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

CGI Group Inc.’s (GIB.A-T, GIB-N) current valuation is “extended in the short term,” according to Desjardins Securities analyst Maher Yaghi, leading him to downgrade his rating for the stock in the wake of recent price appreciation.

“Our long-term view on CGI remains favourable, given its operational strength and track record of profitable M&A,” said Mr. Yaghi, who moved the Montreal-based IT professional services company to “hold” from “buy” ahead of the Aug. 1 release of its third-quarter financial report.

The analyst expects CGI to continue to display “healthy” organic revenue growth with its quarterly results, projecting revenue of $2.96-billion, adjusted earnings before interest and taxes (EBIT) of $425-million and adjusted earnings per share of $1.06. The consensus is currently $2.98-billion, $441-million and $1.08, respectively.

“Over the last two years, the company has largely improved its constant-currency revenue growth as a result of positive industry trends, successful tuck-in acquisitions and strong bookings,” said Mr. Yaghi, “We view this improvement as positive and we believe it helped to push the stock price higher. We still forecast decent constant-currency revenue of 4.5 per cent until the end of FY19. The large revenue increase in FY17 did not translate in bottom-line growth during the period. However, EPS growth has clearly improved over the last two quarters, as we believe the company is starting to reap the benefits of the previously announced restructuring, stock buybacks and revenue growth. We highlight that the stock price has a strong historical correlation with its ability to generate EPS growth.”

He added: “Since the beginning of 2018, the stock went from trading at a discount versus the TSX to a 5-times premium — a very sharp increase, in our view. The spread also represents a historical high in the period following the dot-com bubble. Even though we believe the company has solid growth prospects, we do not believe that the outlook has changed dramatically in the last few months. However, we believe that the stock is supported by the scarcity of high-quality technology companies in Canada."

Though he dropped his full-year 2018 adjusted EPS projection by a modest 2 cents to $4.15, Mr. Yaghi raised his target price for CGI shares to $89 from $84. The average target price on the Street is currently $82.52, according to Bloomberg data.

“While our view of CGI’s ability to deliver long-term bottom-line growth to shareholders through margin improvement and accretive acquisitions has not changed, its valuation is now too elevated relative to the company’s growth prospects, in our view,” he said. “Coupled with a much lower FCF yield as well as a premium multiple vs peers, we would wait for a better entry point before becoming more bullish on the stock.”


The first half of 2018 has been a “highly eventful” period for Canadian airlines, said Raymond James analyst Ben Cherniavsky, who continues to see WestJet Airlines Ltd. (WJA-T) and Air Canada (AC-T) battling in a “turf war” over market share that has resulted in “too much capacity, insufficient pricing power, and operating margins that are clearly inferior to the U.S peers.”

“The Canadian market, in fact, looks even more imbalanced when the relative economic growth of these two regions is factored into the equation,” said Mr. Cherniavksy in a research note previewing the companies’ second-quarter results. “We believe that low fuel prices, low interest rates, and seemingly insatiable demand for travel among Canada’s consumers has enabled Air Canada and WestJet to add all this capacity with relative impunity. The fact is, however, that despite the increasing number of full flights in the sky operating profits for both airlines remain well below peak levels that were reached three years ago. This, we believe, validates our thesis that the sector is engaged in a turf war mentality that prioritizes market share and network expansion over sustainably strong returns and consistent EPS growth. The declining ROIC [return on invested capital] metrics for both airlines over the past few years similarly supports this conclusion.”

Mr. Cherniavsky expressed concern over the “unravelling” of the companies’ share prices stemming from challenging market conditions.

“A shift towards a more ‘risk-off’ sentiment among investors may also be a factor in the broad underperformance of airline stocks over the past 12-18 months (since Jul-24-17 and Jan-24- 17 the U.S. Airline index is down 9 per cent and 5 per cent respectively, versus increases of 14 per cent and 23 per cent for the S&P 500 and 9 per cent and 5 per cent for the TSX Composite over the same periods of time),” he said. “We therefore do not see a universal buy-on-weakness opportunity on the airlines at present. On a case-by-case basis, however, we believe that WestJet’s valuation is looking increasingly attractive as sentiment has become extremely negative on this story … A discount on these shares is certainly warranted. However, our analysis suggests that the company’s 2Q18 earnings report will likely not be as bad as the Street fears, which could set the stock up for a near-term rally. Trade-orientated investors may want to position themselves accordingly.”

