Inside the Market’s roundup of some of today’s key analyst actions
While they do not expect the same degree of outperformance from Canadian technology stocks following a scorching 2023, equity analysts at National Bank Financial are projecting “still more upside” and see “an opportunity for a ‘catch up’ in small-mid cap name.”
“We can’t really talk about our coverage universe without discussing U.S. Technology given that market leads the broader group/market,” they said. “When looking at that, U.S. Technology was driven by the ‘Magnificent 7′ (2023 market cap. weighted return of 90 per cent). That said, there was a widening of breadth in late 2023. With respect to the broad indices, the S&P Info Tech index (ex. APPL, MSFT, and NVDA), BVP Emerging Cloud Index and S&P/TSX Info Tech Index were up 48 per cent, 40 per cent and 69 per cent, respectively, vs. the S&P 500 index up 24 per cent. In our view, that outperformance was driven by a flight to ‘quality’, a reversion from an ‘oversold’ 2022, AI hype, and recognition and action towards capital allocation discipline from the days of “growth at all cost.”
The analysts think the “volatile” rate environment in the U.S. “drove a flight to perceived relative ‘quality’ in large cap technology where scale, outsized relative growth, robust balance sheets/strong cash flow generation, and profitable became a place to hide.” While Canada does not possess similar megacap stocks, they think that a similar trend existed, noting the top 10 largest companies returned an average of 48 per cent in 2023.”
Entering 2024, they think Canadian tech stocks are “cheap on a relative basis,” seeing their coverage universe as “quite compelling from a valuation standpoint relative to the S&P Info Tech index, BVP Emerging Cloud index and the ‘Magnificent 7.’”
In a research report released Wednesday, they made five predictions for the year ahead: small-mid cap stocks will outperform their larger peers; an increase to the pace of M&A; profitability and capital allocation will drive stock performance; artificial intelligence hype will continue and IPO activity will return.
Seeing an “accelerated” pace of capital deployment and calling it a “disciplined allocator of capital,” the firm named Constellation Software Inc. (CSU-T) its large-cap pick for 2024, expecting more spin-offs of its business in the next 12 months.
“If you’ve been following our research, you’d know we’ve been calling for more potential spinoffs for Constellation given successful spinoffs of Topicus and more recently the Lumine Group,” analyst Richard Tse said. “We estimate Topicus and the Lumine Group have added approx. $1.4-billion and approx. $2.3-billion in value to CSU respectively since they began trading as separate publicly traded companies.
“We estimate Constellation’s pace of capital deployment exiting 2023 was 5 per cent ahead of consensus expectations. That outsized rate should fuel upside to growth. In our view, a concerted effort to fuel the pace of capital deployment is seeing execution. And with more than 40k potential targets in its pipeline, a comfortable leverage ratio of 1.0 times and approximately $1.2-billion in available liquidity, we think that pace of deployment should continue. We also think there’s upside to that number (i.e., 20 per cent year-over-year growth) given the Company’s willingness to target larger deal sizes in recent past (e.g., Optimal Blue, Allscripts’ Healthcare Assets, and WideOrbit).”
Analyst Richard Tse raised his target for Constellation shares to $4,300 from $3,400, keeping an “outperform” recommendation. The average target on the Street is $3,418.13, according to Refinitiv data.
“We continue to like CSU for its defensive attributes (recurring revenue and cash flow) and heightened growth profile given the accelerated pace of capital deployment,” he said.
The analysts also named OpenText Corp. (OTEX-Q, OTEX-T) as a top pick, keeping an “outperform” rating and US$60 target. The average is US$50.42.
“Bottom line, investors following our research will know OTEX remains one of our favourite ‘legacy’ names,” said Mr. Tse. “It’s also one we’ve been touting as notable in the current environment. Profitability and strong recurring cash flow offer investors compelling defensive attributes. We see a growing base of recurring revenue through opportunistic acquisitions, expanding operating leverage and optionality from organic growth (7 consecutive quarters of positive organic growth in CC) that is not fully reflected in its current stock price.”
Their “niche technology player picks” are:
* Coveo Solutions Inc. (CVO-T) with an “outperform” rating and $14 target. Average: $12.95.
Mr. Tse: “We see Coveo as a prime takeout candidate for either a strategic buyer or PE firm... We continue to like this name and would look to opportunistically wade in, particularly on pullbacks.”
* Converge Technology Solutions Corp. (CTS-T) with an “outperform” rating and $6 target. Average: $6.47.
