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

With “uncertain times ahead,” Canadian National Railway Co. (CNR-T, CNI-N) “is working to right-size its resources to protect shareholder value,” according to Desjardins Securities analyst Benoit Poirier.

On Tuesday, the company’s stock dropped over 2 per cent in price after it slashed its 2019 profit guidance in the wake of eight-day work stoppage. CN said the strike will reduce per-share profit by 15 cents. It now says full-year profit will rise by low- to mid-single digits, sliding from a high-single digit expectation previously.

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“We continue to expect the volume environment to remain under pressure due to the recent deterioration of economic indicators,” said Mr. Poirier.

“We now forecast adjusted EPS growth of 3 per cent, down from 7 per cent previously. While the strike and ongoing cost-saving initiatives should provide a tailwind for CN in 2020, they are expected to be partially offset by (1) higher depreciation and amortization expenses resulting from record capex spending in 2018– 19; (2) unfavourable pension expenses; and (3) higher compensation expenses."

With the announcement, Mr. Poirier now projects adjusted fully diluted EPS growth of 9 per cent to $6.22 in 2020, down from $6.53. His 2021 expectation slid to $6.84 from $7.19.

Keeping a “hold” rating for CN shares, he reduced his target to $122 from $126. The average on the Street is $123.58, according to Bloomberg data.

“While we expect investors to consider the impact of the strike as a ‘one-time item’, we note that the current volume environment remains challenging,” he said. “We continue to believe the stock is fairly valued (trading at an EV/ FY1 EBITDA premium of 1.5 times vs its five-year average) considering current volume uncertainties and the limited potential return of 6 per cent to our target price.”

Elsewhere, Citi analyst Christian Wetherbee lowered his target for U.S.-listed CN shares to US$100 from US$102 with a “buy” rating.

“Ultimately, we expect the strike and weak demand trends to pressure the shares near term,” he said.

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RBC Dominion Securities analyst Darko Mihelic said another restructuring spoiled “the mood” around Bank of Montreal (BMO-T, BMO-N), which reported otherwise “good” fourth-quarter results.

Before the bell on Tuesday, BMO reported a pre-tax $484-million restructuring charge, which is largely set to be allocated toward severance payments. Excluding that cost, adjusted earnings per share came in at $2.43, exceeding Mr. Mihelic’s projection by a penny and 2 cents ahead of the consensus estimate on the Street.

“The bank expects to generate $200-million of savings in 2020 and achieve annual run-rate savings of $375-million by Q1/20,” the analyst said. "While BMO has taken restructuring and/or severance charges in each of the last 5 years, management suggested that the bank will be able to achieve its 58-per-cent efficiency ratio target (by 2021) without the need to take additional restructuring charges

“Shorter-term we concede that BMO’s valuation may be in the penalty box for its seemingly consistent use of restructuring with relatively little to show for it,” he said. “However, we believe it is a short-term penalty as better than average EPS growth and a solid credit profile will eventually be noticed/rewarded by investors.”

With the results, Mr. Mihelic lowered his 2020 and 2021 diluted EPS estimates to $9.95 and $10.55, respectively, from $10.07 and $10.64 to “reflect lower Wealth and Capital Markets earnings forecasts after results for these segments came in a bit below our expectations this quarter.”

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He added: “Overall, we are forecasting BMO’s 2020 EPS growth at 5.5 per cent vs. an average of 4.4 per cent for peers, though there are several banks still to report Q4/19 earnings and those forecasts are subject to change.”

With an “outperform” rating (unchanged), Mr. Mihelic lowered his target to $109 from $111. The average on the Street is $103.74.

Elsewhere, expecting the restructuring charge to be its last, CIBC World Markets analyst Robert Sedran raised BMO to “outperformer” from “neutral” with a $109 target, up from $107.

Credit Suisse’s Mike Rizvanovic increased his target by a loonie to $94 with a “neutral” rating.

He said: “The most notable item to flag in Q4 was BMOs material $484-million pre-tax restructuring charge that appears to have caught the market off-guard given its sheer size (i.e., impacting roughly 5 per cent of employees). While the associated cost savings are a meaningful positive at roughly $200-million in F2020 and $375-million in F2021, we are concerned about: 1) the potential implications on employee morale, which was not discussed during the conference call; and 2) the growing perception by investors around BMO’s inability to absorb the cost of restructuring initiatives (some banks have been better than others in recent years), which we believe could result in a persistent discounted valuation multiple relative to peers.”


