Inside the Market’s roundup of some of today’s key analyst actions
Ahead of the start of their second-quarter earnings season next week, a series of equity analysts on the Street adjusted their forecasts, valuations and target prices for Canadian banks on Friday.
Canaccord Genuity analyst Scott Chan trimmed his earnings expectations by an average of 2 per cent due to the impact of current conditions on their market-sensitive businesses.
“Accounting for this, we are currently slightly below the Street (higher on BNS; in line with BMO and CM; below on NA, RY and TD),” he said. “Our F2022/F2023 adj. cash EPS forecasts (on avg.) are down 1 per cent/ 2 per cent, respectively (overall slightly above consensus; above on BMO, NA, TD and CM for F2023E and slightly below on RY).”
With those changes, he reduced his target for the bank stocks in his coverage universe. His adjustments are:
- Bank of Montreal (BMO-T, “buy”) to $155 from $171. The average is $156.81.
- Bank of Nova Scotia (BNS-T, “buy”) to $89 from $100. Average: $91.49.
- Canadian Imperial Bank of Commerce (CM-T, “buy”) to $80 from $89 Average: $81.78.
- National Bank of Canada (NA-T, “hold”) to $98.50 from $110. Average: $101.86.
- Royal Bank of Canada (RY-T, “hold”) to $131.50 from $147. Average: $147.55.
- Toronto-Dominion Bank (TD-T, “hold”) to $95 from $106. Average: $103.33.
“Looking out, we continue to favor the Banks (BMO, BNS, CM, TD) with larger P&C exposure/interest rate sensitivity and generally less constructive on Banks (NA, RY) with more market-sensitive exposure,” said Mr. Chan.
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In a research report titled It’s the End of the World As We Know It (and I Feel Fine), Scotia Capital’s Many Grauman said he does not expect the earnings season to be a catalyst for bank stocks.
“As we get set to enter another Canadian bank earnings season, please forgive us if we feel nostalgic for the good old days of early February when the market wholeheartedly embraced the notion that we would be living through a post-pandemic economic boom that would be particularly beneficial for bank stocks,” he said. “The reality is that this ‘Goldilocks’ outlook has gotten a lot more complicated thanks to the war in Ukraine, strict COVID lockdowns in China, and much more hawkish talk (and action) from both the BoC and the Fed. And yet the reality is that expectations were probably too high a few months ago and have now overshot to the downside, with the right answer being somewhere in the middle. Clearly, economic tail risk has grown, but we believe that the market is failing to appreciate key positives including a historically tight labour market and record deposit balances.”
Mr. Grauman is projecting core cash earnings per share of $2.24, down 9 per cent from the first quarter but largely in-line with the result of the same period a year ago.
“Although we expect Q2 results to largely come in as expected, the elephant in the room this quarter will be the macro-economic outlook,” he said. “And while we do expect bank executives to continue to focus on the many positives in the economy, there is a limit to how confident management can be given all the unknowns surrounding Ukraine, China, and inflation just to name a few. Beyond these uncertainties, we are not convinced that bullish commentary from the banks will be able to act as a catalyst for the shares in any event.”
He made these target changes:
- Bank of Montreal (BMO-T, “sector outperform”) to $158 from $161. The average is $156.81.
- Canadian Imperial Bank of Commerce (CM-T, “sector outperform”) to $83 from $161. Average: $81.78.
- National Bank of Canada (NA-T, “sector outperform”) to $106 from $108. Average: $101.86.
- Royal Bank of Canada (RY-T, “sector outperform”) to $147 from $150. Average: $147.55.
- Toronto-Dominion Bank (TD-T, “sector perform”) to $102 from $105. Average: $103.33.
“Heading into the quarter, we believe that RY remains the consensus defensive name in the space, both in terms of absolute size and diversification, but also due to the fact that on a pro-forma basis it now has the highest CET1 ratio of the group,” said Mr. Grauman. “We also continue to like BMO given its operating momentum and the coming accretion from Bank of the West. We also highlight NA which has the second-highest pro forma CET1 ratio of the group, and should benefit from the fact that Quebec’s housing market is more resilient to a slowdown than other key regions in the country. While the bank has a larger exposure to financial markets on a relative basis, we note that its capital markets business mix skews more towards trading than investment banking which should have held up much better given the recent spike in market volatility. We continue to be cautious on TD as fundamental performance here has consistently lagged peers for a number of quarters now, and the benefit of margin expansion is likely to be constrained this quarter. Another name we want to flag is CM. This stock provides a lot of torque to improving market sentiment, but we believe that this turn is unlikely to happen as a consequence of Q2 reporting. In the short run, we believe that the bank is vulnerable to margin pressure in Q2, and is coming off a particularly strong capital markets quarter in Q1. Among the smaller banks we flag CWB which is trading below book value despite a long track record of very strong underwriting and a material exposure to a now booming Western Canada. We also highlight EQB, even after a 26% beat to consensus.”
