Inside the Market’s roundup of some of today’s key analyst actions
National Bank Financial analyst Gabriel Dechaine expects investors to avoid Canadian Imperial Bank of Commerce (CM-T) stock until its net interest margin “dynamic improves and until housing market concerns dissipate,” which he thinks will occur until later in 2023.
Also seeing a “relatively challenged” growth outlook, Mr. Dechaine lowered his recommendation for CIBC to “sector perform” from “outperform.”
He was one of four analysts on the Street to downgrade the bank on Friday, a day after its share plummeted 7.7 per cent.
Banks prepare for economic turbulence after mixed annual results
“CM’s Q4/22 revenues fell short of expectations due mainly to 7 basis points of NIM compression at the all-bank level (excl. trading),” he said. “Spreads were negatively impacted by a variety of factors, namely lower loan yields in Canadian banking (where NIM fell 5 basis points quarter-over-quarter) and negative revenues in the Treasury department. CM’s relatively high mortgage exposure, which is already a negative sentiment driver for the stock, hit revenues as spreads on renewals have compressed materially. This issue could persist over the next couple of quarters, which is reflected in management’s guidance for improved margins only by the second half of fiscal 2023.”
Mr. Dechaine acknowledged the bank’s provision for credit losses (PCLs) performance “certainly drew some attention given the economic backdrop,” given it exceeded his forecast by 45 per cent. However, he attributed the variance “primarily to conservative assumptions made by the bank in setting its performing allowance (ACL).”
“That is, impaired PCLs of $219-million were 22 per cent below our forecast, whereas performing PCLs of $217-million were 10 times our estimate,” he said. “the bank explained that conservative assumptions applied to its unsecured personal loan book in Canada and cuts to its U.S. GDP forecasts were among the most important assumption changes, which resulted in CM’s performing ACL ratio increasing by 4 basis points quarter-over-quarter (i.e., the largest increase in the group this quarter). We note that credit metrics were not alarming, with CM’s GILs ratio flat quarter-over-quarter, new formations down 10 per cent quarter-over-quarter (vs. peers reporting large increases) and the mortgage delinquency rate falling sequentially.”
Adjusting his forecast to account for a lower NIM forecasts and a higher expense base, the analyst lowered his target for CIBC shares to $67 from $80. The average target is $69.30.
Elsewhere, others making rating changes were:
* Scotia Capital’s Meny Grauman to “sector perform” from “sector outperform” with a $68 target, down from $75.
“CIBC’s Q4 EPS miss stands out both in terms of its magnitude and its composition,” he said. “This double-digit miss was not the product of a single event but a series of items including elevated liquidity levels that compressed margins by more than expected, a step-up in performing PCLs that reflects a higher degree of conservatism than most peers, and elevated expenses driven in part by a severance charge. The end result is not only what we expect to be a material downward revision to consensus estimates, but also a wider discount to the group. While we continue to believe that CIBC is well positioned to re-rate over time, this quarter’s performance is likely to push back that timeline as the market takes a much more cautious view of the bank’s future performance including lingering near-term margin headwinds. Given all of that, we feel it is appropriate to step to the sidelines on this name even after a nearly 8-per-cent sell-off on earnings day, and we will reevaluate this stance as margins stabilize and the economic outlook begins to look more constructive.”
* Canaccord Genuity’s Scott Chan to “hold” from “buy” with a $66.50 target, down from $75.
“CM reported a large EPS miss,” he said. “The bank’s Q4 adj. EPS was $1.39 vastly missing consensus of $1.72. Although we don’t view this quarter’s results as indicative going forward, we believe CM’s relative growth should lag peers near term and over our forecasted period. As a result, we are downgrading CM to HOLD (from BUY) and lowering our target price.”
* RBC Dominion Securities’ Darko Mihelic to “sector perform” from “outperform” with a $69 target, down from $78.
Analysts making target adjustments include:
* Desjardins Securities’ Doug Young to $66 from $70 with a “hold” rating.