Keeping a “market perform” rating for both airlines’ shares, Mr. Cherniavky lowered his target price for Air Canada, already a low on the Street, to $24 from $21, which sits well below the average of $31.63.

“With Air Canada being the source of some of the highest-cost, fastest-growing, and least-profitable capacity on the continent, we believe its valuation discount is warranted and we see no reason to recommend the purchase of its shares over any other equally ‘cheap’ airline at present. While Air Canada is a high-volatility stock that can be traded nimbly from time to time — especially around the peak summer season — we prefer to base our investment thesis on underlying long-term industry and company fundamentals. For reasons outlined in this report, our analysis of these fundamentals suggests that there is still considerable risk in this stock, especially as fuel costs begin to creep back into the equation."

He maintained a $20 target for WestJet, which is 23 cents lower than the average.

“We believe that many of WestJet’s self-inflicted problems also warrant a discount on its stock,” said Mr. Cherniavky. “However, we still prefer it over Air Canada because of its superior cost-structure and balance sheet. We also believe that—unlike Air Canada—investor sentiment on WestJet is extremely negative, which could set it up favourably if the airline simply performs better than everyone fears. Finally, we note that WestJet’s stock is now trading at book value, which historically has always been a good entry point, and a very low CAPE ratio. While all of this arguably sets the stock up for a decent trade going into the 2Q18 report, the longer-term issues of WestJet’s overall strategic direction, its margin and ROIC compression, and the over-supplied state of the market keeps us on the sidelines for the time being.”


Reiterating his bullish stance on Canadian National Railway Co. (CNR-T, CNI-N) following the release of better-than-expected second-quarter results, Desjardins Securities analyst Benoit Poirier expects improvements in operating performance to support its growth outlook going forward.

“Recent investments in infrastructure and the addition of new locomotives and crew members helped CN to significantly improve its operating metrics vs last quarter, including dwell time, car velocity and train velocity,” said Mr. Poirier. “This performance was achieved despite the negative impact of flooding at points along the network. Nevertheless, management highlighted that there is still significant work to do as operating metrics remain weaker than historical averages. CN’s operational performance in 4Q18 should improve vs a year ago as infrastructure spending is completed, which should lead to direct improvement in OR. Train productivity has already started to improve (up 3 per cent versus 1Q18) as new employees ramp up their training (350 new employees were qualified as conductors in the quarter), with more to come in 2H.”

On Tuesday, CN reported quarterly revenue of $3.631-billion, up 9 per cent year over year and in-line with Mr. Poirier’s estimate ($3.626-million) while ahead of the consensus ($3.57-billion). Adjusted earnings per share of $1.49 topped both his projection of $1.41 and the Street’s expectation of $1.38.

Calling Jean-Jacques Ruest’s appointment as CN’s new president and CEO a “well-deserved” move, Mr. Poirier raised his EPS projections for 2018 and 2019 to $5.38 and $6.12, respectively, from $5.26 and $6.01 in response to both the results and increased guidance.

With a “buy” rating for its stock, he raised his target to $121 from $118. Consensus is $115.47.

“We are impressed by the effectiveness demonstrated by management to address capacity issues,” he said. “In addition, we expect continued and gradual improvement in operational performance through the year, which should help support CN’s revised outlook. Bottom line, we recommend investors buy the shares.”

Elsewhere, Raymond James analyst Steve Hansen increased his target to $120 from $116 with an “outperform” rating (unchanged).

Mr. Hansen said: “We are increasing our target price … on the back of a resounding 2Q18 beat and corresponding guidance increase—an event that decisively supports our view that CN’s operational recovery plan remains on track to deliver generous capacity/efficiency improvements through 2H18.”