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Believing they are “staying resilient in uncertain times,” Credit Suisse analyst Joo Ho Kim initiated coverage of Canada’s Big 8 banks on Friday.
“We are initiating coverage of the Canadian banks with an eye on both the defensive and offensive traits of the banks used to respectively weather the uncertain geopolitical and macroeconomic environment and benefit from the economic recovery currently unfolding via solid strategy execution,” he said. “Despite the constructive operating environment, we believe bank valuations will remain near the through-the-cycle average until we have improved clarity on the macroeconomic outlook.
“We believe the market will pay for quality to a greater extent in times of elevated uncertainty, and that underpins our Outperform ratings on BMO, CM, NA, and RY. The more defensive-focused banks are NA and RY, while the more offensive-focused names are BMO and CM. We expect a strong total potential return of 20 per cent across the Big Six banks (23 per cent among the Outperform-rated stocks).”
Mr. Kim is forecasting mid-single-digit core earnings per share growth for both 2022 and 2023, adding: “We believe upside to our estimates could come from better-than-expected net interest margin expansion, loan growth, and efficiency improvements. Our forecast reflects conservatism behind several drivers, in addition to our belief that a material adverse scenario affecting the banks’ balance sheets and forward earnings is a tail risk at this time.
“The catalysts for the sector include: 1) continued delivery of strong underlying growth trends including strength in loan growth and outlook for margin expansion, 2) discipline around expenses amid the inflationary pressure, 3) continued conservatism around credit and efficient deployment of capital, and last but not least 4) signs of an improved macroeconomic outlook.”
His ratings and targets are:
- Bank of Montreal (BMO-T) with an “outperform” rating and $159 target. The average is $156.81.
- Bank of Nova Scotia (BNS-T) with an “outperform” rating and $88 target. Average: $91.49.
- Canadian Imperial Bank of Commerce (CM-T) with an “outperform” rating and $81 target. Average: $81.78.
- Canadian Western Bank (CWB-T) with a “neutral” rating and $35 target. Average: $41.96.
- Laurentian Bank of Canada (LB-T) with an “underperform” rating and $39 target. Average: $45.73.
- National Bank of Canada (NA-T) with an “outperform” rating and $106 target. Average: $101.86.
- Royal Bank of Canada (RY-T) with an “outperform” rating and $153 target. Average: $147.55.
- Toronto-Dominion Bank (TD-T) with a “neutral” rating and $102 target. Average: $103.33.
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After “positive” first-quarter results, RBC Dominion Securities analyst Geoffrey Kwan emphasized Brookfield Asset Management Inc.’s (BAM-N, BAM.A-T) current valuation discount, expecting it to narrow due to its fundamentals and “potential catalyst significant growth opportunities over the next year.”
“BAM confirmed plans to spin off its asset management business and indicated its fundraising outlook is very strong, which bodes well for future FRE growth,” he said. “Our Outperform rating reflects our view that BAM offers an attractive mix of positive fundamentals; potential catalysts (e.g., asset manager spinoff, potential large monetizations, successful fundraising); and an attractive valuation (22-per-cent discount to NAV). ... We show buying BAM when it trades at a discount to NAV has been historically a good time to buy.”
However, Mr. Kwan reduced his target for Brookfield shares to US$68 from US$72, citing “s lower financial forecasts owing to reduced management fee forecasts given the recent market pullback and a narrower premium to NAV (0 per cent, was 5-per-cent premium) due to increased macro uncertainty.” The average on the Street is US$70.55.
“We think the combination of: (1) BAM’s strong long-term investment track record; (2) significant liquidity available (US$85-billion) to fund acquisitions and investments at potentially attractive prices in the current market environment and drive future NAV growth; and (3) a differentiated and diversified product shelf with demonstrated ability to fundraise and drive scale benefits could result in double-digit NAV growth,” the analyst said.
