Inside the Market’s roundup of some of today’s key analyst actions
Bombardier Inc.’s (BBD-B-T) surprisingly strong second quarter results were a “materially positive event” for the company that will have “significantly positive longer-term valuation ramifications,” said RBC analyst Walter Spracklin.
He was among several analysts to raise price targets on the business jet maker’s stock following the well-received earnings on Thursday. But Mr. Spracklin was sounding particularly bullish, saying his conviction level has been elevated and he now thinks Bombardier is one of the top stocks to own.
Bombardier’s free cash flow in the second quarter of $341 million blew away the consensus estimate of $123 million. The company is guiding cash flow to come in at $515-million for the year as a whole, a 10-fold increase from prior estimates.
Demand for the company’s jets has only accelerated with COVID and airport disruptions, pushing more wealthy customers to private aviation. Its backlog of work has grown 37% in the past year to $14.7 billion, supported by meaningful deposits and cancellation penalties, the analyst noted.
Mr. Spracklin offered up two key observations. First, “COVID has created a structural, almost windfall event for BBD - which was key given how levered the company was following the (pre-COVID) restructuring. As a result, the company is able to now materially reduce leverage in a much faster period of time ... to quote the CEO: “conditions that we thought would take seven years to materialize have occurred in two.”
Second, the company will likely require less cash on hand, so a portion of the $1.4 billion it has in cash can be applied to accelerate debt reduction in the near term. “Since debt is the key driver (in our view) of the valuation discount, we see this accelerated deleveraging as a key catalyst for the shares,” he said.
RBC raised its target price to C$41 from C$32. Elsewhere, CIBC raised its target price to C$37 from C$36 and TD Securities raised its target price to C$68 from C$60.
The average analyst price target is now about C$50 - but that’s actually down about $3 from a month ago, according to Refinitiv Eikon data Friday morning.
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National Bank Financial analyst Zachary Evershed said he is “throwing in the towel” on Cascades Inc. (CAS-T), downgrading the pulp and paper company to a “sector perform” rating from “outperform” and slashing his price target to C$10 from C$14.
Cascades reported second-quarter results Thursday that were largely in line with expectations, but they were marred by the company cutting guidance on its Tissue division and raising its capital expenditures for this year.
Tissue operations generated another quarter of negative adjusted EBITDA. “As persistent cost headwinds blow and implementation of the second price hike was pushed from July to September/October, the segment’s guidance for the year was cut from $60-80 million to $25-40 million,” Mr. Evershed noted.
Meanwhile, Cascades’ 2022 capex guidance was increased from $415 million to $450-470 million, in part because of elevated costs and labour and materials availability constraints at its Bear Island containerboard conversion project. “We fear that the delay of critical construction milestones may push back the hoped-for December start-up for Bear Island into Q1/23,” the analyst said.
“Given the challenging backdrop in Containerboard and long road toward consistent Tissue performance, we move to a sector perform, pending a reduction in uncertainty in the operating environment,” Mr. Evershed said.
Elsewhere, Scotiabank cut its target price to C$15 from C$17.
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Canaccord Genuity analyst Dalton Baretto downgraded Coeur Mining Inc. (CDE-N) to “hold’ from “buy” while cutting his price target to US$3.50 from US$3.75.
The precious metals company this week reported an adjusted loss per share in its latest quarter of 5 cents, worse than Mr. Baretto’s expectation for a loss of 2 cents.
“Our downgrade is based on the limited implied return to our target price and the heightened technical and financial risks surrounding the company over the next 12 months through ... a volatile and inflationary environment,” he said.
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Maple Leaf Foods Inc.’s (MFI-T) much-weaker-than-expected quarterly results on Thursday has prompted a slew of price target cuts this morning.
CIBC cut its target price to C$35 from C$41, RBC cut its target to C$36 from C$42, Scotiabank cut its target to C$34 from C$40, TD Securities cut its target to C$39 from C$45, and Canaccord Genuity trimmed its target to C$35 from C36.
Maple Leaf’s revenue grew 3.1% from a year earlier to $1.195 billion, driven namely by price increase and higher volumes. But higher input costs that jumped ahead of pricing actions and labour shortages led to consolidated EBITDA amounting to $74 million, far below the Street consensus of $107 million.
“Maple Leaf has implemented another round of price increases (just under 4%) to mitigate the continued inflationary pressures. However, we do not believe the company will see much sequential margin expansion in Q3/22 as it will take some time for the price increases to move through the system,” cautioned Canaccord Genuity analyst Derek Dley in a note to clients.
“Given the much weaker than expected results, and extension of the margin target timelines, Maple Leaf’s stock is likely to be placed in the penalty box until investors are able to witness a visible improvement in results, which is likely a 2023 story. That being said, for those willing to look through the valley we believe the stock has likely bottomed following [Thursday’s] sell-off,” he said.
Mr. Dley continues to rate the stock a “buy”.
