Inside the Market’s roundup of some of today’s key analyst actions
After “very strong” first-quarter financial results that blew past the Street’s expectations, Credit Suisse analyst Mike Rizvanovic upgraded Bank of Montreal (BMO-T) to “outperform” from a “neutral” recommendation.
Before the bell on Tuesday, BMO reported earnings per share for the quarter of $3.06, easily exceeding both Mr. Rizvanovic’s $2.07 estimate and the consensus projection on the Street of $2.15.
“Importantly, BMO’s outsized EPS beat ... was driven by more than just lower PCLs as several other key earnings drivers such as margins and fee-based revenue improved as evidenced by strong growth in PTPP earnings,” said the analyst. “We expect to see continued earnings momentum for BMO through F2022.”
Emphasizing a “more positive” PCL outlook, “recovering” margins and outsized capital markets that he thinks “could stay elevated,” Mr. Rizvanovic hiked his 2021 and 2022 EPS projections to $10.19 and $10.33, respectively, from $8.40 and $9.29.
His target for BMO shares rose to $108 from $97. The average on the Street is $110.32.
Other analysts making target price changes included:
* RBC Dominion Securities’ Darko Mihelic to $125 from $110 with a “sector perform” rating.
“Q1/21 results were good as both revenues and credit positively surprised. We significantly increased our earnings expectations to reflect higher assumed revenue growth and lower PCLs,” said Mr. Mihelic.
* Scotia Capital’s Meny Grauman to $126 from $111 with a “sector outperform” rating.
* CIBC World Markets’ Paul Holden to $120 from $116 with an “outperformer” rating.
* National Bank Financial’s Gabriel Dechaine to $113 from $102 with a “sector perform” rating.
* TD Securities’ Mario Mendonca to $120 from $110 with a “buy” rating.
* Canccord Genuity’s Scott Chan to $112.50 from $106.50 with a “buy” rating.
* Desjardins Securities’ Doug Young to $110 from $100 with a “hold” rating.
* Credit Suisse’s Mike Rizvanovic to $71 from $67 with an “underperform” rating. The average on the Street is $77.21.
“BNS exceeded our expectations in Q1 on lower PCLs, strength in Capital Markets, and an outsized contribution from Corporate,” he said. “However, we continue to have concerns on the Int’l Banking segment as the sequential earnings improvement reported in Q1 was exclusively driven by lower PCLs, while earnings on a PTPP basis increased by a very modest 2 per cent. In the absence of a more constructive backdrop for top-line growth in Int’l, we continue to value BNS at a discount to peers.”
* Desjardins Securities’ Doug Young to $79 from $72 with a “buy” rating.
“Cash EPS was well ahead of expectations,” said Mr. Young. “And the message was, this isn’t the same BNS as pre-COVID-19 — it has derisked, repositioned, international banking is turning the corner, it’s holding the line on expenses and these themes should benefit it through the recovery. "
* CIBC World Markets’ Paul Holden to $120 from $116 with a “neutral” rating.
* TD Securities’ Mario Mendonca to $83 from $79 with a “buy” rating.
* RBC Dominion Securities’ Darko Mihelic to $84 from $77 with an “outperform” rating.
* Canccord Genuity’s Scott Chan to $77 from $70.50 with a “hold” rating.
Though its fourth-quarter earnings fell below his expectation, Industrial Alliance Securities analyst Elias Foscolos raised his rating for Hydro One Ltd. (H-T) to “buy” from “hold,” citing its “favourable” outlook and recent share price weakness.
Before the bell on Wednesday, the utility reported adjusted earnings per share of 27 cents, falling short of the 29-cent projection of both Mr. Foscolos and the Street.
“Higher revenues year-over-year were offset by increased OM&A costs, which were partially due to expenses incurred as a result of COVID-19,” the analyst said. “Income tax expense was a bit higher than we expected, but we expect the effective tax rate going forward to be in H’s 6-13-per-cent guidance range. For full-year 2020, H’s earned ROE [return on equity] was above the threshold for earnings sharing, resulting in $15-million of earning being shared with rate payers.”