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Despite a “dynamic operational backdrop,” ATS Automation Tooling Systems Inc. (ATA-T) delivered a “strong” fourth-quarter performance and outlook given the “less cyclical nature of company’s end-markets,” according to National Bank Financial analyst Maxim Sytchev.
“Similar to our engineering & consulting peers, inflation rates, and by extension, discount rates, have wreaked havoc on trading multiples (all things being equal, a 17 times EV/EBITDA nine months ago is now = 14.5 times given where the 10-year treasuries are),” he said. “However, as investors became concerned re supply chain issues and the ability to convert backlog to revenue (due to Rockwell’s weak results), ATA was caught up in the sentiment downdraft.
“[Thursday’s] results, however, demonstrate that despite a fluid operating backdrop, ATA continues to effectively navigate the climate BECAUSE it has exposure to defensive/secular growth-focused industries such as Healthcare, Food, EVs and Nuclear. The 32-per-cent share price decline year-to-date is much worse than S&P 500 (down 14 per cent), but we would argue ATA has the characteristics of the type of name one wants to own for the foreseeable future, as consumers are pulling back in their horns (limited exposure) while the supply chain re-localization theme is likely to accelerate as OECD countries try to decouple from Asian dependence.”
Before the bell on Thursday, the Cambridge, Ont.-based company reported revenue of $603.2-million, up 51 per cent year over year and well ahead of the projections of Mr. Sytchev ($586.3-million) ad the Street ($562.7-million). Adjusted earnings per share of 64 cents also topped estimates (50 cents for both).
The analysts deemed ATS’ outlook “positive as defensive end-markets deliver,” calling it “conservative” on backlogs “as per usual.”
“Supply chain/inflation disruptions are being effectively managed,” he said. “No one supplier makes up more than 3.5 per cent of spend and the top 10 make up less than 15 per cent, insulating ATA as a result chip shortages/EU macroeconomic climate, etc. The company’s supply chain is also 80-per-cent protected from price increases by being pre-sourced before a quote is given for a program, helping shield against inflation of component pricing. While the company is seeing the situation as ‘dynamic” (some raw material price increases and extended lead times for typically short lead time products are taking place), ATA is managing through these challenges (adjusting for lead times, factoring wage increases in contracts, and by planning ahead allowing for flexibility).”
“Capital allocation – M&A acquisition funnel is healthy (question is at what price?) .... M&A funnel remains healthy, even though we presume the calculation around accretion now has to take into account its own valuation (hence, ATA becoming active on NCIB in April). Capex for the year is expected to be in $90 - $110-million range as ATA is adding capacity to the existing locations and invests in innovation.”
Reiterating an “outperform” rating, Mr. Sytchev cut his target to $52 from $66 with an “outperform” rating after accounting for the rising cost of capital. The average on the Street is $58.50.
Elsewhere, Scotia Capital’s Mark Neville raised his target to $55 from $53 with a “sector outperform” rating.
“We were thoroughly impressed with FQ4 results, especially in the context of ongoing supply chain disruptions and multi-decade high inflation,” said Mr. Neville. “While this speaks to the resiliency of the business, we also think a lot of credit should be given to the management team (and the institutionalization of the ABM). Let’s be clear – it’s not like the company isn’t facing these issues, its just finding countermeasures to mitigate (e.g., pricing, alternative sources of supply, redesign, etc.). If supply chain pressures and inflation don’t get incrementally worse (although unsure when they’ll get better), we think current trends (i.e., margin and backlog conversion) should sustain themselves.”
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Following “another solid quarter despite very difficult operating conditions,” Desjardins Securities analyst Benoit Poirier reaffirmed his bullish stance on Héroux-Devtek Inc. (HRX-T), seeing its “operational track record intact.”
“While these issues are expected to persist in the mid-term, management’s strong operational track record gives us confidence in its ability to navigate through this challenging environment while unlocking value for shareholders,” he said. “We reiterate our Top Pick rating for HRX, the only stock rated as such in our coverage.”
On Thursday before the bell, the Longueuil, Que.-based manufacturer of aerospace products reported revenue of $148-million, down 4.9 per cent year-over-year but above both Mr. Poirier’s $146-million estimate and the consensus forecast of $140-million. Adjusted earnings per share also slipped 5 per cent to 27 cents, missing the analyst’s projection by 2 cents.
Mr. Poirier continues to see a rise government spending as a catalyst for its Defence segment and thinks its Commercial business will see an uptick as Boeing Co. increases production of its 777-freighter model jets, which it provides the landing gear for.
