Inside the Market’s roundup of some of today’s key analyst actions
CIBC World Markets analyst Paul Holden does not see “a lot to get positive on” heading into fourth-quarter earnings season for Canada’s banks.
However, he thinks a pair of potential inflection points are approaching for the sector: “peak credit losses and central bank rate cuts.”
“Clarity on capital requirements coming in December could also help. For now, we believe the right call is to avoid names with the most downside risk, versus playing for upside,” said Mr. Holden.
In a research report released Wednesday, he lowered his quarterly earnings per share estimates by an average of 4 per cent, citing “the expectation for soft revenue and still high expenses.”
“We have also revised down our F2024E by 3.5 per cent on average, mostly to capture central bank rate cuts in the second half of the year and modestly higher credit losses due to a weak Canadian economy,” he said.
“Any EPS beats based on lower-than-expected credit losses are unlikely to be rewarded. However, EPS misses on higher losses are likely to result in outsized losses. The market is anchored on higher losses in F2024. FQ4 results and management commentary are unlikely to change that view.”
Pointing to valuation concerns, Mr. Holden downgraded Toronto-Dominion Bank (TD-T) to “neutral” from “outperformer” with a target price of $86 per share, down from $92 previously. The average target on the Street is $91.35, according to Refinitiv data.
“The premium valuation multiple has expanded over the last 6 months and we see potential for a few negative updates with FQ4 reporting,” he said.
Mr. Holden also made these other target reductions based on his reduced expectations:
- Bank of Montreal (BMO-T, “neutral”) to $115 from $120. Average: $127.12.
- Bank of Nova Scotia (BNS-T, “neutral”) to $62 from $64. Average: $66.98.
- Canadian Western Bank (CWB-T, “neutral”) to $30 from $31. Average: $32.55.
- Laurentian Bank of Canada (LB-T, “neutral”) to $35 from $37. Average: $33.36.
- National Bank of Canada (NA-T, “outperformer”) to $102 from $106. Average: $100.78.
- Royal Bank of Canada (RY-T, “neutral”) to $128 from $129. Average: $134.27.
“Key themes for the quarter are expenses, credit, capital and NIM stability,” he concluded. “Banks will be providing 2024 guidance which we expect will point to slow revenue growth, slowing expense growth and modestly higher-than-average PCLs. The economic outlook will most likely remain a cloud over revenue growth and credit expectations, but we see potential for guidance to shape expense forecasts. Cost restructuring and associated savings will be a major theme this quarter. We see potential for negative capital updates ahead of several capital changes effective Q1/F24 (highest risk for BNS and TD due to lack of guidance). Credit, of course, will be topical, with positive surprises likely to be dismissed (per U.S. banks) and negative surprises resulting in outsized share price reactions. The setup for the banks remains tough.”
“We expect BNS will post the largest year-over-year decline in EPS while NA should post year-over-year growth. Our estimates are approximately 3 per cent below current consensus on average with no positive outliers. We expect most of the banks to announce dividend increases with FQ4 results. Dividend increases should be lower than normal due to a lack of earnings growth in F2023 and a challenging 2024 outlook. We are forecasting dividend increases of 1-3 per cent.”
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RBC Dominion Securities analyst Darko Mihelic said he’s “expecting some noise and some clarity” from Canadian banks during earnings season, reducing his earnings per share expectations by an average of 10 per cent across the sector.
His new projections now imply a EPS drop of 3.3 per cent versus the third quarter and a decline of 6.7 per cent year-over-year.
“We lowered capital markets revenues, increased ‘one-time-ish’ expenses, and upped stage 2 PCL assumptions,” he said in a note released before the bell.
“We expect guidance on stage 3 PCLs to show a modest uptick for 2024, and the Canadian banks have (for the past 3 years) built a reputation of credible PCL guidance. Expenses – elevated for Q4/23, should see ‘low’ growth guidance for 2024. We suspect the banks have been busy managing RWA as they anticipate upcoming regulatory changes; we expect strong capital positions (median 12.9-per-cent CET1) and look for guidance of 13-per-cent-plus CET1 ratios for 2024. We also expect more disclosure on mortgage renewal shock (and will search for early signs of stress) but here the mood may have changed already as interest rate expectations have significantly changed, and consequently, the narrative may be that mortgage payment shock may end up being manageable. As long as PCL guidance is not materially different from recent trends, we think the bank stocks may start to look attractive in a world of falling rates and ‘manageable’ PCLs. We continue to favour BMO despite our expectations for a weak Q4/23.”
