Wednesday’s analyst upgrades and downgrades

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

Raymond James analyst Steve Hansen trimmed his financial estimates for Methanex Corp. (MEOH-Q, MX-T), citing “sliding global methanol prices, wider-than-expected spot-contract spreads (read: discount rate), and higher natural gas price.”

“Global methanol markets have weakened over the past several months, drawing weight from several factors, including tightening monetary policy, acute Chinese lockdowns, and increasing economic concerns,” the analyst said. “Specifically, we note that global spot prices have slipped 27 per cent on average from their fly-up highs last fall, and 19 per cent on average from their temporary surge this spring following the onset of the Russia-Ukraine war. As noted in our weekly Dashboards, the direct supply-side impact of the Russian conflict have been modest, and M. East production has continued at pace. Coupled with demand-side pullback on Chinese lockdowns, the net results has been a build in inventories, now perched at 18 month highs. Despite this weight on spot markets, posted contract prices have remained very firm.”

Mr. Hansen called the relationship between oil and methanol “volatile partners.”

“While methanol’s recent divergence from oil has become increasingly topical of late, we’re not all that surprised,” he said. “To be sure, methanol and oil have a long, tight relationship that goes back nearly 15 years, but this has not been without its volatile departures. As shown below, spot methanol (Asia) & crude are often tightly correlated when global GDP is healthy/accelerating (i.e. demand is firm), leaving energy-related verticals to set the marginal price point. However, this link often breaks when global GDP slows/decelerates (like in recent months), reducing the influence of energy markets.”

“While Methanex shares are also tied closely to crude, their commitment is often tested when the global economic situation deteriorates, leaving them to track their closest (logical) partner: spot methanol. This makes sense in our view, and is one of the reasons we opted to downgrade to market perform in December. That said, once global GDP stabilizes/strengthens, we expect energy to re-exert is influence quickly.”

Maintaining a “market perform” rating, Mr. Hansen cut his target for Methanex shares to US$58 from US$60. The average on the Street is US$56.

“While we continue to admire Methanex’s robust FCF profile and compelling growth outlook (G3), we reiterate our MP3 rating due to our near-term macro concerns,” he said. “We will continue to monitor accordingly.”

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With its “momentum set to continue,” BMO Nesbitt Burns analyst Mike Murphy raised his rating for Spartan Delta Corp. (SDE-T) to “outperform” from “market perform.”

“With cash flow bolstered by the current constructive pricing environment, we expect Spartan Delta to start delivering meaningful shareholder returns in the near term combined with sustainable production growth moving forward,” he said. “SDE trades attractively at a 26-per-cent 2022 estimated free cash flow yield vs. Montney peers at 21 per cent (BMO Deck).”

Mr. Murphy expects Spartan to outline its shareholder return of capital plans in the coming months, given it is now approaching its leverage target of 0.5 times debt to cash flow.

“We anticipate this to be skewed towards buybacks initially, given current valuation,” he said. “The company has the ability to repurchase approximately 8 per cent of its shares outstanding through a potential NCIB.

“Based on operational performance to date, we see upside to 2022 production guidance of 68.5-72.5mboe/d and have forecast annual volumes at the very high end of this range. We also see potential for capital acceleration into Q4/22, which would set the company up for incremental growth next year, beyond our current estimate of 8 per cent.”

Seeing it “positioned for growth in the Montney” and touting its “attractive” valuation, Mr. Murphy hiked his target for its shares to $18 from $14. The average is $18.80.

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Stifel analyst Maggie MacDougall expects AirBoss of America (BOS-T) to feel the impact of delays in U.S. defence spending after U.K.-based peer Avon Protection warned its first-half results will fall below its guidance.

“Avon is a direct comp to AirBoss in the CBRN [Chemical, Biological, Radiological and Nuclear] category, which has experienced rising demand due first to the pandemic and recently the conflict in Ukraine,” she said. “However, despite rising demand, U.S. government spending delays have been a hurdle. We believe that Avon’s H1 miss and commentary around U.S. government spending delays prompted BOS sell-off [Tuesday], and triggered us to receive an update from management on the status of its sales pipeline.”

Shares of Toronto-based AirBoss fell 15.5 per cent on Thursday following the Avon announcement, which led Ms. MacDougall to reset her estimates for their defence business to pre-pandemic levels. That led her to drop her earnings expectations for the next two years.

