Inside the Market’s roundup of some of today’s key analyst actions
RBC Dominion Securities’ Walter Spracklin thinks early results demonstrate Canadian National Railway Co. (CNR-T) has been “successfully delivering on its operational turnaround, which has also been complemented by a favourable demand dynamic and strong pricing.”
While he thinks that turnaround is already priced into its shares, the analyst equity expects investors will react “favourably” to the release of better-than-expected second-quarter results “as the market begins to price in upside to those targets.”
“We believe CN will exceed the high end of its guidance; and we are taking our estimates and target price higher according,” added Mr. Spracklin.
After the bell on Tuesday, CN reported adjusted earnings per share of $1.93, ahead of both the analyst’s $1.78 estimate and the consensus forecast on the Street of $1.78.
“Variance came from much stronger RPU (price and mix); and the better operating ratio (59 per cent vs. consensus 59.8 per cent) was particularly impressive given the mathematical headwind on % margin from higher cost pass-thru revenue,” he said. “Overall a very solid quarter for CN.”
“The full year EPS growth guidance of 15-20 per cent was maintained; which had aligned with expectations going into the report of 18 per cent. But considering the $0.17 beat in Q2 and even if H2 consensus did not tick higher (which it likely will), EPS would already be over 21 per cent. Moreover, in its outlook section, CN pointed to growth in all 11 of its segments; with impressive growth expected in 7 of the 11. This robust volume outlook for H2 implies therefore that earnings should further accelerate (not decelerate, as the guidance suggests). Accordingly, we are considering the official full-year guide to be notably conservative, and taking our estimates above guidance as a result.”
Mr. Spracklin increased his earnings per share projections in response to the results as well as “solid operating trends going into Q2, the significant pricing tailwind, and very favourable H2 volume growth outlook.” His 2022 estimate is now $7.32, up from $7.04 and implying growth of 23 per cent (higher than the guidance of 15-20 per cent). His 2023 estimate rose to $8.15 from $8.
That led him to bump his target for CN shares to $163 from $160, exceeding the $159.90 average on the Street. He kept a “sector perform” recommendation based on relative returns.
“Our Sector Perform rating is based on favourable network dynamics as well as GDP plus growth opportunities and potential for meaningful margin improvement, offset by in our view full valuation. We believe that the rail sector as a whole has positive fundamentals that we expect to drive long-term growth in free cash flow,” he said.
Elsewhere, other analysts making target adjustments include:
* National Bank Financial’s Cameron Doerksen to $166 from $160 with a “sector perform” rating.
“Notwithstanding the strong Q2 results, we maintain our Sector Perform rating on CN shares, which are currently trading at 20.9 times our updated 2022 forecast and 19.1 times our 2023 forecast, both premiums to the U.S. peer group trading at 17.6 times and 16.4 times, respectively,” he said. “We also believe that the growing threat of recession could limit upside on valuation for CN in the near-to-medium-term.”
* Desjardins’ Benoit Poirier to $169 from $167 with a “hold” rating.
“CN reported better-than-expected 2Q results, driven by a strong yield and the return of network fluidity. Management stated that the current demand environment remains strong and reaffirmed its 2022 guidance. We are encouraged by the steps taken so far by CEO Tracy Robinson and by the key achievements in her short time at the helm,” he said.
* Scotia Capital’s Konark Gupta to $152 from $150 with a “sector perform” rating.
“Even before a potential positive reaction [Wednesday], the stock is implying 10-per-cent EPS growth in 2023, at a mid-cycle P/E of 19 times, which could be an aggressive assumption in this uncertain environment,” he said.
* Stephens’ Justin Long to US$130 from US$126 with an “equal-weight” rating.
“While we appreciate the unknowns related to fuel / weather / FX the next couple of quarters, with YTD adj. EPS growth already tracking up 20 per cent year-over-year and easier comps ahead, we believe this outlook could prove to be conservative. Longer term, we also remain incrementally more encouraged by CNI’s strategy under new CEO Tracy Robinson,” said Mr. Long.