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Citi analyst Itay Michaeli raised his financial expectations for Tesla Inc. (TSLA-Q) in response to the recent unveiling of its pickup truck and third-quarter results.

In order to reflect the earnings beat and expected pull forward of Model Y production, the analyst moved his 2019 estimate to a loss of 25 US cents from a loss of US$3.96. He now expects a US$5 profit in 2020, up from a US$2.29 gain. While his 2021 projection slipped to US$10.39 from US$11.13 “mostly on below-the-line items,” he introduced a 2022 estimate of US$13.33.

He noted: “Key points: (1) The demand story has been mixed this year (both regionally & with S/X in particular) with delivery guidance skewed more towards the lower-end of the range; (2) We’d like to see convincing evidence supporting a strong Model Y demand outlook with limited cannibalization from the 3/X—as Model Y will likely become a key driver for the stock next year; (3) We don’t think Q3 ended the debate over Tesla’s ability to sustain profitability particularly when excluding credits & deferred revenue releases, and when considering what’s arguably been unsustainability low opex & capex heading into a period of key new product launches & geographic expansion; (4) We remain unconvinced on the Tesla RoboTaxi AV story (particularly in urban regions) and also see some risks related to the lack of Autopilot driver-monitoring capabilities, though we do see potentially attractive opportunities for Tesla to pursue a pre-AV peer-to-peer platform.”

Mr. Michaeli raised his target for Tesla shares to US$222 from US$191 to reflect “a balance between Tesla’s strong brand & secular exposures with the risks from operating execution, incoming competition and balance-sheet positioning.” The average on the Street is US$284.50.

However, he maintained a “sell/high risk” rating, pointing to what he thinks is “an unattractive risk/reward.”

“Though Tesla shares have underperformed this year, the recent rally seems overdone, in our view, leaving the risk/reward skewed negatively,” the analyst said.

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Fortis Inc. (FTS-T) secured the equity requirements for its five-year capital plan with its recent $600-million bought deal offering and $500-million private placement, said Industrial Alliance Secrities analyst Jeremy Rosenfield upon assuming coverage of the stock.

Though he said the offerings “negatively impacts our near-term earnings estimates due to upfront dilution,” Mr. Rosenfield emphasized his longer-term outlook remains “fundamentally positive," noting per share growth remains“robust.”

He continues to project 5-7-per-cent average annual earnings per share growth over his five-year forecast period.

“We continue to view FTS as a premium defensive utility and power growth play, with (1) stable earnings from a diversified portfolio of regulated utility investments (100 per cent of earnings), (2) healthy long-term EPS growth .... driven by more than $18-billion of organic rate base investment, (3) solid dividend growth (6 per cent pet year through 2024), and (4) potential upside from longer-term investment opportunities,” the analyst said.

With a “buy” rating, Mr. Rosenfield increased his target to $60 from $58. The average is currently $55.79.

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Elsewhere, Scotia Capital analyst Robert Hope raised Fortis to “sector outperform” from “sector perform” with a $57 target, rising from $56.


Raymond James analyst David Quezada said he came away from Algonquin Power and Utilities Corp.'s (AQN-N, AQN-T) Investor Day event in Toronto on Tuesday “with reaffirmed conviction of the stock as our top power and utility sector pick.”

At the event, the Oakville, Ont.-based company increased its long-term growth program to spend $9.2-billion through 2024.

Mr. Quezada said the “large scale” program, which comprised of $6.7-billion in regulated utility capex and $2.5-billion of renewable power, positions Algonquin for “top tier” growth.

“This planned capex supports expected EPS growth of 9-11 per cent which we believe places AQN well above most North American utility peers,” he said. “Algonquin management noted an expectation of 5 year operating income CAGRs [compound annual growth rates] of 14 per cent on the renewable power side of the business and 15-17 per cent in the regulated utility segment. Notably, as this capital program is more weighted towards the regulated side of the business (73 per cent), that segment is expected to grow as a proportion of the company’s mix to an estimated 72 per cent by 2024 from 65 per cent currently. We believe this plan is ambitious yet highly achievable and note Algonquin has a strong track record of delivering on capital plans.”