“HRX currently trades at an EV/FY2 EBITDA of 6.5 times or at an eye-opening discount of 3.4 times vs its U.S. peers despite having a stronger balance sheet and healthy FCF generation capabilities,” he said. “We believe HRX’s greater exposure to the defence segment, solid operational reputation and experienced management team ideally position the company for the recovery. We believe share buybacks are the right tool to unlock shareholder value while maintaining a healthy balance sheet to seize M&A opportunities as they arise.”
After raising his 2023 adjusted earnings per share projection (to $1.07 from $1.01), Mr. Poirier increased his target for Héroux-Devtek to $27 to $25. The average is $23.73.
“With encouraging signs that the air travel recovery is on its way, we believe HRX offers a compelling value proposition, with an attractive valuation and a healthy balance sheet to opportunistically unlock inorganic growth opportunities,” he added.
Others making changes include:
* National Bank Financial’s Cameron Doerksen to $25 from $26 with an “outperform” rating.
“The outlook for revenue and bottom line growth in both F2023 and F2024 remains positive, in our view,” said Mr. Doerksen. “This year, HRX will benefit from a sight increase in the Boeing 777 widebody production rate, the ramp-up of a new commercial actuation contract for Boeing, as well as increased revenue from several defence programs. HRX’s strong free cash flow and low leverage (1.8 times) will also support potential M&A.”
* Scotia’s Konark Gupta to $21 from $24 with a “sector outperform” rating.
“HRX reported good FQ4 results, considering COVID-19 challenges in January and ongoing supply chain disruptions,” said Mr. Gupta. “After a significant FQ3 miss, revenue and EBITDA beat expectations, driven by defence as aftermarket sales rebounded and various contracts continued to ramp up. We believe revenue will finally rebound effective this quarter, after declining over two years, as 777/777X production rate increases (despite delays), defence contracts further ramp up, more contracts begin to contribute, and aftermarket demand remains strong. However, management sounded cautiously optimistic due to supply chain challenges, which causes us to trim our expectations.”
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With early year gains for Canadian junior precious metals producers “as inflation, COVID, supply chain impacts, and a falling gold price have become the dominant themes,” Canaccord Genuity analyst Michael Fairbarn sees the recent sector-wide pullback as a buying opportunity.
“While we look to the gold price to find its floor over the short term, we remain constructive on its prospects over the medium to long term,” he said in a note reviewing earnings season. “We believe there are many quality names in our coverage selling at prices more attractive than they were a few months prior, with fundamentals relatively unchanged despite the bumpy Q1.”
“The standouts in Q1 include Calibre (our top pick), K92, and Torex. All three companies achieved a combination of production and/or cost beats relative to our expectations, overcoming the challenging macro environment. KNT and TXG also delivered on key milestones in Q1, including a resource update for Kainantu and feasibility study for the Morelos Complex, helping to de-risk their key assets.”
Mr. Fairbarn updated a pair of stocks based on valuation on Friday:
* Argonaut Gold Inc. (AR-T) to “hold” from “sell” with a $1.50 target (unchanged). Average: $2.57.
* Wesdome Gold Mines Ltd. (WDO-T) to “buy” from “hold” with a $14 target, down from $17. Average: $16.65.
He also made these target changes:
* K92 Mining Inc. (KNT-T, “speculative buy”) to $11.50 from $12. Average: $12.10.
* Karora Resources Inc. (KRR-T, “buy”) to $7 from $8.50. Average: $7.02.
* Torex Gold Resources Inc. (TXG-T, “buy”) to $23.50 from $24. Average: $23.11.
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In other analyst actions:
* Calling it a “gem of the Clearwater,” BMO Nesbitt Burns analyst Mike Murphy initiated coverage of Rubellite Energy Inc. (RBY-T) with an “outperform” rating and $6 target, exceeding the $5.38 average on the Street.
“Rubellite provides investors with pure play exposure to the Clearwater, which we consider to be the most economic and fastest growing conventional oil play in Western Canada,” he said. “Additionally, we see Rubellite as having the depth and quality of inventory to deliver best-in-class production per share growth in the coming years, with significant upcoming exploration catalysts to unlock upside potential.”
* In a fourth-quarter earnings preview, RBC Dominion Securities analyst Irene Nattel raised her Alimentation Couche-Tard Inc. (ATD-T) target to $77 from $73 with an “outperform” rating. The average is $61.97.