Analyst John Shao: “For CTS, the past year has been volatile with paused M&A and a strategic review falling through. That volatility has also been reflected in the stock price and as a result, CTS is currently trading at a discount to peers. Looking ahead, we believe a consistent track record of execution and simplified growth story will drive the re-rating for CTS to close its valuation gap to peers. For a company in the ITSP business with a critical scale, the execution risk also looks moderate to us.”
* Tecsys Inc. (TCS-T) with an “outperform” rating and $50 target. Average: $46.75.
Mr. Shao: “Time has allowed Tecsys to scale and expand its platform into a growing logistics powerhouse within the healthcare and retail vertical. That fortification along with growth initiatives that include strategic and operational investments and acquisitions is putting Tecsys in a position to scale into broader markets. We believe Tecsys is on the cusp of scaling into a bigger company.”
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Ahead of fourth-quarter earnings season for Canadian trucking and diversified industrial companies, RBC Dominion Securities analyst Walter Spracklin expects “visibility into the freight demand outlook” to be the focus of investors.
Seeing “mixed” signs for volumes with U.S. freight shipments declining but rail traffic rising, he warned trucking pricing was “weak,” however he sees evidence the market is “steadying, signalling we may be nearing a bottom.”
“Transportation and diversified industrial share prices were mostly higher in the quarter with performance mixed versus the index,” said Mr. Spracklin. “CJT, SJ, and WTE outperformed the S&P TSX, while MTL, TFII, and AND underperformed. CJT performed best, up 32 per cent, following a material change in the company’s fleet expansion plan, which should meaningfully pull forward the timing of the anticipated FCF inflection. SJ (up 18 per cent) and WTE (up 9 per cent) also outperformed following solid Q3 results. MTL, TFII, and AND underperformed likely due to concerns surrounding truck pricing and overall freight demand, although TFII shares were up toward the end of December following an announcement that the company is evaluating the benefits of separating into two public companies (TL and LTL/P&C/Logistics).”
“TFII and WTE are trading toward the high-end of their historical ranges – TFII in our view reflecting the potential separation of the company into two separate publicly traded entities (TL and LTL/P&C/Logistics) and WTE due to strong thermal coal demand and ongoing potash terminal conversion. SJ is trading midrange of its historical range likely resulting from U.S. infrastructure spending partly offset by peak pricing concerns. On the other hand, AND and MTL are toward the bottom of their historical valuation ranges we believe due to recessionary headwinds and the potential negative impact on freight volumes. Finally, CJT is also trading toward the bottom of its historical valuation but off recent lows due to an upcoming FCF inflection expected in the immediate term in our view.”
In a research report released Wednesday, Mr. Spracklin lowered his target for shares of TFI International Inc. (TFII-N, TFII-T) to US$155, below the US$156.50 average, from US$160, keeping an “outperform” rating, after reducing his financial expectations due to weaker truck pricing. His earnings per share estimate is now US$1.73, down from US$1.83 but above the US$1.69 average.
“Our 2023 estimate decreases to $6.24 (from $6.34), in line with consensus $6.24 and guidance for EPS of $6.00 to $6.50 .... For guidance, we expect management to guide to 2024 EPS of between $7.50 and $8.00, which we believe reflects uncertainty surrounding pricing and demand and which we would view as neutral to sentiment given consensus sits at $7.78,” he added.
“Specific to TFII, the potential separation of the company into two separate publicly traded entities will be of interest in our view.”
Mr. Spracklin sees two “best-positioned” stocks heading into earnings season:
* Cargojet Inc. (CJT-T) with an “outperform” rating and $184 target. Average: $143.83.
Our Q4 estimate remains unchanged at $80-million, relatively in-line with consensus $82-million. While indication from FedEx is that overnight volumes were under pressure in the quarter, Cargojet this week disclosed that its Q4 results were in line with its expectations,” said Mr. Spracklin.
* Stella-Jones Inc. (SJ-T) with an “outperform” rating and $91 target. Average: $88.43.
“Our Q4 estimate remains at $123-million, above consensus $117-million,” he said. “Our 2025 estimate of $632-million is unchanged and ahead of implied EBITDA guidance of more than $576-million, which we continue to view as incorporating conservatism reflecting upside potential related to the U.S. infrastructure bill.”
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In a research report released Wednesday titled Ripe for Recovery, Scotia Capital analyst George Doumet upgraded Saputo Inc. (SAP-T) to “sector outperform” from “sector perform” previously, seeing an enticing valuation for investors.
