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Inside the Market’s roundup of some of today’s key analyst actions

Canadian National Railway Co.'s (CNR-T, CNI-N) “decent” second-quarter financial results were supported by “disciplined” cost-cutting initiatives, according to Desjardins Securities analyst Benoit Poirier.

After the bell on Tuesday, the company reported revenue for the quarter of $3.959-billion, up 12 per cent year-over-year and largely in-line with the projections of both Mr. Poirier ($3.949-billion) and the Street ($3.931-billion). Adjusted fully diluted earnings per share of $1.69 also topped expectations ($1.64 and $1.65), while an operating ratio of 57.5 per cent met the consensus forecast.

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The analyst said the results offset softer volumes, emphasizing CN chose to maintain its full-year guidance.

“CNR is guiding to adjusted fully diluted EPS growth in the low double digits from the $5.50 reported in 2018," said Mr. Poirier. "This compares with our initial forecast and consensus of an increase of 12 per cent year-over-year. The guidance assumes (1) RTM [revenue ton mile] growth in the mid-single digits, (2) pricing increases above inflation, (3) a WTI price of US$60–65/bbl, (4) $1.7-billion of share repurchases, and (5) an exchange rate of US $0.75/C$1. Additionally, management maintained its capex envelope for 2019 of $3.9-billion (vs $3.5-billion in 2018) as it continues to invest ($1.3–2.4-billion) to build additional capacity to improve network resiliency and address long-term growth prospects highlighted at the investor day. While CNR still has lots of growth opportunities, we will continue to monitor the situation closely as management reiterated that there is still some softness with some commodities (ie intermodal, lumber products and frac sands).”

In response to the results, Mr. Poirier increased his 2019, 2020 and 2021 adjusted EPS estimates to $6.18, $6.89 and $7.47, respectively, from $6.12, $6.81 and $7.38.

He kept a “hold” rating for CN shares while raising his 12-month target to $129 from $128. The average on the Street is currently $127.87, according to Bloomberg data.

“Bottom line, while we continue to like CNR for its longterm growth opportunities and the breath of its network, we believe the stock is fairly valued considering current uncertainties with key commodities and the limited potential return to our target price,” he said.

Elsewhere, RBC Dominion Securities analyst Walter Spracklin increased his target by a loonie to $128 with a “sector perform” rating.

Mr. Spracklin said: “CN bounced back after a difficult Q1 to deliver a Q2 result that showed strong sequential improvement in operating ratio - even if results were in-line. Moreover management sounded incrementally more confident about its volume outlook, which should be well received. All in all we consider this to be a solid quarter, with avenue for upside in the back-half. Shares fairly valued at current levels.”

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Citi analyst Christian Wetherbee expects reaction from investors to be “muted.”

“Coming off the Canadian National 2Q19 earnings conference call we’d note that while the quarter was essentially in line with expectations on a core operating basis, consensus estimates are likely to drift higher on a lower tax rate,” he said. “CN also expects RTMs to ramp up in 2H, as it maintained its MSD [mid single-digit] growth target for the full year following 3-per-cent growth in 1H. Crude by rail continues to be a key catalyst in 2H, providing RTM upside potential. Collectively, CN reported a quarter that was boring in a good way and we see a path to DD [double-digit] EPS growth for 2019.”

Mr. Wetherbee maintained a “buy” rating for CN shares with a US$103 target.


Desjardins Securities analyst expect “a relatively uneventful" earnings season for the Canadian energy sector “that is unlikely to improve investor sentiment,” which they call “apathetic at best ahead” heading toward the federal election.

In a research note previewing second-quarter results, the firm made minor adjustments to their estimates and target prices for the sector to account for adjustments to their light oil differentials forecast for the second half of 2019 as well as slight reductions to their natural gas price projections.

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“When considering that the quarter is seasonally the least active in terms of capital spending due to spring break-up, we also note that significant uncertainty in the macro outlook for oil has only added to already apathetic investor interest in the Canadian energy space.,” the firm said. "Unfortunately, we expect the current situation to persist through the summer months, and potentially depends on the outcome of the federal election in late October.

“That said, producer cash flows generally appear balanced in 2019 at the current strip and we expect no major changes in annual guidance as disciplined capital spending and prudent balance sheet management remain key overriding strategic themes, which should translate into a limited number of potential catalysts through the reporting cycle. Meanwhile, the debate surrounding share buybacks appears to be simmering for the time being as the market struggles to find a consensus as to whether it has been an effective strategy for the limited number of producers that have actively pursued it to date.”

