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

It’s time to digest gains in Stelco Inc. (STLC-T), said Scotiabank analyst Michael Doumet in downgrading his rating on the steelmaker to “sector perform” from an equivalent of a buy rating.

Stelco shares have surged over the past year and continued to rise even this past summer when equity markets struggled to find further lift. But Mr. Doumet believes the surge in steel prices that has been propelling the shares is likely to take a breather, and steel could even be subject to a retracement in price similar to what has been seen in the lumber market.

“Steel prices have risen for 12 consecutive months, climbing an average of 13% per month and a total of 330% since the trough. As a low-cost producer, Stelco has been ideally positioned to reap the benefits – and, as a result, the shares have been the best performer in our universe of coverage. We expect extended lead-times and strong pricing to persist through 4Q21 (potentially into 1Q22) – but, we believe steel prices are increasingly subject to significant downside risk – somewhat similar to what was seen with lumber and, more recently, iron ore,” Mr. Doumet said in a note to clients.

He believes the risk/reward is now more balanced, and raised his price target only modestly to C$55 from $52.50. He previously had a “sector outperform” rating on Stelco shares.

“When compared with pricing in other regions, North American steel prices remain an outlier,” he explained further. “Increased domestic production and imports are likely to narrow the supply deficit in the coming months. Barring any unplanned outages, we expect prices to peak in the near term and normalize through the 2H22. As supply/demand becomes more balanced, we expect prices to fall at a relatively fast rate . In the next twelve months, we expect steel pricing to revert back to ‘normal’ as supply and demand are expected to be equilibrium in 2022. Our L-T HRC price assumption is US$650/nt, above the 10-year average of US$625/nt.”

But income investors should note that dividend payouts could be on the way, or the company may choose to return capital through more share buybacks, he said.

“Following its recent share repurchase, we expect Stelco to rebuild its cash balance and to, once again, be in a position to return capital to shareholders in 4Q22. At that point, depending on the steel price outlook and share price, the company could (i) issue special dividend, (ii) repurchase shares, and/or (iii) keep excess cash for optionality.”

BMO, meanwhile, believes Stelco has further upside, and raised its price target to C$70 from C$65.

The average analyst target is C$59.67, up from $50.78 one month ago, according to Refinitiv Eikon data. With Wednesday’s downgrade, Scotiabank becomes the only research firm to have the equivalent of a hold rating on the stock. The eight other analysts who follow Stelco still have buy ratings.


Citi Research analyst Christian Wetherbee upgraded Canadian National Railway Co. (CNI-N;CNR-T) to “buy” from “neutral” after a U.S. regulator Tuesday rejected the company’s proposed use of a voting trust in its efforts to acquire U.S. railway Kansas City Southern. The ruling by the U.S. Surface Transportation Board has made it unlikely CN will succeed in its takeover efforts, and places rival CP Rail in a better position to pursue a competing bid.

Mr. Wetherbee also raised his price target on CN to US$140 from US$127, “as we think the stock is likely to benefit from the potential that the KSU deal goes away (removing the regulatory overhang) and a refocus from management on operating ratio.”

Some investors seem to have already reached the same conclusion. CN Rail shares rallied more than 7% on Tuesday following the STB ruling.

Operating ratio is a key performance metric for railways. CN seems poised to refocus on the operating ratio following activism by shareholder TCI Fund Management earlier this week, which contended shares were undervalued. It called for former Union Pacific Railway and Canadian National chief operating officer Jim Vena to replace current CN CEO Jean-Jacques Ruest. London-based TCI Fund Management, in a filing, also said it increased its stake in CN Rail to 5.2 per cent, up from 4.25 per cent it last disclosed on June 30, placing it as CN’s second-largest holder behind Bill Gates’ Cascade Investment LLC..

“This move was one we thought was possible and we believe a greater emphasis on OR and EPS growth is desired by shareholders and either the existing or a new management team are more likely to deliver it given the circumstances. In the current environment of lackluster volume growth, we believe the potential for a laggard OR improvement story is likely to resonate with investors,” the Citi analyst said

Elsewhere on the Street, CIBC raised its price target on CN Rail to C$158 from C$145. CIBC analyst Kevin Chiang changed his target price “to reflect the optionality of the potential activism around CN, which could unlock additional earnings power.”

Analysts at Loop Capital lowered their rating to a “hold”, with a price target of C$157.

Several analysts commented that they believe the STB decision Tuesday is likely to end CN’s efforts to acquire the U.S. railway. “We expect the company to focus on its solid pipeline of growth opportunities and potentially close the operating ratio gap vs Class l peers. Meanwhile, we expect CP to reaffirm its US$300/share offer for KCS ahead of KCS’s shareholder meeting,” commented Desjardins Securities analyst Benoit Poirier in a note.

