Inside the Market’s roundup of some of today’s key analyst actions
RBC Dominion Securities analyst Drew McReynolds expects elevated competitive intensity across the Canadian telecommunication sector through the “seasonally-slower” first quarter to lead to “a very ho-hum” earnings period for the group.”
In a research report released Wednesday, he warned it was “not exactly a rip roaring start to the year.”
“While decent wireless and Internet market expansion continued through Q1/24, undoubtedly both wireless and Internet competitive intensity was elevated on a year-over-year basis, which we expect to translate to incremental wireless ARPU [average revenue per use] pressure (particularly for BCE and TELUS) and underwhelming wireline results for the cablecos. In the absence of stabilization in competitive intensity, we expect 2024 guidance to come under increased scrutiny as the year progresses raising the question of whether there are any true winners in this environment,” said Mr. McReynolds. “Company-wise, we expect: (i) Rogers to again lead on postpaid net additions in Q1/24 (extending what has been a period of notable subscriber market share gains that commenced in Q4/22) as well as wireless ARPU growth; and (ii) BCE and TELUS to maintain Internet loading leadership.”
“While following the closing of the Rogers-Shaw-Quebecor transactions investors were bracing for a sustained step-up in competitive intensity, we believe competitive intensity levels on both wireless and Internet are currently higher than initially anticipated with all operators participating in some capacity. On a positive note, our channel checks in March and April do point to the beginnings of some stabilization in promotional intensity (confirmed by the respective operators): (i) Internet pricing has firmed up in Western Canada as both TELUS and Rogers eased on promotional bill credit offers, effectively raising core pricing; (ii) Internet pricing in Ontario is also firming up, albeit what looks like to us in a much more choppy fashion and not to the same extent as in Western Canada; and (iii) both BCE and TELUS have firmed up wireless flanker brand pricing via the removal of holiday promotional plans, albeit with little follow through from Rogers.”
The analyst emphasized the sector has “notably underperforming the broader market” with a total return of negative 10 per cent for the S&P/TSX Telecom Index versus a 7-per-cent gain for the S&P/TSX Composite Index. He blamed that difference to a “renewed back-up in bond yields given ‘higher for longer’ interest rate sentiment as well as lingering concerns around competition following a notable step-up in year-over-year promotional intensity.”
While he thinks valuations look “reasonable,” Mr. McReynolds reduced his target prices after making modest estimate revisions.
“Following another quarter of elevated competitive intensity in Q1/24, we believe investor patience is wearing about as thin as we have ever seen it with investor sentiment on the sector hitting new lows,” he added. “Although under the most probable scenarios we see the glass as half full with the likelihood of some easing in competitive intensity as 2024 progresses, we revisit our base case assumptions for the competitive, regulatory and growth outlooks as well as capital returns and valuations. With respect to our base cases: (i) on the competitive front, incentives should be in place for operators to stay ‘rational enough’; (ii) on the regulatory front, the final TPIA framework should be ‘balanced enough’; (iii) on the growth front, industry revenue growth is moderating but should remain low-single digit positive; (iv) we expect capital returns to moderate but current dividends look safe; and (v) valuations appear reasonable under these base case assumptions with the group trading at an average FTM [forward 12-month] EV/EBITDA of 6.9 times (versus a recent historical range of 6.8 times-8.5) - provided an economic hard landing and/or another leg-up in bond yields is avoided.”
The analyst’s changes are:
* BCE Inc. (BCE-T, “sector perform”) to $54 from $57. The average is $53.21.
* Cogeco Communications Inc. (CCA-T, “sector perform”) to $76 from $84. Average: $71.40.
* Quebecor Inc. (QBR.B-T, “sector perform”) to $35 from $36. Average: $39.10.
* Rogers Communications Inc. (RCI.B-T, “outperform”) to $68 from $73. Average: $73.93.
* Telus Corp. (T-T, “sector perform”) to $26 from $29. Average: $26.06.
