Inside the Market’s roundup of some of today’s key analyst actions
On Tuesday before market open, BMO reported cash earnings per share of $2.36 for the third quarter, exceeding the expectation on the Street of $2.26. Adjusted U.S. earnings jumped 34 per cent year-over-year, driven by 12-per-cent loan growth.
“For the second consecutive quarter, BMO reported a strong adjusted EPS beat (4 per cent) as all operating segments generated positive operating leverage,” said Mr. Chan. “Of note, we had been very conservative on BMO’s US segment forecasts. With another solid quarter, we have increased our U.S. forecasts (e.g. loan, NIM, better efficiency) to reflect a positive market outlook. Further, Capital markets was strong supported by trading and IB [International Banking], helping Other income. Our F2019 EPS forecast increases significantly, by 5 per cent, with growth of 8 per cent now above peer expectations."
Mr. Chan highlighted the performance of the U.S. segment, noting: “Year-to-date, BMO’s U.S. segment accounts for 28 per cent (versus 24 per cent in F2017) of total NI (adj.) with U.S. P&C accounting for 81 per cent this quarter. We could see this proportion increasing towards 30 per cent or more from stronger organic growth characteristics, and the potential for acquisition support. This helps improve BMO’s relative valuation to peers.”
With the results, Mr. Chan increased his 2018 and 2019 EPS projections to $8.89 and $9.60, respectively, from $8.70 and $9.10.
His target price for BMO shares jumped to $118 from $111. The average target on the Street is currently $114.57, according to Bloomberg data.
“We have increased our target P/E [price-to-earnings] multiple to 12.5 times (from 12.4 times), implying a 4-per-cent premium (from 3 per cent) to our Group multiple of 12.0 times,” the analyst said. “Our higher premium is supported by above average EPS growth complemented by its U.S. segment, higher margin outlook in North America, stable credit, and a solid capital position that came in higher than expected.”
Elsewhere, RBC Dominion Securities analyst Darko Mihelic raised his target to $126 from $124, keeping an “outperform” rating.
Mr. Mihelic said: “Cost control is on track and U.S. results were solid; credit quality still solid, too—our thesis is intact.”
CIBC World Markets' Robert Sedran moved his target to $111 from $109 with a “neutral” rating.
“The U.S. story forms a key part of the investment thesis for this bank and so the strength there is noteworthy and important,” said Mr. Sedran. “However, when the largest segment (Canadian P&C banking) has been lagging the group in terms of volume and earnings growth, it makes it more difficult for the shares to sustain their outperformance, in our view. To be sure, the results in Canada were not bad, particularly on the commercial side of the business, and the personal side is being affected by some repositioning as the bank favors branch business versus third party channels that are now being de-emphasized, which has an impact on balance sheet growth overall. Regardless, we believe that better earnings growth here is needed to push estimates higher.”
Desjardins Securities’ Doug Young maintained a “hold” rating and $106 target, despite raising his earnings expectations for the next two fiscal years.
“We like BMO’s commercial (vs retail) banking focus in Canada and the U.S.; however, we also believe increased competition could weigh on this segment over the next year,” said Mr. Young.
Expressing concern about lower earnings “quality” as well as execution risk following the release of its third-quarter results, Canaccord Genuity’s Scott Chan said he’s taking a more “cautious” stance on Bank of Nova Scotia (BNS-T, BNS-N), leading him to downgrade its stock to “hold” from “buy.”
On Tuesday, Scotiabank reported adjusted cash earnings per share of $1.76, an increase of 5 per cent year-over-year but a penny below the expectation of both Mr. Chan and the Street.
“BNS reported a slight EPS miss with lower earnings quality mainly due to credit provisions (added 5 cents versus street), International NIM, Other income, and Capital markets,” he said. “Our fiscal 2019 EPS forecast comes down 1 per cent, with average growth over the next two years now at 6 per cent, below our peer expectations.”
Mr. Chan thinks the bank faces larger risks than its peers due to its exposure to emerging markets, the uncertainty surrounding NAFTA renegotiations and the potential for execution turbulence with recent acquisitions, particularly BBVA Chile. Domestically, he feels its Canadian banking growth target of 7 per cent could be difficult to achieve over the next year.
Accordingly, he lowered his 2018 and 2019 EPS estimates to $6.95 and $7.39, respectively, from $6.96 and $7.50.
His target for Scotiabank shares now sits at $82.50, down from $85 and below the consensus of $85.61.
“We have also decreased our target P/E multiple to 11.4 times (from 12 times), now implying a 5-per-cent discount (from 0 per cent) to our Group multiple of 12.0 times,” said Mr. Chan. “Our lower discount reflects revised EPS growth expectations, execution risk on $7-billion of announced acquisitions, higher risk profile (i.e. International, NAFTA), and its peer low capital position (pro-forma).”
Elsewhere, RBC’s Darko Mihelic maintained a “sector perform” rating and $86 target.
Mr. Mihelic said: "It is too early to develop a negative or positive view on recently acquired businesses (and there are more acquisitions to close). We think it will take a few more quarters before acquisitions are integrated and earnings power/synergies are more accurately understood — till then we believe its valuation multiple is unlikely to change much, all else equal.”
Morgan Stanley analyst Brian Nowak hiked his target price for shares of Amazon.com Inc. (AMZN-Q) to a new high on the Street on Wednesday, believing its “rapidly growing, increasingly large, high margin” revenue streams are likely to drive higher profitability moving forward.