Among large-cap stocks in their coverage universe, analyst Justin Bouchard made the following target price changes:

Canadian Natural Resources Ltd. (CNQ-T, “buy”) to $44 from $47. The average on the Street is $46.36.

Cenovus Energy Inc. (CVE-T, “hold”) to $14 from $13. Average: $14.96.

Husky Energy Inc. (HSE-T, “hold”) to $15 from $19. Average: $15.27.

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Imperial Oil Ltd. (IMO-T, “hold”) to $39 from $38. Average: $39.77.

Mr. Bouchard maintained a target of $54 for Suncor Energy Inc. (SU-T, “buy”), versus an average of $53.05.

Analyst Kristopher Zack lowered his target for Encana Corp. (ECA-T, “hold”) to $8 from $9.50, which falls short of the $11.27 consensus.

“While we have made relatively minor tweaks to commodity price assumptions, we have also adjusted some of our targets going into the 2Q reporting cycle,” the analyst said. “From our perspective, both CNQ and SU continue to stand out as the strongest names in the large-cap coverage universe, all things considered. The production mix of both companies is weighted toward high-netback upgraded synthetic crude, which we believe will provide a cash flow lift on the heels of the global adoption of the IMO 2020 regulations. From an integration perspective, SU has significant insulation from commodity price volatility while CNQ has unmatched capital allocation optionality given its diverse production portfolio. Most importantly, both companies have implemented healthy stock buyback plans. When considering FCF yield across the entire coverage universe, both CNQ and SU also still fall within the top tier. While many of the small and mid-cap producers in our coverage universe have higher FCF yields, we believe that CNQ and SU are generally better positioned to manage the underlying volatility in oil prices and differentials."


Rogers Communications Inc.'s (RCI-B-T) new wireless plans have stimulated the market and added value, according to Echelon Wealth Partners analyst Rob Goff.

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After reporting second-quarter results on Tuesday that largely met the Street’s expectations, Mr. Goff raised his rating for Rogers shares to “buy” from “hold.”

“We are encouraged by commentary about the initial traction of the Infinite Wireless packages together with the option of 3-year handset financing,” he said. "We shared investor concerns about wireless market momentum following a soft Q119 performance. The 365K adopters of the Infinite plans (migrations + new over last six weeks) highlights the market stimulation associated with the new program. It also gives optimism that the longstanding challenge/opportunity of closing the 33-per-cent penetration gap with the U.S. (87 per cent vs 120 per cent) may gain traction. Rogers’ new wireless pricing model wisely manages service levels beyond usage levels avoiding the trap of totally unlimited buckets while addressing consumer fears/dislike of average charges. So far roughly 2/3rd of subscribers migrating to the new plan are upgrading service levels. ARPU [average revenue per user] dilution should be modest with overages at sub-5 per cent of service revenues leaving the stimulative impact to be the larger factor.

“Management cautioned of a moderating of 2-per-cent ARPU growth on the quarter; however, we believe improved subscriber momentum should be well received. We remain bullish on wireless looking for continued market growth of 4-5 per cent with 5G acting as both a modest subscriber/device and ARPU stimulant.”

Mr. Goff raised his target for Rogers shares by $3 to $79. The average is $74.53.

“For new investments, we are maintaining Shaw as our Top recommendation,” he said. “We are encouraged by wired prospects reflecting broadband pricing leverage, a measure of discipline (particularly in the west) and prospects of broader home services. BCE remains held back by virtue of its asset mix where organic wired growth remains challenged. While not as much of a concern in the current market, BCE arguably gets hit with rising rates more than its peers. Quebecor’s (QBR-T, “Buy”, target: $38.00) continued strong fundaments support our ongoing bullish view. Cogeco (CCA-T, “Buy”, target: $106.00) awaits stronger subscriber/financial momentum and its lack of direct wireless warrants a relative discount. We moved Shaw ahead of Rogers following its FQ119 release where we saw indications of near-term slowing momentum on wireless, saw its outperformance and considered the auctions as a potential risk for Rogers, BCE and T. We highlight our view reflects new investments given tax considerations. We look for Shaw to benefit from strong financial momentum along with outperformance at Freedom. Rogers target return at 16% supports our Buy Rating - we have a similar target return for TELUS where the two peers have similar risk/liquidity profiles. The higher target returns at both Shaw and QBR in part reflect their greater volatility.”

Elsewhere, Citi analyst Adam Ilkowitz said he’s “staying on the sidelines," expressing concerns over the state of the Canadian communications sector. With a “neutral” rating, Mr. Ilkowitz kept a $68 target.