Following “very strong" second-quarter results and “better visibility” into the improved performance of Toromont Quebec/Maritimes segment, BMO Nesbitt Burns analyst Devin Dodge upgraded Toromont Industries Ltd. (TIH-T) to “outperform” from “market perform.”

“The combination of robust demand and what we consider to be impressive cost discipline should support strong earnings growth in the legacy Equipment division as well,” said Mr. Dodge.

“Layering in a top-tier management team with an impressive track record of generating double-digit earnings growth and attractive return on capital, we believe Toromont provides a compelling risk/reward.”

He raised his target to $72 from $61. The average is $64.13.


The second-quarter results for Parkland Fuel Corp. (PKI-T) are likely to display the “powerful” earnings potential of a “transformed” business, said Canaccord Genuity analyst Derek Dley.

Expecting to see the benefits of the acquisitions of Chevron Canada’s downstream fuel business and Canadian business and assets of CST Brands, Inc., he is projecting EBITDA for the Calgary-based marketer of fuel and petroleum products of $210-million, which sits well above the consensus of $179-million as well as the $54-million profit seen in the Q2 2018.

“Importantly, the turnaround of the Chevron refinery asset was successfully completed both on time and on budget at the start of the quarter and we expect the company’s results to benefit from the robust crack spreads witnessed in Q2/18,” said Mr. Dley.

He added: “As a reminder, following Parkland’s Q1/18 earnings results, the company increased its synergy guidance from the CST & Chevron acquisition to $80-million by 2020, ahead of our estimate of $70-million, and provided 2018 EBITDA guidance of $650-million, with a 5-per-cent variance level. We note this is below what we view as normalized earnings power, as the company was undergoing a material maintenance program at its Burnaby refinery in Q1/18, which reduced refinery profits during the quarter.”

Maintaining a “buy” rating for Parkland Fuel shares, Mr. Dley hiked his target to $44 from $42, exceeding the current consensus of $37.75.

“Our target price represents 10.9 times our 2019 EBITDA estimate of $718-million (previously 10.9 times our 2019 EBITDA estimate of $700-million), as we are increasing our EBITDA estimate to reflect the stronger earnings potential at the Burnaby refinery,” he said. “We are comfortable assigning Parkland a premium valuation given its strong growth profile, robust acquisition pipeline, healthy balance sheet and stable 3.4-per-cent dividend yield.”


In response to its significant second-quarter earnings miss, RBC Dominion Securities analyst Mike Dahl downgraded Whirlpool Corp. (WHR-N) to “sector perform” from “outperform.”

“Our prior Outperform thesis was predicated on improving industry price discipline across North America allowing for both growth and margin improvement, an inflection in EMEA [Europe, Middle East and Africa], and strong capital deployment opportunity,” said Mr. Dahl. “We now have a higher level of concern driven by the pace of share loss in North America and Europe, greater than expected operational challenges internationally, and potential for further risk to estimates/guidance (particularly on FCF).”

Based on the expectation of continued share losses as Whirlpool strives to protect pricing as well as a “more conservative” view on the magnitude and timing of recovery in EMEA, he dropped his 2018 EBIT and EPS estimates to US$1.44-billion and US$14.27 from US$1.56-billion and US$16.06, respectively. His 2019 projections fell to US$1.53-billion and US$16.55 from US$1.6-billion and US$16.06.

Mr. Dahl also lowered his target for the stock to US$146 from US$176. The average is US$165.


In other analyst actions:

GMP analyst Ian Gillies upgraded Keyera Corp. (KEY-T) to “buy” from “hold” with a $44 target, up from $41. The average is now $42.38.

Eight Capital analyst Joseph Fars initiated coverage of Neo Lithium Corp. (NLC-X) with a “buy” and target price of $3, which is a dime above the consensus.

Pareto Securities analyst Jack Garman initiated coverage of Endeavour Mining Corp. (EDV-T) with a “buy” rating and $33 target, exceeding the consensus of $32.61.

Peters & Co. initiated coverage of Tervita Corp. (TEV-T) with a “sector outperform” rating and $13 target, while TD Securities gave it a “buy” rating with a $13 target.

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