Inside the Market’s roundup of some of today’s key analyst actions
After Northland Power Inc. (NPI-T) achieved a funding “milestone” with its offshore wind Baltic Power project in Poland, iA Capital Markets analyst Naji Baydoun said it remains “the best investment vehicle for investors to gain exposure to the offshore wind investment theme.”
On Tuesday, the Toronto-based company announced it has signed a credit agreement to secure an equivalent of $5.2-billion of non-recourse green financing with a consortium of 25 financial institutions and credit agencies for a term of 20 years. It represents 80 per cent of Baltic Power’s $6.5- billion projected total capital cost for the project, which is being developed with partner Orlen S.A..
“This important milestone should lead to financial close shortly and allow NPI to continue advancing the project towards construction, with full COD still expected in 2026,” said Mr. Baydoun.
“Overall, we view this update as a net positive (1) with execution on key offshore wind projects de-risking the growth outlook, and (2) by providing improved visibility on strong project returns. We expect NPI to provide similar updates on its large-scale offshore wind project in Hai Long in Taiwan before year-end, providing investors with greater clarity on final project costs and returns/economics. We also anticipate further updates on capital recycling initiatives shortly, providingincremental capital for growth and surfacing value for shareholders. In the meantime, the shares remain attractively valued from both an absolute and relative basis.”
Seeing Baltic Power’s financial metrics as “solid,” Mr. Baydoun raised his target for Northland shares to $39 from $38, reaffirming a “buy” recommendation. The average on the Street is $36.14, according to Refinitiv data.
“NPI offers investors an attractive mix of (1) stable cash flows from contracted power assets (approximately 2.7GW net in operation, 10-year weighted average contract term), (2) strong potential long-term FCF/share growth (primarily driven by offshore wind projects), (3) longer-term potential upside from organic development activity and accretive M&A, and (4) an attractive dividend profile (almost 5-per-cent yield, 50-70-per-cent long-term FCF payout). We are revising our price target to reflect higher-than-expected financial contributions from Baltic Power providing upside to our DCF valuation (closer to $4.00 per share, up from $3.00 per share previously). We have now also added Baltic Power to our financial estimate.”
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Desjardins Securities analyst Benoit Poirier now sees “attractive risk/reward characteristics” for Bombardier Inc. (BBD.B-T).
“With BBD shares down 20.1 per cent since the company reported 2Q results (vs the S&P/TSX at up 0.5 per cent), we have received several calls in relation to the turnaround story, bizjet market dynamics and an entry point that would be considered attractive,” he said. “Ultimately, even when using bearish assumptions, our downside scenario is not far off from where the stock is trading currently, signalling that risk/reward characteristics for BBD are skewed favourably, creating a buying opportunity in our view.”
In a research note released Wednesday, Mr. Poirier said investor misunderstanding on seasonality in the company’s deliveries and concerns about new bookings are “the main pushbacks” currently.
“Overall, we view the fact that BBD maintained its full-year FCF guidance (management reaffirmed numerous times on the call its confidence that it would achieve the FCF target) as a strong signal to the market that it is on track for the full year,” he said. “BBD also stated that investors should expect most of its 2H deliveries (roughly two-thirds) in 4Q (implies 58 units), which is not outside the norm when considering the historical seasonality of BBD’s bizjet deliveries; this would represent 42 per cent of annual deliveries. We believe investor concerns are misplaced as management specified that it has a clear line of sight in its production, material supply chain issues have mostly dissipated for BBD (already securing production for next year) and we suspect most of these airplanes are already in BBD factories ready to be delivered.
“We also expect a similar seasonality split in FCF (we forecast a total of US$274-million in 2023 (US$50-million in 3Q vs US$693-million in 4Q)) as bookings return to a more normalized bizjet seasonality cycle after last year’s red-hot 1H (book-to-bill of 2.5 times in 1Q and 1.8 times in 2Q). We are confident that BBD will book the required orders in 4Q to hit the 1-time book-to-bill target following several positive demand signals in the bizjet market recently — the Airshare BBD Challenger order, Chartright Air Group adding three new BBD jets to its fleet and planning to surpass 50 aircraft by 1Q24, the NetJets deal for up to 250 Embraer Praetor, the fact that North America bizjet flight activity has stayed relatively consistent at 5–6 per cent below last year’s level but 18 per cent higher than pre-pandemic levels (permanent step function up in demand, in our view), North American fractional operations up 33 per cent vs pre-pandemic levels and continuing to gain share, pre-owned bizjet inventory remaining low, and reports that Flexjet is preparing a major order at the upcoming NBAA. All in all, high-net-worth individuals are clearly still spending on travel, and the macroeconomic slowdown is a two-sided story which is not affecting high- vs low-income consumers equally.”