Mr. Mihelic’s ratings and targets are currently:
* Bank of Montreal (BMO-T) with an “outperform” rating and $134 target. Average: $127.12.
Analyst: “We think BMO’s stock should perform well particularly if its capital ratio were strengthened and once the pipeline for its capital markets business improves. Unless the ‘noise’ in Q4/23 is deafening, we see a good set-up for 2024.”
* Bank of Nova Scotia (BNS-T) with a “sector perform” rating and $68 target. Average: $66.98.
Analyst: “To become more constructive on the name requires a rock-solid balance sheet (relatively higher capital ratio and loan loss reserves) and a strong credible growth plan (which may come at its investor day in December).”
* Canadian Imperial Bank of Commerce (CM-T) with a “sector perform” rating and $66 target. Average: $60.45.
Analyst: “We believe that in Canada, CM is viewed as the bank most exposed to Canada’s unique “mortgage shock” phenomenon, but we believe this is probably more “manageable” than economic bears believe. CM has strong disclosure on this topic, and we suspect more disclosure and frank discourse on the topic is coming. As this “issue” fades, we suspect this stock could see significant upside (and vice versa should an outlook for higher rates somehow reappear).”
* Canadian Western Bank (CWB-T) with an “outperform” rating and $34 target. Average: $32.55.
Analyst: “For CWB, we forecast core EPS to decrease 1 per cent quarter-over-quarter mainly reflecting higher impaired PCLs of $18.9 million (up from $9.7 million last quarter) more than offsetting our expected 1-per-cent quarter-over-quarter increase in revenues. ... We believe CWB will announce a 1-cent increase to its quarterly dividend.”
* Laurentian Bank of Canada (LB-T) with an “underperform” rating and $33 target. Average: $33.36.
Analyst: " For LB, we forecast core EPS to increase 1 per cent quarter-over-quarter, primarily driven by a moderate 1-per-cent quarter-over-quarter growth in revenues which more than offsets our expected increase in expenses and PCLs.”
* National Bank of Canada (NA-T) with a “sector perform” rating and $105 target. Average: $100.78.
Analyst: “Shorter term, we believe capital markets results, PCLs in its international banking unit, and future capital impacts may be weighing on the stock. It is the only company we model to have a meaningful drop in ROE in 2024 and hence, an outlook on all of the above plus its capital plans are important for the stock particularly when considering its relatively high valuation.”
* Toronto-Dominion Bank (TD-T) with an “outperform” rating and $92 target. Average: $91.35.
Analyst: “TD is the most sensitive to interest rates among the large Canadian banks under our coverage, and we believe a NIM refresh (in a falling rate environment) may be helpful, not hurtful, to the investment thesis.”
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Expecting a “relatively challenging” quarter for Laurentian Bank of Canada (LB-T), Raymond James analyst Stephen Boland recommends “caution” for investors.
“Following the strategic review, the recent September service outage and subsequent executive changes have added another layer of uncertainty for the bank,” he said. “In particular, we expect significant scrutiny on retail deposits this quarter, with investors seeking to gauge the potential impact of any customer fallout following the outage. Early OSFI data suggests Laurentian demand deposits declined 3.3 per cent from July’23 to Sep’23. While trending similarly to recent quarterly declines (demand deposits down 5.6 per cent in 2Q23, down 6.4 per cent in 1Q23), we note that the outage occurred at the end of September. As such, it is possible deposit outflows were more pronounced in October, though the potential magnitude of these outflows is admittedly uncertain. Regardless, we expect NIM to be more pressured in 4Q23 and 2024 as a consequence. Additionally, Laurentian announced a reversal of certain customer account fees for September and October. We expect this to drive lower non-interest revenue this quarter.”
In a note released before the bell, Mr. Boland lowered his net interest margin projection for both the quarter and 2024 based on expected deposit pressures and lower floorplan balances. He also cut his non-interest income estimate due to its service fee reversal strategy for retail customers and increased his assumptions for provisions for credit losses on “worsening economic forecasts.”
