Inside the Market’s roundup of some of today’s key analyst actions
While BlackBerry Ltd.’s (BB-N, BB-T) management reiterated its full-year outlook with Tuesday’s release of its second-quarter 2023 financial results, RBC Dominion Securities analyst Paul Treiber thinks “better visibility to growth is needed to improve sentiment” after “soft” software metrics drew concern.
“BlackBerry remains a ‘show me’ story,” he said. “The investor debate on BlackBerry stems from the company’s future opportunity compared to its current momentum. Licensing appears the healthiest given previous design win momentum. For other opportunities such as ESS and Radar, limited nearterm growth reduces long-term visibility. Cylance is early, and Cylance’s lower growth vs. some competitors creates uncertainty.
“BlackBerry’s valuation has normalized after significant rally in 2021, while software business fundamentals remain unchanged. BlackBerry’s shares have fallen 46 per cent year-to-date (vs. S&P 500 down 23 per cent) after rallying 41 per cent in 2021 (vs. S&P 500 up 27 per cent). BlackBerry’s shares now trade at 3.0 times FTM EV/S [forward 12-month enterprise value to sales], below cybersecurity peers at 6.2 times, which we believe is more aligned with fundamentals.”
After the bell, the Waterloo, Ont.-based company reported revenue of US$168-million, down 4 per cent year-over-year but in line with the estimates of both Mr. Treiber (US$169-million) and the Street (US$167-million). However, he emphasized “slightly light” cybersecurity revenue, down 8 per cent at US$111-million and below his forecast of US$113-million, and disappointing software metrics (ARR, billings, net revenue retention).
Reducing his fiscal 2023 and 2024 revenue and earnings expectations based on “a slower ramp in Cybersecurity, given macro uncertainty and UEM churn,” Mr. Treiber lowered his target for BlackBerry shares to US$6 from US$6.50 with a “sector perform” rating, citing “reduced software valuations and lower visibility to growth.” The average on the Street is US$5.67.
“We believe that BlackBerry’s valuation appropriately reflects BlackBerry’s near-term fundamentals, opportunities, and potential risks,” he said.
Other analysts making adjustments include:
* TD Securities’ Daniel Chan to $4.75 from $5 with a “reduce” recommendation.
“Continued weakness in the Cybersecurity KPIs, an uncertain macro backdrop, and a flight to more defensive names leave us cautious on the name,” said Mr. Chan.
* Canaccord Genuity’s T. Michael Walkley to $5 from $6 with a “hold” rating.
* CIBC World Markets’ Todd Coupland to US$4.50 from US$5 with an “underperformer” rating.
Canaccord Genuity analyst Matthew Lee said Cargojet Inc.’s (CJT-T) inaugural Investor Day event bolstered his “confidence in the company’s trajectory over both the near and longer term.”
“For F22, management remains confident in its H2 revenue forecast, fueled by holiday shopping from Thanksgiving to Boxing Day,” he said. “We note that the company had previously indicated that 55 per cent of its revenue would occur in the second half, which appears to still be the case. We also came away from the presentation remaining constructive on Cargojet’s long-term prospects, with management adamant that its 98-per-cent on-time rate and long-standing relationships with customers will allow it to continue its dominance in the domestic market while adding to its ACMI [Aircraft, Crew, Maintenance and Insurance] network.”
At the event in Hamilton on Tuesday, the company issued guidance for fiscal 2026 that fell in line with Mr. Lee’s projections. He noted revenue targets “suggest strength in ACMI, CPI-level growth in Domestic.”
“Total revenue is expected to be between $1.3-$1.4-billion, which represents a 10-per-cent CAGR [compound annual growth rate] from our F24 estimates,” he said. “Based on our calculations, we expect that $150-million of the revenue increase relates to ACMI, with the Domestic Network growing by 2-3 per cent annually. We believe this may be somewhat conservative given contractual rate increases, implying minimal volume growth across its network. F26 EBITDA margin expansion reflects cost discipline, shift toward ACMI. Adjusted EBITDA guidance of $500-million to $550-millionrepresents a 38.5-per-cent margin, 4 percentage points above our 2022 estimate and 1.5 percentage points above our 2024 estimate.
