Inside the Market’s roundup of some of today’s key analyst actions
Citi analyst Tyler Radke thinks it’s unlikely the first quarter for Shopify Inc. (SHOP-N, SHOP-T) will prove to be a catalyst for its shares.
“Street’s estimates on GMV [gross merchandise volume] appear reasonable assuming typical seasonality and some moderation of 2020 accelerants,” he said in a research report on North America application software firms released Wednesday.
“Though visible on the distant horizon, investors have been given few clues as to timing & magnitude of Shopify’s next catalysts (e.g. Shop App, Fulfillment Network, new social channels). With 2021 articulated as an investment-heavy year (we raise our opex estimates), we remain on the sidelines into the beginning of tougher comps & wait for further conviction in economics/ monetization of more aspirational investments.”
Overall, Mr. Radke sees a “positive” fundamental backdrop for the sector heading into earnings season, pointing to multiple positive pre-announcements, and better-than- expected results from International Business Machines Corp. (IBM-N).
“We see these early data points as well as our fieldwork supportive of a continued improvement in the spending environment (particularly in the U.S). Compares are generally quite easy given the lapping of peak-COVID Qs. At the same time, with more outsized positive estimate revisions outside of software, we think the bar is higher and thus favor companies where we see the strongest demand trends,” he said.
Mr. Radke said the quarter will be the last to exhibit “easier” comps for Shopify following the spike in business stemming from the onset of the COVID-19 pandemic.
“Specifically, we expect benefits from net merchant additions and mix-driven penetration rate (GPV as a percentage of GMV) increases will be harder to come by in 2021, and see less room for numbers to move incrementally higher based on these drivers,” he said.
After an “updated regression of software stock multiples relative to forward operating profile expectations,” he trimmed his target for Shopify shares to US$1,315 from US$1,457, keeping a “neutral” recommendation. The average target on the Street is US$1,438.50, according to Refinitiv data.
“We rate Shopify shares as Neutral, High Risk because while we appreciate the magnitude of the TAM, an acceleration of secular tailwinds coming into focus, a strong management team and record of execution, we believe much of this is priced in at the current multiple—which earns a significant premium to the implied multiple of its growth/margin framework and implies a 10-yr revenue CAGR [compound annual growth rate] that appears potentially too high,” he said.
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In a separate note, citing strength in the Personal Computing market, Mr. Radke raised his financial estimates and opened a “positive catalyst watch” for Microsoft Corp. (MSFT-Q) ahead of the April 27 release of its third-quarter results.
“The combination of our reseller survey and our channel checks gives us incremental confidence that MSFT can drive revenue upside across key three segments: MPC on stronger consumer/commercial demand, Server on robust upgrade/End-of-Life activity and Azure driven by continued strong enterprise consumption growth,” he said. “Importantly, we see most of these growth drivers (particularly Server+Azure) as sustainable beyond Q3, which provides a good set-up into FQ4 and FY22. While shares have had a strong run year-to-date, the performance is modest (17 per cent) vs. most large cap tech names. We continue to see MSFT as the best-positioned megacap in software as we see double-digit growth (revenue+profits) at scale as sustainable, given ramping Azure consumption and upsell motions around O365.”
Mr. Radke said the firm’s second reseller survey showed “a continuation of prior trends with higher overall growth rates,” projecting 10 per cent over the next 12 months.
“In terms of growth drivers, O365 and security products took top spots, with a surprising uptick from on-prem server upgrade activity. Strong Server activity was also a highlight from our checks beyond the survey,” he said.
Seeing these growth drivers as “sustainable” beyond the third quarter and providing “a good step-up” for the fourth quarter and fiscal 2022, Mr. Radke raised his target for Microsoft shares to US$302 from US$292, keeping a “buy” recommendation. The average on the Street is US$273.17.
