Inside the Market’s roundup of some of today’s key analyst actions
Seeing the impact of inflation and the Omicron variant on North American restaurants remaining “very real” in 2022, Morgan Stanley analyst Josh Glass downgraded Restaurant Brands International Inc. (QSR-N, QSR-T) to “underweight” from “equal-weight” on Friday.
“On the one hand, demand signals remain healthy from a macro perspective, supported by robust expected PCE growth and a continued rebound in services spending, which still sits well below pre-Covid levels,” he said in a research report. “But on the other, the reopening trade is now long past, and sales for most restaurants have already recovered from pre-pandemic levels and in many cases are well above already, and lapping the pent-up demand experienced in the 2Q/3Q21 may present year-over-year challenges. And unrelenting inflation and ongoing Covid risks are real and persistent. All this leaves investors with a more difficult setup in ‘22.”
Mr. Glass said his rating change for Restaurant Brands was “a relative call given below peer and history valuation but we worry about a protracted turnaround at BK US, (sales gap to U.S. peers widening, lagging asset upgrades vs. peers, potentially higher capital needs in the system),and a slower recovery for Tim’s (Covid sensitive ,and the top line recovery to date has lagged improved Canadian mobility).”
“While cheap by history and versus peers, Tim’s topline recovery has been slow to take hold and likely dealt another near term blow due tore surgent Covid cases, while BK’s US turnaround will likely take time and is still in its early innings,” he said. “Our UW call on QSR is a relative one, as valuation is accommodating, but we think 22 may be another year of waiting for a top line re-acceleration. Specifically, our fundamental concerns are three-fold: 1) At Tim’s Canada, despite new brand initiatives and incremental advertising spend, sales have recovered more gradually than expected and vs. U.S. peers. While Covid has materially disrupted the morning routine in Canada, we’d note that Canadian consumer mobility (Google data) has improved in the 2H to U.S. levels (after lagging previously) and yet Tim’s sales have not responded commensurately (the company recently noted that Nov. sales had improved vs. prior months, with the degree of magnitude unclear). Regardless, the most recent spike in Covid cases and related governmental mandates will likely be another setback in the recovery trajectory.2) BK US turnaround is still in its early innings, with comp sales lagging peers through 21 and we think this will remain the case in 22.
“While operational/promotional issues have been acknowledged and brand management recently upgraded, we think fixes will not be quick to materialize, extending throughout 22, and may require future investments. We’d note that BK’s U.S. asset (i.e., store) upgrades still lag peers, with 25 per cent of its fleet in its most modern image vs. MCD at 90 per cent and WEN at 70 per cent. 3) As an entity, QSR still spends materially less in G&A than peers (1.3 per cent of system sales vs .a peer average of 2 per cent. G&A spend is rising modestly in ‘22, in part targeted at the BK brand, but we wonder if future spend increases are also possible.”
Mr. Glass cut his target for Restaurant Brands shares to US$60 from US$66. The average on the Street is US$69.69, according to Refintiv data.
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Following the “severe” reaction to its “soft” fourth-quarter 2021 results and announcement of its on-demand grocery delivery program, Desjardins Securities analyst Frederic Tremblay now sees the share price for Goodfood Market Corp. (FOOD-T) as “a good entry point” and expects “shareholders to be handsomely rewarded if execution is solid.”
The Montreal-based company has seen its shares drop by over 50 per cent since the Nov. 17 earnings release, versus a 2-per-cent decline in the TSX. However, Mr. Tremblay thinks its grocery delivery plans could be its “next success story.”
“On-demand delivery (also known as quick commerce) is generating a lot of excitement in the U.S. (US$20–25-billion market) and UK (GBP1.4b market), where venture capital firms and food delivery companies are making big investments in promising start-ups,” he said. “Funding and valuations have skyrocketed for global leaders like Gopuff (US$15-billion valuation or 15 times revenue), Gorillas (US$3-billion or 10 times revenue) and others. Canada is late to the party but activity is heating up as a trio of disruptors (Goodfood, Skip and DoorDash) are beginning the rollout of dark stores.