“Our view of the quarter is constructive, with evidence of recovery in vehicle miles traveled and strong fuel margins,” she said. “Rising fuel prices likely to drive a notable increase in credit card fees, but also lower average volume/transaction and higher frequency of visit, both to the forecourt and inside the store to sustain overall inside store spend. Relative and absolute valuation remain attractive and recent activist activity on Suncor and unconfirmed reports that ATD is in talks with EG Group likely to keep the name topical.”
* Cowen and Co’s Oliver Chen lowered his target for Canada Goose Holdings Inc. (GOOS-N, GOOS-T) to US$30 from US$37 with an “outperform” rating. Other changes include: Credit Suisse’s Michael Binetti to $37 (Canadian) from $48 with an “outperform” rating, Wells Fargo’s Ike Boruchow to $38 from $45 with an “overweight” rating and CIBC’s Mark Petrie to $37 from $45 with a “neutral” rating. The average is $41.15 (Canadian).
“Bigger picture, we continue to believe that GOOS’s recent quarters have shown strong brand heat trajectory globally and resonance with the DTC pivot—which are key drivers to the bull case,” said Mr. Boruchow. “We believe the model has momentum into FY23 despite known China challenges, and thus we aren’t overly concerned on the below 1Q guide in a seasonally insignificant quarter. Net/net, we don’t see much today that changes our view on the FY; our numbers are largely unchanged.”
* BMO Nesbitt Burns’ John Gibson raised his Computer Modelling Group Ltd. (CMG-T) target to $6 from $5.50 with a “market perform” rating. The average is $6.50.
“CMG experiences high incremental margins on its revenue gains, and we expect this should continue over the next few years, particularly given some nice Perpertual wins of late,” he said. “We continue to view CMG in a positive light given its pristine balance sheet and stable revenue base, although we believe better risk/reward lies elsewhere.”
* Barclays’ Raimo Lenschow cut his Descartes Systems Group Inc. (DSGX-Q, DSG-T) target to US$61 from US$78 with an “equal weight” rating. The average is US$86.60.
* Wells Fargo’s Praneeth Satish cut his targets for Enbridge Inc. (ENB-T, “overweight”) to $63 from $64, Pembina Pipeline Corp. (PPL-T, “equal weight”) to $48 from $51 and TC Energy Corp. (TRP-T, “equal weight”) to $73 from $74. The averages are $60, $53.13 and $72.30, respectively.
* Credit Suisse’s Timothy Chiodo decreased his Lightspeed Commerce Inc. (LSPD-N, LSPD-T) target to US$40 from $45 with an “outperform” rating. Other adjustments include: Piper Sandler’s Clarke Jefferies to US$39 from US$54 with an “overweight” rating, Barclays’ Raimo Lenschow to US$31 from US$42 with an “overweight” rating, BMO’s Thanos Moschopoulos to US$40 from US$60 with an “outperform” rating, Raymond James’ Steven Li to $43 from $40 with an “outperform” rating and Truist’s Andrew Jeffery to US$45 from US$60 with a “buy” rating. The average is US$48.11.
“With Q4 GTV and revenue both coming in ahead of expectations, the post-holiday season seasonality in the business was importantly not as bad as feared,” said Mr. Lenschow. “The highlight of the call in our view was the meaningful tailwind that management expects from the return to in-person shopping and dining that should more than offset the expected slowdown in bike and other outdoor verticals. Additionally, the company now expects adj. EBITDA breakeven in FY24 which reflects the increasing scale of the business and an eventual wind down in integration costs from recent acquisitions. With management targeting 35-40-per-cent organic subscription and transaction revenue in FY23 and FY24, the current 3 times calendar 23 estimated sales multiple seems too low and hence we maintain our Overweight rating but lower our PT.”
* Canaccord Genuity’s Doug Taylor cut his Well Health Technologies Corp. (WELL-T) target to $6 from $10 with a “buy” rating. Other changes include: Scotia’s David Buckham to $7.50 from $9 with a “sector outperform” rating, TD Securities’ David Kwan to $7 from $9 with a “buy” rating and CIBC’s Scott Fletcher to $6.50 from $8 with an “outperformer” rating. The average is $9.08.
“We have updated our forecasts for both the quarterly results and increased guidance and the recent equity financing,” said Mr. Taylor. “The latter highlighted WELL’s ability to continue to act as a capital formation and deployment vehicle within a sector that has seen dramatic multiple compression, owing to both its solid cash flow profile and its increasingly unique ability to continue raising capital in this market environment.”
David Leeder