-wide clean fuel standard or carbon tax (the Democrats’ slim majority in

each legislative chamber likely precludes this), we do see potential support in other forms such as further wind and solar tax credit extensions, a tax credit for stand-alone energy storage, and increased federal spending on energy transition/de-carbonization efforts. Outside the U.S., we also see the Canadian Federal Carbon Tax and European climate law supporting opportunities for renewable IPPs in our coverage universe.”

With that bullish view and “phenomenal” share price performance in 2020, Mr. Quezada made a number of rating and target price changes to stocks in his coverage universe in a research report released Wednesday.

“The renewable IPPs have posted impressive returns over the past year and, in several cases, now reside at new all-time highs for valuation,” he said. “With a continued supportive environment, and robust demand from sustainability focused investors, we are reluctant to move to the sidelines completely. However, we are making several downward adjustments to our ratings among names that have been our top picks in recent months.

“Specifically, we are moving each of Boralex, and Algonquin to Outperform from Strong Buy. We stress that these are entirely valuation based calls, and we remain constructive on each company’s fundamentals; however, we also believe remaining upside falls shy of warranting our top rating. Similarly, with substantial outperformance in recent weeks we are adjusting our rating on Atlantica Sustainable Infrastructure to Market Perform from Outperform — again reflecting relative valuation.”

His ratings changes were:

• Algonquin Power & Utilities Corp. (AQN-N/AQN-T) to “outperform” from “strong buy” with a US$20 target, up from US$19. Average: US$16.86.
• Spark Power Group Inc. (SPG-T) to “strong buy” from “outperform” with a $2.75 target, up from $2.25. Average: $2.42.
• Atlantica Sustainable Infrastructure plc (AY-Q) to “market perform” from “outperform” with a US$47 target, up from US$36. Average: US$44.20.
• Boralex Inc. (BLX-T) to “outperform” from “strong buy” with a $65 target, up from $46.50. Average: $54.05.

His target prices were:

• Xebec Adsorption Inc. (XBC-T, “strong buy”) to $14.50 from $12. Average: $10.09.
• Capital Power Corp. (CPX-T, “outperform”) to $42 from $38. Average: $37.75.
• Innergex Renewable Energy Inc. (INE-T, “outperform”) to $37 from $28. Average: $30.95.
• Northland Power Inc. (NPI-T, “market perform”) to $50 from $45. Average: $50.
• Polaris Infrastructure Inc. (PIF-T, “strong buy”) to $30 from $28. Average: $27.10.
• TransAlta Renewables Inc. (RNW-T, “market perform”) to $23 from $18. Average: $20.29.

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TD Securities analyst Michael Tupholme thinks the key drivers for Russel Metals Inc.’s (RUS-T) business have “improved considerably” and he expects “much stronger results going forward.”

“The benchmark U.S. HRC [hot-rolled coil steel] price is up 145 per cent since bottoming in late-July 2020 (currently at a record-high based on available data),” he said. “U.S. carbon plate prices have also moved significantly higher (up 77 per cent vs. 2020 low). OCTG prices have lagged, although they are up 9 per cent since November 2020. Key drivers include: 1) improved demand following the reopening of the economy; 2) relatively tight steel supply; and 3) higher raw material cost. Looking ahead, we see several factors that point to a potential plateauing and eventual decline in steel prices as 2021 progresses, including: 1) increasing U.S. mill capacity utilization and restarts/new capacity additions; 2) recent declines in global scrap steel prices; and 3) historically wide U.S. vs. offshore price spreads. Our forecast calls for steel prices to remain range-bound into early-Q2/21, but to trend downward thereafter.”

“Regarding demand, Q4/20 U.S. and Canada service center shipments of total steel products decreased less than 1 per cent year-over-year — a notable improvement vs. doubledigit declines earlier in 2020. Meanwhile, although North American drilling activity remains very depressed, encouragingly, rig count is up off its mid-2020 lows.”

The analyst raised his 2021 forecast for Russel “notably” based on a higher steel price forecast ahead of the release of its fourth-quarter 2020 results on Feb. 10. However, he also introduced 2022 estimates that include “modestly” lower year-over-year earnings.

Maintaining a “hold” rating, Mr. Tupholme hiked his target to $26 from $19. The average is $24.29.

“Given the historically strong relationship between RUS’ share price and steel prices, we see a risk that the benefits of improved financial performance may be tempered by a possible deterioration in steel prices from current lofty levels. Further, although recent energy sector improvements are encouraging and incorporated into our forecasts, we continue to see a relatively high degree of risk around the outlook for this part of RUS’ business.”

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Following Tuesday’s release of its fourth-quarter production results and guidance through 2023, Canaccord Genuity analyst Dalton Baretto said he expects a “mixed” 2021 for First Quantum Minerals Ltd. (FM-T).

“On a positive note, the company should benefit from higher production growth (10-per-cent copper equivalent) along with ongoing investor enthusiasm for ‘pure play’ copper producers and a potential JV transaction with a Chinese partner at the Zambian assets,” he said. “On a negative note, FM’s cash flows will be relatively suppressed given the substantial hedging program (36 per cent of 2021 production at prices well below $3.00 per pound), and we note ominous rhetoric around.”