Mr. Nowak said these segments, which include advertising, subscriptions and Amazon Web Services, are also likely to lead continued upward estimate revisions.
“For several quarters now, Amazon has been demonstrating higher margins, with AMZN beating the top end of its EBIT guide by an average of 60 per cent over the last 3 quarters,” he said. “Heading into the 2Q:18 print, we were 47 per cent ahead of consensus EBIT for 3Q:18, and yet the top end of Amazon’s guidance for 3Q:18 came in 30 per cent above our prior estimate. We attribute this to the growing size and impact of Amazon’s high-margin revenue streams (advertising, AWS, subscriptions).”
Though he maintained his financial estimates for the tech giant, Mr. Nowak increased his target price for its stock to US$2,500 from US$1,850, keeping an “overweight” rating. The average on the Street is US$2140.19.
“This PT adjustment is rather a reflection of AMZN’s improving business mix (high-margin businesses will make up 22 per cent of total revenue in ’18 by our estimates), as we believe it more accurately presents AMZN’s long-term potential earnings power than our previous three-part sum-of-the-parts price target calculation,” he said. “Indeed, we see these high margin revenue streams increasing Amazon’s long-term profitability (even through investment) as we expect these businesses to contribute $25-billion in GAAP EBIT in 2018, which rises to $45-billion by 2020. For perspective, we only model AMZN reporting $26-billion in company-wide GAAP operating profit in 2020 (which speaks to AMZN’s growing ability to invest in new categories/countries/sectors and deliver higher profitability)."
In a separate note, Mr. Nowak also gave Alphabet Inc. (GOOGL-Q) a new Street-high target, citing “continued strong core and growing Waymo visibility.”
“We see the launch of Waymo’s ride-hailing service by year-end as a potential catalyst for value realization,” he said. “We believe current GOOGL valuation ascribes little value for Waymo, implying it is still a call option. We now value GOOGL’s core business at $1,290 per share ($945-billion in equity value) and the noncore businesses (Waymo) at $60 per share ($45-billion in equity value).”
Mr. Nowak raised his fiscal 2018 and 2019 EBITDA projections by 2 per cent, noting: “we remain bullish the core GOOGL business as we believe GOOGL is still in the early innings of monetizing its seven +1bn user platforms….and that it is investing to build new monetization opportunities such as YouTube subscriptions, Maps, and hardware.”
The analyst increased his target to US$1515 from US$1325 with an “overweight” rating. The average is currently US$1382.19.
RBC Dominion Securities analyst Drew McReynolds said he continues to “see a steady leg up” in Thomson Reuters Corp. (TRI-N, TRI-T) stock following Tuesday’s announcement of a US$9-billion share buyback.
The company also announced it plans to complete the US$17-billion sale of a majority stake in its financial and risk unit to Blackstone Group LP on Oct. 1.
The tender offer, which will expire on Oct. 2, has been priced at US$42 to US$47 per share, or an 11.5-per-cent premium to the stock’s average price over the past 20 trading days, according to the company.
“While the outcome of the SIB (amount, purchase price) and associated trading dynamics remain unclear to us, our fundamental focus is now firmly on the company's organic revenue growth outlook in 2019 and 2020,” said Mr. McReynolds. “In this respect, we continue to see a steady leg up in the stock driven by: (i) mid- to high-single-digit underlying NAV growth; (ii) stronger positive operating leverage should there be an uptick in organic revenue growth within Legal; (iii) a potential re-rating of the stock should the organic revenue growth differential to peers narrow (12.1 times forward 12-month EV/EBITDA excluding one-time costs versus 14.3 times and 15.7 times for Wolters Kluwer and Reed Elsevier based on consensus); and (iv) an active NCIB.”
Mr. McReynolds raised his net asset value assumption for the company to incorporate a new pricing assumption for the SIB of US$44.50, which is the midpoint of the US$42 to US$47 range and up from his previous estimate of US$43, as well as transaction-related expenses related to the Blackstone deal (now US$1-billion versus US$2-billion previously).
That led him to raise his target price for the company’s shares to US$47 from US$45. The average is currently US$44.77.
He kept an “outperform” rating.
The Woodbridge Co. Ltd., the Thomson family holding company and controlling shareholder of Thomson Reuters, also owns The Globe and Mail.
Elsewhere, CIBC World Markets' Robert Bek moved his target to US$46 from US$44 with an unchanged “neutral” rating.
Mr. Bek said: “Given an indicated buyback range of US$42 to US$47, the shares should be very well supported for the next month. Further positive tone could come from future M&A after the buyback. The company also provided updated commentary regarding deal-related closing costs that is positive.”
Cowen analyst Jason Seidl believes Kansas City Southern (KSU-N) stock is likely to return to the trading multiple it enjoyed prior to Donald Trump’s presidency in the wake of the preliminary trade agreement between the United States and Mexico, which he said removes a major hurdle for investors.
Upgrading it to “outperform” from “market perform,” Mr. Seidl emphasized KSU is the transportation stock with the most exposure to Mexico, and thinks it is positioned well to benefit from Mexican energy reform and chemical growth.
Though he cautioned uncertainty remains regarding trade with the EU, China, and Canada, the analyst raised his target for the stock to US$138 from US$124. The average on the Street is US$125.12.