“We consider H’s growth outlook to be predictable for the next couple years. The existing rate framework establishes H’s Transmission and Distribution (T&D) rates through 2022, which should allow H to absorb near-term inflation and interest rate risk in the ROE. H plans to file its joint T&D rate application in H2/21 for the period of 2023-2027.”
Mr. Foscolos maintained a $31 target for Hydro One shares. The average on the Street is $31.40.
Canaccord Genuity analyst Aravinda Galappatthige thinks the shift has a “equity markets friendly orientation.”
“First, the objective of transitioning from a content provider to a content-led technology provider is the key, particularly in a market where valuation multiples for more tech leaning, specially software-oriented stocks are expanding sharply,” said Mr. Galappatthige in a research report.
“A central element of TRI’s strategy is to build on its unique and broad-based content set by applying high-end AI/ML [artificial intelligence/machine learning] capabilities as well as high-quality software, essentially allowing for the delivery of these content sets in more innovative, customer-friendly ways. We note that TRI has already reached the 40-per-cent mark (consolidated) in terms of the mix of software and services for the big 3 divisions and likely to increase even further. Second, despite the dip in EBITDA in 2021 due to investments, the 2021-2023 projections indicate the prospect of low double-digit growth in EBITDA over the full 2020-2023 period and high teens growth in 2022/23. The transition from TRI’s perceived mid-single-digit growth trajectory toward high single digits, to even double digits, allows it to proceed up its comp list from a valuation standpoint with double-digit growth potentially earning 20 times-plus type EV/EBITDA multiples.”
Seeing “a good balance of defence, income and growth, Mr. Galappatthige raised his rating for Thomson Reuters shares to “buy” from “hold.”
“Alongside [Tuesday’s] projections for 2021-2023, we also view the 7-per-cent dividend increase very positively,” he said. “Importantly, this is supported by a healthy FCF trajectory. Note that management is targeting $1.8-billion to $2-billion ($3.60 per share - $4 per share) in FCF by 2023, up from the current ‘normalized’ level of $1.2-1.3-billion. This adds a genuine income component to TRI’s investment thesis, in addition to the aforementioned growth orientation. Furthermore, we know that a cornerstone of TRI’s efforts under the change programme is to improve the customer experience, which we believe would add to TRI’s defensive traits with high retention rates being a key factor investors look for. On this point, we believe that TRI’s demonstrated stability and strength in financial performance through the COVID-19 crisis, as reflected in the Q2-Q4 2020 results will likely further corroborate its low investment risk profile.”
The analyst hiked his target price for Thomson Reuters shares to US$95 from US$79. The average on the Street is US$92.99.
Elsewhere, CIBC World Markets’ Robert Bek upgraded Thomson Reuters to “outperformer” from “neutral” with a US$98 target, rising from US$86.
“The path to FY23 in the company’s bold two-year change plan presents a material upside to our estimates and argues for a next leg in valuation expansion,” said Mr. Bek. “TRI’s solid track of record on executing change initiatives, the granularity of FY21-FY23 roadmap, and the material opportunities in many layers of the organization give us the confidence to raise our estimates and upgrade the shares.
“While we highlight the company’s excellent performance through the COVIDquarters, the FY23 targets are shifting the business model to the next gear, aided by tech investments and agile operations.”
Other analysts making target changes included:
* RBC’s Drew McReynolds to US$98 from US$92 with an “outperform” rating.
“We believe Thomson Reuters over the next five years can sustain an NAV CAGR of 8–9 per cent, a notable increase over an estimated normalized NAV CAGR of 5–6 per cent through the 2000s and 2010s,” he said. “We see potential for further multiple expansion as Thomson Reuters continues an evolution to software provider. Importantly, we believe all of the KPIs underpinning NAV growth and multiple expansion are sitting at structural low points when looking out over the next decade.”
* National Bank Financial’s Adam Shine to US$122 from US$115 with an “outperform” rating.
* Credit Suisse’s Kevin McVeigh to US$115 from US$105 with an “outperform” rating.
* Scotia Capital’s Paul Steep to US$90 from US$89 with a “sector perform” rating.
* TD Securities’ Vince Valentini to $125 (Canadian) from $120 with a “buy” rating.
* JP Morgan’s Andrew Steinerman to US$91 from US$83 with a “neutral” rating.