* Credit Suisse’s Ariel Rosa to US$134 from US$122 with a “neutral” rating.
* JP Morgan’s Brian Ossenbeck to $150 from $148 with a “neutral” rating.
* Cowen and Co’s Jason Seidl to US$128 from US$126 with a “market perform” rating.
Scotia Capital analyst Meny Grauman is “generally constructive” on the Canadian insurance sector heading into second-quarter earnings season, believing “sentiment for the space should improve as we head into the second half of the year and investors increasingly recognize the defensive aspects of the space in this recessionary environment.”
“Rapidly rising rates in response to runaway inflation across North America and beyond have caused investors to abandon the view that post-pandemic period would be a repeat of the roaring 20s, and instead have triggered fears of an impending recession,” he said. “This change in economic sentiment has weighed heavily on equity markets, and Canadian lifeco shares have certainly not been left untouched with the group down 20% since peaking in February. This compares to a 12-per-cent decline for the TSX as a whole over the same time period, and a nearly identical decline for Canadian banks.
“Yet while insurers are not immune to a souring economy and are particularly vulnerable to falling equity markets through their large asset management units, we wonder whether investors are underestimating how well core results can perform in the face of a consumer-driven recession, especially given the strong demand we are seeing for protection products in the wake of the pandemic. We suspect part of the reluctance to view lifecos as relatively recession resistant is tied to the traumatic experience of the global financial crisis in 08/09, but in our view that period is not reflective of the current situation.”
For the quarter, Mr. Grauman is forecasting earnings per share to be relatively flat versus the previous quarter but down 6 per cent from the same period a year ago. He attributed that decline to equity markets weakness.
“We remain generally constructive on the insurance sector, and believe that sentiment for the space should improve as we head into the second half of the year and investors increasingly recognize the defensive aspects of the space in this recessionary environment,” he said. “In a recession we would expect to see lifecos outperform banks.”
Mr. Gupta upgraded Manulife Financial Corp. (MFC-T) to “sector outperform” from “sector perform” with a $27 target. The average on the Street is $26.89.
“Although we have preferred SLF to MFC for a while now due to a number of factors including higher tail risk at MFC and the consensus view that MFC was likely to be more impacted by the transition to IFRS 17 than SLF ... we switch our pecking order around given the steep selloff in MFC shares since Q1 reporting, and the fact that SLF has a higher exposure to asset management than Manulife,” he said. “We upgrade MFC from Sector Perform to Sector Outperform, but leave SLF as a Sector Outperform as well given its year-to-date underperformance.”
He maintained a $67 target for Sun Life Financial Inc. (SLF-T) shares, below the average on the Street is $68.08.
Mr. Gupta said IA Financial Corp. Inc. (IAG-T) continues to be his “top pick” in the space. He has a “sector outperform” rating and $85 target for its shares, above the $81 average.
“Our enthusiasm for this name continues to be driven by peer-leading sales growth, very impressive internal capital generation, and a very defensive reserving methodology,” he said. “IAG has historically been a higher beta name due to its relative size, but the reality is that this is a very conservatively run and positioned company with significant growth opportunities in the U.S..”
“While we’re mindful of the slowing macro backdrop, we think the risk/reward seems compelling—given the stock’s current valuation of 3.7 times calendar 2023 estimated EV/EBITDA and 5.2 times P/E, and the fact that CLS seems to have strong demand visibility over the next six to nine months,” he said.
TSX-listed shares of the electronics manufacturing services company fell 5.5 per cent on Thursday following the premarket release, which saw quarterly revenue rise 21 per cent year-over-year to US$1.72-billon, above the consensus forecast of US$1.66-billion and prior guidance of US$1.575-1.725-billion. Adjusted earnings per share of 44 US cents also beat the Street (42 US cents) and the company’s projection (38-44 US cents).
“We believe CLS continues to have strong visibility over the next six to nine months, as ongoing supply constraints have forced customers to place orders far in advance,” he said. “While this might change as macro conditions evolve, we think that strong secular drivers and market share gains in two of CLS’s key markets—semi equipment and data center infrastructure—should support revenue and EPS growth in FY2023.”
