Inside the Market’s roundup of some of today’s key analyst actions
BMO Nesbitt Burns analyst Sohrab Movahedi said he’s “cautious” about the earnings outlook for banks coming out the quarter, leading him to reduce his target price for stocks in the sector on Friday.
“Benefits of central bank rate hikes were on full display especially for banks like TD and RY with an ‘advantage’ in retail core deposits,” he said. “CM, NA, and TD delivered 9 per cent plus pre-tax pre-provision earnings year-over-year growth, despite 7-10-per-cent non-interest expense growth, which leave them more levers if a ‘harsher winter’ necessitates lower expense growth.
“The more cautious management outlook commentary, coupled with the recent inversion in the 10-year vs. 3-month yield curve, has us incrementally more measured coming out of the quarter. We believe our updated 2023E EPS for the banks reflects the ‘puts and takes’ of these uncertainties.”
Mr. Movahedi’s target changes include:
- Bank of Nova Scotia (BNS-T, “market perform”) to $86 from $89. The average on the Street $85.50.
- Canadian Imperial Bank of Commerce (CM-T, “outperform”) to $76 from $83. Average: $76.27.
- Canadian Western Bank (CWB-T, “outperform”) to $35 from $40. Average: $33.50.
- National Bank of Canada (NA-T, “outperform”) to $103 from $108. Average: $103.
- Royal Bank of Canada (RY-T, “market perform”) to $132 from $140. Average: $138.13.
- Toronto-Dominion Bank (TD-T, “market perform”) to $95 from $100 . Average: $99.78.
“We see RY as the only ‘premium’ bank to the bank index with forward P/E [price-to-earnings] target valuation of 11.4 times; at the other end of the spectrum, we value CM and BNS at 9.9 times,” he said. “A 1.5-times turn valuation difference between the ‘highest’ and ‘lowest’ P/E bank compares with the long-term average of a 1.9-times spread (looking back to 1984), but is below the 2.7-times turn average spread we have seen during prior economic slowdowns.”
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In a research note reviewing earnings season for the Canadian banking sector, Keefe, Bruyette & Woods analyst Mike Rizvanovic upgraded Toronto-Dominion Bank (TD-T) to “outperform” from “market perform,” seeing “a compelling growth story in its U.S. business that separates it from the peers.”
Believing it should benefit from rising interest rates and possesses a valuation that is favorable relative to historical levels that doesn’t reflect “its superior growth profile through fiscal 2024.″ he raised his target for TD shares to $103 from $90, above the $99.78 average on the Street.
He also made these other target adjustments:
- Bank of Montreal (BMO-T, “outperform”) to $159 from $149. Average: $150.47.
- Bank of Nova Scotia (BNS-T, “market perform”) to $86 from $84. Average: $85.50.
- Canadian Imperial Bank of Commerce (CM-T, “market perform”) to $72 from $70. Average: $76.27.
- EQB Inc. (EQB-T, “outperform”) to $89 from $88. Average: $80.19.
- National Bank of Canada (NA-T, “outperform”) to $106 from $100. Average: $103.
- Royal Bank of Canada (RY-T, “underperform”) to $129 from $118. Average: $138.13.
- Toronto-Dominion Bank (TD-T, “market perform”) to $95 from $100. Average: $99.78.
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Citi’s Paul Lejuez called the second-quarter earnings report from Lululemon Athletica Inc. (LULU-Q) “great” given the “tough” retail environment.
He was one of several equity analysts on the Street to raise their financial forecasts and target prices for shares of the Vancouver-based athletic apparel maker after it reported better-than-anticipated results, prompting an increase to its full-year guidance.
After the bell on Thursday, Lululemon announced earnings per share of US$2.20, easily exceeding the analyst’s US$1.88 estimate and the Street’s forecast of US$1.86 as well as its own guidance of US$1.82-US$1.87. Total sales jumped 29 per cent, topping the consensus projection of 22 per cent.
Driven by the beat, Lululemon hiked its net revenue forecast for 2022 to between US$7.87-billion and US$7.94-billion from US$7.61-billion to US$7.71-billion. Its full-year adjusted earnings per share expectation jumped to between US$9.75 and US$9.90, compared with its previous outlook of US$9.35 to US$9.50.
“LULU’s strong top-line results and success of recent category launches (including footwear, hiking, golf and tennis), underscore the strength of the brand despite a weakening athleisure market,” Mr. Lejuez said. “And while inventory levels are elevated (up 196 per cent vs. 2Q19 vs sales up 112 per cent), which is the only real hole to poke in this report, markdown levels remain in-line to below 2019 levels. Biz is very strong and is clearly bucking the trend of a weak macro environment and pressure from a wallet share shift out of the category. However, with shares trading (pre-market) at an F23 EV/EBITDA multiple of 17 times (among the most expensive in our universe), we believe the risk/reward is balanced at current levels.”
In a research note titled In Their Own World; Impressive 2Q All Around, Mr. Lejuez raised his EPS estimates for 2022 and 2023 to US$9.95 and US$11.85, respectively, from US$9.60 and US$11.77 to reflect the results as well as a “slightly” higher sales outlook in the second half of the year.