Believing the Burnaby, B.C.-based company’s “negatives are impounded in expectations,” he raised his rating to “outperform” from “sector perform.”
“Dipping our toes into an oversold / high-quality business; we see five reasons why buying now makes sense: 1) Expectations reset has happened (RBA down 24 per cent year-to-date vs. OEMs/dealers up 17 per cent; Orlando GTVs were negative; Q4/20 was a miss; everyone knows about H2/21E tough comps); 2) While this likely warrants a deeper piece and methodological rethink, is RBA a tech company or an industrial company? At 29 times P/E (not revenue) and dominant market position, this is not expensive and in line with long-term median valuation; 3) The company has a recently renewed and unused $100-million share buyback program; 4) Using 2019 as an EPS anchor, RBA is expected to show more growth vs. OEMs/dealers (up 16 per cent vs. up 8 per cent, respectively); 5) Shares are oversold when looking at any technical indicator, priming for a potential bounce,” said Mr. Sytchev.
He did admit that he’s “not exactly sure when the stock will start to ‘work’ as the overused ‘catalysts’ moniker is relatively meagre at the moment.”
The analyst added: “We feel that the shares are washed out as a lot of negatives are already impounded in expectations (lower numbers, downgrades, large share price discrepancy vs. OEMs/dealers year-to-date ... Importantly, we believe that service revenue growth will outperform GTVs over the forecast horizon, something that investors are paying much greater attention to. The latter dynamic is also translating into stronger projected EPS CAGR growth vs. OEMs/dealers when using 2019 as the anchor point (while we don’t believe the market is pricing in Evergreen targets). We would not be surprised to see the company stepping up on NCIB accelerator.
“Finally, as we said many times before, this is a great business. And we are buying it now at reasonable (to RBA) multiples. While we are not pivoting away from more cyclically-positioned names under our coverage, long-term investors should do well with RBA.”
Mr. Sytchev maintained a US$57.00 price target for RBA shares. The average is US$60.17.
Stelco Holdings Inc. (STLC-T) is “set up for a bumper 2021 and improved 2022,” according to RBC Dominion Securities analyst Alexander Jackson, who raised his rating for its shares to “outperform” from “sector perform.”
“Our operating costs estimates were reduced going forward as Stelco demonstrated better than expected results from operations following the blast furnace upgrade project,” he said. “We have also lowered operating costs in Q4/21 and beyond as a result of the coke battery project.
“While we expect steel prices to fall over the next 24-months, Stelco’s cost structure has improved and the shares are trading at an unwarranted discount to the historical average and U.S. based peers in our view
Mr. Jackson’s target for Stelco shares rose to $29 from $26. The average is $28.93.
“We expect strong cash generation and earnings in 2021 as Stelco benefits from recent investments to increase capacity and reduce operating costs, as well as capitalizes on the current steel price environment,” he added. “In our view STLC will be in a position to return additional capital to shareholders above the reinstated 10 cents per quarter dividend.”
Acknowledging there is investor uncertainty on how to approach precious metals equities given the recent price volatility, Industrial Alliance Securities Puneet Singh named Osisko Gold Royalties Ltd. (OR-T) his “best defensive pick” in this market climate.
“Fundamentally, OR is the cheapest large/mid-cap PM [precious metal] equity in our coverage universe,” he said. “OR trades at just 0.7 times and is our top royalty pick. OR returned to a strict royalty business model in H2/20 post its development assets spin-out. Earlier this month, the operators of its largest royalty (Malartic; 30-per-cent NAV) released a plan to add a UG component to the current OP. The implications of Malartic UG for OR were received positively by the Street ... Technically, OR has been an outperformer versus the S&P/TSX Global Gold Index (XGD-T) during this recent period of gold’s consolidation. We think the relative outperformance is being driven by OR’s cheap valuation, anticipated high growth (20-per-cent GEO year-over-year growth over next five years), and positive reception of Malartic UG. We would expect this trend to continue and thus highlight OR as the best defensive pick in the short term as yields pressure PM prices, and longer term, we would expect outperformance driven by OR’s growth pipeline.”
Calling it a “relative outperformer,” Mr. Singh maintained a “strong buy” rating and $25 target for Osisko shares, exceeding the $23.15 average on the Street.