“We rate MSFT Buy based on our view that cloud-related revenue streams will enable growth to continue at double-digit levels, with operating margin expansion. In the Azure business, we see COVID-19 as having catalyzed customer adoption and acceleration in consumption. In the Productivity franchise, we expect incremental demand in this space plus tepid macro conditions are likely to drive higher price per seat as customers upgrade to E5 SKU. Meanwhile, we see headwinds from on-prem business subsiding as these businesses continue to diminish in size,” the analyst said.
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Desjardins Securities analyst Doug Young predicts there could be “knee-jerk stock reactions” for Canadian lifecos on May 6 if first-quarter results are “noisy” given all four companies are hosting post-earnings conference calls.
“On that note, for MFC the net impact on headline EPS from shifts in rates was likely negative, driven by a steepening of the yield curve, despite higher absolute interest rates,” he said in a research report. “Otherwise, lifeco stocks increased 16.4 per cent on average in the quarter, outperforming the S&P/TSX (7.3 per cent) and the S&P/TSX Financials sub-sector (12.7 per cent).
“An improved 2021 macro outlook bodes well for the sector; however, we are not out of the woods yet given further lockdowns in Canada.”
Overall, Mr. Young is projecting a 31-per-cent year-over-year increase in core earnings per share, based on higher equity markets, interest rates and an “easy” comp from a weak quarter a year ago.
“For 2021 and 2022, we expect core EPS to increase by 12 per cent and 7 per cent on average, respectively,” he added. “As we look out to 2021, there are several drivers behind our core EPS growth expectations: (1) SLF — margin expansion at its U.S. group insurance operations, momentum in Asia, expense actions in Canada, higher contribution from SLC Management and potentially capital deployment (although we have not built any in); (2) MFC — momentum in Asia and wealth management, and expense efficiencies; (3) IAG — integration of acquisitions (specifically IAS in the US), organic growth, digital initiatives and leveraging improved distribution capabilities domestically; and (4) GWO — inclusion of MassMutual’s US retirement business, expense savings in the U.S. and Canada, and growth in Europe and CRS.
“Worth noting, a weaker U.S. dollar vs Canadian dollar and a potentially higher corporate tax rate could be headwinds for certain lifecos as we look out over the coming year. For perspective, the percentage of our 2021 headline earnings coming from the U.S. is as follows: 47 per cent for SLF, 30 per cent for MFC (excluding WAM), 12 per cent for GWO and 12 per cent for IAG.”
After raising his EPS projections to “factor in the positive impact of equity markets (versus lifeco expectations) and the mixed impact of interest rates,” Mr. Young made the following target price adjustments (in order of preference):
- Sun Life Financial Inc. (SLF-T, “buy”) to $72 from $69. The average target on the Street is $69.69.
- Manulife Financial Corp. (MFC-T, “buy”) to $30 from $28. Average: $28.39.
- iA Financial Corporation Inc. (IAG-T, “buy”) to $78 from $68. Average: $74.22.
- Great-West Lifeco Inc. (GWO-T, “hold”) to $36 from $32. Average: $34.50.
“Compared with average historical P/BV [price to book value] levels, three of the four lifecos are trading below historical P/BV averages,” he said. ”Given MFC’s lower ROE outlook compared with pre-crisis levels (partially a function of hedging costs), we believe a lower multiple is warranted. GWO also deserves a lower multiple, in our view, due to issues at Putnam and its exposure to uncertainty in the UK. We believe SLF warrants a multiple above the historical average, given (1) its lower risk profile (ie sale of its U.S. annuity operations); (2) a larger portion of earnings coming from MFS; (3) its strengthened and stable Canadian operations; (4) a clearer strategy; and (5) a strong financial position.”
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Ahead of the start of first-quarter earnings season for precious metals producers, analysts at Canaccord Genuity lowered their price assumptions for gold by an average 11 per cent and silver for 4-10 per cent, leading to a series of rating and target price assumptions for stocks in their coverage universe on Wednesday.