That led to a new earnings per share estimate for the quarter of $1.05, down from $1.22. His full-year 2024 estimate slid to $4.50 from $5.
Maintaining a “market perform” recommendation for Laurentian shares, Mr. Boland dropped his target to $29 from $36. The current average is $33.36.
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Citing his projected return of 20 per cent and an expectation its operating segment Loblaw Companies Ltd. (L-T) should “generate solid earnings growth next year despite slowing inflation,” Desjardins Securities analyst Chris Li raised his recommendation for George Weston Ltd. (WN-T) to “buy” from “hold.”
“WN’s holdco discount has been volatile, ranging from high-single-digit percentage to mid- to high teens this year. We continue to believe 8–10 per cent is an appropriate discount given WN’s simple corporate structure with two high-quality assets (L and CHP.UN),” he said.
Mr. Li said George Weston’s third-quarter results, released on Tuesday before the bell, largely fell in line with his expectations and he continues to see its financial position as “strong.”
“Since WN has no plans for acquisitions in the foreseeable future, management continues to view capital return as a key tool to enhance shareholder value, especially given the wide holdco discount (mid-teens),” he said. “During 3Q, WN repurchased 2.4 million shares (1.7 per cent of total), including 0.4 million purchased from the Weston family (Wittington). Recall it was announced last quarter that Wittington (owns 57 per cent of WN) will participate in WN’s share buyback program in a fixed proportion of 50 per cent of its pro rata share of WN shares outstanding. Year-to-date, WN has deployed approximately $835-million to repurchase 5.2 million shares (4 per cent of total). Given GWL’s strong financial position and FCF of $1-billion annually (comprised of L and CHP.UN distributions and WN’s participation in L’s NCIB), we believe it can sustain the current pace of buybacks of $0.9–1-billion per year for the next couple of years. We expect WN to refinance the $200-million debenture due in 2024.”
Based on a 10-per-cent holdco discount, the analyst hiked his target for the company’s shares to $187 from $177. The average target on the Street is $192.
Elsewhere, other analysts making target adjustments include:
* Scotia Capital’s George Doumet to $179 from $184 with a “sector perform” rating.
“With shares trading at a 13-per-cent discount to market NAV (vs. 10-15 per cent on average post–Weston Food divestiture), we view the risk/reward as fairly balanced,” he said. “Furthermore, we would need to see greater appetite for defensive stocks (in general) to get more constructive on the name.”
* RBC’s Irene Nattel to $215 from $219 with an “outperform” rating.
“Our constructive outlook on WN is predicated on our favourable outlook for 52.6-per-cent-owned Loblaw (TSX: L) and 61.7-per-cent-owned Choice Properties REIT (TSX: CHP’UN), augmented by share repurchases at WN,” said Ms. Nattel. “Our view remains that for the foreseeable future at least, GWL will remain as is, with management deploying excess FCF/cash balances to consistent share repurchase. Current discount to NAV 11 per cent, narrower than 16 per cent at Q2 release date and 15-per-cent holdco discount we apply to generate our SOTP price target.”
* CIBC’s Mark Petrie to $213 from $215 with an “outperformer” recommendation.
“WN shares underperformed [Tuesday], though we did not see anything in the FQ3 results to justify this,” said Mr. Petrie. “Since widening out to a holdco discount of 18 per cent in late July, the WN discount to NAV has narrowed in the last few months and sits at around 11 per cent today. We still continue to see a favourable risk/reward on WN shares at current levels, especially since the discount to NAV reached 7 per cent earlier this year.”
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Seeing it “attractively valued” in the wake of a period of underperformance, Citi analyst Scott Gruber upgraded Ovintiv Inc. (OVV-N, OVV-T) to “buy” from “neutral” on Wednesday.
“OVV has experienced a solid run of late, but the stock also collapsed earlier this year. YTD, the stock has underperformed peers and is down 11 per cent (v. the XOP up 3 per cent),” he said. ‘We see better performance in early FY2024 given upside to production estimates, as we sit 2 per cent above consensus on oil and condensate. We believe their 200mbo/d plateau will rise after assessing performance on recent wells from the Midland acreage acquired earlier this year. Later in FY2024, we see continued outperformance on the anticipation that gas markets tighten in FY2025. This not only would improve CF but could spur better appreciation for OVV’s Montney position. We find OVV trading attractively relative to its inventory life in part due to a heavier discount on its Canadian gas position.”