“When we initiated coverage of SAP (back in October 2022), we had limited visibility on the recovery in commodity prices and how big the size of the optimization bucket (in the strat plan) would eventually be,” he said. “Valuation, at the time, was healthy. Fast-forward to today, visibility around the benefits of strategic initiatives have somewhat improved, the commodity markets seem to be bottoming (although the speed of recovery remains unknown), and valuation is at a 10+ year trough.”
Mr. Doumet said he now likes the set up for the Montreal-based company, describing “‘trough-ish’ U.S. and Europe margins against a trough valuation.”
“While we acknowledge that it may take some time to get back to historical valuation levels, we feel that the market is ascribing little to no value to the optimization efforts underway (which we estimate could lift EBITDA by $265-million (or 20 per cent) by F26, of which $195-million should come from the already-announced initiatives),” he said. “Commodity markets are normalizing and FCF is set to inflect over the NTM (FCF yield of 8 per cent in F25 vs. 5 per cent in F24), paving the way for significant deleveraging. With M&A on pause, this should ultimately position SAP to significantly boost capital returns to shareholders (10 per cent plus buybacks).”
He maintained a target of $31.50 per share. The average is currently $34.28.
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First Quantum Minerals Ltd.’s (FM-T) three-year guidance highlights the need for additional liquidity, according to National Bank Financial analyst Shane Nagle.
“We do not anticipate any positive headlines related to these pending negotiations until after upcoming federal elections in Panama in May,” he said. “A prolonged closure at Cobre Panama will likely lead to breach of debt covenants sometime in H2/24 making any potential refinancing more expensive and deteriorating FCF sufficiently enough to impact growth initiatives across the company’s portfolio.”
First Quantum weighs asset sales as Cobre Panama shutdown takes toll
On Tuesday, the Vancouver-based miner released its fourth-quarter 2023 production results, which fell in line with Mr. Nagle’s expectations, as well as “markedly” lower expectations for 2024 and 2025 production guidance due to the removal of Cobre Panama for projections.
It also introduced moves to protect its balance sheet given the protracted dispute with the Panamanian government.
“Given the shutdown at Cobre Panama, FM has eliminated its dividend and capital costs have been reduced by US$650-million throughout 2024-2025,” said Mr. Nagle. “FM has commenced discussions with its banking partners to address these concerns and extend its loan facilities. In our view, a minority stake sale of the Zambian operations is the most significant arrow in the quiver to strengthen the balance sheet and addresses the company’s need for US$2-billion (US$1.5-billion of which is provided by current RCF capacity) of additional liquidity to service debt repayments throughout 2025-2026.”
Maintaining a “sector perform” recommendation for First Quantum shares, Mr. Nagle trimmed his target to $15 from $15.50. The average on the Street is $16.86.
Elsewhere, others making changes include:
* Canaccord Genuity’s Dalton Baretto to $17 from $19 with a “buy” rating.
“While Q4/23 production was in line with our estimates, guidance was generally softer than we had anticipated,” said Mr. Baretto. “Production guidance for all metals was lower than we had forecast, due to lower grades (stockpiles) during the Kansanshi S3 ramp, an adjustment to the mine plan at Sentinel resulting in lower grades over the period, and Ravensthorpe moving to processing stockpiles only given where nickel prices are. Unit cost guidance was also above our forecast across the guidance period. Finally, capex was higher than we had anticipated, particularly given the balance sheet pressures facing FM, although management notes that this guidance represents a total savings of $650 million vs. what the budget would have been had Cobre Panama not been suspended.”
* CIBC’s Bryce Adams to $15 from $18 with a “neutral” rating.
* JP Morgan’s Patrick Jones to $11 from $15 with a “neutral” rating.
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A pending bus order from New York City is a “reflection of positive trends” for NFI Group Inc. (NFI-T), said National Bank Financial analyst Cameron Doerksen.
“At the end of Q3, NFI’s backlog sat at 9,556 firm orders and options worth $6.6-billion with another 1,834 equivalent units (EUs) worth of awards pending,” he said. “This backlog supports NFI’s plans to increase bus deliveries over the next two years, and we expect strong order activity to continue in 2024 that will provide visibility on deliveries beyond 2025. Indeed, in the coming weeks, NFI is poised to firm up a new order from New York City (North America’s largest transit bus operator) that may be the largest in the company’s history.
“In late December, the New York City MTA recommended the approval of two new transit bus orders for NFI’s New Flyer subsidiary. The first order is for 187 40-foot and 18 60-foot electric buses (223 EUs) with options to purchase an additional 1,215 buses (total potential of at least 1,510 EUs). These buses will begin deliveries in 2025 with options exercisable through 2029. In a separate contract, the MTA has recommended the approval of an order for 224 60-foot diesel buses (448 EUs) plus another 446 options (total potential of 1,340 EUs) with deliveries of the firm orders in 2025-27. The New York City awards alone have the potential to increase NFI’s firm and option backlog by approximately 30 per cent.”