Mr. Quezada also said the company’s plan to simplify its business may also act as a catalyst moving forward, noting: “While we have long taken a positive view of AQN’s international endeavors, it is true that Atlantica Yield’s cost of capital, for a variety of reasons, has remained sufficiently high to limit its effectiveness as a co-investor. Accordingly, AQN has indicated an intention to potentially look at alterative global investment partners while also focusing on “simple” regulated utility growth and renewable power development. Meanwhile, AQN also sees HLBV [hypothetical liquidation at book value] income declining as a proportion of earnings in the long run, again simplifying the earnings stream.”

Pointing to its “extended” growth profile, Mr. Quezada increased his target for Algonquin shares to US$16.50 from US$16. The average on the Street is US$14.65.

He kept a “strong buy” rating.

“Currently trading at a 20 times 2020 P/E ratio, we continue to believe AQN trades at an excessively wide discount to some of the U.S. mid-cap utility peers at 23-25 times 2020 P/E,” he said. “This is despite the fact AQN sports superior earnings growth and maintains the vast majority of its footprint in the US. We see this valuation gap narrowing due to several factors including: 1) the company continuing to deliver on ambitious growth targets; 2) potential asset recycling to reduce common equity needs; and 3) the potential for a simplification of the company’s business - something that has been a key pushback from investors.”

Meanwhile Scotia Capital analyst Robert Hope cut Algonquin to “sector perform” from “sector outperform.”

Desjardins Securities’ Bill Cabel moved his target to US$15 from US$14.50 with a “buy” rating (unchanged).

Mr. Cabel said: “The investor day reaffirmed our positive investment thesis. We believe AQN has the potential to deliver strong, sector-leading returns, and it is one of our preferred names. It offers long-term stable and diversified operations combined with significant relatively low-risk growth, a strong likelihood for continued annual dividend increases to fuel further share price appreciation and the potential to make accretive acquisitions.”


Though widely expected by the Street, Gibson Energy Inc.'s (GEI-T) sanctioning of its diluent recovery unit near Hardisty, Alta., “marks a significant development,” according to Raymond James analyst Chris Cox.

On Tuesday, Gibson and partner US Development Group, LLC announced an agreement to construct and operate the facility. ConocoPhillips Canada has contracted to process 50,000 barrels per day of inlet bitumen blend through the DRU.

Mr. Cox said the unit strengthens "the competitive positioning of the broader Hardisty terminal while also supporting material growth for the company and establishing a new service offering with the potential for significant phase expansion opportunities."

He also emphasized the importance of Gibson’s first-mover advantage on Western Canadian DRU development.

“While smaller than the 100 Mbbl/d that most of the Street was expecting, the initial development will incorporate a standardized design for the separation facility, allowing for cost-effective replication of additional phases, with Management indicating that the company remains in discussions with additional shippers – both producers and refiners – for additional capacity,” he said. “Gibson’s partner will also develop an offloading facility in Port Arthur, Texas (not to be owned by Gibson) that will be pipeline connected to Phillips 66’s Beaumont Terminal, providing access to a network of refineries and marine facilities along the Gulf Coast. Given the cost effective nature of future expansions, the ability to leverage Gibson’s existing Hardisty footprint and the initial development in offloading capacity on the Gulf Coast, we see a very strong first mover advantage for Gibson and USD Partners that could provide significant competitive advantages if industry pursues more significant development of DRU capacity in Western Canada.”

“Importantly, Management indicated that the development is expected to be consistent with the company’s historical 5-7x build multiple that has been realized within the Terminals business historically. In addition to providing for attractive returns underpinned by take-orpay contracts with an investment grade customer, the development also further strengthens the contracting of the Hardisty unit train facility and the connected pipeline owned by Gibson.”

With an “outperform” rating, Mr. Cox hiked his target for Gibson shares to $28 from $25.The average is $27.97.

Elsewhere, RBC Dominion Securities analyst Robert Kwan raised Gibson shares to “outperform” from “sector perform” and increased his target to $31 from $27. The average is $27.97.


In other analyst actions:

Argus Research Corp initiated coverage of Enbridge Inc. (ENB-N, ENB-T) with a “buy” rating and US$44 target. The average is US$41.83.

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