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“We have taken a more cautious stance on the Canadian communications category due to the potential financial impacts from the new unlimited wireless plans, and we maintain that view after comments made by Rogers management," he said. "The potential near-term dilution adds to previous concerns such as slowing wireless subscriber and ARPU [average revenue per user] growth. The Cable business remains one of modest growth potential, particularly with Rogers facing increased fiber competition and lacking a low-cost video option, while the capex benefit of migrating to Ignite TV is partially offset by the licensing fee for the platform.”

Desjardins Securities analyst Maher Yaghi maintained a “buy” rating and $79 target.

Mr. Yaghi said: “After a weak start to the year, operating metrics picked up nicely in 2Q, fitting with our overall positive view on the stock. The recovery path from 1Q was not expected to be swift (it rarely is in telecom); however, steady positive improvements have added up and created strong momentum. We saw enough positive signals in 2Q to keep us optimistic about the rest of the year.”


Though he expects CGI Group Inc.'s (GIB-A-T) quarterly results to be “mixed," Raymond James analyst Steven Li thinks the outperformance of its stock thus far in 2019 “might keep a lid on share price.”

In a research note previewing earnings season for technology and communications companies in his coverage universe, Mr. Li said he’s projecting revenue for the CGI, a Montreal-based information technology consulting, systems integration, outsourcing, and solutions company, of $3.14-billion and earnings per share of $1.20, which sits in-line with the consensus on the Street of $3.14-billion and $1.21. It would represent organic growth of 3.5 per cent.

“Net-net, expecting a more mixed quarter for CGI,” he said. “Headline numbers should be ok while bookings might see some headwinds. Margins, cash generation should be flattish/slight improvement. CGI strong performance to date relative to U.S. peers might keep a lid on shares on earnings day.”

Mr. Li raised his target for CGI shares to $110 from $104, keeping an “outperform” rating. The average on the Street is $102.56.

Despite the increase, he said he prefers both Baylin Technologies Inc. (BYL-T) and Open Text Corp. (OTEX-Q, OTEX-T).

He maintained an “outperform” rating for both with targets of $5.75 and US$48, respectively.


Believing its shares “need a breather,” Haywood Securities analyst Daniel Rosenber cut Well Health Technologies Corp. (WELL-X) to “hold” from “buy.”

“Last week WELL announced it will acquire 51 per cent of SleepWorks Medical Inc., a sleep disorder services specialist,” he said. “We like the acquisition as it is accretive to WELL’s bottom line. It also gives rise to future cross-selling opportunities of higher margin non-insured services as WELL continues to expand its clinic base. Management has executed on impressive growth utilizing disciplined M&A, and we continue to see a lengthy runway for further transactions. However, a recent surge in share price has left the stock ahead of fundamentals. Since a July 4 news publication, we have seen elevated trading volumes. We recognize a greater investor awareness around WELL relative to small-cap peers, and we have adjusted our valuation multiples to account for increased demand and impressive execution around M&A. Our new target price however does not offer investors a large enough 1-year return to merit a buy rating in our view.”

Mr. Rosenberg raised his target to $1.70 from $1.10. The average is $1.46.


Scotiabank analyst Vladislav Vlad made a series of ratings changes on Wednesday.

He downgraded Step Energy Services Ltd. (STEP-T) to “sector perform” from “sector outperform” with a target of $2.50, down from $3.75. The average on the Street is $3.58.

He also lowered Horizon North Logistics Inc. (HNL-T) to “sector perform” from “sector outperform” with a $2.50 target, down from $3.50. The average is $3.09.

Mr. Vlad raised Ensign Energy Services Inc. (ESI-T) to “sector perform” from “sector underperform” with a $5 target, down from $5.75 and below the $6.77 consensus.

The analyst also upgraded Precision Drilling Corp. (PD-T) to “sector perform” from “sector underperform” with a target of $2.75, falling from $3.25. The average is $4.06.


In other analyst actions:

Mackie Research analyst Greg McLeish raised his rating for MediPharm Labs Corp. (LABS-X) to “buy” from “market perform.”

“Over the last few weeks MediPharm Labs has issued a number of positive news releases which will help underpin our financial forecasts through 2020,” said Mr. McLeish. “Additionally, we have also had more detailed discussions with senior management which helped clarify some of the concerns we had with the company’s long-term business model. As a result, we are upgrading our recommendation on MediPharm Labs.”

His target increased to $7 from $6, which is 19 cents below the average.

GMP analyst Anoop Prihar initiated coverage of Euro Manganese Inc. (EMN-X) with a “speculative buy” rating and $1 target. He’s the lone analyst currently covering the Vancouver-based mining company.

PI Financial cut Excellon Resources Inc. (EXN-T) to “neutral” from “buy” with a $1.15 target, up from $1. The average is $1.28.

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