“We expect the key drivers of the firm’s improved profitability to be: (a) a substantial increase in ACMI revenues, which garners 60-70-per-cent margin, (b) cost reductions from flying larger, more fuel-efficient aircraft, and (c) reducing opex intensity with growing scale.”
While expecting renewals of both its UPS and Canada Post contracts by the first half od 2023 and emphasizing its “on-time performance provides a differentiator in the ACMI space,” Mr. Lee cut his target for Cargojet shares to $195 from $210 “given the macroeconomic backdrop in tandem with the substantial challenges faced by several of the firm’s key peers.” The average on the Street is $205.64.
“Our valuation remains below historical trading averages and, in our view, adequately accounts for the current economic uncertainty,” he noted.
Mr. Lee maintained a “buy” recommendation.
Other analysts making changes include:
* RBC Dominion Securities’ Walter Spracklin to $286 from $287 with an “outperform” rating.
“CJT’s investor day provided a compelling overview of the company’s unique business model, along with impressive financial guidance provided out to 2026,” said Mr. Spracklin. “The FCF guide is particularly notable in that it represents a meaningful 2026 estimated FCF yield of 15 per cent. Simply put, there is a significant disconnect between the defining investment characteristics of this company and the FCF yield at which its shares are trading — making this a compelling investment opportunity. We continue to rank CJT as our #1 investment idea across our coverage universe today.”
* CIBC World Markets’ Kevin Chiang to $203 from $210 with an “outperformer” rating.
Heading into third-quarter earnings season, Citi analyst Itay Michaeli expects North American auto parts suppliers, including Magna International Inc. (MGA-N, MG-T), to be able to “largely hold” their full-year outlook ranges.
However, he expects them to adopt a “cautious stance” on 2023.
“Our latest estimates bake-in 2023 estimated global auto production of up 4 per cent (vs. S&P Global 5 per cent), but we wouldn’t be shocked to hear some companies set the initial bar even lower,” said Mr. Michaeli in a research note released Wednesday.
“The good news for supplier stocks is that even under a modestly tougher 2023 macro (i.e. slight year-over-year production growth), fundamentals don’t necessarily break since: (a) EPS should still benefit from commercial recoveries, some cost relief, smoother schedules and content gains; (b) Global LVP is already well-below peak with years of recovery potential ahead. (c) Secular trends are accelerating; (d) Valuation isn’t demanding. Still, with consensus ‘23 estimates looking too high and after a number of false-starts to the supplier recovery trade, we’d like to see estimates come down ahead of Q3 to improve the risk/reward. Even then, a sustainable rally might require more reassuring Q4 datapoints. Tactically, we’re also remain a bit cautious on trim-mix exposure in Europe (ex. Aptiv where H2 guidance seems conservative) since our work suggests this to be a source of potential downside surprise vs. our and street estimates (Visteon and Lear have some exposure here). We remain selective on Tier-1 suppliers with Aptiv and Magna being our core Buys.”
For Aurora, Ont.-based Magna, he lowered his 2022 forecast on “tweaks” as well as the impact of foreign exchange. He also cut his estimates for 2023 and 2024 “to reflect reduced global light vehicle auto production (LVP) growth expectations, particularly in Europe.”
Keeping a “buy” recommendation for its shares, he lowered his target to US$62 from US$77. The average on the Street is $78.63.
“We see two paths for further multiple expansion,” said Mr. Michaeli. “The first is simply delivery of Magna’s FCF growth/conversion plan. The second, in our view, is to reposition the segments/story (including for a possible future spin) towards the increasingly important & unique role that Magna can play in AV/EV mobility scaling. This “two-entity” thesis is a way to perceive Magna in the context of Car of the Future investing.”