Elsewhere, after reducing his cable and media expectations, National Bank’s Adam Shine cut his Rogers Communications target to $76 from $78 with an “outperform” recommendation.
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National Bank Financial analyst Rupert Merer sees Hammond Power Solutions Inc. (HPS.A-T) as “a strong company with a long runway for growth and a perfect pureplay candidate for investors looking to play re-shoring, electrification and accelerating data center demand.”
However, pointing to “rapid” share price appreciation and near-term capacity constraints, he initiated coverage of the Guelph, Ont.-based manufacturer of dry electrical transformers with a “sector perform” recommendation.
“Hammond Power Solutions (HPS) has a manufacturing presence across the North America, and India and a dominant share of the dry-type transformer market in North America (approximately $3-billion fragmented market),” said Mr. Merer. “Revenues grew 87 per cent over the last two years along with demand for its products and the market should continue to grow at more than 10 per cent per year. Growth is coming from residential, commercial, industrial and transportation markets and supported by sectoral tailwinds from re-shoring, electrification and rising data center demand. The company is also expanding its offerings in related power quality products.”
“With revenue growth of 27 per cent year-over-year in 2023, EBITDA margins were up y/y to 17 per cent from 12 per cent, driving a 68-per-cent year-over-year increase in EBITDA. HPS achieved $5.33 EPS in 2023, a two-year increase of 313 per cent. The stock has responded, up more than 1000 per cent over the last two years. HPS is in a good position to grow, as it has a strong balance sheet, strong FCF and a small dividend. HPS achieved a 26-per-cent ROIC in 2023 and sees a rapid payback on organic growth. It could look for M&A in associated product lines, like power quality products.”
Mr. Merer warned capacity issues could limit top-line growth in 2024 with Hammond currently running close to its production limits at $800-million per year in revenue. He said expansion later this year could raise those gains to $900-$950-million annually.
“HPS has plans to grow faster than the market and should soon start its next investment cycle. With a year-long lead time to receive production equipment, growth could accelerate again in 2025 and beyond,” he said.
The analyst set a target of $164 per share. The current average on the Street is $140.50.
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Heading into first-quarter earnings season for his Industrial Products coverage universe, National Bank Financial analyst Maxim Sytchev says both sentiment and technical indicators are “uniformly bullish.”
“Our space continues to attract investor dollars as government spending remains robust while projected earnings are expected to outpace those of S&P 500 by 500 basis points in 2024 and 2025 amid positive earnings revision dynamic (on an annual basis),” he said.
“No changes to recommendations, but we have marginally compressed numbers for NOA (seasonality), AFN (seasonality), RUS (steel pricing) and STLC (steel pricing); ARE’s projections upped slightly as we are still trying to figure out the accounting adjustments (vs. economic reality) for divestitures, etc.”
In a research report released Wednesday, Mr. Sytchev said full-year earnings per share estimates for companies he covers have risen by an average of 5 per cent over the last six months, however he cautioned of “significant dispersion.”
“While many names in our universe are no doubt nominally more ‘expensive’ than before, the multiple expansion is at least partially justified with both nominal expected earnings growth and continued upwards earnings revision,” he said.
“Best ideas when it comes to making incremental $ at this point in order of preference (and market-cap agnostic) are FTT (stock has started to work post our Q4/23 upgrade as copper careened higher), RBA (structural undervaluation vs. own history as market gets more comfortable with IAA not losing customers), AFN (nothing seems to be working in ag year-to-date but operational improvements and international revenue skew vs. history are bearing fruit) and WSP (post the short report drop that we deem as disingenuous and inaccurate).”
Mr. Sytchev made one target change, lowering his Stelco Holdings Inc. (STLC-T) projection by $1 to $54 with an “outperform” rating after modest reductions to his forecast. The average on the Street is $53.14.