Mr. Moschopoulos cut his target for Celestica shares to US$12.50 from US$13, citing recent multiple compression across the sector. The average is US$12.19.
“We think the stock is being valued as if it’s a given that earnings are reaching a cyclical peak, and/or that Street estimates for FY2023 are too high. We’re not convinced that either scenario will prove to be the case. Further, we expect CLS’s FCF generation to ramp up over the next year, as working capital comes down (due to an easing of supply constraints), which, all else equal, should further knock down its EV/EBITDA multiple,” he said.
Other analysts making target adjustments include:
* TD Securities’ Daniel Chan to US$11 from US$13 with a “hold” rating.
“Celestica continues to execute well in a challenging environment. We continue to be cautious of the macro backdrop,” said Mr. Chan.
* CIBC’s Todd Coupland to US$12 from US$14 with a “neutral” rating.
In a research note titled Mortgage Land in No Man’s Land, National Bank Financial analyst Jaeme Gloyn said he sees mortgage stocks displayed an “attractive entry point,” sitting in “depressed” levels following underperformance thus far in 2022.
However, he warns “caution and patience remain the appropriate strategy heading into Q2-22 results and likely for the remainder of the year.”
Year-to-date, three of the four stocks in the sector have fallen below the S&P/TSX Financials Index, which is down 13 per cent. Home Capital Group Inc. (HCG-T) leads decliners, falling 35 per cent, with EQB Inc. (EQB-T) down 21 per cent and Timbercreek Financial Corp. (TF-T) lower by 13 per cent. First National Financial Corp. (FN-T) is the lone “outperformer” with a loss of 11 per cent.
Mr. Gloyn pointed to four factors that represent downside risk and will “continue to constrain sector valuations and share price performance near term.” They are: rising regulatory and policy uncertainty; a rapid rise in interest rate; elevated housing market risk and stock valuations trading “closer to crisis average valuation multiple.”
“Overall, we believe Mortgage Land’s relative underperformance will persist in the near term, at least until uncertainty surrounding these risks diminish,” he said. “As a result, we lower our target multiples across the board. Our estimate changes largely reflect a slower pace of residential mortgage origination.
“What could cause a shift in our view? We have a keen eye on the employment outlook and central bank positioning. We believe more widespread employment losses (e.g., Shopify, tech players) will pressure mortgage stocks lower, potentially to previous crisis trough levels that would offer investors an attractive entry. A dovish turn from the Federal Reserve and/or Bank of Canada could also cause a change in our currently softer view.”
To reflect the near-term uncertainty, he lowered his target prices:
* EQB Inc. (EQB-T) to $75 from $86 with an “outperform” rating. The average on the Street is $83.21.
“EQB remains our preferred name within the sector given stronger diversification relative to Mortgage Finance peers: i) asset mix (e.g., commercial, equipment and decumulation loans), ii) funding mix (e.g., more cost-effective EQ Bank and covered bond channels), and strategy (e.g., digital bank buildout, fintech / open banking relationships, Concentra acquisition, AIRB),” he said. “While these fundamental strengths do NOT provide EQB with immunity, the company is more favourably positioned to manage through the above-noted risks in our view.”
* First National Financial Corp. (FN-T) to $35 from $36 with a “sector perform” rating. The average is $37.50.
“We remain positive about FN’s industry-leading and diversified origination platform, diversified funding model, limited credit risk, defensive recurring revenue model and capacity to consistently raise the dividend,” he said. “These fundamentals help explain FN’s premium trading multiple of approximately 11 times on 2023 consensus EPS vs. the Big Six Bank average of 9 times. However, FN historically trades at a discount to Big Six Banks, particularly during periods of elevated risks to the outlook. Moreover, FN’s near-term earnings power is more sensitive to sudden shifts in origination volumes”
* Home Capital Group Inc. (HCG-T) to $35 from $38 with an “outperform” rating. The average is $42.29.