Mr. Michaeli sees a “relatively better” setup for automakers than suppliers, noting: “(1) While Ford’s Q3 guide-down did revive NT supply-chain & inflation concerns (reflected in our estimate revisions), we believe automaker fundamentals still appear more macro resilient than what’s currently priced-in. Therefore, we see potential for eventual multiple expansion should this resilience continue. (2) Consensus 2023 estimates appear less vulnerable than for the suppliers. (3) In GM’s case, a lack of material exposure to Europe + upcoming potential catalysts (Nov Investor Day) significantly improve risk/reward at the current 12-per-cent Auto FCF yield, in our view. We think GM could still earn roughly $4.00-$5.50 EPS (or better) under a modest U.S. downturn, and roughly $2-3 EPS under a more severe downturn. (3) If production volume stays constrained and segment mix (Pickups) holds-in, then the U.S. price/mix vs. commodity/freight equation could become a source of upside next year, though our models attempt to err on the side of conservatism here. GM remains our Top Pick on ideal exposures (Trucks, exited Europe) and heading into the Ultium EV & Cruise AV deployment ramps. We remain Neutral on Ford as the Q3 guide-down left a number of unanswered questions, but believe the stock could conceivably recover ground if management adequately addresses these questions/concerns on the Q3 call, since the company did confirm 2022 guidance (stock down ~20% since then) and might also enjoy a sentiment boost from the upcoming re-segmentation.”
He made these target changes:
- Ford Motor Co. (F-N, “neutral”) to US$13 from US$16. Average: US$15.91.
- General Motors Co. (GM-N, “buy”) to US$78 from US$87. Average: US$51.98.
Continuing to “accretively expand in to the heart of the Clearwater to significantly bolster its long-term value proposition,” National Bank Financial analyst Dan Payne thinks Tamarack Valley Energy Ltd. (TVE-T) is “defying the odds and coming out on top.”
Resuming coverage following its $1.4-billion deal for Deltastream Energy Corp., he said the Calgary-based company is gaining a “significant & scalable inventory of opportunities” in a key region of the Clearwater heavy oil play, calling it a “best in class asset acquisition.”
“The acquired assets add high-returns within the heart of the Clearwater fairway at Marten Hills, Nipisi & Canal, expanding the company’s dominant position as the largest operator in the project, where scalable assets with high-velocity of recirculation of capital (backstopped by infra.) and upside from waterflood, significantly carries the long-term value proposition,” said Mr. Payne. “Proforma, the company’s balanced & return-focused strategic-orientation will be augmented, with a view towards delivering ‘23 production of 70 mboe/d (83-per-cent liquids) on the basis of a less-than $450-million capital program that is derived within a less-than 40-per-cent payout (30-per-cent free cash yield implied).
“Priorities of free cash (in addition to long-term 2-3-per-cent growth) will remain through an increased cash dividend and 4-per-cent cash yield ($0.15 per share, up 25 per cent), repayment of associated obligations (18-per-cent payout) and enhanced returns. Its expanded cash dividend and long-term enhanced returns are secured through $500-600-million annual FCF (the latter to come past H2/23).”
Mr. Payne has an “outperform” recommendation with a $9 target, up from $8 previously, for Tamarack Valley shares. The average on the Street is $7.60.
“Pro-forma the transaction we see the stock offering a 70-per-cent return profile (vs. peers 34 per cent) on leverage of 0.5 times D/CF [debt to cash flow] (vs. peers negative 0.1 times), while trading at 2.0 times EV/DACF [enterprise value to debt-adjusted cash flow] (vs. peers 1.8 times),” he said.
Elsewhere, others making changes include:
* BMO’s Mike Murphy to $5 from $6 with a “market perform” rating.
“We consider the Deltastream assets to be among the highest quality in the entire Clearwater trend, with inventory quality and depth to support modest corporate production growth moving forward. However, the acquisition comes at the cost of delayed shareholder returns and a less resilient balance sheet in a weakening commodity environment,” said Mr. Murphy.
* CIBC World Markets’ Jamie Kubik to $6 from $6.50 with an “outperformer” rating.
Canaccord Genuity analyst Robert Young called Sangoma Technologies Corp.’s (STC-T) fourth-quarter financial results a “bump in the road” that “obscures” an attractive valuation.
“Sangoma reported mixed FQ4 results below expectations due to manifold factors from continued supply chain pressure, slower customer decisions pushing projects to later completion, macro caution creeping in and a negative reclassification of Star2Star revenue as gross versus net,” he said.