“AirBoss has been waiting on announcements from [U.S. Department of Health and Human Services] and the [U.S. Department of Defense] on potential new contract wins from its more than US$1.0-billion big pipeline for several quarters,” she said. “In particular investors have been looking for the final RFP from the U.S. Department of Health and Human Services (HHS) for up to 397.5 million Level 4 surgical gowns. BOS management has indicated that the RFP posting for this contract is unlikely to occur before the end of the U.S. Government September 30th fiscal year-end, and that re-approval in new budgeted funds will be required for this to proceed. We believe this pushes out this potential contract win until late 2022 or 2023. The smaller level 1 and 2 gown contract is still under consideration for RFP posting in Fiscal 2022. However, given the extent of delays experienced, timing is unclear.”

Keeping a “buy” rating, she dropped her target for AirBoss shares to $26.50 from $45. The average is $32.71.

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Goldman Sachs analyst Neil Mehta cut his targets for a group of Canadian energy companies on Wednesday.

His changes include:

• Canadian Natural Resources Ltd. (CNQ-N/CNQ-T, “buy”) to US$70 from US$80. The average on the Street is US$71.30.
• Cenovus Energy Inc. (CVE-N/CVE-T, “buy”) to US$26 from US$29. Average: US$24.05.
• Imperial Oil Ltd. (IMO-T, “buy”) to $79 from $87. Average: US$68.94.
• MEG Energy Corp. (MEG-T, “neutral”) to $22 from $25. Average: $25.77.
• Parkland Fuel Corp. (PKI-T, “neutral”) to $35 from $36. Average: $47.50.
• Suncor Energy Inc. (SU-N/SU-T, “buy”) to US$46 from US$51. Average: US$42.14

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Following the latest rate hike from the Federal Reserve, RBC Dominion Securities analyst Mike Dahl expects to see a further deterioration in U.S. housing demand, prompting him to make significant reductions to his financial projections for homebuilders and building product companies for both this year and fiscal 2023.

“We’ve been clear about our caution across our space, remain wary, and see no urgency to catch a falling knife given the rapidly changing environment and downside risks, though the most recent leg lower in the stocks and signs of greater capitulation from investors/sell-side may at least help to better balance risk/reward,” he said.

In a research report released Wednesday, Mr. Dahl reduced his earnings per share estimates for builders by 3 per cent for 2022 and 19 per cent for 2023, which is now 21 per cent below the Street’s forecast.

“We take our sales pace estimates back to 2017–19 levels (down 30 per cent vs. ‘21) and assume sharp margin contraction through ‘23 as prices soften/incentives kick in,” he said. “These are not a ‘worst case scenario,’ but declines will seem significant vs. elevated current levels. We believe the true downside scenario (triggered by lower home prices or a prolonged recession) would be more severe and multiples likely remain depressed to reflect this. We also note that extended backlogs and elevated margins today mean that the full EPS impacts may not hit until CY’24 (more meaningful increase in cancellations/incentives could bring this forward).”

For building product companies, Mr. Dahl reduced his earnings per share estimates for 2023 by an average of 14 per cent, now sitting 26 per cent below the Street’s view.

“We expect falling builder orders and existing home sales to pressure building product companies with a lag, perhaps extended vs. normal given the long project backlogs though there’s also risk that de-stocking could driver quicker impacts,” he said. “R&R is likely to remain positive in ‘22 (helped by inflation), but we expect declines in ‘23. We assume blended end-market declines of mid single-digits in ‘23 driving our revenues down 4.5 per cent year-over-year on average, with risk of further declines if price rolls more meaningfully.”

With those reductions, Mr. Dahl lowered his target prices for builders by an average of 23 per cent, citing “significant demand declines and margin pressures, as rising rates and sharply stretched affordability are quickly eroding the pool of buyers.” His targets for building product companies slid by 21 per cent.

He lowered his ratings for a series of companies:

* Beacon Roofing Supply Inc. (BECN-Q) to “sector perform” from “outperform” with a US$58 target, down from US$70. The average on the Street is US$70.77.

* GMS Inc. (GMS-N) to “sector perform” from “outperform” with a US$46 target, down from US$73. Average: US$62.63.

* Installed Building Products Inc. (IBP-N) to “underperform” from “sector perform” with a US$71 target, down from US$91. Average: US$104.80.

* JELD-WEN Holding Inc. (JELD-N) to “underperform” from “sector perform” with a US$12 target, down from US$20. Average: US$23.62.

* PulteGroup Inc. (PHM-N) to “sector perform” from “outperform” with a US$41 target, down from US$56. Average: US$53.69.

Conversely, he upgraded these stocks:

* Equity Residential (EQR-N) to “outperform” from “sector perform” with a US$79 target, down from US$95. Average: US$88.53.

“We think EQR’s focus on affluent renters positions the company relatively well to weather a potential downturn, and we also expect that coastal markets may weather a downturn better than they have in recent cycles. EQR’s historical focus on recycling capital may benefit the company in the current environment more than peers that focus on growth through acquisition or development when higher costs of capital make this unattractive, and less competition could accelerate the shift into the sun belt.”