“The lower target multiple compared to EQB reflects HCG’s greater exposure to residential mortgages and residential real estate investors,” he said. “While we believe the company’s significant remaining excess capital ($260 million) will continue to drive an improved ROE profile, a more elevated risk backdrop could constrain the company’s ROE potential near term.”
* Timbercreek Financial Corp. (TF-T) to $8.75 from $9.50 with a “sector perform” rating. The average is $9.45.
“Overall, we believe the portfolio quality remains robust (i.e., a high percentage of multi-unit residential properties, first mortgages, cash-flowing properties, low LTV loans) and will benefit from stable commercial real estate trends in its key segments and geographies (multi-unit residential),” he said.
The market response to Newmont Corp.’s (NGT-T, NEM-N) second-quarter results was “overdone,” according to National Bank analyst Mike Parkin, prompting him to raise his recommendation to “outperform” from “sector perform.”
Shares of the miner dropped 13.2 per cent in New York on Monday following the premarket release. It saw a modest 3.5-per-cent rebound on Tuesday.
Newmont reported adjusted earnings per share of 45 US cents, missing both Mr. Parkin’s 53-US-cent estimate and the consensus forecast of 63 US cents. It also cut its full-year 2022 gold production outlook by almost 200,000 ounces as costs continue to rise.
“We have updated our model for Newmont’s weaker than expected Q2 and revised our medium term outlook to align with management commentary, which calls for production to remain relatively flat to the revised outlook for 2022 over the near term, while also calling for elevated cash costs over this period,” said the analyst. “Newmont’s portfolio of mines continues to support an outlook for modest gold production growth, but due to nearer term challenges this growth is now expected to show up in 2025+. We expect some modest cost easing into 2023 and 2024, mostly a function of modeling some deflationary price pressure starting in 2H23, as well as from potential FX tailwinds as our base case price deck suggests (especially for the CAD, AUD and MXN). We have moved to align with expectations for higher growth capital budgets for Ahafo North (up 15 per cent) and the Tanami Expansion 2 (up 25 per cent) projects, and we have assumed a 10-per-cent cost overrun for the Yanacocha Sulphides project, which is expected to receive a ‘Full Funds’ decision in 4Q22. We have also moved to align with the expectations for lower capital spending in 2022 as per the revised guidance. Overall, the changes weighed on our FCF outlook for the company.”
Despite those changes, Mr. Parkin now sees an “attractive” entry point into the company’s shares.
“We view Newmont as one of the the safest names to own in the gold producer sector moving forward, especially, in our opinion, with this guidance revision more than priced in,” he said.
" Our target price for Newmont has dropped from $90 to $79 on a lower EBITDA outlook (deferred production growth at higher near term costs) and a modestly lower target valuation multiple, which we feel is warranted given the production growth is less immediate. We view Newmont as a top tier company with a very healthy balance sheet and continuing to offer the potential for significant capital returns to shareholders via robust dividends and potential share repurchases through the outstanding NCIB.”
The average target on the Street is $115.
Elsewhere, with a similar view of the share price drop, Canaccord Genuity’s Carey MacRury raised Newmont to “buy” from “hold” with a US$60 target, down from US$66.
“In our view, the 13-per-cent drop in NEM’s share price [Monday] was overdone with the EPS miss including a number of abnormal items, including the $70 million profit-sharing agreement at Penasquito relating to 2021, the timing of gold sales and $105 million in negative provisional pricing adjustments,” he said. “The revised gold production guidance was largely in line with our prior forecast with 2-per-cent higher AISC guidance. We view Newmont as offering investors a steady gold production profile centered on geopolitically stable jurisdictions, with a deep project pipeline, strong balance sheet, and solid operating team.”
Citing its valuation, Desjardins Securities analyst Gary Ho downgraded Fiera Capital Corp. (FSZ-T) to “hold” from “buy” ahead of the Aug. 11 release of its second-quarter results.
