Inside the Market’s roundup of some of today’s key analyst actions
Desjardins Securities analyst Doug Young feels current valuations for Canadian banks “still appear reasonable” given the other investment alternatives.
“While Canadian bank stock prices decreased 5.8 per cent during 4Q FY18, on average the group still outperformed the S&P/TSX as well as the Canadian and U.S. lifeco average and U.S. bank index,” said Mr. Young. “CM was the best-performing Canadian bank (down 4.2 per cent) while CWB underperformed materially (down 16.1 per cent, negatively impacted by market sentiment on mortgage loan growth, NIM expansion and branch-raised deposits).
“The Big 6 Canadian banks are on average trading below their 20-year historical average P/4QF EPS multiples. There are some tailwinds for the Canadian banks over the near term: (1) rising rates in Canada and the U.S.; (2) higher levels of capital; (3) decent expense control, an important lever as loan growth slows; and (4) a benign credit environment. In addition, the banks have been able to effectively manage a number of headwinds over the past few years, such as a drop in oil prices and new regulatory capital rules. However, we also acknowledge a number of risks on the horizon, such as operating in the late stages of the economic cycle, volatility in the equity markets, higher volatility of provisions under IFRS 9 and the impact of higher rates on the Canadian consumer.”
In a research note previewing the fourth quarter for the banking sector, Mr. Young said he’s projecting cash earnings per share growth of 9 per cent year over year, a “slight deceleration” from 11 per cent on the previous quarter. In explaining the slowdown, he pointed to U.S. tax reforms, increasing interest rates (on both sides of the border), “decent” loan growth, acquisitions, “what appears to be a benign credit environment” and share buybacks.
Ahead of the start of earnings schedule, which Bank of Nova Scotia is set to kick off on Nov. 27, Mr. Young lowered his target prices for stocks in the sector in order to “reflect higher risk.”
His changes were:
Canadian Imperial Bank of Commerce (CM-T, “buy”) to $133 from $135. The analyst average on the Street is $132.93, according to Bloomberg data.
Toronto-Dominion Bank (TD-T, “buy”) to $84 from $87. Average: $85.67.
Bank of Nova Scotia (BNS-T, “buy”) to $85 from $88. Average: $85.88.
Royal Bank of Canada (RY-T, “buy”) to $109 from $111. Average: $112.07.
Canadian Western Bank (CWB-T, “hold”) to $38 from $40. Average: $38.22.
Bank of Montreal (BMO-T, “hold”) to $108 from $110. Average: $115.23.
National Bank of Canada (NA-T, “hold”) to $64 from $66. Average: $68.50.
Laurentian Bank of Canada (LB-T, “hold”) to $45 from $47. Average: $47.67.
“Despite decent results thus far in FY18, bank stocks are down 5.4 per cent year-to-date on average, although this is better than the 6.1-per-cent drop for the S&P/TSX,” the analyst said. “Macroeconomic volatility and an indebted Canadian consumer remain the primary concerns. However, with the Big 6 trading below historical average forward P/E multiples, reasonable FY19 EPS growth forecasts and a decent economic backdrop for now (rising interest rates, low unemployment, etc), we remain comfortable with our neutral view.”
Ahead of Thursday’s release of its third-quarter financial results before market open, Raymond James analyst Kenric Tyghe lowered his target price for shares of Canadian Tire Corp. Ltd. (CTC.A-T) after shrinking his same-store sales growth estimates for both its Canadian Tire Retail and FGL Sports segments.
“The revisions to our 3Q18 and 2018 estimates largely reflect our (i) increased concerns on bigger ticket purchases, (ii) further possible share losses in sporting goods, and (iii) the imputed increased risk to CTFS on the current state of the consumer,” he said.
Mr. Tyghe now a 10.4-per-cent jump in revenues to $3.606-billion, slightly exceeding the consensus on the Street of $3.578-billion. He expects a 4.5-per-cent drop in adjusted EBITDA to $409.4-million, falling from his previous estimate of $431.5-million and slightly above the consensus of US$406.4-million.