In a research note released Wednesday, Mr. Doerksen said the competitive environment for the Winnipeg-based company has improved, pointing y to the exit of the U.S. market by peer Nova Bus, which initially planned to bid for the NYC order, and the Chapter 11 and sale of smaller ZEB manufacturer Proterra.
“Cost inflation has been a major factor in lower margins for NFI and while the company still needs to deliver some lower margin buses in H1/24 before there is a more meaningful margin inflection, we are confident that margins will improve as better pricing is reflected in new deliveries,” he said. “Average pricing in NFI’s backlog was up 20 per cent year-over-year in Q3 and we expect it will move even higher driven by a higher percentage of ZEB orders as well as the competitive environment improvements. The pending New York City transit bus orders further solidify our view that pricing is moving meaningfully higher.”
Seeing improvements to its contractual cash flow and supply chain, Mr. Doerksen raised his 2025 EBITDA estimates to $398-million, just below management’s target of $400-million, from $378-million.
“We have modestly decreased our bus delivery forecast but based on pricing in backlog and the pricing trends in recent orders, have increased our unit pricing assumption for transit buses materially,” he added.
Maintaining an “outperform” recommendation for NFI shares, Mr. Doerksen increased his target to $19 from $18. The average on the Street is $15.90.
“The company needs to execute on its production ramp and there remain lingering risks around supply chain improvement, but with demand for buses continuing to be very strong and pricing in backlog improving significantly, we believe financial results will trend much more positively in 2024 and through 2025, which we believe will support further upside to the share price,” he said.
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Scotia Capital analyst Michael Doumet sees a “large disconnect” between the trading multiple for Ag Growth International Inc. (AFN-T) and his expectations for 2024 and beyond.
“The market is valuing AFN like a cyclical on the cusp of a profit pullback; instead, we view AFN as a secular growth story that combines multi-year tailwinds in international markets and unique growth opportunities (i.e., market share expansion and ability to leverage customer relationships globally),” he said. “As such, while several ag equipment peers are talking down 2024 sales/volumes expectations, we expect AFN to expand EBITDA in 2024 (can achieve 5-per-cent to 15-per-cent EBITDA growth per year, in our view) despite doubling EBITDA since 2019. As the sustainability of its profit growth becomes apparent, we expect a meaningful re-rate, from a 15-year low (approximately 6 times EV/EBITDA) to something more reflective of its growth prospects. Multiple expansion should be further aided by its FCF yield (10 per cent) and its further balance sheet deleveraging.”
In a note released Wednesday, Mr. Doumet suggests the Winnipeg-based company is better positioned to endure changes in the industry than its peers.
“In the last three years, farmer incomes benefited from higher crop prices. But it’s widely believed that the pullback in crop prices and expected moderating farmer incomes will result in a normalization of capital goods volumes in 2024,” he said. “DE-US’s [Deere’s] 2024 guidance highlighted (if not strengthened) such expectations — and that “normalization” sentiment has weighed on AFN’s trading multiple (in addition to the fact that AFN has doubled EBITDA since 2019, we believe largely due to its under-earning in 2019 due to a lack of operational performance and consolidation post-M&A). AFN does not share the same macro drivers as its ag equipment peers (i.e., it is more skewed to crop production, weather, and crop trade flows), and we believe that, as a small cap, it will be successful with its needle-moving organic initiatives. Therefore, while ag equipment sales are largely expected to moderate in 2024, we believe AFN may generate EBITDA growth in 5 per cent to 10 per cent in 2024. Its ability to buck the trend in 2024, in our view, will demonstrate the sustainability (and secular nature) of its recent EBITDA growth, which should drive a re-rate in the shares.”
Also touting its “growth story,” including opportunities in Brazil and India, he raised his target for its shares by $1 to $83, keeping a “sector outperform” recommendation. The average is currently $76.56.
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In other analyst actions:
* RBC’s Maurice Choy lowered his target for Capital Power Corp. (CPX-T) to $42 from $45 with a “sector perform” rating. Other changes include: Scotia’s Robert Hope to $45 from $47 with a “sector perform” recommendation and ATB Capital Markets’ Nate Heywood to $41 from $42 with a “sector perform” rating. The average is $44.56.