Maintaining a “buy” rating for First Quantum shares, Mr. Baretto cut his target by a loonie to $28. The average is $26.21.

Other analysts cutting their targets included:

* Scotia Capital’s Orest Wowkodaw to $29 from $30 with a “sector outperform” rating

“Although we view the update as a modest negative for the shares given our lower estimates, the company’s strong production growth and deleveraging trajectory remains intact. We remain buyers on weakness,” said Mr. Wowkodaw.

* BMO Nesbitt Burns’ Jackie Przybylowski to $21 from $23 with a “market perform” rating

* Deutsche Bank’s Nick Snowdon to $28 from $31 with a “buy” rating.

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A series of equity analysts lowered their target prices for shares of Yamana Gold Inc. (AUY-N, YRI-T) following Tuesday’s release of its preliminary fourth-quarter and full-year 2020 production results, three-year production guidance and a 10-year production overview.

Those making changes included:

* Raymond James’ Farooq Hamed to US$7.50 from US$8 with a “market perform” rating. The average on the Street is US$7.72.

“Over the next ten years, we expect virtually all senior gold producers to be in a similar situation of requiring exploration success and various expansions/developments to maintain current production levels,” said Mr. Hamed. “Looking at AUY’s plan that is based on exploration and expansion at existing operations we believe it is well positioned to be able to sustain its production level with the potential for growth from greenfield development. Further, with AUY’s efforts to improve its balance sheet over the last few years resulting in low net debt levels (below 1 times EBITDA) and stable operating cash flows, we believe the company should be able to internally finance its development plans.”

* CIBC World Markets’ Anita Soni to US$9.25 from US$10 with an “outperformer” rating.

* National Bank’s Michael Parkin to $7.50 (Canadian) from $9 with a “sector perform” rating.

* Scotia Capital’s Tanya Jakusconek to US$6.25 from US$6.50 with a “sector perform” rating.

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Citing its “high margin business model, near-term growth profile, longer-term growth optionality, strong balance sheet, dividend yield and current valuation,” Raymond James analyst Brian MacArthur initiated coverage of Nomad Royalty Co. Ltd. (NSR-T) with an “outperform” rating.

“We believe royalty/streaming companies like Nomad offer equity investors exposure to precious metals prices while mitigating downside risk given limited exposure to operating and capital costs,” he said. “At the same time, upside optionality exists through exploration potential. Nomad’s royalty/streaming portfolio offers meaningful growth as GEO production is expected to grow to about 40 per cent to about 25 Koz in 2021 with the start-up of Blyvoor and higher production from stream/royalties acquired during 2020. In 2022, we expect Woodlawn to provide additional GEO growth. Longer term, Nomad also has potential growth from a number of royalties/streams on numerous development assets such as Robertson and Troilus. Finally, Nomad has a strong balance sheet and pays an annual dividend of 2 cents per share, representing around 2-per-cent dividend yield.”

The analyst set a $1.80 target. The current average on the Street is $2.06.

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Seeing a new supply chain investment cycle emerging with the COVID-19 pandemic has “an accelerant,” Raymond James analyst Steven Li initiated coverage of Tecsys Inc. (TCS-T) with an “outperform” recommendation.

“The e-commerce boom ... has left many customers needing a more complete and agile supply chain system at a time when they are still running on systems from Y2K,” he said. “Tecsys’ recurring cloud revenues growth has started to accelerate ahead of a new supply chain investment cycle. Tecsys’ cloud-recurring revenues grew 5 per cent year-over-year in fiscal 2019 and 14 per cent year-over-year in F2020 before exploding to 29 per cent year-over-year in 1H21.”

“Tecsys provides a fully integrated, end-to-end, SCM solution through its Itopia platform. From F2016 to F2020, the average deal size grew from a little over $0.6-million to almost triple that size ($1.6-million). At the same time, the number of new deals per year also grew from 14 deals in F2016 to over 34 deals by the end of F2020.”

Seeing it as the “right time to look at Tecsys,” Mr. Li set a Street-high target of $70 per share. The average is $44.80.

“We compare Tecsys’ profitability model with that of Descartes and Open Text,” the analyst said. “Given the significantly higher mix in professional services, Tecsys’ margins are well below these peers. We believe that now that Tecsys is at a large enough size and at the center of a supply chain investment cycle, its partner ecosystem should start to thrive, driving a more favorable revenue mix in the long term.”

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Citi’s senior retail analyst Paul Lejuez made a series of rating changes to stocks in his coverage universe on Wednesday.

Seeing a risk-reward proposition for investors that is “now more fairly balanced at current levels,” he lowered Under Armour Inc. (UAA-N) to “neutral” from “buy” with a US$16 target, down from US$19 but exceeding the US$15.64. consensus.

