Inside the Market’s roundup of some of today’s key analyst actions
CIBC is taking a more conservative view of the engineering and construction sector in light of soaring inflation and the increasingly likely prospect of recession.
In a report titled Bracing For Sticker Shock, CIBC analyst Jacob Bout said he is expecting project delays or even cancelations in the sector because of higher prices of materials.
As a result, he cut price targets on several stocks he covers and downgraded ratings on two them: Aecon Group Inc (ARE-T) and Bird Construction Inc (BDT-T). Both are now rated “neutral” instead of “outperformer”. Aecon’s price target went to C$16 from C$20. Bird’s went to C$9 from C$12.
“Heading into the second half of 2022, the prospect of an economic recession seems increasingly likely. While E&C and Dealership firms are indicating that backlog remains robust, it seems more probable that projects in the pipeline will need to be reworked because of inflationary pressures (i.e., “sticker shock”) and hence delayed (or canceled). To reflect this risk, we are reducing our estimates (primarily for 2023) and target valuation multiples for most companies under coverage,” Mr. Bout said in a note to clients.
He sees construction firms Aecon and Bird as having particularly high risks from inflation, which could translate into further downside for his 2023 estimates.
He said engineering companies are better positioned than construction companies when it comes to protecting margins. And equipment dealers are more defensive investors during recessionary times because they have lower working capital and inventory requirements.
Other changes were:
Finning International Inc (FTT-T): Target price to C$35 from C$50. Rating maintained at “outperform” based on valuation.
North American Construction Group Ltd (NOA-T): Target price to C$17 from C$22. Maintained “neutral” rating.
SNC-Lavalin Group Inc (SNC-T): Target price to C$30 from C$36. Maintained “outperformer” rating.
Stantec Inc. (STN-T): Price target from $79 to $74 to reflect slightly lower estimates and the reset in peer valuations. “Outperformer” rating maintained.
Toromont Industries Ltd. (TIH-T) Price target from $125 to $107. Reiterated “neutral” rating.
WSP Global Inc. (WSP-T) Price target from $192 to $175 to reflect slightly lower estimates and the reset in peer valuations. “Outperformer” rating maintained.
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Shares in Ritchie Bros Auctioneers Inc. (RBA-N, RBA-T) have come too far, too fast, said National Bank Financial analyst Maxim Sytchev in downgrading his rating on the company to the equivalent of a sell recommendation.
The company’s valuation remains elevated versus the broader market and no longer supports a “sector perform” rating given recent momentum, Mr. Sytchev said. His new rating is “underperform”, but his price target remains at US$56.
“RBA’s shares have ‘worked’ much better vs. Original Equipment Manufacturers and dealer peers as fears around a recession have pummeled the latter. The magnitude of outperformance however is quite striking,” he said in a note. Ritchie Bros. shares are up 9% year to date whereas the S&P 500 is down 20% and the TSX is down 11%.
“We have shown in the past that even though RBA’s business model is counter-cyclical, its shares are not, as they typically slump during a downturn,” he said. “We are still in a relatively tight equipment market, making the potential for a volume disappointment a quarterly possibility.
The company’s shares are trading at 32 times his estimated 2023 EPS projections; he sees a 27 times multiple as more appropriate.
Ritchie Bros is the world’s largest industrial equipment auctioneer, conducting auctions for the construction, transportation, agricultural, material handling, mining, forestry, energy and marine industries.
The average analyst price target is US$63, according to Refinitiv Eikon data.
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National Bank’s Mr. Sytchev also believes shares in Toromont Industries Ltd. (TIH-T), an operator of one of the largest Caterpillar dealerships globally, have been holding up a little too well amid the broader market’s pullback. He downgraded his rating to “sector perform” from “outperform” and also cut his target price to C$109 from C$127 to reflect a looming economic downturn.
“TIH remains one of the quality stalwarts amid the Canadian industrial coverage. The “quality” moniker gets reiterated every time when the broader market drops and TIH shares barely move, providing some safe harbour to investors. Operationally, TIH has a lot of positive momentum behind it, with construction and commodity markets supportive at the moment. Rentals / materials handling / internal optimization initiatives will all help preserve the margin profile / revenue growth,” Mr. Sytchev commented.
“However, the shares’ valuation premium vs. the broader market and Caterpillar now stands in relatively uncharted territory, something that we believe can lead to normalization, especially if there is no material capital deployment in the short term given eventual change of top guard at the company’s helm. Recall as well that distributors’ top line can compress as much as 20% during a macro downdraft; while we are not calling for such an aggressive retrenchment, TIH shares are imputing a relatively low slowdown probability, something that we believe is not ideal from risk/reward perspective,” he added.