Mr. Gruber’s target jumped to US$52 from US$48. The average target on the Street is US$58.39.
Elsewhere, Wells Fargo’s Roger Read trimmed his target to US$49 from US$51, keeping an “equal-weight” rating.
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While he is expected to see more signs of softening in retail demand when BRP Inc. (DOO-T) releases its third-quarter fiscal 2024 financial results on Nov. 30, National Bank analyst Cameron Doerksen thinks those weakening conditions are already reflected in the recreational vehicle manufacturer’s share price.
“In fiscal Q2, BRP’s North American powersports retail sales were up 41 per cent year-over-year with retail strong in other regions as well (EMEA [Europe, the Middle East and Africa] up 23 per cent, LATAM [Latin America] up 36 per cent, APAC [Asia-Pacific] up 33 per cent),” he said. “However, based on peer group results for calendar Q3, we expect to see some softening in retail demand for BRP in its fiscal Q3 (ended October). BRP’s largest competitor, Polaris, reported that its calendar Q3 North American ORV retail sales were up 5 per cent year-over-year (but down 20 per cent versus Q3/19) with the industry up low-single digits percent.
“While still positive year-over-year, Polaris management noted that retail trends weakened throughout the quarter and now expects full-year North American industry retail to be flat year-over-year (compared to up low-single digits when reporting Q2 results). In addition, we expect BRP’s Marine segment to see continued headwinds in fiscal Q3 with Polaris, noting that higher interest rates continue to put downward pressure on retail demand for boats (North American industry pontoon retail sales down low-single digits in Q3). Polaris management is now forecasting sales in its Marine segment to be down mid-twenties percent (versus mid-teens percent previously) while Brunswick and Malibu Boats both also reported similar trends. BRP will also face more difficult year-over-year comparables in H2 as its North American retail sales were up 43 per cent and 21 per cent year-over-year in fiscal Q3 and Q4 last year, respectively.”
Mr. Doerksen is now projecting earnings per share of $3.06 for the quarter, falling from $3.30 previously down 15.9 per cent year-over-year (from $3.64) and 4 cents below the consensus estimate on the Street. Citing the “more challenging retail landscape,” he also lowered his full-year 2024 and 2025 forecasts to $12.61 and $12.69, respectively, from $12.65 and $13.12.
“Although underlying industry demand for powersports products is softening, we note BRP has outperformed its peers with North American retail up 41 per cent in fiscal Q2 versus the industry up mid-teens percentage driven by share gains and new products,” he said. “Given the large number of new product introductions for BRP, we expect share gains to continue (including from the recent launch of the new Maverick R SSV and the planned launch of new electric motorcycles and the Sea-Doo Rise hydrofoil board in 2024, plus the full rollout of new boat models), which should be an offset to retail softness.”
With its valuation remaining at “historical lows,” Mr. Doerksen trimmed his target for BRP shares to $136 from $143, reiterating an “outperform” recommendation. The average target on the Street is $135.72.
“In our view, BRP’s historically low forward valuation reflects a market expectation that financial results over the next fiscal year will come in well below the current consensus forecasts,” he said. “If we were to assume that the stock should trade at its historical average EV/EBITDA multiple (7.5 times) in a downturn scenario, the current share price would imply an EBITDA of approximately $1.25-billion in F2025, which would be a 34-per-cent decline from the midpoint of management’s F2024 guidance. We believe this is an overly pessimistic scenario, even in the context of a weaker powersports market.”
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Following “strong” third-quarter results that exhibited its “recurring ability to build market-leading brands,” a “path to profitability [is] becoming clearer” for Indiva Ltd. (NDVA-X), according to Echelon Partners analyst Andrew Semple.
Also touting the emergence of a more “manageable” balance sheet, he raised his recommendation for the London, Ont.-based producer of cannabis edibles to “speculative buy” from “hold” previously.
“Our decision to upgrade the stock to a Speculative Buy rating is the result of: 1) improved financial forecasts (and DCF valuation) while still maintaining a degree of conservatism relative to management’s internal expectations, 2) an improved risk profile with a near term liquidity gap in our model now plugged, and 3) ahead of potential material catalysts for Canadian LPs and edibles manufacturers specifically,” said Mr. Semple. “In addition, since we moved Indiva to a Hold rating, its shares have declined by 27 per cent. We view the risk/reward trade-off to now be much improved at current share price levels, and with demonstrated operational and balance sheet improvements. We believe it is an opportune time for investors to consider adding to positions.”