For his “best ideas” list, his targets are:
- Finning International Inc. (FTT-T, “outperform”) $46 (versus a $47 average on the Street)
- RB Global Inc. (RBA-T, “outperform”) US$85 (versus US$80.33).
- Ag Growth International Inc. (AFN-T, “outperform”) $82 (versus $82.44)
- WSP Global Inc. (WSP-T, “outperform”) $234 (versus $238.50)
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Bank of America Securities analyst Ken Hoexter upgraded Canadian National Railway Co. (CNI-N, CNR-T) on Wednesday, seeing volumes trending “slightly” ahead his expectations, the grain crop “not as bad as originally feared” and believing it “appears on track to achieve its near-term double-digit earnings growth objective.”
“Rail carloads ended 1Q24 up 1 per cent year-year, up for the second consecutive quarter,” he said. “Carloads have been positive for 10 consecutive weeks and have been positive for 17 of the past 21 weeks. In 1Q24, Class I railroads lapped impacts from the Feb 13, 2023 East Palestine, Ohio derailment. In addition to track outages and service delays, the derailment sparked a wave of increased regulatory focus and has served to intensify Class I efforts to improve service and safety. Rail volumes were also aided by an additional Leap Year operating day, which we estimate added 1 percentage point to volume growth. Class I rails also have improving operating metrics/service levels, and with inflecting volumes this early in the cycle continues to set the stage for improved performance. We remain bullish on the rails, and our top pick remains UNP (Union Pacific) given its operational turnaround. We think UNP can surprise on the upside led by costs.
“We increase our 1Q24 EPS estimates 1 per cent on average as we account for slightly better-than-expected volumes. Rail carloads were flat on average in 1Q24 vs our prior down 0.7-per-cent forecast. We expect rail operating ratios to deteriorate 270 bps in 1Q24 from 4Q23 on average (to 63.4 per cent on average), and to deteriorate 120 bps year-year on cost pressures and impacts from harsh weather in January. For 1Q24, we increase our estimate for CNI 4 per cent to $1.66 and UNP 2 per cent to US$2.51, maintain CP at 93 cents, and lower CSX 2 per cent to 45 US cents.”
Mr. Hoexter raised CN to “buy” from “neutral” with a US$145 target, rising from US$140. The average is US$136.14.
The analyst also increased his target for Canadian Pacific Kansas City Ltd. (CP-T, CP-N) to US$97 from US$87 with a “buy” rating (unchanged).
“We are positive on CPKC’s ability to gain share given its leading service product and offerings,” he said,
Mr. Hoexter added: “Nevertheless, we see risk into the potential May 22 strike by the Canadian Engineers and Conductors, which could offer a particularly good entry point.”
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Elsewhere, ahead of the April 24 release of the first-quarter results from Canadian Pacific Kansas City Ltd. (CP-T), ATB Capital Markets analyst Chris Murray thinks “strengthening” volumes are supporting its outlook, calling it “a best-in-class growth story given the expanded network reach and opportunity for synergy realization over a multi-year period, which we believe justifies the company’s current valuation premium.”
“Weekly data indicate that RTMs [revenue ton miles] increased 0.9 per cent year-over-year in Q1/24, led by automotive and intermodal, partially offset by bulk volumes, particularly coal,” he said. “After a challenging January, volumes strengthened in February/March (up 5.0 per cent year-over-year), reflecting improving demand conditions. With guidance calling for mid-single-digit volume growth in 2024, we expect to receive an update on price/volume trends by freight type, notably grain and intermodal, with Q1/24 results.”
“Intermodal volumes increased 7.4 per cent year-over-year, a positive development as intermodal was a significant volume headwind in H2/23. Management attributed the improved performance to stronger international volumes, adding that the Port of Vancouver is benefitting from early signs of inventory restocking, combined with softer demand for East Coast ports given the situation in the Red Sea and concerns surrounding a potential strike.”
