Inside the Market’s roundup of some of today’s key analyst actions
Scotiabank analyst Konark Gupta upgraded Canadian Pacific Railway (CP-T) to “sector outperform” from “sector perform” as a U.S. regulator approved its merger with Kansas City Southern.
He also raised his price target to C$116 from C$110.
The Surface Transportation Board approved Canadian Pacific Railway’s US$27-billion takeover of Kansas City Southern Wednesday morning, allowing Canada’s second-biggest rail shipper to forge a network that reaches the Gulf of Mexico and Pacific Ocean via the North American industrial heartland.
The STB imposed some conditions on the deal that include monitoring some rail data for seven years.
CP Rail shares shot up more than 5% on the approval in morning trade. Mr. Gupta’s upgrade and associated research note was issued prior to the decision, on the expectation that it would get the green light.
He said the upgrade is driven by two factors.
“One, we have fully integrated KCS into our model, as opposed to projecting only earnings per share using the equity method, which has improved our perspective on KCS-driven industry-leading earnings growth. Secondly, after some delays, CP has finally reached the last step in the regulatory process, which is the Surface Transportation’s decision, before it begins the integration shortly. Meanwhile, the stock has underperformed the TSX and S&P 500 over the past 3-4 months, which makes valuation more attractive,” Mr. Gupta said in a note to clients.
Mr. Gupta said if all this plays out as he expects, CP shares could climb to C$140 or higher over the next two to three years.
The average analyst price target on CP Rail, as of midday Wednesday, was $116.55, according to Refinitiv Eikon data.
At least two analysts cut their price targets on Dorel Industries Inc (DII-B-T) in the wake of the manufacturer of juvenile products and home furniture reporting disappointing fourth-quarter results.
BMO cut its target price to C$6 from C$7 while TD Cowan cut its target price to C$10 from C$11.5.
Dorel reported a fourth quarter negative adjusted EBITDA of $18.8-million, well below Street estimates - TD’s forecast, for instance, was for a loss of $11.6-million.
“We expect sales and margin headwinds to continue into H1/23, before easing in H2/23 as industry conditions normalize. Consequently, we have reduced our 2023/2024 EBITDA estimates by 47%/6%,” TD Cowen analyst Derek Lessard said in a note.
“It was a tough quarter highlighted by organic revenue declines and margin pressure, mostly from aggressive inventory reductions,” he summed up.
But Mr. Lessard sees an opportunity here for patient, long-term, investors and he maintained a “buy” rating. He thinks ultimately either the juvenile products or home furniture segments could be sold - or even both.
“The transition to lower-cost inventory is ongoing. Although there could be bumps along the way, we believe that most of the heavy lifting is done. Together with cost containment, and anticipated sales and volume growth (Home), we expect profitability improvement to accelerate through 2023. Our 2024 estimates reflect near-record revenue, margin, and EBITDA levels for both segments. This should set Dorel up for the eventual sale of one or both businesses, which we believe is worth significantly more (when healthy) than its current valuation of ~2.8x 2024E EBITDA,” he said.
“However, buying Dorel shares is best-suited for investors with considerably longer investment horizons as the tough environment is limiting short-term visibility,” Mr. Lessard cautioned.
BMO analyst Stephen MacLeod maintained a “market perform” rating on the stock and expressed even more caution.
“Our forecasts reflect gradual sales and margin improvements beyond Q2/23E, but visibility remains low especially in light of weak macro. While monetization of Home & Juvenile remains a potential outcome, this is unlikely without stabilized earnings. Absent incremental sale clarity, we believe low earnings visibility will limit the stock’s upside,” Mr. MacLeod said.
The average analyst price target is $8.
Stifel GMP analyst Andrew Partheniou downgraded Reunion Neuroscience Inc. (REUN-T) to “hold” from “speculative buy” after the biotechnology company disclosed a lawsuit against a competitor, alleging it copied one of its psychedelic-based therapies in development.