Before the bell on Tuesday, Indiva reported quarterly sales of $9.8-million, topping the analyst’s $8.5-million estimate by 15 per cent and representing a gain of 30.4 per cent quarter-over-quarter and 20.4 per cent year-over-year. Adjusted EBITDA came in at a record $1-million, also well ahead of expectations.
“Automation of production lines supported new product launches while simultaneously driving cost efficiencies, which bolstered the bottom line,” said Mr. Semple. “This helped Indiva to move firmly into positive EBITDA for the quarter. We view the adj. EBITDA print of $1-million in the quarter as reaching a level which can support roughly breakeven levered FCF. This was much quicker than we were expecting, with our prior forecast calling for Indiva to reach breakeven FCF in 2025. Management guided to sequential growth in revenue and earnings from its core brands in Q423 driven by organic growth in consumer demand, a full quarter of benefit from its new No Future product line, and seasonal tailwinds. However, the Company noted that contract manufacturing related revenues may see a sequential decline after strong volumes filled in Q323 for inventory replenishment. On the balance, we expect to see consolidated revenues and EBITDA roughly flat in Q423 relative to Q323. Still, this implies Q423 results well above our prior forecasts.”
Seeing signs of improved liquidity, Mr. Semple, currently the lone analyst covering Indiva, raised his target for its shares by 3 cents to 13 cents, representing a total return of 100 per cent to its current price.
“Following the strong Q323 revenue beat, with strength continuing into Q423, we have raised our revenue and EBITDA forecasts for Indiva in all future periods,” said Mr. Semple. “We believe the revenue momentum is being driven by ongoing strength in Pearl gummies, the surprisingly strong uptake and launch of new No Future gummies and Doppio cookies, and the more gradual development of No Future vapes. Partly offsetting our core brand sales forecasts, we have moderated assumptions on contract revenues in all future periods. This creates a slight tailwind to our margin forecasts, as we attribute more revenues to higher margin, in-house Indiva brands. We are particularly excited by the Company’s new No Future brand, which looks to be a price leader in the value category. Consumers have shown a very high elasticity of demand for cannabis products. We believe this new brand at a value price point will be effective at driving profitable sales for the Company and at converting some consumers that still shop in illicit market channels.”
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Eight Capital analyst Kiran Sritharan sees an “improving operating environment and profile” for Sabio Holdings Inc. (SBIO-X).
After the bell on Monday, the Toronto-based provider of connected TV and over-the-top advertising platforms reported third-quarter results that came in at the high end of its pre-released ranges. That included revenue of $8.8-million, down 26 per cent year-over-year due to a “pronounced declines in political and advocacy spending.”
“We expect the macro-driven weakness to continue into next year, despite improving economic indicators,” said Mr. Sritharan. “However, key headwinds specific to Sabio are subsiding (ending strikes and an uptick in political spending) and management expects a lift in estimates. The $10-million in commitments that Sabio has locked in from agencies implies success with expanding wallet share from large logos. The industry’s transition to CTV remains intact, and we like the fragmented nature of this channel which offers healthy competition from niche players like Sabio.”
The analyst reduced his projections for Sabio, saying the revisions “substantially calms back growth following the weakness expected to persist exiting 2023.”
“On balance, the cost cuts and improving unit economics we expect to drive a meaningful lift against current estimates,” he added.
Keeping a “buy” recommendation for Sabio shares, Mr. Sritharan cut his target by $1 to $1.50. The average is $1.67.
“While the macro-driven volatility is expected to persist, company-specific challenges are subsiding, and management noted an improved operating environment. We think the substantial cost cuts should benefit cash generation in the upcoming quarters, and we like the resilience being built into the model,” he said.
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In other analyst actions:
* “Moving to the sidelines on valuation on the back of a generally in-line print,” Canaccord Genuity’s Matt Bottomley downgraded 4Front Ventures Corp. (FFNT-CN), an Arizona-based multi-state cannabis operator and retailer, to “hold” from “speculative buy” with a 30-cent target. The average is 23 cents.