After the bell on Tuesday, the Montreal-based firm reported its preliminary estimate of assets under management for June of $157.6-billion, down 10.2 per cent from the first quarter and below Mr. Ho’s estimate of $170.3-billion.
“Private alts continue to perform well with modest 0.8-per-cent AUM growth, while public market AUM decreased $18.0-billion (down 11.4 per cent),” he said. “In 2Q, the S&P 500 depreciated 16.4 per cent (down 13.7 per cent C$-adjusted) and the S&P/TSX depreciated 13.8 per cent, while the investment-grade corporate index we follow declined 9.0 per cent (down 6.0 per cent C$-adjusted).
“For perspective, AUM was down 10.2 per cent for AGF, down 10.1 per cent for IGM and down 9.8 per cent for CI (down 20.0 per cent excluding wealth management) in 2Q.”
For the quarter, he’s now forecasting adjusted earnings per share of 29 cents, a penny higher than the consensus.
“For 2Q, we will be interested in updates on its private alt platform and capital deployment activity, as well as the outlook for 2H22,” he said. “Lastly, we will also focus on commentary around net flows activity through the StonePine sub-advisory arrangement (represents around one-third of FSZ AUM).”
With the market correction and AUM results, he lowered his full-year AUM forecast for both 2022 and 2023 by 7 per cent. His earnings per share projections slid to $1.26 and $1.32, respectively, from $1.34 and $1.43.
Mr. Ho’s target for Fiera shares fell by $1 to $10. The average on the Street is $10.57.
“While we like FSZ’s growing private alt platform (an attractive risk/return profile with steady cash flow) and attractive 9.1-per-cent yield, we view the shares as fairly valued,” he said.
Concurrently, he made these target adjustments for Fiera’s peers:
* Alaris Equity Partners Income Trust (AD.UN-T) to $22.50 from $24.50 with a “buy” rating. The average is $24.57.
“Our investment thesis is based on: (1) AD’s diverse portfolio is well-positioned to perform, even with an uncertain U.S. macro outlook; (2) the strong pace of capital deployment recently, supported by a fortified balance sheet from the Kimco redemption and recent debt financing; (3) a healthy 60–65-per-cent payout ratio; and (4) the units remain attractively valued, trading at 0.95 times P/BV with an 8.0-per-cent distribution yield,” he said.
* Dominion Lending Centres Inc. (DLCG-T) to $5.50 from $6 with a “buy” rating. The average is $6.50.
“While sentiment on the housing/mortgage sector has waned, our positive thesis is predicated on: (1) continued strength in funded mortgage volumes; (2) reflagging efforts to add new brokers could bolster DLC growth in 2022/23; (3) a potential fintech play with Newton/Velocity, a business which is already EBITDA- and FCF-positive; and (4) a potential privatization scenario providing share price upside,” he said.
Seeing it “well-positioned for unsettled weather,” RBC Dominion Securities’ Irene Nattel reiterated her “constructive view” on Canadian Tire Corp. Ltd. (CTC.A-T) ahead of the release of its second-quarter results “even as [the] economy cools.”
“Current share price appears to be discounting a substantial earnings contraction, trading at 8.4 times revised calendar 2023 EPS that reflects an economic slowdown. In our view, current share price presents long-term investors with a compelling investment opportunity,” she said.
In a research report released Wednesday, Mr. Nattel reduced her earnings per share projections for 2022, 2023 and 2024 to $19.49, $19.32 and $21.84, respectively, from $19.50, $20.84 and $22.42, with the firm expecting a “shallow” recession.
However, she thinks the retailer’s current share price " already reflects more substantial earnings erosion than is likely to occur.”
“While solid through Q3, likely more difficult thereafter as inflation and rising rates reduce consumers’ purchasing power. long-term macro backdrop remains supportive of CTC moving toward its 2025 financial aspirations,” she said.
Maintaining an “outperform” recommendation, Ms. Nattel cut her target to $235 from $260. The average is $222.10.
