Inside the Market’s roundup of some of today’s key analyst actions
Pointing to healthy traffic growth, accelerating pricing momentum and abating trade concerns, Raymond James analyst Steve Hansen feels the backdrop for Canadian railway companies remains “solid,” leading him to raise both his financial expectations and target prices for Canadian National Railway Co. (CNR-T, CNI-N) and Canadian Pacific Railway Ltd. (CP-N, CP-T).
“While trading multiples have clearly expanded in recent months, we remain broadly constructive on both CN and CP given our positive macro view and associated belief that Street estimates still lag their true potential (i.e., the stocks are less expensive than they look),” said Mr. Hansen in a research note released Wednesday. “Consistent with this view, we are increasing our target prices on both carriers to reflect upward revisions to our financial estimates.”
Mr. Hansen noted both companies benefited from “robust” traffic growth in the third quarter with revenue ton miles (RTMs) rising 12.9 per cent for CP and 4.8 per cent for CN.
“We believe CN and CP are both poised to benefit from a multi-year surge in crude-by rail volumes as western Canadian crude (oil sands) production outpaces pipeline takeaway capacity,” he said. “Corroborating this view, we point to recent multi-year volume commitments by Cenovus, and complimentary news by USD Partners that it plans to expand its Hardisty, AB CBR loading terminal capacity by 50 per cent by year-end.”
Also emphasizing the importance of the newly created United States-Mexico-Canada Agreement (USMCA), Mr. Hansen said: “After months of lingering uncertainty, we are encouraged by the conclusion of tripartite negotiations associated with the new US-MexicoCanada (USMCA) trade agreement. While US-China trade tensions continue to simmer, we believe the USMCA agreement should help mitigate US-Canada trade concerns, with the core principles of the agreement casting aside former threats of cross-border auto tariffs.”
The analyst kept an “outperform” rating for shares of CN, raising his target price to $125 from $120. The average target on the Street is $119.71, according to Bloomberg data.
He maintained a “strong buy” rating for CP with a target of $305, rising from $285 and exceeding the average of $287.98.
Though he expects Nike Inc. (NKE-N) to exceed the financial expectations on the Street, HSBC analyst Erwan Rambourg downgraded its stock to “hold” from “buy” based on valuation concerns.
"The capacity to surprise investors on the upside is not as substantial anymore and with shares in the mid-80s and up close to 70 per cent over the past 12 months, we are happy to take a breather," he said. "We still have some upside linked to higher margin estimates ... but not enough to keep a buy rating.”
He maintained a target price of US$92, which tops the average of US$87.81.
“Nothing wrong with fundamentals but value agnosticism could become an issue,” said Mr. Rambourg.
CAE Inc. (CAE-T, CAE-N) is “well-positioned as a top-tier military service provider,” said Desjardins Securities analyst Benoit Poirier following a recent tour of its Dothan Training Center in Alabama.
“The defence market is firing on all cylinders, and CAE is well-positioned to capitalize on these opportunities,” he said. “As previously highlighted, the defence market is booming across all key regions. The growth in the U.S. defence budget is encouraging other countries to increase their spending as well. Gene Colabatistto, President, Defence & Security Group, highlighted during his presentation that he had never seen this situation before in his career; he indicated that usually in the past, an increase in U.S. defence spending resulted in reduced spending by U.S. allies. On top of that, other countries are putting into place requirements to maintain mission readiness following several years of spending cuts, as well as increasing the use of integrated mission training (Live-Virtual-Constructive solutions). There is also a propensity to increase the outsourcing of training solutions to improve their quality and reduce internal costs. CAE is strategically positioned in all four regions to benefit from these key industry trends.”
Mr. Poirier said CAE appears poised to benefit from increases to its defence business through its training systems integration (TSI) strategy. He sees the opportunity to grow its market share in the $17-billion market.