The analyst picked Wheaton Precious Metals Corp. (WPM-T) as his best offensive pick.
“Our study on past cycles and past periods of volatility caused by yields led us to conclude that royalty equities are the first out of the gate once PM prices swing to the upside in a bull market and subsiding pressure from yields eases off,” he said. “Our larger thesis on PM prices continues to be that given the record amounts of stimulus and more projected to be on the way, inflation will run rampant and benefit hard assets such as gold/silver. Silver prices are benefiting from their industrial (60-per-cent demand) applications in the recent reflation trade and technically, the Au/Ag ratio favours silver to outperform, just as it did in the last cycle (2:1 outperformance vs. gold). Additionally, WPM’s stochastics are in the oversold territory ... WPM has the highest exposure to silver (30-per-cent revenues) and is our best offensive pick in the short term as it should be one of the first to benefit from funds flow back into the sector.”
He has a “buy” rating and $90 target for Wheaton shares. The average is $79.58.
As its turnaround “takes hold,” Citi analyst Shawn Collins raised his rating for toymaker Mattel Inc. (MAT-Q) to “buy” from a “neutral” recommendation, citing a “strong” performance in the second half of 2020, “significant progress” on improving its operating margins and deleveraging of its balance sheet.
“On December 9, we initiated coverage on Mattel with a Neutral rating due to lower margins than its primary peer Hasbro, greater leverage (approximately 6 times), and an in-line valuation (with Hasbro & the S&P 500),” he said. “Since then we have been impressed by the following: (1) Greater-than-expected revenue growth (up 3 per cent in 2020, estimated to be up 7 per cent in 2021); (2) Stronger toy-related entertainment offerings – 11 films & 17 TV shows; (3) Margins improve (EBIT% to 10 per cent for 2020) & further cost cuts announced; (4) B/S deleverage to 4.0 times (3.0 times net) from 6 times – due to positive FCF in ’20.”
“Both Mattel and Hasbro are in the process of transitioning from Toy companies to Toy & Entertainment companies. We are encouraged by Mattel’s efforts in films, TV, and digital gaming. We expect its Power Brands – Barbie, Hot Wheels, and Fisher-Price – will translate well to digital offerings over time. We expect to hear more on these initiatives at its Analyst Day on Feb 24.”
Mr. Collins raised his target for Mattel shares to US$22.50 from US$20, exceeding the US$20.38 average.
“We are impressed by management’s progress on executing its multi-year strategy. Our initial wait and see approach appears to be too conservative. Retail toy demand remains robust into ’21 and we expect will be further aided by new Biden administration stimulus and a rebounding U.S. economy,” he said.
Pointing to its “aggressive yet prudent” approach to M&A and “full deal pipeline,” Raymond James analyst Rahul Sarugaser expects Skylight Health Group Inc. (SHG-X) to “materially boost its top line during the next few quarters.”
In a research report released Wednesday, he initiated coverage of the Toronto-based services and technology company, which focus on U.S. multi-specialty primary healthcare networks, with an “outperform” rating and $2.25 target, exceeding the $2.12 average.
“According to our revenue estimates, SHG trades at 5.5 times and 4.6 times 2022 and 2023 EV/Revenue, respectively, representing a 10-26-per-cent discount to peers,” said Mr. Sarugaser. “As such, we derive an average EV/Revenue valuation of $2.23 per share, which we round, and derive a Target Price of $2.25 per share. Given that this represents a 25-per-cent premium to SHG’s current share price at the time of writing, we ascribe an Outperform rating.”
In other analyst actions:
* Jefferies analyst Owen Bennett downgraded Canopy Growth Corp. (WEED-T) to “underperform” from “hold” with a $29.09 target, up from $27.78. The average on the Street is $46.51.
“Bulls will argue Canopy’s multiple is deserved given possible near term U.S. entry,” Mr. Bennett said. “While its U.S. optionality is the best among Canadian names, it is still too expensive for us.”
* Mr. Bennett raised his Aurora Cannabis Inc. (ACB-T) target to $9.44 from $4.59 with an “underperform” recommendation. The average is $13.04.