His same-store sales estimate for Canadian Tire’s retail segment fell to 1.8 per cent from 2.3 per cent, while his FGL projection dropped from 2.1 per cent to 1.5 per cent.
Maintaining an “outperform” rating, his target dipped to $181 from $198. The average is $184.08.
Following “weak” quarterly results that led to a “significant" reduction in his financial estimates, BMO Nesbitt Burns analyst Ben Pham downgraded Keyera Corp. (KEY-T) to “market perform” from “outperform.”
“To be clear, we are still positive on the long-term outlook, particularly if KEY is successful in expanding its service offering to include liquids transportation from the Montney to Fort Saskatchewan,” said Mr. Pham. “However, the abysmal Alberta gas price, frac fee compression, and lower-than-expected returns on new growth prompted us to recalibrate our estimates lower. As such, we now sit 6-7 per cent below consensus.”
He lowered his target to $36 from $43. The average is $41.73.
The recent selloff in Hardwoods Distribution Inc. (HDI-T) is “overdone,” according to Acumen Capital analyst Nick Corcoran, who views it as an opportunity for investors despite Monday’s release of “mixed” third-quarter financial results.
“While the margin pressure from the U.S. trade case and general sentiment against building products has weighed on the stock, we remind investors that demand for hardwood products is generally less cyclical and HDI has a solid plan to grow organically and through acquisitions,” said Mr. Corcoran.
The Langley, B.C.-based distributor of building products reported a 11.9-per-cent jump in sales year over year to $290.4-million, exceeding the projections of both Mr. Corcoran ($278.1-million) and the Street ($294-million). However, adjusted EBITDA of $15.2-million missed the $15.7-million estimate of both the analyst and the consensus.
“Management was optimistic about the outlook and highlighted that it has a diversified product mix of new residential, remodeling, commercial and other,” said Mr. Corcoran. “While the sentiment has largely shifted against building products, hardwood products are specialized, higher value, and have firmer pricing (especially when compared to softwood).”
“Management reiterated its expectations of mid- to high-single digit organic growth in U.S. and low-single digit organic growth in Canada. Gross profit margin is expected to remain below the 18-19-per-cent target range through year-end (versus previous expectations that it would recover in H2/18). With a mixed outlook for housing, Management indicated that it is well diversified with approximately 50 per cent of its products used in residential construction, 30 per cent in non-residential construction, and 20 per cent used in other diversified end-markets.”
Despite maintaining a “buy” target for its stock, Mr. Corcoran lowered his target to $19.50 from $23. The average is $21.69.
Though its third-quarter results fell below his expectations, due largely to start-up problems at its new Entwistle facility, BMO Nesbitt Burns analysts Jonathan Lamers upgraded Pinnacle Renewable Holdings Inc. (PL-T) to “outperform” from “market perform” with an $18 target. The average is $18.56.
“Pinnacle offers substantial earnings growth, remains meaningfully discounted to industry peer Enviva, and there have been a number of positive developments to-date providing near-term opportunities that we believe are not reflected in the stock,” he said.
Though it reported “solid” quarterly results, Canaccord Genuity analyst Brendon Abrams downgraded Slate Office REIT (SOT-UN-T) to “hold” from “buy," believing the quarter was "overshadowed by its investment activity and proposed distribution plans.
“In Q3/18, the REIT closed on the acquisition of 120 South LaSalle Street, a 656,000 square foot office building located in downtown Chicago for US$155-million. This was the REIT’s second purchase in the city in 2018, bringing its acquisition total to $500-million year-to-date,” he said.
“While we like the U.S. acquisitions, as they act to high-grade Slate’s portfolio quality and cash flow stability, we are concerned by the near-term pressure put on the REIT’s balance sheet (D/GBV of 64 per cent) and payout ratio (110 per cent of AFFO). While the REIT intends to reduce leverage through asset sales in the range of ~$300 million, we believe relying on asset dispositions of this magnitude has increased the REIT’s risk profile given the uncertainty relating to the timing and value of assets to be sold.”