“The current situation in Canada reminds us of the early days of meal kits and, in our view, offers an opportunity: (1) for Goodfood to disrupt the $140-billion grocery industry by entering the untapped quick commerce market, and (2) for investors to accumulate FOOD shares because the stock price does not reflect any value for on-demand grocery. While quick commerce involves risks, we believe that Goodfood has the right attributes to be successful. FOOD’s advantages include its early entry, differentiated product offering, competitive prices, brand awareness and past investments.”
Ahead of the Jan. 18 release of its first-quarter results, Mr. Tremblay said he sees Goodfood in “a transition period which will lead to an acceleration in top-line growth and progressive sequential margin improvement.”
“Although 1Q results will likely be scrutinized closely, we expect the main spotlight will be on management’s near- and long-term outlook for its legacy market-leading subscription meal kit business and its emerging e-grocery play, including plans related to the rollout of on-demand delivery,” he said.
“Our revised 1Q revenue forecast is: (1) down year-over-year given lockdown tailwinds in the prior year, and (2) roughly flat quarter-over-quarter to reflect a limited contribution from on-demand delivery (first two locations launched in mid- to late November) and the continued effect of the reopening of economies. In addition to the impact on operating leverage of our top-line reduction, we expect cost inflation (ingredients, labour) and supply chain headwinds to weigh on 1Q results.”
Keeping a “buy” recommendation, he trimmed his target for Goodfood shares by $1 to $8, exceeding the $5.86 average on the Street.
“FOOD trades at a deep discount to meal kit peers, food delivery peers and some privately held quick commerce players. We believe that incremental disclosures and strong execution would help narrow the valuation gap,” Mr. Tremblay said.
Elsewhere, National Bank Financial analyst Ryan Li cut his target to $5.50 from $7 with an “outperform” rating.
“Despite recent underperformance and uncertainty associated with the shifting business model, we highlight that management has executed successfully against plans in the past. Ultimately, Goodfood is still predominantly a meal-kit business, which has been proven to be profitable; Goodfood continues to trade at a discount to HelloFresh. Private label grocery and an increasing focus with on-demand provide credible drivers for Goodfood to grow sales/earnings over the medium term. Investors will be looking for sustained traction with recovery over the next several quarters and further disclosure on Goodfood’s shifting strategy,” said Mr. Li.
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Touting an “attractive valuation and entry point,” Citi analyst Ashwin Shirvaikar raised his rating Telus International Inc. (TIXT-N, TIXT-T) to “buy” from “neutral” on Friday.
“We believe that TIXT has done a good job in pivoting its business to faster growth areas both organically (adding faster growing clients to its digital customer experience business) and inorganically (adding high growth potential content moderation and AI data solutions businesses),” he said in a research report on North American IT providers. “The inorganic piece includes some large businesses added in 2020 and we believe that TIXT has performed well while integrating these businesses, showing a sustainable level of growth with solid margins and essentially removing the M&A execution risk that we contemplated at the time of the IPO. We see a number of growth tailwinds for TIXT going forward including clients looking to improve customer engagement and interactions to promote revenue growth, an increased focus on content moderation (from a public perception, regulatory, and customer satisfaction perspective) due to the rapid growth of user-generated content, and a growing need for usable data to build and test out AI algorithms. 2022 is the first year where all the pieces added become organic and we look for a slight acceleration in the organic growth rate due to this.
Looking ahead, Mr. Shirvaikar expects Telus International to report relatively in-line fourth-quarter 2021 results and initial 2022 outlook in mid-February.
“The biggest variable with the 2022 outlook is what will happen to organic growth once the Lionbridge AI acquisition fully laps (closed at end of 2020) – we believe this business was somewhat underperforming the company’s initial expectations earlier in 2021 but believe more recently that the AI data solutions business has been performing better, partially due to a cross-sell with content moderation offerings,” he said. “We believe this will lead to a slight organic growth acceleration in 2022 led by the content moderation and AI data solutions businesses (believe these businesses also carry slightly higher margins which will lead to some margin expansion in the year). We also are expecting the company to be active in M&A in the near-term as the company is already at the lower-end of its 2-3 times net leverage target range (not assuming any forward M&A in model though). At some point in the year, we also expect TIXT to hold an investor day and further improve its disclosure with potentially more details on its different business lines.”