“Adjusted pre-tax, pre-provision (PTPP) earnings were 12 per cent below our estimate,” he said. “To be fair, we agree with management that these results are not indicative of the earnings power of the bank. That said, given the outlook, CM could be more of a 2H FY23 story in our opinion.”
* Credit Suisse’s Joo Ho Kim to $66 from $72 with an “outperform” rating.
“CM’s Q4 results were disappointing, as much of the miss against us came from weaker net interest margins, a key area of focus certainly for this quarter and the near-term. Partly driving the Canadian P&C NIM compression was the impact of tightening mortgage spreads, which was echoed by some of the peers (could persist but is improving). Also impacting NIMs were lower prepayment activities, which is expected to dissipate (given the stability in rates more recently; NIMs were up 2bps ex. prepayment impact). On expenses, CM seems to be nearing the tail-end of its strategic spend initiatives (which drove nearly half of the year-over-year expenses this quarter), and that should set up the bank well in delivering positive operating leverage next year,” he said.
* Barclays’ John Aiken to $66 from $69 with an “equal-weight” rating.
“While the reset in expectations from the weaker fourth quarter could present upside for CIBC in 2023, we note that it is not likely to get much valuation credit until it executes on its efficiency improvements,” said Mr. Aiken.
* BMO’s Sohrab Movahedi to $71 from $76 with an “outperform” rating.
* KBW’s Mike Rizvanovic to $62 from $69 with a “market perform” rating.
* TD Securities’ Mario Mendonca to $64 from $65 with a “hold” rating.
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With a “stronger outlook support by [an] 8-per-cent dividend raise,” Canaccord Genuity analyst Scott Chan upgraded his recommendation for Toronto-Dominion Bank (TD-T) to “buy” from “hold” in response to stronger-than-anticipated fourth-quarter results.
Canada’s Big Six banks reported fourth-quarter earnings this week. Here’s what you need to know
Shares of TD jumped 2.6 per cent on Thursday with the premarket earnings release, including adjusted earnings per share of $2.18 that topped both Mr. Chan’s $2.11 estimate and the consensus forecast of $2.06. Total provision for credit losses (PCLs) of $617-million were also well ahead of expectations ($497-million and $499-million, respectively), “including reserve builds within Canadian and US consumer portfolios.”
“Relative to CG estimates, total revenue was higher (driven by NII), slightly offset by higher expenses and PCLs,” said the analyst. “However, the bank did benefit from a lower-than-expected tax rate. Adj. PTPP growth rose 10 per cent year-over-year, while operating leverage was flattish. TD continues to target positive operating leverage over the medium term. From a segmented basis in FQ4, TD’s P&C segment were solid on both sides of the border, while market-sensitive businesses trailed (as expected) impacted by the challenging market environment ... Amongst the Big-6, TD has the lowest exposure to Capital markets, which will slightly improve based on the recent closing on Cowen Inc.”
Emphasizing its U.S. retail momentum and incorporating its acquisition of First Horizon Corp. into his financial model, Mr. Chan raised his target for TD shares to $103 from $95. The average target on the Street is $101.40, according to Refinitiv data.
Other analysts making target adjustments include:
* Desjardins Securities’ Doug Young to $105 from $103 with a “buy” rating.
“Clearly, it was a big beneficiary of higher interest rates. With the pending close of the First Horizon acquisition being delayed, we have adjusted our model, and depending on when it actually closes, we may have to do so again. Otherwise, we like the set-up for TD over the coming year,” said Mr. Young.
* Credit Suisse’s Joo Ho Kim to $98 from $96 with a “neutral” rating.
“TD reported another quarter of strong results (even adjusting for the tax benefit), underpinned by margin improvements from both P&C businesses which topped the peer group,” he said. “That strength overshadowed other softer areas of the results including continued sluggishness in overall loan growth from the U.S. (especially relative to peers), in addition to elevated expenses (despite the guidance for some moderation ahead). Meanwhile, capital was another good news story, with the bank reiterating its confidence for the CET1 ratio to remain above 11-per-cent post-Cowen and FH acquisitions.”
* RBC’s Darko Mihelic to $113 from $106 with an “outperform” rating.