“The company’s F2023 guidance, however, was roughly in line with expectations with implied 14-16-per-cent organic growth (versus low single digits in FQ4) and 18-per-cent EBITDA margins at the midpoint. Management highlighted low churn as evidence that underlying health in the business is strong despite macro worry. Pressure on gross margins from NetFortris and supply chain combined with internal growth initiatives limits the expansion of EBITDA margins in the short run. Mix of services is the longer-term driver of gross margin and EBITDA margin expansion, and this remains a focus. M&A will likely take a backseat or face more stringent criteria given the company’s current market valuation relative to targets. According to management, cash will likely be allocated toward deleveraging and buybacks. Issues in the quarter appear to be temporary, in our view.”
Trimming his full-year 2023 sales and earnings projections and pointing to peer multiple compression, Mr. Young cut his target for shares of the Markham, Ont.-based company to $13 from $21 with a “buy” rating. The average is $20.87.
“We believe Sangoma has a strong blend of stable financials and 12-per-cent adj. FCF yield at a highly attractive valuation,” he said.
Elsewhere, others making adjustments include:
* Acumen Capital’s Jim Byrne to $15 from $20 with a “buy” rating.
“We have adjusted our target valuation multiple lower to reflect the further compression in multiples for the peer group,” he said. “The company’s shares, along with its peer group, remain under considerable pressure given the broader tech selloff. STC continues to execute on its strategy, and we believe the long term fundamental support for the shares remains positive.”
* BMO’s Deepak Kaushal to $20 from $30 with an “outperform” rating.
“We cut our valuation and target price to reflect the ongoing correction in tech stocks, and trimmed our forecasts to reflect new accounting treatment for legacy Star2Star revenue, ongoing supply-chain constraints, and signs of slowing customer activity levels. That said, we continue to believe Sangoma is executing well on its longterm strategy and see good synergy opportunities with acquisitions of Star2Star and NetFortris. Furthermore, we believe valuation is attractive, but recognize management must meet or exceed its F2023 guidance to improve investor sentiment. We think patience will be rewarded,” he said.
* TD Securities’ David Kwan to $17.50 from $18.50 with a “buy” rating.
“We believe the stock looks very attractively valued, given its strong organic growth, healthy margins, and solid balance sheet. In addition, we like the fact that Sangoma continues to generate strong FCF (more than $25-million on a LTM basis before changes in working capital; 14-per-cent yield), which we expect to materially improve going forward, with our forecasts implying 15-per-cent NTM FCF yield,” said Mr. Kwan.
Seeing the resource at its Panuco project in Mexico as “world-class and growing rapidly,” Stifel analyst Stephen Soock initiated coverage of Vizsla Silver Corp. (VZLA-X) with a “buy” recommendation.
“We see the deposits supporting mid-tier level production with a high margin (14Moz AgEq/yr at an AISC of $9.57/oz) over an 11 year mine life producing site-level FCF of $129-million per year,” he said. “The wide vein width, high grades, and proximity to infrastructure will likely keep capital intensity and per ounce costs low. With only 12 per cent of the total known vein length explored on 1/3rd of the property, we expect additional discoveries from the company. We believe the Vizsla team has an excellent track record of value creation in the resource space.”
He set a target for shares of the Vancouver-based company of $3.50, below the $4.12 average.
“Given the project is just 45 minutes from a major port town, along a paved highway with power lines on the property, we expect low initial capital requirements and reduced operating unit costs compared to more remote sites. This would put Vizsla as a high margin, mid-tier silver producer, and we expect the commiserate re-rate to follow. The production profile and buildable nature of Panuco should also make it an attractive target for major silver producers,” he added.
In other analyst actions:
* Seeing it “undervalued on a relative basis ... but patience may be needed for absolute outperformance,” Jefferies’ Chris Lafemina initiated coverage of Teck Resources Ltd. (TECK.B-T) with a “buy” recommendation and $60 target. The average on the Street is $52.15.