BMO analyst Peter Sklar agreed that the stock offered good value at current levels. “While outlook for near-term improvement is muted, we are maintaining our Outperform rating as, in time, price increases will catch up to inflation and with expectations reset after today’s results, we see value in the stock,” said Mr. Sklar, who has a C$31 price target on the stock.
The average price target is now $36, down from $40.33 a month ago.
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Scotiabank analyst Ben Isaacson upgraded his rating on Parkland Corp. (PKI-T) to “sector outperform” from “sector perform” while raising his price target to C$47 from C$45.
He listed five reasons why investors should build an overweight position in the name.
“First, the oil/gas rally that redirected funds flow to high-beta E&P names is winding down. In fact, PKI should benefit from an intra-sector reversal of this trade.
Second, with a greater than 5% divvy bump earlier in the year, PKI has raised its dividend at a pace more in line with shareholder expectations.
Third, we believe investors will reward PKI for consolidating SOL (its independent fuel marketer in the Caribbean) in what will be an immediately accretive deal, as well as leverage neutral.
Fourth, while the market debate over PKI’s evolution continues, run-rate EBITDA is improving (i.e., ex peak refinery margins), and the market hasn’t yet paid up for it. Separately, but still on EBITDA, PKI just raised the mid-point of it’s ‘22 guide by 10% (to $1.6B - $1.7B.
Fifth, we like that PKI has now ring-fenced the refinery in its reporting structure, which will help investors perform a more accurate Sum Of The Parts valuation (we think in PKI’s favour). Peak refinery margins don’t hurt, either.”
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National Bank Financial analyst Jaeme Gloyn downgraded Home Capital Group Inc. (HCG-T) to “sector perform” from “outperform” and cut his price target to C$31 from C$35.
The company this week reported earnings that were a modest miss, at 97 cents per share versus expectations of $1.04.
But it was Home Capital’s announcement of a Substantial Issuer Bid (SIB) that has Mr. Gloyn more concerned, as it has generally not been a positive indicator for the company.
The $115 million SIB allows the buyback of up to 4.6 million, or 11%, of its outstanding shares, at a price of $25.20 to $28.60.
A SIB allows a company to purchase shares for cancellation in amounts above the levels otherwise permitted under a normal course issuer bid (NCIB) rules.
Home Capital’s SIB will commence August 8th and expire on September 13th. HCG will suspend its existing NCIB, which had repurchase capacity of about 1.4 million shares remaining.
“While the SIB is certainly accretive to EPS, BVPS and ROE (we assume full take up) at an attractive P/B of 0.65x to 0.74x Q2-22 book value, two factors temper our enthusiasm. (1) At pro-forma CET1 ratio of ~15%, HCG is no longer in an excess capital position, reducing capital allocation flexibility (e.g., loan growth, return of capital to shareholders) and/or downside protection as macro headwinds build. (2) HCG’s share price performance during and post-SIB execution lacks the upside one would anticipate following an accretive transaction. In fact, HCG shares traded below the SIB range during and following completion of all three previous transactions. Interestingly, HCG’s underlying performance was trending favourably as the company posted earnings beats preceding all three previous repurchases. This latest SIB comes on the heels of two significant earnings misses and a less favourable outlook,” the analyst said in a note.
Separately, Scotiabank raised its target on Home Capital to C$39 from C$37.
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The recent pullback in shares of fertilizer giant Nutrien Ltd. (NTR-N, NTR-T) provide a good entry point for investors, said RBC analyst Andrew D. Wong, who believes the company will soon be buying back some of its shares and hiking its dividend.
Underpinning his view is continued favourable fundamentals for the agriculture and fertilizer sectors. “We see crop prices still 30-40% above historical levels supporting strong crop economics, which should encourage demand to return while fertilizer supply remains constrained,” Mr. Wong said in a note to clients.
“We remain positive on Nutrien given continued favourable fundamentals, with potash markets still tight and potential nitrogen upside. We think shares currently trading at near pre-war levels makes little sense and see the recent mid-year pull-back as an attractive entry-point. We expect strong free cash flow supporting outsized capital return plans including significant buybacks and a likely dividend increase in the next six months,” he said.
He reiterated an “outperform” rating and US$135 price target.
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Analysts are reacting this morning after Thomson Reuters Corp. (TRI-N, TRI-T) reported stronger-than-expected quarterly results on Thursday.
RBC analyst Drew McReynolds raised his target by US$1 to US$124 while reiterating an “outperform” rating.
He said his “long” thesis is getting stronger following several quarters of upward revisions to the company’s outlook. He said his enthusiasm is derived from a “combination of new structural tailwinds, the transformational Change Program, and attractive capital returns.”
“We continue to view Thomson Reuters as a high-quality core holding with both growth and defensive attributes,” Mr. McReynolds said in a note to clients. “We believe the company has the ability to deliver average annual total returns of approximately +10–15% over the longer term and has entered a new phase of +8–12% annual dividend growth underpinned by a step-up in free cash flow generation driven by the ongoing Change Program. We believe the company remains on track to meet its upwardly revised financial outlook for 2022 and 2023 despite rising macro uncertainty.”