“Gold averaged $1,797 per ounce in Q1/21 which while down 4 per cent quarter-over-quarter is up 14 per cent year-over-year and the third-highest quarterly average ever,” the firm said. “Silver shot up 7 per cent quarter-over-quarter to average $26.25 per ounce, copper rose 18 per cent and zinc 5 per cent. We note Q1 tends to be seasonally weak from a production standpoint; we generally forecast lower production quarter-over-quarter.”
“Gold equities off to a mixed start in 2021 but have rebounded off recent lows. The S&P/TSX gold index is down 3 per cent year-to-date (in US$), outpacing the 6-per-cent drop in the gold price. However, the gold index bottomed on March 1 and has since gained 19 per cent vs. gold up 3 per cent and correcting oversold conditions; we estimate the equities are now discounting a $1,755 per ounce gold price. U.S. treasury yields and the dollar have eased, and the US 10-year real rate has declined modestly to negative 0.7-0.8 per cent from negative 0.6 per cent in February.”
Though the firm lowered its long-term gold price estimate to US$1,796 per ounce from US$2,014, it expects gold producers to “effective match” 2020′s record all-in sustaining cost (AISC) margin and free cash flow with an average price of US$1,763.
“We estimate an average 2021 AISC of $1,021 per ounce, roughly flat with 2020 and generating an AISC margin of $742 per ounce, also flat with 2020 and well above the previous 2011 peak of $524 per ounce,” it said. “Across our coverage universe, we forecast aggregate FCF of $13.5 billion, effectively in line with the $13.7 billion in 2020. We forecast FCF rising to $14.9 billion in 2022 (up 10 per cent vs. 2021), although we suspect some of this to be allocated to higher dividends, exploration budgets and continued modest reinvestment into growth. We expect 70 per cent of the companies in our coverage universe to be in a net cash position in 2022 up from just 35 per cent in 2019.”
Though the analysts view the sector’s valuations as “attractive” overall, they made a trio of rating changes:
* Analyst Carey MacRury lowered Maverix Metals Inc. (MMX-T) to “hold” from “buy,” citing a 6-per-cent return implied by his unchanged $8 target price. The average on the Street is $8.39.
* Also pointing to concerns about its projected return, analyst Kevin MacKenzie dropped Pretium Resources Inc. (PVG-T) to “hold” from “speculative buy” with a $15 target, down from $18 and below the $17.19 average:
“With continued operational execution, we increasingly view Pretium as a potential acquisition target. That said, we look to the H1/22 resource, reserve and life of mine plan update for a more comprehensive/detailed overview of the project’s long-term prospects. Recall that the 2020 life of mine plan was based on a partial resource update with an applied mine call factor to the balance of the derived reserve base,” he said.
* Emphasizing “the significant political overhang on Kumtor and the possibility that the mine economics ... could be significantly impacted over the next 12 months,” analyst Dalton Baretto cut Centerra Gold Inc. (CG-T) to “speculative buy” from “buy” with a $14.50 target, down from $18. The current average is $18.06.
“While the Q1 results are important, we remain focused on the evolving dynamic between Kumtor (53 per cent of asset-level NAV) and the new political leadership in the Kyrgyz Republic. Recall that in February 2021, a State Commission was formed by the Kyrgyz Republic Parliament to, among other things, review the performance of the Kumtor Mine. Given that the formation of the 2012 State Commission was a precursor to a material decline in the nature of the relationship between CG and Kyrgyzstan, we will be watching this dynamic unfold closely,” said Mr. Baretto.
The firm also made these target price adjustments for senior producers:
- Newmont Corp. (NEM-N/NGT-T), “buy”) to US$70 from US$83. Average: US$73.85.
- Barrick Gold Corp. (ABX-T, “buy”) to $35 from $40. Average: US$36.54.
- Agnico Eagle Mines Ltd. (AEM-T, “buy”) to $90 from $110. Average: $99.90.
- Kinross Gold Corp. (K-T, “buy”) to $13.50 from $16. Average: $15.54.
- Kirkland Lake Gold Ltd. (KL-T, “buy”) to $60 from $70. Average: $70.02.