Mr. Partheniou also slashed his price target to C$1 from C$5.50. There is minimal coverage of the stock by other analysts.
The lawsuit alleges that Mindset Pharma Inc. knowingly copied its RE104 therapy and misleadingly presented it as its own invention when applying for a patent.
“While we have not seen a detailed response by MSET to the allegations, we recognize patent law is extremely complex with timelines and outcomes that are difficult to predict,” commented Mr. Partheniou in a note to clients. “As a result, we do not presume to have a strong belief on what an eventual resolution will look like.”
“Nevertheless, it seems this conflict presents a significant hurdle for REUN to raise the additional capital necessary to further develop RE104, introducing significant uncertainty into the viability of the company’s lead program. Due to our limited visibility on the path forward, we downgrade our rating,” he said.
The analyst said he is concerned with the impact the lawsuit will have on the company’s ability to raise capital. “We believe REUN has the resources to launch RE104′s Phase 2 in H2/23 and get through 2023. However, the company needs to raise additional capital to complete the trial,” he added.
AirBoss of America Corp. (BOS-T), a manufacturer and seller of rubber compounds, has transitioned to become “a deep-value play” while also offering an attractive 5.2% dividend yield and decent balance sheet, said Canaccord Genuity analyst Yuri Lynk.
But with its Engineered Products (EP) segment having been restored to profitability, there are few identifiable catalysts that could ignite a rally in its shares at the moment, he said.
In preliminary fourth-quarter results last week, the company reported adjusted EBITDA of $13.9 million, substantially ahead of Canaccord’s $5.7 million estimate and consensus of $6.3 million. Full results were released this week.
“With the full financials in hand, we could confirm the beat was driven by the EP segment on higher revenues and a return to profitability mainly on the back of renegotiated agreements with key suppliers and customers, which more than offset weak results from the other two segments,” Mr. Lynk said in a note.
Mr. Lynk reiterated a “buy” rating and C$14.00 one-year target price. The average analyst price target is C$13.60.
Several analysts raised their price targets on Meta Platforms Inc (META-Q) in the wake of the tech giant confirming a second round of job cuts this year.
Baird raised its target price to US$220 from US$205; Bernstein raised its target price to $225 from $210; Citigroup raised its target price to $260 from $228; Mizuho raised its target price to $235 from $210; Truist Securities raised its target price to $230 from $215.
The average analyst target is now US$215.45.
In part of what’s being called the “Year of Efficiency,” Meta announced a further 10,000 job cuts earlier this week that will reset headcount back to 2021.
Citigroup analyst Ronald Josey also cited progress at Reels - Meta’s short-form video experiences product - for increased optimism over the stock.
“Our updated proprietary tracking of Reels monetization suggests ad loads continue to rise with Reels QTD ad load reaching 16.2% (18% in March) versus 14.4% in 4Q. Key here is that we believe Reels engagement continues to rise as entertainment and discovery become a larger part of the overall experience at FB and IG led by Meta’s AI Content Discovery engine. And, while monetization continues to ramp, we project Reels revenue can reach $6.4+B in ‘23,” Mr. Josey said in a note to clients.
“Our ‘23 and ‘24 GAAP EPS projections increase materially to $11.81 and $14.63, respectively. Given improving engagement, newer ad products (Advantage+), increasing Return on Ad Spend, and now an increasingly lean organization, we reiterate our buy rating,” he said.
In other analyst actions:
Fortis Inc (FTS-T): Credit Suisse raises target price to C$62 from C$61
Titanium Transportation Group (TTNM-T): Haywood Securities raises PT to C$5 from C$4.75
Charles Schwab Corp (SCHW-N): Credit Suisse cuts target price to US$67.5 from US$81.5 and raises rating to outperform from neutral; Deutsche Bank cuts target price to $83 from $109
Freeport-Mcmoran Inc (FCX-N): Scotiabank raises to sector outperform from sector perform
Raymond James Financial Inc (RJF-N): Credit Suisse cuts target price to $95.5 from $116
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