“TD had a good quarter with a core EPS above our estimate and consensus, mostly led by higher-than-expected results in Canada and U.S. P&C.,” he said. “The bank also increased its dividend this quarter. TD had strong revenue and loan growth this quarter relative to peers. The core all-bank NIM according to our calculations also expanded quarter-over-quarter, which we view positively. With an acquisition on the horizon we view TD’s EPS growth as above average with room for upside once we are on the other side of a recession.”
* Barclays’ John Aiken to $102 from $100 with an “overweight” rating.
“Although we still await any regulatory news on the First Horizon acquisition, TD’s fourth quarter provides solid results on which it can build in 2023, outside of the deal,” said Mr. Aiken.
* CIBC’s Paul Holden to $96 from $93 with a “neutral” rating.
“TD put up a strong quarter, highlighted by NIM expansion. F2023 guidance implies that consensus EPS was already in the right range. The rate trade should work for at least one more quarter, possibly two, but then we will have to worry about credit risk and capital levels. This is what holds us back from being more positive on TD. It is a more credit-sensitive name and CET1 will be near the bottom of the range following the closing of acquisitions,” said Mr. Holden.
* BMO’s Sohrab Movahedi to $98 from $94 with a “market perform” rating.
* KBW’s Mike Rizvanovic to $106 from $102 with an “outperform” rating.
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While Bank of Montreal’s (BMO-T) core earnings per share fell short of his expectations, RBC Dominion Securities analyst Darko Mihelic called it a “fine” quarter, saying it remains “strong where it mattered in Canada and U.S. P&C.”
BMO shares rose 1.2 per cent on Thursday following the premarket release of its fourth-quarter results, which included adjusted EPS of $3.04 that fell 9 cents below Mr. Mihelic’s estimate.
“Capital Markets and Corporate earnings missed our forecasts this quarter but were partially offset by better than expected earnings in Canada and U.S. P&C,” he said. “Changes to our model mainly reflect actual Q4/22 results, lowered NIM in Canada P&C and Capital Markets, and slower expense synergies from the acquisition of Bank of the West. Our core EPS estimates move lower as a result.”
“We make some changes to our model, largely reflecting Q4/22 actual results and lowered NIM assumptions in Canada P&C and Capital Markets. We also increase our NIM expectations in U.S. P&C, which is partially offset by slower expected expense synergies from the Bank of West acquisition, which affects our 2023 core EPS estimate. Overall, our core EPS estimate moves to $14.68 (was $15.27) in 2023 and $15.44 (was $15.50) in 2024.”
Rolling forward his valuation to his 2024 core EPS estimate, Mr. Mihelic increased his target for BMO shares by $3 to $154, reaffirming an “outperform” rating. The average is $145.82.
Others making changes include:
* Desjardins Securities’ Doug Young to $146 from $148 with a “buy” rating.
“It was a noisy quarter for sure, but our thesis has not changed. We like the larger exposure to commercial vs retail banking and the growth potential provided by the pending Bank of the West (BoTW) acquisition,” said Mr. Young.
* Barclays’ John Aiken to $147 from $153 with an “overweight” rating.
“There was a mixed bag in BMO’s Q4-22 results, with decent loan growth overall aided by U.S. margin expansion offset by margin compression in Canada and a weaker performance in wealth,” he said.
* National Bank’s Gabriel Dechaine to $142 from $147 with a “sector perform” rating.
* Canaccord Genuity’s Scott Chan to $151 from $148 with a “buy” rating.
* KBW’s Mike Rizvanovic to $160 from $158 with an “outperform” rating.
* TD Securities’ Mario Mendonca to $150 from $145 with a “buy” rating.
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IA Capital Markets analyst Matthew Weekes thinks the fundamentals for TC Energy Corp.’s (TRP-T) North American natural gas assets “remain constructive,” driving a “strong” long-term growth outlook.
However, following this week’s Investor Day event, he lowered his recommendation for the Calgary-based company to “hold” from “buy,” awaiting clarity on the costs of the Coastal GasLink pipeline. He predicts the project will remain an “overhang” until further details are disclosed, which he anticipates early in the new year.