That led him to raise his target for Lululemon shares to US$350 from US$345, reiterating a “neutral” recommendation. The average target on the Street is US$384.83, according to Refinitiv data.
“Comp momentum has been among the best in retail and margins have expanded almost 400 basis points since 2015,” said Mr. Lejuez. “Product innovation continues to drive strong results in seemingly developed categories such as women’s pants, the men’s business is a big opportunity, and the customer has given LULU license to broaden into new categories. However, with the LULU being valued as one of the most expensive specialty retail concepts ever, we believe the risk/reward is fairly balanced.”
Other analysts making adjustments include:
* Cowen and Co.’s John Kernan to US$531 from US$512 with an “outperform” rating.
* Keybanc’s Noah Zatzkin to US$375 from US$350 with an “overweight” rating.
* Deutsche Bank’s Gabrielle Carbone to US$434 from US$427 with a “buy” rating.
* Barclays’ Adrienne Yih to US$446 from US$435 with an “overweight” rating.
* Piper Sandler’s Abbie Zvejnieks to US$320 from US$310 with a “neutral” rating.
* JP Morgan’s Matthew Boss to US$396 from US$382 with an “overweight” rating.
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A pair of equity analysts on the street trimmed their targets for shares of Rogers Communications Inc. (RCI.B-T) after it announced Thursday its lenders have agreed to give the company more time to close its planned acquisition of Shaw Communications Inc., in return for up to $775-million in extra fees on financing for the $26-billion deal.
Rogers’ purchase of Shaw now likely to drag into mid-2023, analyst predicts
Those making adjustments include:
* National Bank Financial’s Adam Shine to $77 from $78 with an “outperform” rating. The average target on the Street is $75.
“Our forecast and valuation have been updated for the initial consent fee to be paid in 3Q and the assumption that the additional consent fee will need to get paid in 1Q23,” he said.
* CIBC World Markets’ Stephanie Price to $75 from $77 with an “outperformer” rating.
“The extension removes financing uncertainty from the deal and comes as the path to regulatory approval appears to be elongating,” she said. “The Competition Bureau recently noted that the Quebecor deal does not satisfy its concerns, and we see a full Competition Tribunal path becoming increasingly likely. We acknowledge the uncertainty inherent in the process and the cost of elongated timelines for Rogers and Shaw. However, we believe Rogers has a solid case should the deal go to Tribunal hearings. We view Rogers as attractively valued versus peers and see upside from current levels even if the deal is ultimately not approved. We continue to rate Rogers an Outperformer.”
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Believing Acadian Timber Corp. (ADN-T) “possesses multiple avenues to surface value,” Credit Suisse analyst Andrew Kuske raised his recommendation to “neutral” from “underperform” on Friday in response to “relatively recent weak share price performance.”
“In terms of share price performance, over the last six months, Acadian’s stock performance was down 9 per cent versus the TSX Composite’s 13 per cent,” he said. “That share price decline translated into a sufficient potential excess return to our unchanged $18 target price. In relation to other areas, Acadian looks to be well positioned in New Brunswick for potential margin expansion from timber harvesting on private lands along with selected benefits arising from carbon credits. As per our body of work, carbon credits and related activities remain in focus on multiple levels.”
“In relation to carbon credits, Acadian provided an update that focused on a portion of the Maine Timberlands with the initial model estimating carbon credit volume of roughly 1.6 million over 10 years. These initial estimates will be verified by third parties and, under the current timeline, registered on the American Carbon Registry in Q4 2022 – with ‘the potential for sale to be realized immediately thereafter.’ Notably, Acadian expects to receive 84 per cent of gross revenues from any sale of the carbon credits.”
Mr. Kuske’s unchanged $18 target is 20 cents lower than the average on the Street.
“Acadian’s niche regional timber exposure is positioned to benefit from specific dynamics affecting local wood markets, carbon related activities, greater potential for biomass values along with the US housing market balances on a longer-term basis,” he concluded.
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With shares of Marathon Gold Corp. (MOZ-T) plummeted 18.3 per cent on Thursday after announcing it planned to proceed with construction of the Valentine Gold project at a higher-than-anticipated price, Desjardins Securities analyst John Sclodnick sees “upside potential” and reaffirmed it as “a favourite developer.”
Before the bell on Thursday, the Toronto-based miner announced the project, located central Newfoundland and Labrador, is now expecting to cost $470– 490-million, a 57-per-cent increase from an April 2021 estimate of $305-million. It attributed the increase to inflation, scope changes and sustaining capital reallocation.
“It expressed confidence that the updated estimate is realistic and achievable, and we gained some comfort on the number given civil engineering at site is 85–100-per-cent complete while overall detailed engineering was 43-per-cent complete at end-July,” said Mr. Sclodnick.
“We estimate that MOZ is now facing a $200–225-million funding gap. We expect this gap will be largely filled by an equity raise and we also believe that Sprott may upsize its project debt financing. MOZ has an option to buy back 0.5 per cent of the 2% NSR held by Franco-Nevada, and a payment to MOZ to maintain the full royalty and better reflect the current value is likely, in our view.”