“After revenues came in much better than expected in 3Q20, buoyed by pandemic purchases of active apparel, expectations for a sales turnaround have been set higher (the stock is up 33 per cent since reporting 3Q on 10/30),” he said. “However, with potential topline pressure ahead from distribution rationalization and increased competition in the category, the sales recovery may not be smooth (or linear). And after several years of restructuring and a big pull back in spending during COVID-19, SG&A has remained stubbornly high, limiting upside in the model.”

He also downgraded these stocks:

* Ulta Beauty Inc. (ULTA-Q) to “neutral” from “buy” with a US$320 target, up from US$290. Average: US$302.42.

“While we believe ULTA is a market share winner in the beauty sector and is poised to accelerate market share gains on the other side of Covid-19, we believe expectations for a strong sales and margin recovery are largely priced in at current levels,” he said. “Our model lays out an optimistic margin scenario, with ULTA exceeding its prior peak EBIT margin by F24 despite headwinds from a much larger Ecom biz vs. what we expected prior to Covid-19. While we believe it is achievable, we acknowledge some new competitive threats in the market (partnership with TGT, Sephora in KSS) that could become bigger risks down the road.”

* Five Below Inc. (FIVE-Q) to “neutral” from “buy” with a US$205 target, up from US$180. Average: US$204.38.

“While we believe FIVE has a long runway for growth still ahead and is favorably positioned as an off-mall value retailer, shares are trading at an F22 EV/EBITDA multiple of 23 times,” he said. “In many ways this multiple is much deserved, but also makes for a more balanced risk/reward at current levels. FIVE is poised to have a very strong 1H21 as it laps Covid-19 closures and benefits from stimulus, and we are optimistic about their long-term growth potential in price points above $5, but we believe our optimism is shared by the market. And with FIVE beginning to slow store growth to the mid-teens level next year, it makes valuation upside harder to justify.”

* Burlington Stores Inc. (BURL-N) to “neutral” from “buy” with a US$258 target, up from US$250. Average: US$266.38.

“While we continue to believe BURL is well-positioned in the coming quarters (as its moderate consumer benefits from stimulus checks) and years (particularly as other retailers close stores, putting share up for grabs), the stock’s performance (only 6 per cent off its all-time highs) indicates the market appreciates many of the favorable aspects of the BURL story,” he said. “While we expect BURL to close the margin gap with its peers in the long-term, investments in the business could reduce flow-through in the near/medium-term. Although we are raising our TP to $258, we do not see enough upside from current levels to justify a Buy.”

Conversely, Mr. Lejuez raised his rating for these stocks:

* Kohl’s Corp. (KSS-N) to “buy” from “neutral” with a US$56 target, rising from US$33. Average: US$37.60.

“In the near-term, we expect KSS to benefit from consumer stimulus checks, driving sales/profits higher against easy comparisons. Better near-term performance can also change the market’s perspective on the company’s ability to reach its longer-term operating margin goal of 7-8 per cent,” he said. “As we look out beyond F21, we view KSS as a retail fighter. Its off-mall positioning should enable to capture some of the significant share being put up for grabs by many mall-based competitors, helped by its AMZN and Sephora partnerships. And expense savings achieved during the pandemic period should help drive operating margin higher.

* Dick’s Sporting Goods Inc. (DKS-N) to “buy” from “neutral” with a US$90 target, up from US$66. Average: US$68.95.

“We believe that there is another leg higher for the stock as DKS emerges from COVID-19 as a leader in the sporting goods sector with enhanced omni-channel capabilities and a greater mindshare with the consumer,” he said. “While COVID-19 has brought tailwinds to the business, we believe that the market share gains from smaller competitors exiting the market and the reemergence of the team sports category (estimated 15 per cent of sales) will help DKS hold onto sales/EBIT in a post-COVID environment.”

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In other analyst actions:

* Cormark Securities analyst David Ocampo raised his target for TFI International Inc. (TFII-T) to $105 from $80 with a “buy” rating, while Stephens’ Jack Atkins increased his target to $100 from $80 with an “overweight” recommendation. The average is $98.35.

* TD’s Mario Mendonca increased his Trisura Group Ltd. (TSU-T) to $115 from $105 with a “buy” rating. The average is $113.88.

* Credit Suisse analyst Andrew Kuske raised his target for Keyera Corp. (KEY-T) to $30 from $28 with an “outperform” rating. The average is $27.22.

“In our view, the core question for energy infrastructure stocks with meaningful marketing businesses (like KEY) is the direction of that segment – not so much in the Q4 results, but for the outlook into 2021 and beyond,” he said. “Clearly, many marketing businesses showed moderation over the course of 2020. Positive tailwinds were present in the latter part of Q4 and, therefore, in general, we remain constructive on many of these businesses – albeit with general moderate views. Given the long-cycle nature of our coverage universe, we do not place undue emphasis on short-term quarterly results.”

* Mr. Kuske increased his Pembina Pipeline Corp. (PPL-T) to $42 from $40 with an “outperform” rating. The average is $38.32.

* National Bank analyst Richard Tse resumed coverage of Docebo Inc. (DCBO-Q, DCBO-T) with an “outperform” rating and US$70 target, which falls short of the US$72 average.