Inside the Market’s roundup of some of today’s key analyst actions
In response to an “electrifying” run in 2020, Canaccord Genuity analyst Jed Dorsheimer downgraded his rating for Tesla Inc. (TSLA-Q) to “hold” from “buy” on Wednesday, seeing “a balanced risk reward for investors to lock in profits.”
“Just as we observed a clear buy signal coming into 2020, we see the risk of China’s coronavirus as a clear headwind to the Shanghai facility, suggesting a more pragmatic position,” he said in a research note released before the bell.
“Given the 3,000 per week China Model 3 production expectations in a country that remains on lockdown, we feel a reset of expectations in Q1 is likely and thus needs to be reflected in the valuation.”
Mr. Dorsheimer maintained a target price of US$750 and pointed to his expectation “for volatility in the shares.” The average target on the Street is currently US$470.23, according to Bloomberg data.
“While we continue to favor TSLA as the leading EV juggernaut and believe the April battery day will be a critical positive milestone for investors to understand how formidable the lead is that TSLA holds, we believe patient investors will likely get a more attractive entry point,” he said.
The upcoming first-quarter earnings season for Canadian banks is likely to “set the stage for the year,” according to Desjardins Securities analyst Doug Young.
In a research report released Wednesday, Mr. Young thinks downward estimate revisions for the sector are “mostly” complete.
“We expect average cash EPS growth of 3 per cent year-over-year for the Big 6 banks,” he said. "From a business perspective, we expect Canadian P&C banking to grow 3 per cent year-over-year and capital markets to grow 8 per cent (excluding TD), partially offset by a 9-per-cent decline in U.S./international banking. Share buybacks in the quarter should help.
“Two banks took restructuring charges last quarter; will we see any more (ie CM)? Expense management remains a key lever to pull given the weaker outlook for NIMs and normalizing credit trends. We do not expect any big surprises with credit, although last quarter several banks noted increasing Canadian consumer insolvencies. We expect an update regarding consumer credit. Lastly, capital levels remain strong across the banks; however, we expect two items (changes to the securitization framework and adoption of IFRS 16) to negatively impact capital ratios. Share buybacks have been pushed back to 2H FY20 at a few banks.”
Ahead of the earnings season, which is scheduled to begin with Royal Bank of Canada on Feb. 21, Mr. Young “tweaked” his estimates. That led to a series of target price changes. Those are:
Bank of Nova Scotia (BNS-T, “buy”) to $78 from $80. The average on the Street is $77.07.
“BNS is the name to watch,” said Mr. Young. “(1) The bank pre-announced a number of one-time items that will impact this quarter’s results. One is $150-million of additional PCLs in relation to adding a severe pessimistic scenario for its IFRS 9 models, which we are not adjusting for (9 cents per share). (2) International banking results will be impacted by the political unrest in Chile. However, an additional month of results from Mexico should help. (3) This is the first quarter with the new business line, Global Wealth Management. We expect more commentary regarding Jarislowsky and MD Financial.”
Toronto-Dominion Bank (TD-T, “buy”) to $79 from $81. Average: $79.27.
Royal Bank of Canada (RY-T, “hold”) to $110 from $111. Average: $111.50.
Canadian Western Bank (CWB-T, “hold”) to $35 from $36. Average: $34.54.
Canadian Imperial Bank of Commerce (CM-T, “hold”) to $114 from $115. Average: $113.13.
Mr. Young maintained his target prices for the following stocks:
Bank of Montreal (BMO-T, “hold”) at $105. Average: $104.62.
National Bank of Canada (NA-T, “hold”) at $72. Average: $72.19.
Laurentian Bank of Canada (LB-T, “hold”) at $44. Average: $43.36.
On the sector as a whole, Mr. Young said: “The Big 6 Canadian banks (excluding NA) are trading below their 20-year historical average P/4QF EPS multiples. There are some tailwinds for the Canadian banks over the near term: (1) a constructive economic backdrop, with low unemployment; (2) a benign credit environment for now; (3) comfortable CET1 ratios; and (4) a focus on managing expenses—important as loan growth slows. In addition, the banks have been able to effectively manage a number of headwinds over the past few years, such as a decline in oil prices and new regulatory capital rules. However, we also acknowledge that there are a number of risks on the horizon, such as operating in the late stages of the economic cycle, volatility in the equity markets, the potential for increased volatility in provisions for credit losses (PCLs) under IFRS 9 and the high levels of household debt in Canada. That said, relative to other investment alternatives in Canada, we believe bank valuations are still reasonable.”
Desjardins Securities analyst Gary Ho is expecting “decent” fourth-quarter results from Canadian asset managers.
However, in a research note released Wednesday, Mr. Ho said he's keeping a "neutral" outlook on the sector heading into earnings season.
"Share prices for the group gained 4.9 per cent in 4Q19 and were up 19.8 per cent in 2019, outperforming the S&P/TSX Capped Financials Index (up 0.2 per cent in 4Q19 and 16.9 per cent in 2019). Momentum has continued thus far in 2020, with the group up 6.6 per cent vs 1.7 per cent for the S&P/TSX Capped Financial Index.
"For 4Q19, the focus is on: (1) management’s guidance, including SG&A outlook and capital/FCF allocation; (2) net flows expectations for the important RRSP season—we are encouraged to see recent stabilization of industry net flows; and (3) commentary on the alt platform build-out and new product launches."