Adjusting his valuation multiple, he trimmed his target for Telus International shares to US$36 from US$40. The current average is US$40.15.
“TIXT has underperformed the past couple months due to a likely combination of an unchanged outlook with last earnings (due to FX pressure) and market rotation,” said Mr. Shirvaikar. “TIXT’s closest comps currently trade around a 26-27 times 2022 P/E while TIXT is currently at 25 times despite faster growth and higher margins than most of the peer set (TIXT’s closest comp in TASK trades closer to a 32-times multiple, albeit has a faster growth rate). We expect improved disclosure over time as well as incremental M&A to help the story and we view this lower valuation as an attractive entry point to get into the name.”
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Scotia Capital analyst Mark Neville is expecting to see a gradual increase in North American automobile production volumes, prompting him to raise his financial projections for parts suppliers.
“Production volumes in 2021 were significantly constrained by supply chain challenges – most notably, semiconductor shortages,” he said in a note released Friday. “In our opinion, strong consumer demand coupled with record low inventory levels should support a sustained period of robust production volumes – when chip availability allows. We continue to anticipate a gradual recovery in industry volumes through 2022 as chip availability improves, and a full recovery in 2023. Higher volumes should translate into higher margins, while more consistent volumes should largely eliminate inefficiencies related to unpredictable scheduling changes.”
Mr. Neville is projecting fourth-quarter production volumes will be down “significantly” year-over-year, however he thinks they will have “improved meaningfully quarter-over-quarter as a number of OEs (including GM and Ford) have spoken about improved semiconductor availability.”
He added: Moreover, it is also our understanding that sudden changes to production schedules have become less frequent, which should also help the cost side of the equation in Q4 – relative to Q3. As we gain increased confidence in the shape of the production recovery – and, in turn, earnings and CF – we have increased our valuation multiples across the group.”
With that view, he raised his target prices for shares of these companies:
- Magna International Inc. (MGA-N/MG-T, “sector outperform”) to US$105 from US$100. The average on the Street is US$97.71.
- Martinrea International Inc. (MRE-T, “sector perform”) to $17.50 from $16. Average: $15.63.
- Linamar Corp. (LNR-T, “sector outperform”) to $105 from $100. Average: $97.
“For Q4/21, we’re above consensus for LNR, largely in line for MRE and ABCT, and modestly below for MGA. That said, the range of estimates is still fairly wide. Moreover, as we’ve previously stated, we view positive incremental data points around production as the catalyst to take the auto equities higher, not near-term earnings,” said the analyst.
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Citing the “strength of the balance sheet and the increased scale of the company,” Canaccord Genuity analyst Anthony Petrucci raised his rating for InPlay Oil Corp. (IPO-T) to “buy” from “speculative buy.”
On Thursday, the Calgary-based company revealed its 2022 capital budget, which includes plans to spend $58-million and a production target of 8,900 to 9,400 barrels of oil equivalent per day. That matched Mr. Petrucci’s expectations.
“With an active drill program, and the acquisition of Prairie Storm late in 2021, IPO’s production per share this year is expected to grow 31 per cent over 2021 levels,” he said.
“At our current estimates of $75 WTI and $3.25 AECO, we expect that IPO will generate annual cash flow of $118-million, or FCF of $60-million. With these funds being applied to the balance sheet, we anticipate IPO will exit 2022 with only $16-million in debt, for a trailing D/CF of 0.1 times.”
Mr. Petrucci maintained a $4 target for InPlay shares. The average on the Street is $3.51.
“IPO was the best performing stock in our coverage universe in 2021 (up 850 per cent), and yet the stock remains significantly undervalued, in our view, trading at just 2.2 times 2022 estimated EV/DACF [enterprise value to debt-adjusted cash flow,” he said. “Considering the company’s operational success, recent acquisition activity, and the strength of the balance sheet, we believe IPO will continue to outperform in 2022.”
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Expecting a “solid performance across the board,” National Bank Financial analyst Jaeme Gloyn raised his financial forecast for TMX Group Ltd. (X-T) ahead of the Feb. 7 release of its fourth-quarter 2021 results.