“Although the quarter was generally in line with our expectations (albeit a little light on the top line), with FFNT’s share price up almost 3 times since its Q2 reporting date, and with no meaningful changes to our forward estimates in what continues to be a slowed growth environment, our lowered investment recommendation is largely on valuation,” he said.
* Previewing the Nov. 28 release of its second-quarter 2024 fiscal results, Canaccord Genuity’s Luke Hannan raised his Alimentation Couche-Tard Inc. (ATD-T) target to $90, exceeding the $86 average, from $84 with a “buy” recommendation.
“· For the quarter, we are forecasting EBITDA of $1,404 million, slightly above consensus’ $1,371 million estimate and below $1,455 million for the same period last year,” he said. “Further, we are forecasting EPS of $0.78, above consensus’ forecast of $0.76 and below Q2/F23′s $0.82.”
Mr. Hannan added: “We believe Couche-Tard’s organic growth initiatives should be supportive of consolidated margin expansion over the course of our forecast period, while structural market dynamics suggest fuel margins over the medium-to-long term should remain healthy. Furthermore, while we have not incorporated share buybacks into our estimates, we expect the company to be active with its NCIB over the next 12 months.”
* BMO’s Stephen MacLeod raised his Colliers International Group Inc. (CIGI-Q, CIGI-T) target to US$129 from US$107 with an “outperform” rating. The average is US$120.83.
“We hosted CEO Jay Hennick, CFO Christian Mayer & CEO of Real Estate Services Chris McLernon for investor meetings. The tone of the meetings reflected strong confidence in the long-term growth outlook (notwithstanding near-term macro headwinds). Progress towards Enterprise ‘25 creates a more recurring, higher-margin professional services firm; expected to lead to multiple expansion. We see value in the stock (10.9 times 2024 estimated EV/EBITDA; SOTP valuation pushes $115-143+), and believe Colliers will continue to be a multi-year compounder of shareholder value.”
* National Bank’s Don DeMarco raised his target for Fortuna Silver Mines Inc. (FVI-T) to $6 from $5.50 with a “sector perform” rating. The average is $5.67.
* Canaccord Genuity’s Carey MacRury lowered his target for Franco-Nevada Corp. (FNV-T) to $185 from $205 with a “hold” rating. The average is $205.88.
* Mr. MacRury also cut his Pan American Silver Corp. (PAAS-Q, PAAS-T) target to US$22 from US$23.50 with a “buy” rating. The average is $21.81.
* ATB Capital Markets’ Frederico Gomes resumed coverage of Calgary-based SNDL Inc. (SNDL-Q) with an “outperform” rating and US$4, down from US$6 but above the US$3.63 average.
“We think SNDL is the value (and safest) play in cannabis,” he said. “In our view, the stock offers low downside given an asset-rich balance sheet, a depressed valuation with little to no value attributed to diversified operating segments, and significant upside from a mature liquor retail business, vertically integrated Canadian cannabis operations, and exposure to U.S. cannabis credit investments, some of which are restructuring and could be equitized via a Nasdaq-compliant structure. In particular, we think the market is neglecting SNDL’s U.S. cannabis exposure via the SunStream JV; with rescheduling on the horizon, the value of these investments could rise materially. We expect SNDL to continue pursuing options to unlock value for shareholders. These options could include share buybacks, asset divestitures, spin-offs, and restructuring of U.S. investments.”
* Canaccord’s Katie Lachapelle raised his Sprott Physical Uranium Trust (U.UN-T) target to $31.50 from $28 with a “buy” rating. The average is $31.25.
* RBC’s Maurice Choy trimmed his TransAlta Corp. (TA-T) target to $15 from $16 with an “outperform” rating. The average is $15.67.
“Besides a weaker-than-expected 2024 guidance, we believe the Investor Day’s negative share price reaction was partly due to the perception that some capital c/should have been allocated to share buybacks given how the shares are trading below the intrinsic values estimated by management and many investors,” he said. “However, as multi-year growth rarely happens linearly, we believe TransAlta will exhibit flexibility in its capital allocation (including by buying back its shares) in the near-term if it does not identify opportunities that collectively have returns/yields that are more comparable (if not superior to) those implied by its share price.”
David Leeder