TC Energy expects cost of Coastal GasLink pipeline project to rise
“TRP highlighted additional material cost increases on CGL, which are not built into the current funding plan and will most likely aim to be financed by asset sales over and above the current $5-billion-plus estimate,” he said. “With additional funding drag from CGL on a CAPEX plan that is already above average for 2023, along with general inflation, higher interest rates, and regulatory lag in US Gas Pipelines, we believe the path to deleveraging will remain challenged in the near term.”
Mr. Weekes said the additional “material” cost overruns for CGL “sullied” a “generally positive tone” for the Investor Day event. He thinks messaging and strategy “remained consistent,” seeing “robust investment potential in its asset base to serve growing demand for natural gas, power, and low-carbon solutions.”
“TRP’s existing assets are well positioned to deliver natural gas from prolific, low-cost gas basins to meet growing demand-pull from industrial, power generation, and LNG export markets across the continent,” he said. “TRP also sees opportunities to optimize its Liquids systems. The Company also highlighted the key role of Bruce Power in supporting Ontario’s growing electricity supply needs, as well as robust opportunities to support customers in the low-carbon energy transition.”
“TRP’s approach to energy infrastructure development is grounded in fundamentals and the Company aims to be ahead of the curve in terms of how its investment mix compares to the evolving energy mix. TRP’s assets are heavily weighted toward natural gas transmission and the Company’s pipelines are situated to provide access from low-cost production basins to growing demand markets. TRP sees natural gas demand continuing to grow through the decade and maintaining a significant proportion of the energy mix over the long term. Key demand growth drivers include LNG exports, coal-to-gas power conversions, and industrial use. North American production growth is largely expected to come from the Montney in the WCSB and Haynesville and Permian shale gas in the southern U.S., while the Appalachian shale is expected to provide the largest but more mature profile of gas production.”
‘No sacred cows’ as pipeline company TC Energy prepares for $5-billion asset sales
After trimming his comparable earnings per share projections for 2022 and 2023 from $4.26 and $4.24, respectively, from $4.29 and $4.37 due, in part, to higher capital spending, Mr. Weekes reduced his target for TC Energy shares to $64 from $66. The average is currently $65.10.
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After it released “impressive” 2023 financial guidance that was well ahead of the Street’s expectations and predicted another record year, Desjardins Securities analyst Brent Stadler called Capital Power Corp.’s (CPX-T) Investor Day event “solid,” seeing it “on track to significantly reduce emissions and create value for shareholders.”
“In our view, 2022 has highlighted the importance of natural gas assets to grid reliability, which we expect will be emphasized as more renewables are added to the grid,” said Mr. Stadler. “We believe CPX can unlock additional value from these assets as it executes on its emissions reduction plans. On the growth front, CPX’s opportunities are robust for both natural gas and renewables.”
The Edmonton-based company announced “strong” 2023 adjusted EBITDA guidance of $1.455–$1.515-billion with the midpoint of $1.485-million sitting 13 per cent higher than the 2022 guidance midpoint. Adjusted funds from operations guidance is $805–865-million with the midpoint ($835-million) up 6 per cent year-over-year
“In our view, CPX should remain a leader in Alberta with its thermal operational expertise, and its focus on greening its operations by removing coal and repowering assets using some of the most efficient technology, as well as carbon capture and the buildout of renewables,” the analyst said. “CPX expects to achieve 10–12-per-cent annual total shareholder returns, underpinned by its $1.3-billion growth capex, which it expects to complete by 2024. Further, we believe CPX should continue to be viewed as an ESG diamond in the rough as it looks to eliminate 7 million tons of carbon annually from its portfolio of assets in Alberta (70 per cent of the remaining targeted emissions reductions in the province) by removing coal (by 2023), together with efficient natural gas repowerings (online by 2024) and large-scale carbon capture (by 2027).”
Maintaining a “buy” recommendation for Capital Power shares, Mr. Stadler raised his target by $1 to $57. The average on the Street is $51.77.