* Summit Materials Inc. (SUM-N) to “outperform” from “sector perform” with a US$31 target, down from US$33. Average: US$40.47.

“We continue to believe SUM is well-positioned to capture demand tailwinds on the public side as increased infrastructure spending starts to benefit results in FY’23 with this relative tailwind coming at a time of demand weakness across most areas of building products,” he said.

* SiteOne Landscape Supply Inc. (SITE-N) to “sector perform” from “underperform” with a US$118 target, down from US$128. Average: US$172.75.

“SITE’s stock is down 54 per cent year-to-date vs. distribution peers down 37 per cent, and we now believe the multiple compression better reflects our concerns, while SITE remains a well-positioned long-term growth story with a somewhat more defensive endmarket mix, strong balance sheet, and potential for M&A to partly blunt the broader macro housing pressures over the next two years. Overall while we believe there could still be further near-term downside, we view risk/reward as more balanced at current levels,” he said.

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After organizing a meeting with the management of GURU Organic Energy Corp. (GURU-T) and investors on Tuesday in Montreal, Stifel analyst Martin Landry reiterated his view that the company’s success in Quebec can be replicated elsewhere.

“Management made a compelling presentation discussing recent successes on raising brand awareness and converting consumers away from competing brands,” he said in a research note titled GURU, The Energy Drink of the Next Generation.

“Consumers appear to increasingly absorb the company’s message about good energy and about its positioning as a progressive brand. We also got a peek at the new marketing material which will be used this summer and this fall for the company’s upcoming marketing campaigns. The marketing message is simple and focuses on authenticity, and natural and healthy living. We believe these online videos and TV ads will resonate with consumers.”

Mr. Landry said Guru is enjoying “strong traction” with young consumers, calling it “appealing under a scenario where GURU can keep these consumers engaged as they grow older.” He also sees notable distribution gains made through its Canadian distribution partnership with PepsiCo.

Mr. Landry maintained a “buy” rating and $11 target for Guru shares. The average is $12.90.

“In our view, GURU has the potential to more than double its sales levels in the next four years. This strong growth is expected to come from the brand’s expansion outside of Quebec. The convenience store channel accounts for more than 60 per cent of sales of energy drinks, and GURU has just started to expand into that channel outside of Quebec. In our view, the distribution partnership with PepsiCo is a de-risking event for the execution of the company’s growth plan,” he said.

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Expecting “strong” growth from its aggressive acquisition strategy, Acumen Capital analyst Nick Corcoran initiated coverage of Pluribus Technologies Corp. (PLRB-X) with a “buy” rating.

The Toronto-based company has completed 13 acquisitions since it was founded 2018, focused on smaller business-to-business technology firms, which Mr. Corcoran said are spread across “four verticals with a large addressable market and high growth – eLearning, eCommerce, Digital Enablement, and HealthTech.”

Without further acquisitions, he’s projecting revenue to grow from $18.6-million in 2021 to $48.5-million in 2023 with adjusted EBITDA rising from $2.8-million to $9.5-million.

Seeing Pluribus as “a compelling investment,” Mr. Corcoran, currently the lone analyst covering the stock set a target of $4.50.

Formerly known as Aumento Capital IX, Pluribus began trading on the Venture Exchange through a reverse takeover in February.

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In other analyst actions:

* TD Securities analyst Tim James lowered his Bombardier Inc. (BBD.B-T) target to $62 from $69, keeping a “speculative buy” rating. The average on the Street is $54.49.

* CIBC World Markets’ Mark Jarvi raised his Capital Power Corp. (CPX-T) target to $47, above the $46.77 average, from $45 with a “neutral” rating.

* Mr. Jarvi also increased his TransAlta Corp. (TA-T) target by 50 cents to $17.50 with an “outperformer” rating. The average is $16.21.

“At the beginning of this year, we did not believe the very strong Alberta power prices we saw in 2021 would repeat in 2022,” he said. “However, we did not anticipate the surge in natural gas pricing that’s occurred YTD, and natural gas prices are increasingly driving spot and forward power prices. With favourable gas hedging and renewable assets that don’t bear the brunt of higher fuel costs, we believe both Capital Power (CPX) and TransAlta (TA) should benefit from recent strength in spot prices and higher forwards. On the back of higher power price assumptions we raise our estimates and price targets for CPX and TA. Both stocks could perform relatively well in the near-term—at current levels, we prefer TA (Outperformer rated) over CPX (Neutral rated).”

* RBC Dominion Securities’ Brad Heffern cut his Tricon Residential Inc. (TCN-N, TCN-T) to US$13 from US$17 with an “outperform” rating. The average is US$16.21.