Based on his scenario analysis, Mr. Poirier now sees the potential for upside of $133 per share for Bombardier if bookings are stronger than expected and deleveraging drives multiple expansion.
“In this scenario, we assume BBD will book some chunky orders, slightly increase production and keep its book-to-bill more than 1 times through 2024,” he said. “For BBD to achieve this in 2023, it must book a minimum of 100 orders in 2H, which would likely have to include a large fleet operator order. We calculate that leverage would fall to 1.3 times, likely driving an investment-grade credit rating—the faster improvement in leverage would likely command a bump in valuation.”
Reiterating his bullish stance on its shares, Mr. Poirer maintained a “buy” recommendation and target of $99 per share. The average is $80.92.
“We remain confident in management’s ability to meet (and potentially exceed) its 2025 targets,” he concluded.
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While Citi analyst Paul Lejuez expects Nike Inc.’s (NKE-N) first-quarter 2024 financial results to fall in line with the Street’s expectations, he is not enthusiastic about its investment potential for investors, expecting a reduction in its guidance and emphasizing headwinds from both North America and China.
“We are cautious on F24 guidance for several reasons: 1) NAM [North American] sell-in comparisons are very difficult (2Q23 NAM sales up 31 per cent) and we believe the street models 2Q NAM sales too aggressively/optimistically (our estimate down mid-teens-percentage vs cons down mid-single digits); (2) Recent datapoints suggest the NAM active market is weakening, potentially impacting NKE’s 2H orders; and (3) Since NKE’s last report, the macro-outlook in China is more volatile/weaker,” he said in a note previewing the Sept. 26 quarterly release.
“Given the headwinds facing NKE in their two most important markets (NAM/China), we see potential for management to lower F24 sales guidance from up mid single digits to up low single digits, though a stronger GM could limit EPS downside. We anticipate management will guide 2Q sales well below cons (our estimate down 6 per cent vs cons up 3 per cent) as they lap difficult NAM sell-in comparisons and face macro headwinds in China. We also remain cautious on 2H sales given the difficult (promotionally-driven) comparisons LY and low visibility into future demand.”
For its first quarter, Mr. Lejuez reiterated his forecast of earnings per share of 75 US cents, matching the Street’s expectation, and he sees the potential for a beat from stronger gross margins driven by freight tailwinds.
However, he dropped his second-quarter estimate to 77 US cents from 80 US cents, well below the Street’s 96-US-cent expectation based on weaker sales (down 6 per cent year-over-year versus the consensus of a 3-per-cent gain). His full-year projection is now US$3.52, down from US$3.74 “on a more cautious view on 2H China/NAM sales.”
“While NKE had a strong 4Q23 in China (constant currency growth up 25 per cent), recent datapoints suggest a more volatile macro environment and a consumer who is focused on value,” the analyst said. “While mgmt does not give geo-specific sales guidance, we see the potential for management to take a more conservative view on growth in the China market this year. Longer-term, the Chinese market carries risk tied to the geo-political environment (underscored by the Chinese govt’s recent actions related to Apple).”
Remaining “cautious” on the stock and maintaining a “neutral” rating, Mr. Lejuez dropped his target to US$100 from US$109. The average on the Street is US$124.06.
“Nike is the dominant player in the global athletic footwear and apparel market, which is a healthy and growing market buoyed by structural tailwinds, including growing sports participation even in its most mature markets,” he said. “However, near-term headwinds in China and uncertainty in the U.S, place consensus sales/EPS estimates at risk. We believe the risk/reward is fairly balanced at current levels.”
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RBC Dominion Securities analyst Matthew Swanson said he’s “optimistic on the competitive positioning and unique role” that International Business Machines Corp. (IBM-N) plays in the “technology eco-system” with value proposition “best represented by enabling efficient digital transformation through consulting and software.”
In a research report released Wednesday, he initiated coverage of IBM with an “outperform” recommendation, believing the company’s software business is “misunderstood, and undervalued, particularly its role in hybrid environments, AI and spend optimization.”
“In the time we’ve spent with and around IBM, we are impressed with the depth of the company’s software platform, particularly its capabilities around enablement,” said Mr. Swanson. “In a post-pandemic world, we’ve seen networks broaden and become increasingly complex. IBM combines consulting and software solutions, particularly those provided by Red Hat, to bring a unique set of assets to pull large enterprises through their digital transformation journeys. We feel this same dynamic could lead to another leg of growth for automation, certainly in terms of GenAI, but also a renewed interest in the broader Watson suite in a macro that is valuing ROI and time to value.”