- Pan American Silver Corp. (PAAS-Q/PAAS-T, “buy”) to US$39.50 from US$42. Average: US$43.26.
- Yamana Gold Inc. (YRI-T, “buy”) to $9 from $11. Average: $9.16.
- B2Gold Corp. (BTO-T, “buy”) to $9.50 from $11. Average: $9.38.
- Endeavour Mining Corp. (EDV-T, “buy”) to $45 from $48. Average: $45.64.
“Our top picks are Endeavour, B2Gold, and Kinross among the senior producers; Equinox Gold, SSR Mining, Roxgold, K92 Mining, and Calibre Mining among the intermediate/junior producers, and Osisko Royalties among the royalty/streaming companies,” the firm said.
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As Canadian Pacific Railway Ltd. (CP-T) and Canadian National Railway Co. (CNR-T) wage a bidding war for Kansas City Southern (KSU-N), BMO Nesbitt Burns analyst Fadi Chamoun sees CSX Corp. (CSX-Q) as “a desirable M&A target in a transcontinental merger ... a scenario that we believe will increasingly colour valuation going forward.”
Pointing a stronger volume growth outlook, which he thinks supports greater positive leverage, he raised his rating for the Jacksonville-based railway company to “outperform” from “market perform.”
“As of the end of 2020, CSX effectively matched the Canadian railroads’ best-in-class operating costs when adjusted for length of haul,” he said. “The company has consistently delivered stronger performance than its U.S. eastern counterpart from an operating execution standpoint (please refer to our U.S. eastern railroads comparative analysis, here). While we would expect the rail industry cost curve to continue to improve going forward (which we believe should provide margin improvement across the entire sector), our confidence in CSX’s execution has been reinforced over multiple years and we sense the company is well-positioned to deliver strong incremental margins as the cyclical recovery plays out over the coming quarters.”
Mr. Chamoun’s upgrade came despite “light” first-quarter results, released Tuesday. CSX reported earnings per share of 93 US cents, down 7 per cent year-over-year and 2 US cents below his estimate (and 3 US cents below the Street’s expectation).
“CSX expects double-digit revenue growth in 2021 with volume growth in excess of GDP,” he said. “We interpret the volume growth guidance to be around high-single-digit (BMO estimate is for an 8.8 per cent increase year-over-year). With improving pricing momentum, we believe that the railroads – and CSX specifically, given its large exposure to industrial end markets – offer a winning combination of modest cost inflation, improving pricing momentum, and positive productivity outlook. Limited upward pressure on capex in the case of CSX should allow for strong free cash flow, ROIC and operating margin expansion. This backdrop is scarce in the freight transportation sector where cost inflation is limiting margin improvement opportunities, growth capex is typically elevated, and ROIC is generally under pressure.
“Our BMO Rail Demand Index (RDI) fuels our confidence in the demand outlook that CSX highlighted on its conference call and supports our enthusiasm for the revenue opportunity going forward. Our RDI tends to lead rail volumes by three to six months. We believe that CSX’s execution on the commercial side has been particularly strong in recent years as management has placed emphasis on leveraging improved service and cost leadership. This strategy should continue to pay off, in our opinion, particularly given the tight supply/demand conditions in the freight market and the positive cyclical tailwinds.”
After raising his financial projections, Mr. Chamoun increased his target for CSX shares to US$110 from US$95. The current average is US$105.74.
“CSX’s consistently strong execution, significant cyclical tailwinds (particularly in industrial end markets, which command higher margins and where CSX has significant presence), improving pricing outlook, benign cost inflation, low capital intensity and by extension high free cash flow and ROIC expansion, are the fundamental reasons underpinning our upgrade,” he said.
Elsewhere, RBC Dominion Securities analyst Walter Spracklin raised his target to US$108 from US$100, keeping an “outperform” rating.