Pointing to improved industry flows, “strong” market returns and an increased focus on expense containment, Mr. Ho increased his valuation multiple for the group of stocks in his coverage universe. That led to an increase in target prices.
In order of preference, his changes were:
Fiera Capital Corp. (FSZ-T, “buy”) to $15 from $13.75. The average on the Street is $13.72.
AGF Management Ltd. (AGF.B-T, “buy”) to $9 from $8.50. Average: $7.75.
CI Financial Corp. (CIX-T, “hold”) to $25 from $21.50. Average: $24.44.
IGM Financial Inc. (IGM-T, “hold”) to $42 from $39. Average: $41.
He maintained a “hold” rating and $3.25 target for Sprott Inc. (SII-T). The average is currently $3.38.
Citi analyst Jason Bazinet thinks Amazon.com Inc. (AMZN-Q) “continues to have long runway of growth opportunities in its highly profitable Enterprise segments.”
In a research note released late Tuesday, Mr. Bazinet raised his earnings estimates for the retail giant to reflect its fourth-quarter results.
His 2020 earnings per share projection rose to US$30.05 from US$28.31, while his 2021 and 2022 expectations increased to US$44.06 and US$56.99, respectively, from US$41.46 and US$54.22.
With those changes, he increased his target for Amazon shares to US$2,400 from US$2,220, keeping a “buy” rating. The average target on the Street is currently US$2,411.82.
“We believe Amazon is leveraging dual-purpose infrastructure (servers, fulfillment centers, web traffic) to profitably sell services to Enterprises,” he said. “There have been ongoing concerns about anti-trust risk as it pertains to Amazon. However, the US DoJ has suggested the current laws (Section 2 of the Sherman Act) are quite capable of addressing antitrust concerns. And, under prevailing laws, we see few legal risks to Amazon’s business model.”
RBC Dominion Securities analyst Mike Dahl upgraded Toll Brothers Inc. (TOL-N) to “outperform” from “sector perform,” citing its “increased” commitment to driving return on equity, which he thinks will likely drive upside to earnings per share estimates and multiple expansion over the next two years.
“We still see near-term risks on fiscal 2020 revenues and margins, but believe these are reflected in buy-side expectations and are now offset by the larger buybacks,” said Mr. Dahl.
“Some investors have turned more positive of late, but TOL still trades at just 1.15 times calendar 2020 estimated TBV, has the highest short interest among our mid/large cap builders (6.6 per cent), underperformed peers by 2700 basis points over 12 months, and has a negative sell-side rating skew, creating favorable risk/reward in our view.”
He increased his target for shares of Pennsylvania-based home construction company to US$55 from US$39. The average on the Street is US$42.04.
Calling its 2020 outlook “disappointing,” RBC Dominion Securities analyst Joseph Spak also feels a lack of transparency adds an “impediment” to Ford Motor Co. (F-N) “underwriting a 2021 turnaround.”
“To quote CFO Tim Stone, ’2019 results were not okay,'” he said. "The issue, we believe, is that on an apples-to-apples basis (backing out one-time UAW bonus payment), 2020 was guided 13-per-cent lower on adjusted EBIT ($900-million). To further complicate the issue, it’s not clear to us exactly what is driving the profit lower. That’s not entirely fair, Ford did indicate the major tailwind/headwind factors, though these were mostly known/obvious. But the magnitude is unclear and the lack of transparency is not likely to sit well with investors or inspire confidence, even if the company talks about the abundant opportunities they have to improve operational execution and drive growth. And 2021 should have a payback on 2020 new product investment. But until Ford is able to show sustainable traction, investors are likely to sit out.”
After reducing his 2020 and 2021 earnings per share estimates to US$1.02 and US$1.35, respectively, from US$1.30 and US$1.35, Mr. Spak lowered his target for Ford shares to US$9 from US$10 with a “sector perform” rating (unchanged). The average is currently US$10.10.
RBC Dominion Securities analyst Josh Wolfson thinks Kinross Gold Corp.'s (KGC-N, K-T) fourth-quarter results will “mark an inflection point for the company company and see the potential for a continuation of recent short-term outperformance."
“We forecast 4Q FCF of $85-million, supported by operating improvements in line with prior guidance and a catch-up of sales that have lagged production, marking a meaningful shift from 3Q FCF consumption of $61-million,” he said. “Since 2010, in only one quarter has KGC achieved FCF at our forecast 4Q levels (pre-w/c changes). At a recent competitor presentation, management highlighted various incremental favourable data points, including the expectation of achieving its 8th consecutive year of guidance, confirmation that cash generation was achieved in 4Q, Tasiast throughput was averaging a well-above-nameplate rate of 15ktpd, and that improvements at Bald Mountain have been achieved.”
He maintained a “sector perform” rating and US$5.25 target. The average on the Street is US$5.80.
“KGC could generate a compelling $3.8-billion in FCF over an upcoming 5-year period at spot gold, positioning the company with increased flexibility, and potentially enabling the company to balance sharp declines in production forecast long-term,” said Mr. Wolfson.
In other analyst actions:
Eight Capital analyst Jenny Wang initiated coverage of Alimentation Couche-Tard Inc. (ATD.B-T) with a “buy” rating and $51 target. The average on the Street is $48.54.