He’s now projecting core earnings per share of $1.74, up 22 per cent year-over-year, above the $1.66 consensus on the Street and 9 cents higher than his previous estimate due largely to better-than-expected trading activity. His full-year 2021, 2022 and 2023 EPS forecasts rose to $7.09, $7.01 and $7.54, respectively, from $7, $6.90 and $7.41.
“We make the following adjustments: i) upward revision of $0.05 EPS to Derivative revenues due to a continued rebound in traded volumes; ii) a $0.04 EPS increase due to higher volumes lifting Equity and Fixed Income Trading revenues; and iii) higher Capital Formation revenues ($0.03 impact) driven by solid financing activity; offset by higher operating expenses ( $0.02 impact) due to higher Compensation and Benefits expenses,” said Mr. Gloyn.
Conversely, after adjusting his valuation multiple, the analyst cut his target for TMX shares to $147 from $154, keeping a “sector perform” rating. The average target on the Street is $152.14.
“Our $147 price target implies a P/E [price-to-earnings] valuation multiple of 19.5 times (was 21 times) NTM [next 12-month] core EPS +1 year,” he said. “The downward revision to our multiple reflects i) decreasing industry multiples in recent periods (coming off recent peaks); and ii) TMX’s multiple averaging 18.5 times in the last six months and 19.0 times in the past year. TMX currently trades at a P/E multiple of 18.0 times (consensus NTM), which is below Atlantic Exchange and Derivative Exchange peers at 23.0 times and 29.0 times, respectively.
“While we maintain a favourable view of TMX’s long-term growth outlook, strong track record of strategic execution (e.g., diversify business mix, invest in tech/data, grow derivatives and drive cost control) and defensive attributes (e.g., more than 50-per-cent recurring revenue, diversified/counter-cyclical revenue drivers, strong balance sheet and solid FCF generation), we maintain our Sector Perform rating in light of a lower total return to our target price relative to other companies in our coverage universe.”
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Despite its shares enduring “a rough start” to 2022, like its trucking peer group, end markets remain “very supportive” for TFI International Inc. (TFII-T), according to National Bank Financial analyst Cameron Doerksen.
“Of note, the latest spot truck pricing (December) from DAT showed that U.S. dry van rates were up 22.0 per cent year-over-year with contract rates up 23.6 per cent year-over-year,” he said. “A very tight market for drivers will likely limit the supply of trucking capacity for an extended period, which should be supportive of pricing through 2022.”
“Regardless of end-market fundamentals (which remain robust for the LTL industry), we believe ongoing margin improvement at the TForce Freight LTL operations will be a major driver of earnings growth over the next two years. We are very confident that a sub-90-per-cent operating ratio can be achieved for the business on a full-year basis. We forecast TFII’s net-debt-EBITDA at a very comfortable 1.7 times at year-end 2021 and estimate free cash flow in 2022 at $760 million, despite it being a capex heavy year, so the company remains well-positioned to continue M&A in 2022.”
After trimming to his forecast for both the fourth quarter of 2021 and the first half of 2022 to account for “some near-term pandemic-related impacts on revenue,” Mr. Doerksen cut his TFII target to $153 from $160 following its 12.7-per-cent slid thus far in January. The average on the Street is $132.24.
However, keeping an “outperform” rating for its shares, he said the company’s relative valuation is now “attractive” for investors.
“On our 2022 forecast (which does not fully reflect the potential upside for the company’s LTL segment) TFII is trading at 15.9 times P/E [price-to-earning] versus the weighted average comparable multiple of 18.3 times,” he said. “TFII’s revenue is now nearly 60 per cent derived from its LTL and Logistics segments where comparable P/E multiples are 20 times-plus.”
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Though he reiterates its “turnaround is well underway,” RBC Dominion Securities analyst Joseph Spak thinks the near-term upside for Ford Motor Co. (F-N) “looks a little more challenging.”
Accordingly, “moving to sidelines for now,” he downgraded the automaker to “sector perform” from “outperform” on Friday, despite expressing optimism about its transition to the “EV/AV/software world.”