Maintaining a “buy” recommendation for its shares, he cut his target to $3 from $3.75. The average is $3.11.
“Our NAVPS estimate fell 19 per cent to $3.06, but with the shares falling by 18 per cent [Thursday], the stock continues to, the stock continues to trade at 0.45 times NAV vs developer peers at 0.34 times,” he said. “Given MOZ is through the EA process with a feasibility-level project in a top-tier jurisdiction and has further resource growth potential, we expect the stock to trade at a larger premium and see the current valuation as an attractive entry point.”
Other analysts making changes include:
* Canaccord Genuity’s Michael Fairbairn to $3.50 from $3.75 with a “speculative buy” rating
“While the estimated cost to complete is higher than we anticipated, we believe the project’s strong fundamentals are capable of supporting the additional cost, and the inclusion of the Berry pit into the mine plan should result in a stronger project overall,” he said. “Additionally, we believe the updated capital number provides increased certainty for investors ahead of project financing. Overall, we continue to view Valentine as one of the top gold projects in Canada and note that MOZ trades at an attractive 0.35 times P/NAV vs. construction peers at 0.49 times NAV.”
* Scotia Capital’s Ovais Habib to $3 from $3.50 with a “sector outperform” rating.
“We view the announcement as mixed. Although the new capex guidance was above our estimate, we believe the values are conservative and reduce uncertainty. Additionally, we see near-term upside potential with the upcoming DFS (2H/22 expected) that will include the Berry deposit which may notably increase project NPV,” said Mr. Habib.
* Raymond James’ Craig Stanley to $2.40 from $2.85 with an “outperform” rating.
* CIBC World Markets’ Anita Soni to $2.30 from $2.50 with a “neutral” rating.
* TD Securities’ Arun Lamba to $2.50 from $2.70 with a “speculative buy” rating.
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With methanol prices continuing to move lower due to “weak sentiment,” RBC Dominion Securities analyst Nelson Ng trimmed his full-year earnings expectations for Methanex Corp. (MEOH-Q, MX-T).
However, he thinks a rebound is imminent, expecting prices to trough and move higher in the fourth quarter.
“Absent a deep recession, we believe the company will generate strong discretionary cash flows in 2023 where natural gas prices should remain elevated (Methanex’s feedstock is mostly fixed or hedged globally),” he said.
To reflect Methanex’s latest non-discounted reference prices for September and Chemical Market Analytics’ updated methanol price forecast, Mr. Ng cut his 2022 adjusted EBITDA forecast to US$949-million from US$952-million. Conversely, his 2023 estimate rose to US$864-million from US$855-million.
“Using Chemical Market Analytics’ methanol price forecast ($360/MT through 2023), we estimate that Methanex will generate $500 million ($7 per share) of discretionary cash flows (after taxes, maintenance capex, lease payments and dividends),” he said. “As a result, we continue to expect the company to announce another NCIB later this year.”
The analyst maintained an “outperform” rating and US$55 target for Methanex shares. The current average is US$47.91.
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In other analyst actions:
* Stifel analyst Stephen Soock downgraded Monarch Mining Corp. (GBAR-T) to “hold” from “speculative buy” with a 50-cent target, down from $1.50 and below the 98-cent average.
“Monarch Mining provided a disappointing operational update on the ramp up of its Beacon Mill,” he said. “The mill has had severe mechanical issues and has only operated at 50 per cent of its capacity since startup. Additionally, the grade of low grade 2.5 grams per ton stockpiled material has reconciled to 1.5 g/t through the plant. This brings into concern the validity portions of Beaufor’s geological model. A lack of ability to process higher grade or successfully ramp up within the next 6 months will leave the company in a cash crunch to execute their near term growth strategy at the mine. We have adjusted our model for the slower ramp up, decreased our LOM head grade assumption by 10 per cent, incorporated additional equity raised, and delayed Croinor’s development resulting in 62-per-cent decrease in corporate NAV.”
* In a research report reviewing second-quarter earnings season in the Canadian real estate sector, BMO Nesbitt Burns’ Jenny Ma raised her H&R Real Estate Investment Trust (HR.UN-T) target to $17 from $16.50, above the $16.39 average, with an “outperform” rating.
“Largely as expected, the macro themes from Q1/22 carried into Q2/22 as risks around inflation and rising interest rates continued to drive market volatility, in addition to persistent downward pressure on cash flow and cloudy outlook on property valuations,” she said. “Retail continued to prove steady, with all retail REITs under coverage reporting positive year-over-year cash flow/unit and SPNOI growth. The outlook for office remains cautious, while cash flow/unit in Q2/22 was flat y/y and occupancy was down on average. The multifamily REITs once again recorded positive y/y growth in cash flow/unit on an average basis on the back of positive SPNOI growth as pressure from cost inflation was fully absorbed by positive top line growth. As highlighted in our July 4 sector note ‘Battening Down the Hatches Amid Rising Rates and Risks’ we pivoted to a more conservative outlook for Canadian REITs due to the macro uncertainty taking place.”
David Leeder