The average price target is C$120.72, up from $117.30 a month ago.
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Barclays analyst Raimo Lenschow cut his price target on Lightspeed Commerce Inc. (LSPD-N, LSPD-T) to US$27 from US$31, calling its latest quarterly results “healthy” but cautioning that the near-term outlook is mixed. He still rates the stock as an “overweight”. Lightspeed is an electronic payments technology company.
“The post pandemic return of shopping/dining as a meaningful tailwind but the potential for worsening consumer spend as a possible headwind. In our view, the dominating force here is tough to tell but we note management highlighted other factors that should help offset macro headwinds - namely the geographical and vertical diversity of the customer base and the still low (~15%) penetration of payments. The quarter itself was solid (3% revenue beat, 4% beat on software & payments) despite management calling out the negative impact from inflation, particularly on the retail segment,” the Barclays analyst said.
ATB Capital Markets analyst Martin Toner also cut his price target, to C$75 from C$80 but reiterated an “outperform” rating. “At current stock prices, we believe Lightspeed’s strong secular growth story is significantly undervalued, and we continue to recommend the shares,” he said.
TD Securities took Lightspeed off its “Action List Buy” list - its top recommended stocks. While it still recommends investors buy shares, its target price went to US$35 from US$40.
“We are taking Lightspeed off the Action List given the ongoing macro uncertainties and challenging stock market for the tech sector. We believe high inflation, lower consumer confidence, European macro uncertainty, and a potential recession will remain an overhang on the shares. However, we continue to believe Lightspeed will execute well to drive growth from higher payments adoption, which remains in the early stages of adoption with only 15% of its GTV being processed through Lightspeed Payments. This remains a compelling entry-point for investors, in our view,” TD analyst Daniel Chan said in a note.
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Piper Sandler analyst Nicole Miller Regan raised her price target on Restaurant Brands International (QSR-N, QSR-T) to US$58 from US$52 following upbeat quarterly results. But she maintained a “neutral” rating.
Restaurant Brands International reported better-than-expected second-quarter results, driven largely by better-than-expected same-store sales results across Tim Hortons Canada market
“We will be continuing to monitor Burger King’s evolving work around value messaging, and continue to hold a cautious outlook on FY23 as macroeconomic uncertainty, specific to European locations, remains. On the digital/ technology front, the company’s efforts continue to gain traction and offer a long-term potential to drive sales, profitability, and consumer awareness,” Ms. Miller said in a note to clients.
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Western Forest Products Inc. (WEF-T) was upgraded by TD Securities analyst Sean Steuart to “buy” from “hold” as he raised his price target to C$1.85 from C$1.75.
Even though the company saw an earnings miss this week, TD upgraded the stock given “balance sheet flexibility and comfort with downside risk.”
“Western’s share price and valuation have lagged peers’ over the past year. The company has a flexible business model that yields relative earnings stability over the cycle. Our relatively conservative target-price multiple reflects the company’s concentrated operating platform and fewer apparent catalysts compared with peers,” the analyst commented.
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TD Securities analyst Menno Hulshof cut his price target on Suncor Energy Inc (SU-T) to C$56 from C$63 but kept a “buy” rating.
The move came after the company reported quarterly results Thursday night, which saw funds from operations beat consensus estimates, even though there was a slight production miss.
“We continue to see relative upside in SU shares and shareholder returns, while 2022 guidance revisions have set the bar lower through at least year-end. However, operational consistency will prove critical to bridging the multiple gap, and we may be in a holding pattern pending the outcome/implications of the retail strategic review/CEO search. SU is therefore further down the list within our integrated pecking order,” the TD analyst said in a note.
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In other analyst actions:
Airboss of America Corp (BOS-T): National Bank of Canada cuts target to C$30 from C$38
Exro Technologies Inc (EXRO-T): Raymond James downgrades rating to outperform from strong buy and cuts target price to C$2.75 from C$4
Innergex Renewable Energy Inc (INE-T): TD Securities cuts to hold from buy and raises target to C$21 from C$19. It cited recent share price appreciation for the ratings downgrade.
BCE Inc (BCE-T): TD Securities raises target price to C$67 from C$65; Barclays raises target price to C$66 from C$63; Scotiabank raises target price to C$68.50 from C$68
Labrador Iron Ore Royalty Corp (LIF-T): Scotiabank cuts target price to C$32 from C$37
Quebecor Inc (QBR-B-T): TD Securities raises target price to C$40 from C$36
Saputo Inc (SAP-T): CIBC raises target price to C$39 from C$35; RBC raises target price to C$40 from C$35; National Bank of Canada raises target price to C$39 from C$35; TD Securities raises target price to C$42 from C$39
Kellogg Co (K-N): Credit Suisse raises target price to US$72 from US$69; JP Morgan raises target price to US$71 from US$67; Piper Sandler raises target price to US$74 from US$64 and upgrades rating to “neutral” from “underweight”
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Darcy Keith