“The view for many years was Flagged competitors on ‘new auto’ transition,” said Mr. Spak. “F has changed that narrative through action and ambitions (and in general, we can’t understate how much messaging has improved). F got the Mach-E to market quickly, has seen strong demand, and is now tripling capacity for the product. F got the F-150 Lightning to market ahead of competitors which alone was a solid feat. A fair pushback had been they leaned heavily on the existing F-150 platform vs. competitors that took a group up approach. But, it now appears that Ford may not have a technical disadvantage and got to market quicker. Overall, the company is now targeting 600k BEV capacity in 2023. We still aren’t sure they can produce to that level in 2023 given ramps, but it’s significantly more than expected a few years ago. F also has made major investments in BEV and battery capacity (and formed battery JVs). This is on top of improving fundamentals from restructuring, positive earnings revisions, and ‘unlocking’ value from under corporate Ford via the investment in Rivian and potentially from its stake in Argo.”
Mr. Spak’s target for Ford shares rose to US$26 from US$21, exceeding the US$21.14 average.
“Again, we don’t want to take anything away from the job at Ford,” the analyst said. “The company has re-rated and there could be some further potential for the company to re-rate as they continue to prove their transition. However, that could take time, so we focus a little more on umbers. Here is where this gets tricky. RBC is at 2022 EBIT/EPS of $12.6-billion/$2.15 (5 per cent above consensus) and 2023 EBIT/EPS of $14.3-billion/$2.50 (10 per cent above). We believe that our forecast is very achievable. We also believe that for 2022, Ford may initially guide EBIT at $11.5-$12.5-billion (bracketing consensus). ... Further, our valuation is based on our higher numbers (granted on 2022, but even if we look to a 2023-based method we’d only see a modestly higher base case).
“Bottom-line, is we believe Ford stock price may consolidate for a while, so investors may choose to allocate capital to other auto names in the interim. Potential positives could be 1) an Argo IPO that surprises to the upside on value; 2) international operations’ improvement which may be underappreciated, but we also see more upside (vs. consensus) in 2023 than 2022. 3) More Ford Pro disclosure which could yield further re-rating. On concerns: 1) pricing could roll in 2H (industry issue, not exclusively Ford); 2) We have some concern about how the stock will react if RIVN is (tactically) sold down. Right now, market may be using the stock price as the mark. But if it turns to cash, F will use this to advance investment, but valuing that (and returns on investment) tougher.”
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In other analyst actions:
* Deutsche Bank analyst Amit Mehrotra upgraded Canadian National Railway Co. (CNI-N, CNR-T) to “buy” from “hold” with a US$137 target, rising from US$129. The current average on the Street is US$131.09.
* Goldman Sachs analyst Michael Lapides downgraded TC Energy Corp. (TRP-T, TRP-N) to “sell” from “neutral” with a US$45 target. The average is $71.54 (Canadian).
* BMO Nesbitt Burns analyst Joel Jackson raised his target for Nutrien Ltd. (NTR-N, NTR-T) to US$85 from US$75 with an “outperform” rating. The average is US$81.27.
“In the ferts, NTR seems the most attractive option currently,” he said. “Unless BPC/Belarus can figure out how to resolve increasing challenges to receive payment for potash sales and transport product after January through Lithuania or Russia (via private Lithuanian rail companies or Russian rail/port Plan B options), potash markets could stay around peak levels, and this will benefit NTR and its excess potash capacity (likely one million tonnes with little effort and millions more tonnes if sizably more labour is hired), though tangible restrictions against BPC would boost the case for MOS, K+S, ICL, etc. Also, NTR (and CF) benefits from extremely wide energy cost premiums in Europe and China relative to N. American nitrogen producers (e.g., perhaps a ~$25 gas premium to Europe versus N. America). This being said, we expect some demand destruction in potash and phosphate this year and still believe growers can always mine the soil for potash and phosphate this year if needed to offset other costs and inflation (as farmer income should be lower in 2022 though off of high 2021 levels).”