“We believe CPX offers investors deep value in light of our view that it is mispriced in the market,” he said. “It offers near-term exposure to a strong Alberta power market and the hot renewables market, but also provides a unique re-rate angle as it works to remove coal (by 2023). Longer-term (2027), we believe another re-rate is possible as CPX cleans up its strategically located natural gas assets through a carbon capture and storage solution.”
Elsewhere, other analyst making changes include:
* IA Capital Markets’ Naji Baydoun to $52 from $50 with a “hold” rating.
“Despite executing on significant diversification and growth initiatives in recent years, CPX’s shares continue to trade at a steep discount to their Canadian IPP peers,” said Mr. Baydoun. “CPX’s increased exposure to thermal assets is likely to place a cap on the shares’ equity market valuation over the near term (in our view). As such, although we have increased our near-term financial estimates and price target on CPX, we would continue to wait for a better entry point or more strategic developments before accumulating the shares.”
* ATB Capital Markets’ Nate Heywood to $52 from $50 with a “sector perform” rating.
“In the near-term, we expect Capital Power to continue investing heavily in growth initiatives, with a significant focus on the Genesee 1 & 2 repowering, accompanied by recent efforts on carbon capture and renewable projects in both Canada and the U.S.,” he said. “Additionally, management has demonstrated its appetite for natural gas generation M&A with the recent Midland Cogen acquisition, an example of acquiring midlife assets with attractive contracting profiles. The Company boasts an attractive dividend yield of 4.9 per cent, supported by a modest 2022 payout ratio of 32 per cent (below the 45-55-per-cent target range), and is targeting 6-per-cent annual dividend growth through 2025. With a 2023 estimated EV/EBITDA of 7.0 times, we note that Capital Power is trading at a discount to the peer average of 10 times, although we attribute the discount to its exposure to thermal generation – a business line that may continue to see future investment; however, CCS investment could offer modest discount relief.”
* Scotia’s Robert Hope to $51 from $50 with a “sector perform” rating.
“Capital Power’s Investor Day highlighted the company’s various growth opportunities as well as its exposure to the robust Alberta power market,” said Mr. Hope. “The company’s 2023 guidance was better than expected, though we remain slightly below the range as we are taking a conservative view on Alberta power pricing. If the Alberta power market remains strong, we see the potential for estimates to be revised higher, which would be a positive for the shares. Capital Power is currently trading at 7.8 times 2024 estimated EV/EBITDA, and as such, we expect some multiple expansion as our target implies an 8.0-times multiple. We have a positive bias on the name and our target increases $1 to reflect the higher EBITDA outlook.”
* CIBC World Markets’ Mark Jarvi to $50 from $48 with a “neutral” rating.
“2023 guidance, supported by strong Alberta (AB) power price forwards and positive hedge position updates (gas and power), points to another strong year ahead. This in turn drives continued solid FCF to support the growing dividend and growth initiatives. While there has been some minor cost creep on key projects, including the Genesee repowering and CCS initiatives, returns are still very healthy, and projects are generally advancing well. With positive estimate revisions and an improving outlook, our target price increases,” said Mr. Jarvi.
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In other analyst actions:
* Haywood Securities’ Pierre Vaillancourt downgraded Lundin Gold Inc. (LUG-T) to “hold” from “buy” with a $14 target, rising from $12.75 and above the $9.26 average on the Street. Elsewhere, Desjardins Securities’ Jonathan Egilo hiked his target to $15.25 from $12.75 with a “buy” rating.
* Initiating coverage of the U.S. cannabis industry, Wedbush analyst Gerald Pascarelli named Green Thumb Industries Inc. (GTII-CN, US$18 target) his “top pick,” pointing to “strong revenue growth, margins, profitability and cash flow generation. He gave it an “outperform” rating.
“We rate GTI as our Top Pick in cannabis, as the company has consistently demonstrated the ability to deliver on its targets and has the most efficient operating structure among all peers evidenced by the ability to generate positive net income, EPS and operating cash flow despite the penal 280E tax provision,” said Mr. Pascarelli. “On a go-forward basis, we are expecting GTI to be a net market share gainer and consistently deliver solid 30-per-cent EBITDA margins while benefitting from new adult use rollouts and an improving overall market backdrop as capex buildouts slow and new retail stores open up in key markets.”