Taking a “more cautious stance” on the REIT as he monitors “the execution of its disposition program and its progress towards a stronger financial profile," Mr. Abrams dropped his target to $7.75 from $8.50. The average is $8.10.
Though he holds a “conservative” outlook ahead of the release of its third-quarter financial results on Nov. 14, Industrial Alliance Securities analyst Elias Foscolos initiated coverage of Tervita Corp. (TEV-T) with a “buy” rating.
Calgary-based Tervita was formed from the recent merger of Newalta Corp. and Tervita Corp., and began trading on the TSX in mid-July.
“Tervita is poised to show EBITDA growth in 2019 irrespective of drilling activity,” said Mr. Foscolos. “Growth will be achieved through a combination of (a) reduced costs resulting from streamlining operating and overhead costs, and (b) a return to investing in organic capital projects which were deferred due to historically stretched balance sheets.”
Mr. Foscolos is projecting EBITDA for the third quarter of $52-million, which sits below the $59-million consensus on the Street, adding: “For 2019 our conservative EBITDA projection is based on recent widening oil price differentials, which are predicted to curtail drilling activity in 2019. However, these wide differentials may benefit TEV’s Energy Marketing division.”
He set a target price of $11 for Tervita shares. The average is $12.23.
Raymond James analyst Ben Cherniavsky thinks the risk-return for shares of Finning International Inc. (FTT-T) is now “materially more attractive today than it was earlier this year when it traded near $35.00.”
“Finning’s 18e P/E multiple has now compressed to trough levels, thus deflating much of the valuation risk that previously concerned us,” he added. “Cyclically-adjusted P/E multiples similarly suggest that valuation risk is low at present.”
On Monday, the Vancouver-based distributor of Caterpillar products and support services reported third-quarter eanrings per share of 45 cents, topped Mr. Cherniavsky’s expectations by a penny and rising 10 cents from the previous quarter.
“3Q18 backlog of $1.5-billion is up 67 per cent year-over-year but flat quarter-over-quarter, indicating a deceleration of growth and the challenge of lapping increasingly tougher comps,” he said. “For cyclical sectors like machinery, this represents the pressing question that investors have been asking lately: is this the peak? We don’t think so, not yet at least. We expect machine sales growth to slow next year but assume healthy higher-margin CSS activity as the aftermarket cycle runs its course. We also expect 2019 free cash flow to accelerate, supporting a deleveraging of the balance sheet and—possibly— further buybacks beyond the $100 mln repurchases program planned for 2018.”
With an “outperform” rating, Mr. Cherniavksy lowered his target to $35 from $38.50. The average is $36.25.
Elsewhere, CIBC World Markets' Jacob Bout lowered his target to $38 from $41 with an “outperformer” rating (unchanged).
Mr. Bout said: “While we are taking down our numbers slightly due to weakness in Argentina (5 per cent of FTT sales), backlog is up 67 per cent year-over-year and end-market demand in Western Canada (September order intake was the highest on record in 2018) and Chile (13-per-cent year-over-year product support growth) continues to be robust. We continue to believe FTT will benefit from operating leverage on a reduced cost base, which should see margins and ROIC levels expand in 2019.”
Citing a deceleration in sales growth for its branded segment, BMO Nesbitt Burns analyst Peter Sklar downgraded Jamieson Wellness Inc. (JWEL-T) to “market perform” from “outperform.” His target dropped to $24 from $28, while the average is $27.
In other analyst actions:
TD Securities analyst Derek Lessard upgraded Pizza Pizza Royalty Corp. (PZA-T) to “buy” from “hold” with a $11.50 target, which matches the consensus.
Stephens analyst Vincent Caintic downgraded Element Fleet Management Corp. (EFN-T) to “equal-weight” from “overweight” with a $7 target, which falls below the average of $9.20.
Eight Capital initiated coverage of Curaleaf Holdings Inc. with a “buy” rating and $17 target. The average is $18.50.