* Scotia Capital analyst Ovais Habib raised his target for Endeavour Mining Corp. (EDV-T) to $51 from $50 with a “sector outperform” rating. The average is $48.
* RBC Dominion Securities analyst Nelson Ng cut his Northland Power Corp. (NPI-T) target to $51 from $55 with a “sector perform” rating, while CIBC World Markets’ Mark Jarvi lowered his target to $51 from $52 with a “neutral” recommendation. The average is $53.79.
“Overall, the outlook for NPI remains positive,” said Mr. Jarvi. “Even with a few headwinds, NPI was able to meet 2020 Adj EBITDA guidance and we believe it can deliver solid results in 2021. Further, there is steady progress on key development efforts that should drive longer-term growth. We continue to believe NPI has a differentiated growth portfolio in offshore wind (with highquality contracts), and the capability to enhance its growth and asset mix through strategic M&A. The stock has checked back but investors might want to be patient in the near term as the broader space pulls back after a surge in recent months.”
* Jefferies analyst Hamzah Mazari increased his GFL Environmental Inc. (GFL-N, GFL-T) target to US$40 from US$35, keeping a “buy” rating, while Scotia Capital’s Mark Neville raised his target to $35 from $34 with a “sector outperform” rating. The average is US$28.92.
* TD Securities initiated coverage of AcuityAds Holdings Inc. (AT-T) with a “buy” rating and $37 target. The average on the Street is $17.83.
* TD’s Linda Ezergailis raised her Gibson Energy Inc. (GEI-T) target to $23 from $22 with a “hold” rating, while JP Morgan’s Jeremy Tonet cut his target to $25 from $27 with an “overweight” recommendation. The average is $24.06.
* Canaccord Genuity analyst Dalton Baretto cut his Dundee Precious Metals Inc. (DPM-T) target to $10.75 from $11.25 with a “buy” rating. The average is $12.86.
* Canaccord’s T. Michael Walkley raised his Sierra Wireless Inc. (SWIR-Q, SW-T) target to US$30 from US$24 with a “buy” recommendation, while TD Securities’ Daniel Chan increased his target to US$18 from US$15 with a “hold” rating. Raymond James analyst Steven Li increased his target to US$19 from US$13, keeping a “market perform” rating. The average is US$19.85.
“Sierra Wireless reported Q4/20 results ahead of our recently adjusted estimates on revenue and adjusted EBITDA,” Mr. Walkley said. “We believe the company is executing on its strategy of improving its core business with a shift toward its Device-to-Cloud value proposition and driving a higher proportion of recurring revenue versus one-time IoT hardware sales.”
* National Bank Financial analyst Endri Leno raised his target for Andlauer Healthcare Group Inc. (AND-T) to $38 from $36.25 with a “sector perform” rating, while Scotia Capital’s Konark Gupta moved his target to $40 from $38.50 with a “sector perform” recommendation. The average is $45.30.
* Scotia Capital analyst Paul Steep cut his target for Dye & Durham Ltd. (DND-T) by a loonie to $57 with a “sector outperform” rating, while Raymond James’ Stephen Boland hiked his target to $63 from $51.50 with an “outperform” recommendation. The average is $53.83.
“Three major events occurred for Dye & Durham over the past 10 days,” said Mr. Boland. “First, the company reported results for the quarter ending December 31, 2020 and provided forward guidance. Second, the company raised $530 million through a combination of equity and convertible debentures. Finally, DND announced that it has made an informal offer to acquire Idox Plc in the UK for $600-million.”
* Scotia’s Phil Hardie raised his Equitable Group Inc. (EQB-T) target to $136 from $130 with a “sector perform” rating. The average is $145.38.
* Scotia’s Scott MacDonald raised his Lucara Diamond Corp. (LUC-T) target to 70 cents from 55 cents with a “sector perform” rating, while Berenberg’s Richard Hatch increased his target to 80 cents from 70 cents with a “hold” rating. The average is 88 cents.
* TD Securities analyst Aaron MacNeil raised his target for Trican Well Service Ltd. (TCW-T) by 10 cents from $2 with a “hold” rating, while Raymond James’ Andrew Bradford increased his target to $2.50 from $2.30 with a “strong buy” recommendation. The average is $2.08.