Kansas City Southern is holding a special meeting on Sept. 3 in which may determine if it will deem CP’s recently revised bid as a superior offer to CN.

CN issued a brief statement Tuesday night saying it is evaluating options.

The average analyst target on CN Rail shares is C$149.70.


Canaccord Genuity analyst Derek Dley raised his price target on shares of Dollarama Inc. (DOL-T) to C$57 from C$53, but reiterated a “hold” rating, believing that government-mandated capacity restraints at its stores will limit sales growth.

Dollarama is scheduled to report its fiscal second quarter results on Sept. 9.

In the month of June during the quarter, Ontario lifted its ban on non-essential retail, followed by an increase in store capacity and further easing of restrictions as part of the province’s re-opening plan.

“While the relaxation of restrictions allowed Dollarama to sell its full assortment of goods, we believe operating capacity restrictions earlier during the quarter and a gradual increase in capacity over the course of the quarter still would have translated into traffic-related headwinds,” Mr Dley said. “Accordingly, we are forecasting -2% YoY same-store sales growth for Q2/F22, which assumes that Dollarama will realize an approximate 15% decline in same-store sales for the front half of the quarter, a period where the non-essential retail ban was in effect.”

“The relaxation on non-essential retail likely helped shift the product mix toward the company’s higher-margin regular seasonal and discretionary offerings over the course of the quarter, positively impacting gross margins. That said, we believe this shift in product mix will be modestly offset by an increase in shipping and freight costs due to ongoing supply chain issues, as suggested by Dollar Tree’s results. Accordingly, we are forecasting gross margin of 43.4%, down 50 bps from Q2/F21 but up sequentially 110 bps from Q1/F22,” the analyst added.

The average analyst price target on Dollarama is C$61.79.


Argus analyst Taylor Conrad reaffirmed a “buy” rating on shares of Advance Auto Parts Inc. (AAP-N) and raised his target price to US$225 from $215.

He cited a range of positive developments for the retailer and distributor of automotive replacement parts and accessories.

“The company’s earnings have recovered from the impact of the pandemic, and both revenue and earnings are in growth mode. We expect comp improvement as the company continues to expand its omnichannel capabilities and increases marketing spending. We also expect margin improvement ... supply-chain optimization; and other productivity initiatives. The company has a clean balance sheet, and management has signaled confidence in its outlook by quadrupling the dividend, which now yields an above-market 2.0%.

“From a technical standpoint, the shares are in a bullish pattern of higher highs and higher lows that dates to March 2020. On the fundamentals, AAP shares are trading at 16-times our 2022 estimate, compared to a five-year historical range of 12-28. Our revised target price of $225 implies a projected 2022 P/E of 18, still in the lower half the historical range,” he added.

The average analyst price target is US$233.19.


TD Securities analyst Aaron MacNeil initiated coverage on Greenlane Renewables Inc. (GRN-T) with a “speculative buy” rating and C$2.50 price target. That’s below the average Street target of C$2.84.

Greenlane is an engineering services firm specialized in developing biogas upgrading systems using water wash, membrane and pressure swing adsorption technology.

Mr. MacNeil said the company serves a high-growth, low-carbon market at the early stages of commercialization, with a solid reference base of project deliveries and a competitive product portfolio.

But he believes the firm “is not meaningfully differentiated from its competitors through unique intellectual property.”

In the longer-term, he thinks the company is well-positioned for long-term renewable natural gas (RNG) industry growth.

“Under current climate-related regulatory frameworks, we believe that RNG project economics are attractive and that the broader industry has a strong long-term growth outlook. With this macro backdrop, we share Greenlane management’s view that there is no “one-size-fits all” biogas upgrading solution and that the company’s range of products allows it to pursue a larger breadth of opportunities in the space.

“In our view, this implies a strong revenue growth opportunity for Greenlane that should result in relatively consistent gross margin performance over time, expanding EBITDA margins as the company increases the operational leverage over its fixed administrative cost structure, and high conversion rates of EBITDA into free cash flow,” the TD analyst said in a note.


In other analyst actions:

Ballard Power Systems Inc. (BLDP-T) Wolfe initiates coverage with “underperform” rating and C$16 price target.

Thomson Reuters Corp. (TRI-T): National Bank of Canada raises target to C$162 from C$145

Canadian Imperial Bank of Commerce (CM-T): Fundamental Research downgrades rating to “hold” with a price target of C$148.51.

American Water Works Co Inc. (AWK-N): HSBC cuts to “hold” from “buy” and raises target price to US$190 from US$181

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