The analyst thinks “a major turning point” for the company came in late November of 2021 with the separation of its managed infrastructure services business to Kyndryl.
“While the company now sees approximately 75 per cent of revenue coming from software and consulting and 50 per cent of revenue being recurring, investors still seem to view IBM largely from its hardware and services lens,” he said. “We feel this view is currently embedded in valuation where the company trades roughly in-line with consulting peers but a significant discount to software peers. Software revenue, which is growing in the high single-digits at a $20-billion scale, should continue to grow over time as a percentage of revenue relative to infrastructure, improving profitable growth.”
“Leveraging its consulting practice and deep expertise, IBM has created what we believe is a unique role in hybrid cloud enablement to allow for digital transformation at enterprise scale, utilizing both IBM products and those of its partners. We feel that IBM is going to use a similar playbook for GenAI, becoming a critical player in the enterprise for governance and model management as it benefits from its independence and being able to share in the success of its partners regardless of the winners.”
Mr. Swanson set a Street-high target of US$188 per share. The average is US$146.
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Needham analyst Anna Andreeva initiated coverage of Lululemon Athletica Inc. (LULU-Q) with a “buy” rating, expecting double-digit top-line growth as “accelerating technical innovation drives demand across both core franchises and newer Play verticals (Tennis, Golf).”
“We also anticipate profitability upside, aided by China, LULU’s 2nd most profitable region, scaling to corporate margins and generating $4-plus per share in earnings power, up from less than $1 currently,” she added. “Valuation at 4.5 times EV/Sales, 16 times EV/EBITDA and 28 times P/E on our ‘24 estimates is at a slight premium to ‘22 averages but at a discount to historic levels and our Premier Global Brands Universe, despite LULU’s superior growth characteristics. We expect FCF inflecting this year on a working capital unwind (we estimate FCF/share more than tripling in ‘23), which we think could translate to enhanced buybacks/other shareholder friendly initiatives.”
The analyst set a US$470 target, exceeding the US$435.71 average.
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Following Truist Securities Data Science and Engineering team’s latest analysts of the credit and debit card data from U.S. fast food restaurants, analyst Jake Bartlett trimmed thinks Restaurant Brands International Inc. (QSR-N, QSR-T) has the potential for a “strong” miss with its third-quarter results despite demand appearing “solid.”
“The Truist Card Data adjusted estimate for 3Q23 U.S. Burger King system sales of $2.76-billion is 2.0 per cent below consensus,” he said. “We are lowering our 3Q23 US BK SSS [same-store sales] estimate to a gain of 6.5 per cent, from 11.5 per cent, below consensus of 7.9 per cent. Our 3Q23 US BK system sales est. is now roughly inline with the Card-based estimate. We based our initial 3Q23 U.S. BK SSS on four-year trends, which had accelerated for 5 consecutive quarters, but we did not factor in abnormally strong results in 3Q19, when the ‘Impossible Whopper’ was launched.
“We view underlying demand as solid and still expect Burger King’s “Reclaim the Flame” turnaround initiative to prove successful. For instance, our conversations with franchisees indicate sales of the ‘Royal Crispy Wraps’ (launched on 8/14/23) have been much higher than expected. The card-based estimate is based on card sales for the first 10 weeks of 3Q23 (through 9/8/23) and the last 3 weeks projected using the sales weighting of those same weeks in ‘17-’19 (22.6 per cent).”
After lowering his 2023 and 2024 EBITDA estimates, which remain above the Street’s expectations, Mr. Bartlett cut his target for shares of Tim Hortons’ parent company by US$1 to US$89 with a “buy” rating. The average is US$81.06.
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In other analyst actions:
* Seeing a higher probability of the spinoff of its majority stake in eye care firm Bausch + Lomb (BLCO-T), Jefferies’ Glen Santangelo upgraded Bausch Health Companies Inc. (BHC-N, BHC-T) to “buy” from “hold” with a US$16 target, up from US$9 previously. The average target on the Street is US$9.67.
* KBW lowered Chesswood Group Ltd. (CHW-T) to “market perform” from “outperform” with an $8 target, down from $10 but above the $7.75 average.
* In response to an updated mineral resource estimate at its El Tigre project, Desjardins Securities’ Jonathan Egilo raised his Silver Tiger Metals Inc. (SLVR-X) target to 70 cents from 60 cents with a “buy” rating. The average is 84 cents.
“The scale of the resource increased drastically relative to the previous MRE in 2017 ... We have updated our model to reflect the MRE. As a result, we have increased our NAVPS by 23.7 per cent,” he said.
David Leeder