“In non-recessionary environments, CTC has typically traded in a valuation band between 11-16 times consensus EPS; At current share price this implies 25-45-per-cent downside to NTM [next 12-month] street estimates,” she said. “While possible, current RBC Economics forecasts are calling for a shallow recession. Consistent with that view, we are revising our 23 EPS forecast by down 7 per cent. Historically, earnings have been extremely resilient, and any downdraft short-lived.”
Canaccord Genuity analysts Mark Rothschild and Christopher Koutsikaloudis think it’s becoming “increasingly clear that there will be upward pressure on cap rates over the next year.”
In a research note released Wednesday, they expressed concern about the outlook for real estate investment trusts moving forward , seeing a “greater risk” of an economic recession as central banks attempt to harness inflation through “aggressive” rate hikes.
“While we have yet to see significant evidence of an upward move in cap rates, there has been some anecdotal evidence in recent real estate transactions, and we believe that cap rates will settle at a higher level following a period of price discovery,” the analysts said. “We note that last week, Choice Properties REIT adjusted the cap rates used to value its assets and commented that the ultimate move is likely to be between 50-100 basis points. We have, therefore, increased the cap rates we use to value REITs’ portfolios by, on average, 50 bps. As a result, our NAV estimates have declined by, on average, 13 per cent, while our target prices have been reduced by, on average, 10 per cent.”
With those changes, the analysts downgraded a pair of REITS to “hold” from “buy” based on limited return to their targets. They are:
* Firm Capital Property Trust (FCD.UN-T) with a $7.25 target, down from $8.25. Average: $8.58.
* Slate Office REIT (SOT.UN-T) with a $4.75 target, down from $5.25. Average: $4.98.
“Our best investment ideas for the next 12 months primarily include REITs in sectors benefitting from strong fundamentals and for which current valuations are attractive relative to peers and private market values,” they said. “Further, we believe Brookfield Asset Management should benefit from rising allocations to alternative investments and growing management fees.
“Our updated best investment ideas for the next 12 months include: Minto Apartment REIT (Target Price: $22.00); Tricon Residential (Target Price: US$15.00); Brookfield Asset Management Inc. (Target Price: US$62.50); First Capital REIT (Target Price: $18.00); Dream Industrial REIT (Target Price: $16.00).”
In other analyst actions:
* Citing “the solid underpinning currently provided by the company’s cash reserves,” Canaccord Genuity’s Matt Bottomley upgraded Cronos Group Inc. (CRON-T) to “buy” from “hold” and raised his target to $5 from $4.50. The average is $5.69.
“As part of its Q2/22 reporting, we believe Cronos will make incremental progress in both its top-line and margin profile compared to the prior quarter. Per our review of branded sales data at the retail level (where we have visibility), we note that Cronos branded products look to be up by 7 per cent on a sequential basis,” said Mr. Bottomley.
* IA Capital Markets’ Naji Baydoun raised his Innergex Renewable Energy Inc. (INE-T) target by $1 to $25 with a “strong buy” rating. The average is $21.38.
“Overall, we see significant potential value in INE’s growth story at current valuations,” he said.
* Stifel’s Justin Keywood trimmed his LifeSpeak Inc. (LSPK-T) target to $2.50 from $2.75, below the $3.43 average, with a “buy” rating.
* Eight Capital reduced its Stelco Holdings Inc. (STLC-T) target to $53.70 from $63.85 with a “buy” rating. The average is $50.52.
* TD Securities’ Tim James cut his Transat AT Inc. (TRZ-T) target to $3.25, below the $3.55 average, from $4 with a “reduce” recommendation.
* BMO Nesbitt Burns’ John Gibson raised his Trican Well Service Ltd. (TCW-T) target to $5.50 from $5.25, below the $5.58 average, with an “outperform” rating.
“TCW’s Q2/22 results were above expectations, while the back half of 2022 is shaping up very favorably given ever improving industry conditions. Net pricing gains should take effect in 2H/22 as we enter undersupplied territory in WCSB pressure pumping, and result in additional margin expansion. Post quarter we are tweaking estimates higher and increasing our price target,” he said.