Mr. Murray modestly weakened his operating ratio projection to account for challenging weather conditions early on the quarter as well as higher share-based compensation. His earnings per sare projection for the quarter slid by 5 cents to 96 cents. While his full-year earnings estimate also declined, his expectation for 2025 increased.
“Volumes were mixed with growth led by automotive and intermodal freight, reflecting the impact of normalizing supply chain conditions and traffic levels into West Coast ports. We will be looking for commentary on bulk volumes, particularly Canadian grain, for the remainder of 2024, given softer volumes in Q1/24 and guidance for mid-single-digit total volume growth in 2024,” he said.
Maintaining an “outperform” recommendation for CP shares, he raised his target to $130 from $120. The average is $123.26.
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Eight Capital analyst Puneet Singh thinks Karora Resources Inc.’s (KRR-T) planned merger with Australia’s Westgold Resources Ltd. creates a larger new company “that will allow it to attract more investors and benefit from Aussie funds, attracting a better multiple that a TSX-only listed entity wouldn’t benefit from.”
“Essentially, this is a larger vehicle, with more production per annum with all the assets in Western Australia,” he said. “Post-combination, this will be a top-5 ASX-listed gold producer. In Canada, we compare/contrast with New Gold Inc. (NGD-T, Not Rated). NGD is a $1.6-billion market cap gold producer with a Canadian asset base that trades at 1.1 times P/NAV. At the time of the announcement, WGX was trading at 0.9 times and KRR was trading at 0.8 times.
“In our view, the combined entity will likely fetch a similar premium to NAV and that premium will grow as funds flow starts to come into the gold trade in earnest. On the cost side, this will be torqued (to a rising gold price) vehicle pro-forma (we expect management to work towards to getting costs under US$1,300/oz over time). While we don’t rule out another bidder, given the premium being offered, we think the probability is low. For WGX shareholders, the merger brings growth and a lower cost asset base.”
In response to the proposed merger, which will see Karora shareholders receive 2.5241 WGX shares (approximately $5.14 per share), 61 cents in cash and 0.30 shares of a new spinco, Mr. Singh moved his recommendation for the Toronto-based miner to “neutral” from “buy” previously and reduced his target to $5.90 from $7. The current average is $6.32.
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Scotia Capital analyst Konark Gupta thinks valuations for Canadian aerospace and defence companies remain “attractive” heading into first-quarter earnings season, particularly for Bombardier Inc. (BBD.B-T).
“Stock is up 34 per cent since last earnings (early February) and up 12 per cent year-to-date,” he said. “However, EV/EBITDA valuation remains quite attractive at just 6.8 times/5.3 times on our 2024/2025 vs. closest comps (GD and TXT) at 12.8 times 2024/11.8 times 2025 (on consensus) and BBD’s pre-pandemic average of 10 times (albeit not too comparable due to different business mix).
“Our thesis on margin expansion and balance sheet deleveraging continues to play out, while the top-line growth story has recently improved with BBD raising its production rate earlier than we had expected. That said, we have low expectations from Q1 given management had cautioned on wider FCF usage vs. last year and our understanding that delivery mix was more skewed toward Challenger jets than we were previously anticipating. Thus, there is some risk that the stock could trade sideways on earnings day if EBITDA and FCF fail to impress the Street. However, we would take advantage of any weakness as the company could potentially raise some 2025 targets at the upcoming investor day on May 1, while extending the market’s visibility into 2026 or 2027.”
While maintaining his quarterly free cash flow projection for Bombardier, Mr. Gupta made a modest reduction to his revenue and earnings estimates, which he noted are “slightly more conservative than the Street’s.”