“We expect the company to benefit from strength in met coal in the near/medium term even if the global economy continues to weaken,” he said. “In addition, Teck is developing a large copper project, expected to come online in 2H22/1H23, and we believe the delivery of copper growth into a tightening copper market will be a clear positive for shares. We believe the benefit of met coal price strength now and copper price strength later should lead to strong through-cycle FCF, with shares averaging 21-per-cent FCFY over the next decade. Meanwhile, shares trade at a ‘23 EV/EBITDA of just 2.6 times and a FCF yield of 16.3 per cent on our forecasts.”
“The ongoing cyclical slowdown has further to go, in our view, and is a headwind to mining shares. In the case of Teck, cyclical weakness in base metals should be at least partly offset by continued strength in coal for now. However, strong performance for Teck shares in absolute terms likely depends on an economic recovery from the ongoing slowdown.”
* Mr. Lafemina reduced his targets for Barrick Gold Corp. (GOLD-N/ABX-T, “hold”) to US$15 from US$17 and Kinross Gold Corp. (KGC-N/K-T, “hold”) to US$3.50 from US$3.75. The averages on the Street are US$23.76 and US$5.83, respectively.
* Following Tuesday’s release of second-quarter 2023 EBITDA guidance that was “materially” below the Street’s expectations, Stifel’s Ian Gillies cut his target for Algoma Steel Group Inc. (ASTL-T) to $11.25 from $14 with a “hold” rating, while BMO’s David Gagliano lowered his target to $14 from $16 with an “outperform” rating. The average is $15.35.
“Algoma Steel is a growth stock as it is embarking on a $700-million capital investment to convert its BOF to an EAF,” said Mr. Gillies. “This will increase the company’s effective production capacity by 0.7 mmtpa, or 25 per cent. It will also reduce the company’s risk related to a rising carbon tax in Canada. The company’s strong balance sheet and government support leave it well positioned to fund this growth plan. We believe the significant volatility of steel producer estimates adds increased risk to the name, and therefore we remain on the sidelines despite the favorable return to our target price.”
* Jefferies’ Owen Bennett cut his Aurora Cannabis Inc. (ACB-T) target to $1.50 from $4.10, below the $2.36 average on the Street, with a “hold” rating.
* After a tour of its U.S. manufactured home community portfolio in Ohio and Kentucky, Raymond James’ Brad Sturges trimmed his target for Flagship Communities REIT (MHC.U-T) by US$1 to US$23 with an “outperform” rating. The average is US$22.43.
“On a pro forma basis, Flagship’s financial leverage rises to 42 per cent, providing the REIT with some modest balance sheet capacity to fund additional near-term tuck-in transactions. We believe Flagship remains well positioned to generate average lot rent growth of around 5 per cent year-over-year,” said Mr. Sturges. “Also, we believe Flagship offers the best way for investors to gain pure-play exposure to positive underlying U.S. Mid-West MHC sector fundamental tailwinds, given the high barriers to adding new MHC supply combined with growing demand for affordable housing that can be provided by MHCs.”
“Ivanhoe Electric represents a unique offering amongst copper explorers/developers combining access to large potential copper projects in historically prolific mining jurisdictions in the USA with proprietary geophysics exploration technology that could allow for better target generation, making exploration drilling more cost-effective,” he said. “Further, we believe these assets benefit from being under the ‘Ivanhoe’ banner with CEO and Chairman, Robert Friedland, given his and the group’s track record of finding and developing large mineral deposits and ability to finance such projects.”
* CIBC World Markets’ Anita Soni lowered her target for Marathon Gold Corp. (MOZ-T) to $1.75 from $2.30, below the $2.63 average, with a “neutral” rating.
* Raymond James’ Andrew Bradford cut his Precision Drilling Corp. (PD-T) target to $115 from $130 with a “strong buy” rating. The average is $133.91.
“We agree with the market in its implications that the 2023 consensus estimates for PD are too high ... directionally,” he said. “However, our analysis tells us the market is implicitly overshooting on the downside — the rig count declines necessary to justify a $69.50 share price for PD imply U.S. production declines that will prove unsustainable — and even if these declines were acceptable over a short period, they would need to be reversed with higher rig counts over the medium to long-term.
“We are lowering our forward estimates and, consequently, our target price on PD to $115 from $130. However, we believe PD, along with much of the OFS complex, is oversold, and are therefore reiterating our Strong Buy rating.”