* In response to the release of its fourth-quarter operational results and fiscal 2022 guidance, National Bank Financial analyst Don DeMarco trimmed his target for Wesdome Gold Mines Ltd. (WDO-T) to $15.25 from $15.50 with an “outperform” rating, while Desjardins Securities’ John Sclodnick cut his target to $12.50 from $13 with a “hold” rating and Echelon’s Ryan Walker reduced his target to $13.50 from $14.25 with a “buy” rating. The average on the Street is $14.70.
“We continue to reiterate WDO as a top pick on the back of production and FCF growth, prospective exploration potential, and M&A appeal as one of the few 100-per-cent Canadian producers,” Mr. DeMarco said.
* After “unprecedented” preliminary fourth-quarter and 2021 operating results, National Bank’s Mike Parkin raised his target for shares of Equinox Gold Corp. (EQX-T) to $13 from $12.50 with an “outperform” rating. The average on the Street is $12.88.
“Equinox’s outperformance in Q4 was largely driven by strong production at its Los Filos and Mesquite assets,” he said. “Los Filos benefited from consistent operations and high grades coming from the commencement of mining its Guadalupe open-pit and Bermejal underground deposits which our model now aligns with. We also tweaked up the mining rate and grades processed at Mesquite to better reflect its strong Q4 performance. Other small tweaks for the other mines with respect to grade, mining/milling rates and recoveries were made to align our estimates with today’s release. We also rolled our model forward one quarter, with our NTM estimate capturing 1Q22-4Q22.”
* With Thursday’s release of its 2022 budget and confirmation of its inaugural dividend (10 cents annually), Canaccord Genuity analyst Anthony Petrucci increased his target for Tamarack Valley Energy Ltd. (TVE-T) to $5 from $4.75 with a “hold” rating, while RBC’s Luke Davis bumped up his target to $6 from $5 with an “outperform” rating and Acumen Capital’s Trevor Reynolds moved his target to $5.50 from $5 with a “buy” rating. The average is $5.58.
* Seeing “very strong” momentum after its “solid” third quarter, Scotia’s Patricia Baker hiked her Aritzia Inc. (ATZ-T) target to $65 from $49 with a “sector outperform” rating. The average is $64.86.
“Our constructive stance on ATZ shares also reflects our view on the management team, which we believe stands out in terms of strategic vision and operational execution,” she said. “Their ability to navigate the challenges facing apparel retailers in the context of global supply chain disruptions speaks well to the operational excellence at ATZ. We particularly liked commentary on the earnings call from ATZ CEO Brian Hill when discussing implementation of price increases: “there are two ways to go bankrupt, by being stupid and by being greedy.” These comments do provide some insight into the careful consideration of the customer and what the brand stands for that underscores important decisions at ATZ. We have confidence that both operating and strategic decisions at ATZ will be very much focused on what is good for the business and for the brand in the long term. While the current valuation is indeed robust, we believe ongoing momentum in the business should see ATZ sustain current valuations and as such we look to the shares moving higher.”
* Scotia’s Divya Goyal initiated coverage of Softchoice Corp. (SFTC-T) with a “sector perform” rating and $30 target. The average is currently $33.93.
“We believe Softchoice’s well-established business model and highly experienced executive management team makes it a good investment opportunity for investors looking for a stable free cash flow-generating, dividend-paying company with a positive long-term outlook,” said Ms. Goyal.
* Scotia’s Mario Saric slashed his target for units of H&R Real Estate Investment Trust (HR.UN-T) to $15.25 from $18.25, keeping a “sector perform” rating. The average is $16.18.
“Bottom-line, we think H&R is on the right path, but investors may adopt a ‘wait and see’ view on strategic execution given H&R’s track record. That said, the units look cheap (18-per-cent discount to NAV and to Shadow REIT; Ex.12) and we think H&R will make good progress in 2022,” he said.
* CIBC World Markets analyst Robert Bek raised his Corus Entertainment Inc. (CJR.B-T) target to $8 from $7.50 with an “outperformer” rating. The average on the Street is $8.24.
* TD Securities analyst Craig Hutchison lowered his Denison Mines Corp. (DML-T) target to $2.25 from $2.40 with a “hold” rating. The average is $2.64.
* TD’s Greg Barnes raised his Teck Resources Ltd. (TECK.B-T) target to $56 from $47, exceeding the $44.42 average, with an “action list” buy recommendation.