He also initiated coverage of three companies, which he also gave “outperform” recommendations. They are: Cresco Labs Inc. (CL-CN, US$4.50 target); Curaleaf Holdings Inc. (CURA-CN, US$8.50 target) and Trulieve Cannabis Corp. (TRUL-CN, US$18 target).
* Ahead of the Dec. 15 release of its second-quarter results, ATB Capital Markets analyst Kenric Tyghe cut his Empire Company Ltd. (EMP.A-T) to $45 from $50 with an “outperform” rating. The average is $42.50.
“We are lowering our estimates (and price target) to better reflect the impact of current market dynamics on Empire’s absolute (and relative footprint),” he said. “Specifically, in the context of recent peer reports which highlighted food gross margins were flat to down (with reported margin expansion largely reflecting a tailwind from drug retail, where Empire has a markedly smaller footprint), and cost pressures that were too much for even the most tightly cost focused operator to manage away, we are lowering our gross margin and expense leverage expectations. We now expect sales of $7.59-billion (from $7.60-billion prior) for EBITDA of $569.4-million (from $581.6-million) and EPS of $0.66 (from $0.71). Despite our negative estimate revisions (and more cautious thesis), Empire remains Outperform rated on its attractive relative valuation.”
* Following increases to her lithium price forecast, Scotia Capital’s Lola Aganga raised her target for Lithium Americas Corp. (LAC-T, “outperform”) to US$42.50 from US$38.50 and Sigma Lithium Corp. (SGML-X, “outperform”) to $55 from $27. The averages are US$37.69 and $46.24, respectively.
“Lithium Americas remains our top pick as a fully-financed, near-term producer advancing the largest new brine operation in the last decade on track for initial production in Q1/23, and situated in the bottom quartile of the total cash cost curve,” she said. “Although there remains some headline risk pending a federal BLM ruling on its Thacker Pass project in Q1/23, we see a limited impact to the overall development timeline of the project which is currently on track for construction to begin in 2023. Upcoming catalysts include: guidance update at Argentinian operations by yearend, a feasibility study and partnership/financing agreement for the Thacker Pass project in 2023, construction decision at Pastos Grandes in H2 2023, and the completion of business separation into Argentinian and North American focused entities by year-end 2023.”
* Credit Suisse’s Andrew Kuske lowered his Mercer International Inc. (MERC-Q) target to US$18.50 from US$21 with an “outperform” rating. The average is US$17.90.
* Scotia Capital’s George Doumet cut his Rogers Sugar Inc. (RSI-T) target to $6.25 from $6.50 with a “sector perform” rating. The average is $6.20.
“RSI reported Q4 results that surpassed our expectations by 3 per cent and Street expectations by 7 per cent – and provided F23 guidance that implies flattish EBITDA growth at Sugar and modest growth at Maple,” he said. “As such, we have tapered our F23 estimates. All in all, our view on RSI remains unchanged: we like it for its stability and dividend yield (approximately 6 per cent) but see limited upside to the shares given its current valuation (10 times EBITDA F23E). Furthermore, we see an overhang as the company continues to evaluate its financing options for the Montreal expansion.”
* Seeing signs of a “robust” Black Friday Cyber Monday (BFCM) shopping period, CIBC’s Todd Coupland raised his target for Shopify Inc. (SHOP-N, SHOP-T) to US$50 from US$40, above the US$40.91 average, with a “neutral” rating.
“While the web traffic to the aggregate group of Shopify Plus merchants we now track remained in line, at up 12 per cent year-over-year during Q4 compared to Q3, in November it picked up to 16 per cent,” he said. “This was a trend we also noticed among Plus fashion merchants, which represent Shopify’s largest vertical exposure. Merchants in this category saw their web traffic rise to 29 per cent, up slightly from 28 per cent in Q3, but up 32 per cent in November. Web traffic data for Stripe, Shopify’s payments processor, mirrors these trends.”