“CSX reported a mixed Q1/21,” he said. “Earnings were light compared to expectations and of lower quality given the benefit of storage revenue. Somewhat offsetting was the new guide, which was slightly better than expected and reflects management’s increased confidence in the outlook. Net net, we expect a modest negative reaction in the shares [Wednesday]. Nevertheless, we like CSX for the strength in its operating model amid a period of significant volume surges and associated volatility.”
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Quisitive Technology Solutions Inc. (QUIS-X) is poised to deliver “strong” cloud and payment growth in 2021, said Desjardins Securities’ Kevin Krishnaratne.
On Tuesday, the Toronto-based firm reported revenue of US$13.1-million for the fourth quarter of 2021, exceeding the analyst’s US$12.9-million projection driven by an 18-per-cent year-over-year jump in organic growth.
“While we continue to remain bullish on Cloud trends in 2021, we are even more excited for the launch of LedgerPay,” he said. “Management is positive it will obtain bank sponsorship in the near term (weeks), a key milestone required to enable payment processing capabilities. We would be buying the shares ahead of this event.”
“Obtaining bank sponsorship appears imminent, with management indicating this would have likely been achieved in 1Q were it not for its acquisition of BankCard, which added some complexities related to existing bank agreements. Next key milestones include PCI audit approvals (May) and Visa certification (90 days following bank sponsorship closing). All indications are pointing to merchant onboarding becoming a reality in 3Q via the migration of BankCard merchants and through joint initiatives with Microsoft targeting larger retailers. We see upside to our forecasts which (1) do not include large retailer wins, and (2) assume very little LedgerPay cross-sell upside within BankCard. We note that management has indicated at least a 25-per-cent increase in related net revenue and EBITDA from synergies over the next few years.”
With Quisitive expecting lower first-quarter results due to a number of factors, including the expected phasing out of Rev19 licence revenue and consulting and professional services delays related to the Texas winter storms, Mr. Krishnaratne trimmed his 2021 and 2022 financial projections.
He maintained a “buy” rating and $2.50 target. The average on the Street is $2.14.
Elsewhere, Canaccord Genuity analyst Robert Young kept a “buy” rating and $2.30 target.
Mr. Young said: “Quisitive reported an in-line Q4 with revenue marginally below our estimates and EBITDA in line with our and consensus estimates. The company continues to see strong momentum in its cloud development business, particularly among healthcare clients, and is seeing a rebound from its retail and hospitality customers, who were hit by the pandemic. Looking ahead, we believe management’s top priority is LedgerPay’s commercialization in Q3, with the bank sponsorship agreement expected in the coming weeks. As well, Quisitive expects to close the BankCard acquisition soon and begin the process of migrating its merchants to LedgerPay. On the earnings call, management pointed to a sequential decrease in Q1 revenue given the contract delays from power outages caused by the Texas cold wave along with a one-time LedgerPay licensing agreement with Rev19, which laps in Q1. However, our previous estimates reflect the decrease, and therefore our model for Q1, 2021 and 2022 is roughly unchanged.”
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Marimaca Copper Corp.’s (MARI-T) wholly-owned project in northern Chile features “low political risk, complexity and capex” as well as “compelling economics,” according to Raymond James analyst Farooq Hamed.
He initiated coverage of the Vancouver-based miner with an “outperform” rating.
“The Marimaca copper project hosts a copper oxide resource containing over 640kt Cu in M&I and Inferred resources,” said Mr. Hamed. “The project envisions an open pit mine with heap/ROM leach and SX-EW processing producing copper cathode over a 12-year mine life. The resource starts at surface and has favorable geometry that minimizes the need for pre-stripping. Further, the project is near power, water and port infrastructure. In comparison to other projects, we believe these characteristics along with its location support our view that Marimaca is a low risk project. Further, these characteristics allow for a modest development capital estimate of $285-million or capital intensity of just under $8,000 per ton which is amongst the lowest in comparison to current copper projects.”