“Capital Power’s 2024 EBITDA guidance was generally in line with our below-consensus view, though our cash flow estimates decrease moving forward to reflect higher maintenance costs,” said Mr. Hope. “Management also moved down 2023 guidance (to a very tight range) to reflect the softer-than-expected pricing in Q4/23. Commensurate with our lower estimates, our target price decreases $2 to $45. Capital Power is currently trading at 6.9 times 2024 estimated EV/EBITDA, and as such, we expect some multiple expansion as our target implies a 7.4 times multiple.”
* Barclays’ Theresa Chen raised her Enbridge Inc. (ENB-T) target to $53 from $48 and TC Energy Corp. (TRP-T) to $53 from $51 with an “equal-weight” rating for both. The averages on the Street are $53.60 and $53.35, respectively.
* ATB Capital Markets’ Tim Monachello bumped his Enerflex Ltd. (EFX-T) target to $11, above the $10.25 average, from $10.50 with an “outperform” rating.
* JP Morgan’s Jeremy Tonet trimmed his Gibson Energy Inc. (GEI-T) target by $1 to $25 with an “overweight” recommendation. The average is $24.75.
* UBS’ Joseph Spak bumped his Magna International Inc. (MGA-N, MG-T) target to US$60 from US$59 with a “neutral” rating. The average is US$67.
* Following a fourth-quarter 2023 production beat but weaker-than-expected 2024 guidance, Desjardins Securities’ John Sclodnick cut his Orla Mining Ltd. (OLA-T) target to $6.50 from $7.25 with a “buy” rating. The average is $7.09.
“With a high-margin operation and a highly respected management team, the stock should trade at a more meaningful premium to its peer group,” he said.
* Wells Fargo’s Roger Read cut his Ovintiv Inc. (OVV-N, OVV-T) target to US$44 from US$46, below the US$58.52 average, with an “equal-weight” recommendation.
* Stifel’s Cody Kwong lowered his Parex Resources Inc. (PXT-T) target to $32.75 from $37.50 with a “buy” rating, while RBC’s Luke Davis cut his target to $32 from $33 with an “outperform” rating. The average is $35.98.
“Parex’s latest update detailed 4Q23 results and a 2024 budget that we would characterize as disappointing,” said Mr. Kwong. “The most surprising element of this update is that the disappointment surrounded its base development program, and not its exploration efforts which had been deemed higher risk. In fact, its ‘Big E’ exploration well at Arauca-8 yielded a successful result, with two of four tested zones seeing peak rates of 6,200 boe/d [barrels of oil equivalent per day] (87-per-cent oil) and 2,500 boe/d (42-per-cent condensate). With our forward cash flow estimates being pulled back 7-9 per cent, we are reducing our target price to $32.75/sh. While the overtly negative market reaction comes as no surprise to us, we think the downside is likely moderated by the stock’s relatively low valuation, growth prospects, and FCF return profile that continues to screen better than peers, and by the possibility of production outperformance with the recent exploration success.”
* In response to its US$1.1-billion deal to acquire Carrols Restaurant Group Inc. (TAST-Q), a publicly traded company that operates 1,022 Burger King locations in the U.S., CIBC’s John Zamparo cut his Restaurant Brands International Inc. (QSR-N, QSR-T) target to US$87 from US$88 with an “outperformer” rating, while Scotia’s George Doumet bumped his target to US$80 from US$77 with a “sector outperform” rating. The average is US$82.12.
“We view this transaction as favourable and see clear strategic alignment, as it will allow RBI to move closer and faster towards its stated goals – (i) making sure every BK in the U.S. has a modern look, and (ii) expanding franchisee network and working with more smaller local operators,” said Mr. Doumet. “Carrols operates 1,000 BK units (400 re-imaged) in the US. RBI will invest $500-million in remodeling the remaining 600 units (using a part of Carrols operating cash flow over the next five years), doubling the current pace of remodels. This would have been more challenging to do for Carrols as a public company.”
* In response to its 2023 production results and 2024 guidance, Raymond James’ Brian MacArthur lowered his Teck Resources Ltd. (TECK.B-T) target to $65 from $66 with an “outperform” rating. Other changes include: National Bank’s Shane Nagle to $66 from $68 also with an “outperform” recommendation and Canaccord Genuity’s Dalton Baretto to $56 from $62 with a “buy” rating. The average is $60.21.
“We maintain our Outperform rating given Teck’s strong financial position, robust copper growth pipeline and attractive valuation. Divestiture of the steelmaking coal business will provide significant cash to both bolster the balance sheet and return cash to investors, both supportive of a re-rating,” said Mr. Nagle.
David Leeder