He is modeling that the company will trade at 22 times price to earnings in 2023, down from an earlier estimate of 24 times, due to expected multiple compression in the sector.
Separately, CIBC cut its target price to C$107 from C$125.
The average analyst price target is C$122.88.
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Stifel analyst Mike Rizvanovic cut his price target on shares of Toronto-Dominion Bank (TD-T), citing regulatory concerns over the Canadian bank’s ability to close its $13.4-billion cash deal to buy First Horizon Corp. (FHN-N)
TD announced the deal earlier this year in an effort to expand its footprint in the southeastern U.S. The deal would make TD the sixth-largest U.S. bank.
“Ongoing risks around the FHN acquisition potentially being blocked by U.S. regulators are reflected in the sizable discount of FHN’s share price relative to TD’s offer price, and are not likely to subside any time soon,” Mr. Rizvanovic said in a note to clients.
“We expect that uncertainty to remain an overhang on TD’s shares for the foreseeable future, justifying a modest relative valuation discount to its Big Six peers. If the FHN deal was to be blocked (not our base case assumption), we would expect a somewhat muted impact on TD’s share price as much of that risk appears to be priced in. However, we would see that outcome as a net negative given the potential hit to TD’s credibility, and the implications on the bank’s ability to inorganically grow its U.S. business, which is the most obvious destination for its excess capital.”
TD’s proposed acquisition of FHN remains in the crosshairs of the U.S. government as it revisits past reports of aggressive sales tactics by the bank that originally came to light on March 10, 2017, Mr. Rizvanovic noted. Led by Senator Elizabeth Warren, a group of U.S. lawmakers are calling for the FHN deal to be blocked until there is a more stringent review of TD’s past sales practices.
“The end result could include potential corrective action against TD and/or financial penalties,” he said.
“Based on data from the Consumer Financial Protection Bureau that we examined, the number of complaints against TD related to the ‘account opened as a result of fraud’ category increased dramatically throughout the pandemic and was well above large U.S. peers when adjusted for the size of the bank’s branch network. That could potentially indicate a larger issue at TD related to this type of sales practice, although on a positive note, we find that such complaints against TD have declined sharply in recent months since peaking in Feb 2022,” he said.
As of July 12, FHN’s stock price was trading at a sizable 16% discount to TD’s offer price of US$25/share. That is below the recent peak discount of 21% mid-June but well above the 6% discount when the deal was first announced, the analyst noted.
FHN shareholders approved the transaction in May.
With the risk of the deal failing to close, he reduced his price target to C$93 from C$97. He continues to rate TD a “hold.” The average analyst target on TD shares is C$101.41.
He now values TD bank at a 5% price-to-earnings discount versus its Big Six peers.
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Citigroup analyst Jim Suva slashed his price target on Apple Inc (AAPL-Q) as he lowered his financial estimates on the tech giant given consumer spending cuts amid the weakening economy, as well as continued supply chain bottlenecks that are likely to weigh on near-term fundamentals.
His price target went to US$175 from US$200. The average analyst price target is US$184.45.
Nevertheless, he continues to rate Apple a “buy”, believing there are several positive drivers for Apple’s products and services:
“1) We believe iPhone 14 build is still on track for Sept 14 launch and we expect a foldable phone in 2023; 2) Mix shift continues to skew away from lower priced Android phones towards more mid end and premium pricing products; 3) A $90 bln (4% of current market cap) stock buyback, which lends support to shares; 4) Sticky services revenues and potential for more devices-as-a-service offering; and 5) New product category launches such as AR/VR headsets and Apple Car in 2025, not currently reflected in current estimates/market cap.”
Barclays also trimmed its target price on Apple shares to $166 from $167.
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Among other analyst actions:
Air Canada (AC-T): Atb Capital Markets cuts target price to C$30 from C$35
Arizona Sonoran Copper Company (ASCU-T): Stifel GMP initiates coverage with buy rating and price target of C$3.20
Artemis Gold Inc (ARTG-X): CIBC cuts target price to C$9 from C$12.50 and downgrades rating to “neutral” from “outperformer”
Marathon Gold Corp (MOZ-T): CIBC cuts target price to C$2.50 from C$4 and downgrades rating to “neutral” from “outperformer”
Victoria Gold Corp (VGCX-T): CIBC cuts target price C$18.50 from C$21 and downgrades rating to “neutral” from “outperformer”
Brookfield Asset Management Inc (BAM-N): Deutsche Bank cuts target price to US$52 from US$57; maintains “hold” rating.
With files from Reuters
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Darcy Keith