“Over the last few years, CAE has been able to reach a market share of 25 per cent in the traditional flight simulation defence market—a mature position which management is comfortable with,” the analyst said. “Nevertheless, the company has been working to increase its exposure to services and to expand in other segments of the TSI market. Services accounted for 52 per cent of total revenue in FY18 in the Defence & Security segment, up from 30 per cent in FY13. TSI has become a focus as the market is sizeable ($15-billion of total revenue per year vs $2-billion for the traditional flight simulation market). Since FY13, revenue associated with TSI programs have grown exponentially by a CAGR [compound annual growth rate] of 49 per cent to $300-million in FY18. According to management, work representing a $7-billion revenue opportunity is submitted each year. CAE is submitting bids for two-thirds of this work annually, as it prefers to target value-add projects where it can differentiate itself and avoid the lower end of the market, which is competitive. Assuming CAE is able to reach a similar market share in the TSI segment as in its traditional flight simulation market, we estimate that it could derive incremental revenue of up to $1.1–1.2-billion annually. However, management highlighted that M&A would be required to reach this level of penetration over time.”
Emphasizing a “robust” outlook for the global defence industry, Mr. Poirier maintained a “buy” rating and $30 target for CAE shares. The average target is currently $27.95.
“Overall, we continue to like CAE in light of its strong balance sheet, record backlog and attractive fundamentals across each segment,” he said. “As a result, we recommend investors buy the stock.”
Elsewhere, CIBC World Markets analyst Kevin Chiang kept a “neutral” rating and $27 target.
Mr. Chiang said: “We came away from the investor analyst event with a more positive outlook on CAE’s Defence division and its pipeline of opportunities. CAE is well positioned to continue to gain market share as a training systems integrator (TSI).”
Raymond James analyst Tara Hassan initiated coverage of Contact Gold Corp. (C-X), a Vancouver-based exploration company focused on Pony Creek project in Nevada, with an “outperform” rating.
“While Contact is in the initial stages of exploration, we believe the company’s strategic location along a productive gold trend in Nevada coupled with encouraging project geology, a supportive shareholder base, a team versed in Nevada exploration, and an attractive valuation position it for a market re-rating,” she said.
Though it is currently a pre-resource stage company, Ms. Hassan said Contact sits in an advantageous position due to its land holdings within Nevada and North America, which she emphasized are jurisdictions that have been the focus for investment and acquisition.
“With North American assets of all stages continuing to be a strong focus for investors and acquirers, and Contact sitting in a strategic location on a belt that is attracting the attention of major and intermediate gold producers, we believe it is well positioned for valuation gains as it advances its projects,” she said.
Currently the only analyst on the Street covering the stock, Ms. Hassan set a target price of $1 for Contact shares.
In response to the market’s negative reaction to its US$2.1-billion acquisition of Gianni Versace SpA, Citi analyst Paul Lejuez upgraded his rating for Michael Kors Holdings Ltd. (KORS-N), seeing several positives for the company moving forward.
Shares of the New York-based accessories, footwear and apparel company have fallen almost 9 per cent since the deal was announced on Sept. 25.
“KORS’ pattern of beat and raise in recent quarters has been impressive, and while the Versace acquisition brings uncertainties, we don’t believe KORS overpaid, as Versace seems to be on the rise,” said Mr. Lejuez, moving the stock to “buy” from “neutral.” “The opportunity for KORS to further improve sales productivity and margins at Versace is a source of future upside potential we do not believe the market prices in, creating a positive risk/reward from current levels.”
Mr. Lejuez said he believes Versace is currently “punching below its weight” and the sales and profit target set out by Michael Kors management are not “aggressive” and may actually prove to be conservative.
“Contrary to press reports implying there was a bidding war, we do not believe Versace was part of a formal sale/bid process. Using EV/sales as a sanity check (they paid 2.5 times sales), the valuation is at or slightly below its luxury peers, also suggesting they got Versace at a reasonable price.”
The analyst maintained a US$89 target for Michael Kors shares. The average on the Street is $78.29.
“We do not believe the $2.1-billion acquisition destroyed value (so no reduction to our TP is warranted), and with the stock now at $66.10, our TP represents now implies 20-per-cent upside from current levels,” he said.
Ahead of the release of third-quarter financial results, Citi analyst Itay Michaeli feels both Ford Motor Co. (F-N) and General Motors Co. (GM-N) would benefit in the marketplace from an increased emphasis on their pickup offerings.