“We continue to expect 22 deliveries in Q1 (flat year-over-year; Street 23), however, we believe the delivery mix could be more skewed to Challenger jets this quarter vs. last year, which caused us to revise our revenue and margin assumptions,” he said. “We kept our aftermarket services revenue estimate intact at US$475-million (up 12 per cent year-over-year; Street US$471-million). As a reminder, management noted on the last earnings call (February) that this year’s delivery and FCF profile should be similar to 2023. The company also indicated that Q1 FCF usage could be greater year-over-year to support year-over-year growth in deliveries beyond Q1 (mostly 2H) and due to ongoing supply chain disruptions. We expect the unit book:bill to remain relatively steady at 1.0 times vs. 0.9 times last year and 0.9 times last quarter.”
With his changes, Mr. Gupta trimmed his target for Bombardier to $83 from $85 with a “sector outperform” rating. The average on the Street is $75.40.
Conversely, he raised his MDA Ltd. (MDA-T) target to $18.50, above the $16 average, from $17 with a “sector outperform” rating.
“MDA remains our top idea in the group, given its significant multi-year growth potential and upcoming order catalysts, although we have low expectations from Q1,” he said.
Mr. Gupta also increased his Heroux Devtex Inc. (HRX-T) target to $22.50 from $21 with a “sector outperform” rating. The average is $23.90.
“BBD offers the best downside protection, but Q1 may not impress due to FCF seasonality and delivery mix. We see CAE as the only beat candidate, but the stock is likely to react to guidance and Defence segment narrative. HRX may not surprise much,” he concluded.
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In other analyst actions:
* Touting “high margin ounces with room to grow and a hidden gem,” Stifel’s Stephen Soock become the first analyst to initiate coverage of G2 Goldfields Inc. (GTWO-X), giving it a “buy” rating and $1.65 target.
“Oko Main already hosts a resource of 2.0Moz at 3.09 g/t with drilling since doubling the plunge and the nearby Ghanie discovery adding high quality OP/UG ounces with potential to add more through exploration at depth,” he said. “We see this supporting production more than 160koz/yr at a site AISC of $876/oz for $150m/yr in FCF driven by the high grade, Guyanese cost structure and good site accessibility.
“Extensive, small-scale mining surface workings and scout drilling have identified multiple other gold deposits along the major shear structure. G2′s Guyana portfolio also has a ‘hidden gem’ – the Puruni district, which hosts the historic, ultrahigh grade underground Peters Mine and a high grade oxide resource ... The stock trades at an EV/oz/(g/t) of just $18, well below the exploreco average of $27. Watch for additional deposits emerging along trend and possible M&A action.”
* HSBC’s Akshay Gupta cut his Lululemon Athletica Inc. (LULU-Q) target to US$405 from US$500. The average is US$470.97.
* Seeing a “compelling entry point,” Desjardins Securities’ Frederic Tremblay increased his Savaria Corp. (SIS-T) target to $23.50 from $22.50 with a “buy” rating. The average is $21.36.
“We attended Savaria’s investor day on April 9,” he said. “As expected, rather than revealing new targets/guidance, the presentations and site visit provided additional clarity around top-line and profitability levers as the company remains focused on its Savaria One program, with sights still set on revenue growth to $1-billion and adjusted EBITDA margin expansion to 20 per cent. We are increasing our forecasts and target slightly and expect execution to be investors’ and management’s main focus in the coming quarters.”
* B. Riley’s Lucas Pipes hiked his Teck Resources Ltd. (TECK.B-T) target to $72 from $59 with a “buy” rating. The average is $65.83.
* In response to its third-quarter earnings release on Tuesday, Canaccord Genuity’s Matt Bottomley cut his Tilray Brands Inc. (TLRY-Q, TLRY-T) to US$4 from US$4.25 with a “buy” rating. The average is US$2.44.
“On the whole, FQ3 came in behind our expectations for the period while management elected to lower its remaining full-year adj. EBITDA and adj. FCF guidance for FY2024,” he said. “However, with anticipated changes in Canada surrounding excise taxation/collection and the recent legalization of cannabis in Germany, we believe there are a number of positive regulatory tailwinds starting to take shape that could help reaccelerate fundamentals into 2024/2025.”
David Leeder