“As part of our analysis we benchmarked the Marimaca project against 23 other open-pit copper projects with a technical study published in the past four years. We focused the comparison on capital intensity and project profitability as we view both as important metrics when considering the likelihood of a project being sanctioned and financed. We estimate that the Marimaca project has a capital intensity of $7,943 per ton versus the comparison group average of $11,700 per ton and a ranking of 6th best out of 24 projects compared. Using a profitability index of NPV divided by initial development capital, we estimate the Marimaca project has a ratio of 1.8 times versus the group average of 1.0 times which ranks it at the top of our comparison universe of 24 projects”
Also touting its organic growth opportunities surrounding the project area and its “significant” upside to spot copper prices, Mr. Hamed set a target of $5.50 per share. The average is $5.31.
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In other analyst actions:
* Scotia Capital analyst Konark Gupta cut his target for shares of Canadian Pacific Railway Ltd. (CP-T) to $480 from $516, keeping a “sector perform” rating, and Canadian National Railway Co. (CNR-T) to $143 from $145 with a “sector outperform” recommendation. The averages on the Street is $528.41 are $137.78, respectively.
“Our analyses suggest that CP could have a relative limitation in a potential bidding war with CNR, unless it compromises on accretion or initial leverage. Thus, we think CP stands a fair chance to win over KSU if the latter’s shareholders put more weightage on regulatory approval and long-term value as opposed to cash consideration,” said Mr. Gupta.
* In response to the rise in iron prices, Raymond James analyst Brian MacArthur raised his target prices for Champion Iron Ltd. (CIA-T, “outperform”) to $7 from $6.50 and Labrador Iron Ore Royalty Corp. (LIF-T, “market perform”) to $39 from $37. The averages on the Street are $6.85 and $39.71, respectively.
“Iron ore prices continue to increase with P65 prices now over US$215 per ton,” he said. “In our view, the recent prices reflect ongoing strong demand supported by commitments to reduce emissions from steel making. In addition, 1Q production from major producers (Vale and Rio Tinto) that was in-line, or lower-than-expected, as well as terminal challenges (CSN) highlight the supply challenges the industry is currently facing to meet demand. Given this situation, we have again increased our 2021 calendar Fe 65 price forecast.”
* TD’s Craig Hutchison raised his Labrador Iron Ore Royalty Corp. (LIF-T) target to $44 from $41, topping the $39.71 average, with a “buy” recommendation.
* CIBC World Markets analyst Sumayya Syed raised her Crombie Real Estate Investment Trust (CRR.UN-T) target to $16.75 from $16.25, exceeding the $15.91 average, with an “outperformer” rating.
“Our positive view reflects a defensive tenant base and highly predictable rent profile, anchoring visible growth from value-add developments. We view the geographic footprint and near-term visibility of Crombie’s development pipeline as differentiating factors versus peers. Further, the REIT’s relatively small size and scale amplify the contribution of developments to per unit growth. As Crombie continues to unlock embedded land value in major urban markets, we see a clear path to NAV growth at an above-average pace,” she said.
* TD Securities analyst Tim James cut his target for TFI International Inc. (TFII-T) to $110 from $115 with a “buy” rating. The current average is $98.36.
* TD ‘s Brian Morrison raised his Gildan Activewear Inc. (GIL-N, GIL-T) target to US$38 from US$36, maintaining a “buy” rating. The average on the Street is US$34.88.
* Cowen and Co. analyst George Mihalos bumped up his Nuvei Corp. (NVEI-T) target to $102 from $100, keeping an “outperform” rating. The average is $90.
* Telsey Advisory Group initiated coverage of Bespoke Capital Acquisition Corp. (BSPE-Q, BCU-T) with an “outperform” rating and US$15 target.
* Eight Capital analyst Suthan Sukumar cut his PopReach Corp. (POPR-X) target to $1.75 from $2.35 with a “buy” rating. The average is $1.71.
* Eight Capital initiated coverage of Leaf Mobile Inc. (LEAF-T) with a “buy” rating and $1 target, exceeding the 75-cent average.
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