“We expect some EPS pressure from China/FX/trade headwinds, but likely not to the extent of some recent auto warnings (BMW, Conti) — the distinguishing factor being the uniqueness of the North America pickup truck market (volume + our edge from proprietary mix data) supporting resilient NA margins in the face of rising oil, rising rates, a flat/down SAAR [seasonally adjusted annual rate] and rising off-lease,” said Mr. Michaeli.
“Why are pickups resilient? Because they’re fundamentally different from a structural demand & LT secular perspective, and we think this is sustainable (pickups outperformed again in Sept). Management teams should take note of yesterday’s stock reactions to Sept SAAR and ask themselves whether current NA reporting/messaging properly explains their respective pickup franchises (est. majority of earnings) and the price-discipline that pickups are arguably affording the industry (evident in Sept). Without this appreciation, stocks find themselves trapped in a repeated cycle that sees negative reactions to ‘SAAR’ followed by muted reactions to strong NA margins. But with setbacks comes opportunity—we continue to encourage automakers to take steps to shift the narrative towards pickups.”
In a research note released Wednesday, Mr. Michaeli adjusted his third-quarter and full-year earnings per share projections for both companies to account for trade issues and forex.
His third-quarter EPS estimate for GM rose to US$1.30 from US$1.18, while his fourth-quarter estimate dipped to US$1.39 from US$1.73, leaving his full-year estimate at US$5.93 (from US$6.16).
He kept a “buy” rating for GM shares with a US$57 target, down from US$60. The average is US$45.10.
“Despite near-term EPS headwinds, we remain comfortable in the region where most of the GM bull/bear debate still resides — North America,” he said. “Our proprietary AutoTech//Tracker data suggests a $200-million year-over-year Q3 EBIT tailwind that’s likely not visible to the street, driven mostly by strong crew cab mix (est. 84 per cent vs. 62 per cent). This, along with higher production and disciplined pricing should drive respectable Q3 GMNA margins despite the ongoing GM truck transition. Said differently, we think GMNA margins will look better than what the stock implied after the ‘down 11 per cent’ Q3 sales release. Besides Q3 and related narrative issue, we’ll look for AV updates and any directional view on 2019, where we do think GM has some clear EPS/FCF tailwinds. We remain Buyers of GM.”
Mr. Michaeli’s third-quarter projection for Ford rose by a penny to 28 US cents with this fourth-quarter result falling to 34 US cents from 38 US cents. His full-year expectation is now US$1.33, down from US$1.35.
He maintained a “neutral” rating for shares of Ford with a target of US$9.70, down from US$9.90. The average is US$10.95.
“Like GM, we think Ford has an opportunity to reshape the NA narrative,” the analyst said. “Unlike GM, Ford also faces the burden of demonstrating better execution and urgency to fix underperforming operations.”
Ahead of the release of its fourth-quarter financial results on Oct. 19, CIBC World Markets analyst Robert Bek lowered his financial estimates for Corus Entertainment Inc. (CJR.B-T) for the “seasonally smaller” quarter and added some “conservatism” to his fiscal 2019 expectations.
“The shares have rebounded from lows after a number of events this past summer, most notably the removal from the index,” he said. “The story remains challenged, not only due to fundamental uncertainty, but largely due to an overhang from the 38-per-cent ownership from Shaw Communications that appears in flux. Given a high debt level, and a lack of flexibility due to regulatory rules, Corus shares are weighed down by poor sentiment. Notwithstanding massive FCF and deeply discounted multiples, the name is not gaining traction at this point. Will F2019 commentary from management trigger some repair to this sentiment?”
His 2018 and 2019 earnings per share projections now sit at $1.10 and $1.03, respectively, from $1.12 and $1.10.
Mr. Bek kept a “neutral” rating with a target of $7, down a loonie. Consensus is $5.44.
“Though our expected return remains outsized relative to our Neutral rating, we continue to watch from the sidelines,” he said. “We intend to more aggressively review our thesis when the company reports.”
In other analyst actions:
Scotia Capital analyst Ovais Habib downgraded Continental Gold Inc. (CNL-T) to “sector perform” from “sector outperform” with a $5 target, which is 91 cents below the consensus.