Inside the Market’s roundup of some of today’s key analyst actions
While acknowledging its “muddied” outlook in the United States, National Bank Financial analyst Gabriel Dechaine upgraded Toronto-Dominion Bank (TD-T) to a “sector perform” recommendation from “underperform” previously, pointing to short-term tactical factors.
TD shares slid 2.1 per cent on Thursday following the release of its third-quarter financial results, reporting its first quarterly loss in 21 after it set aside a US$2.6-billion provision to pay anticipated regulatory fines over anti-money laundering failures.
“Our rationale: 1) the regulatory fine provision ‘clears the deck’ for potential CEO succession, which could include an external candidate; and 2) we expect street estimates to be cut closer to our 2025 (6 pere cent below pre-Q3/24 consensus),” he said. “Despite the upgrade, we would still position TD in the bottom half of our bank pecking order, especially over the longer term, as TD’s relative growth may trail peers.”
Andrew Willis: Resolving TD’s regulatory woes will pave way for bank’s next CEO
While he sees the US$3-billion in provisions against potential U.S. regulatory fines as a “clearing event”,Mr. Dechaine emphasized the bank’s long-term outlook south of the border remains “cloudy.”
“Specifically, the bank’s press release related to monetary penalty provisions also made mention of non-monetary penalties,” he said. “Aside from regulatory requirements that push compliance costs structurally higher, the bank could also face an asset cap on its U.S. operations. We discuss this risk factor in [a] report from May 2, 2024. We note that even if an official asset cap isn’t imposed on TD, future asset growth could be much lower than historical given a larger compliance infrastructure that could impede ‘business as usual’ progress.
“Aside from penalties, the fallout from TD’s U.S. regulatory matters has put pressure on the bank’s cost base. Case in point, expenses have grown at 10 per cent year-to-date, outpacing guidance for mid-single-digit growth this year. Aside from Cowen expenses, this guidance included $500-million of after-tax compliance costs related to U.S. regulatory matters. The bank had not provided guidance for these costs for F2025. When we asked on the call, management acknowledged that these costs were part of a multi-year program. We had already factored in another year of these expenses in our forecasts.”
Increased his target multiple to “reflect reduced uncertainty with regard to the direct financial impact of TD’s regulatory matters,” Mr. Dechaine raised his target for the company’s shares to $78 from $74. The average target on the Street is $86.29, according to LSEG data.
Elsewhere, other analysts making target adjustments include:
* RBC Dominion Securities’ Darko Mihelic to $88 from $89 with an “outperform” recommendation.
“Earnings were a little noisy as weather-related claims impacted insurance earnings; otherwise, we see earnings power as closer to $2.16 per share all else equal, although expense creep seems to be an issue,” said Mr. Mihelic. “We see credit quality as stable. We model a US$1 billion AML-related provision in Q4/24, and a final resolution to its AML issues is close at hand. We do not anticipate a ‘hard’ asset cap for TD, but expect higher expenses and some growth challenges in the U.S. We believe valuations reflect too much pessimism on earnings power and capital.”
* Desjardins Securities’ Doug Young to $90 from $91 with a “buy” rating.
“Cash EPS was essentially in line,” he said. “Adjusted pre-tax, pre-provision (PTPP) earnings were 3 per cent below our estimate due to misses in insurance and corporate. Trends in Canadian and US P&C banking were encouraging. There were no credit surprises. And while there are uncertainties around the U.S. AML issue, we are getting closer to a final resolution. We lowered our cash EPS estimates and target (to $90 from $91) and maintained our Buy rating. But patience is required.”
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National Bank Financial analyst Patrick Kenny recalibrated his target prices for Canadian pipeline, utility and energy infrastructure companies on Monday, seeing lower interest rates buoying valuations.
“With further doubt cast upon the ‘soft landing’ macroeconomic outlook scenario as sluggish data continues to emerge, and the 10-year GCAN rate having pulled back 50 basis points since the end of Q1/24, now hovering back down around 3.0 per cent, we have updated our cost of capital assumptions in line with our Economics & Strategy Group’s recently revised interest rate forecast,” he said in a research note.
“While our colleagues are now calling for a 10-year GCAN rate in the 2.60-2.75-per-cent range through 2025 on the back of another 175 basis points of expected overnight rate cuts, we highlight expectations of a more normalized 3.0-per-cent range by mid-2026. As such, we have lowered our long-term GCAN 10- year assumption embedded in our cost of capital assumptions across our coverage universe to 3.0 per cent (was 3.5 per cent). Recall, every 50 bps decrease to our long-term 10-year GCAN benchmark assumption results in a 10-per-cent valuation impact to our Pipeline & Utilities valuations, and 5-per-cent impact across our Midstream & Alberta Power names. As such, our target prices move up 7 per cent on average across our coverage list.”
Given that view, Mr. Kenny made these changes:
- AltaGas Ltd. (ALA-T, “outperform”) to $39 from $36. The average on the Street is $36.88.
- Atco Ltd. (ACO.X-T, “sector perform”) to $45 from $40. Average: $43.92.
- Brookfield Infrastructure Partners LP (BIP.UN-T, “sector perform”) to US$34 from US$31. Average: US$35.30.
- Capital Power Corp. (CPX-T, “outperform”) to $47 from $44. Average: $44.30.
- Emera Inc. (EMA-T, “sector perform”) to $54 from $49. Average: $52.67.
- Enbridge Inc. (ENB-T, “sector perform”) to $57 from $53. Average: $55.36.
- Fortis Inc. (FTS-T, “sector perform”) to $62 from $56. Average: $59.43.
- Gibson Energy Inc. (GEI-T, “outperform”) to $26 from $25. Average: $25.
- Hydro One Ltd. (H-T, “sector perform”) to $45 from $40. Average: $42.33.
- Keyera Corp. (KEY-T, “sector perform”) to $38 from $36. Average: $40.09.
- Pembina Pipeline Corp. (PPL-T, “sector perform”) to $57 from $53. Average: $56.75.
- TransAlta Corp. (TA-T, “outperform”) to $15 from $14. Average: $13.92.
- TC Energy Corp. (TRP-T, “outperform”) to $65 from $60. Average: $59.22.
The analyst also sees dividend yield spreads “offering further valuation torque.”
“Meanwhile, as the 10-year rate has slid back down, buoying valuations across the space, dividend yield spreads for the Pipelines & Midstreamers have tightened up towards their five-year averages (excl. pandemic years 2020-2021) versus the Power & Utilities names in our coverage universe remaining slightly inside normalized levels,” said Mr. Kenny.
“Assuming mean reversion, we highlight further upside potential for TRP, ENB, GEI, CU and EMA, with H, FTS, CPX, PPL and KEY leading the implied downside screening exercise. Having said that, we continue to reiterate the highly contracted and rate regulated return nature of the sub-sectors, providing shelter from inflationary pressures through escalators, supporting valuations amidst ongoing market volatility related to interest rate cut expectations, ongoing regulatory/political uncertainty and the upcoming U.S. election in November. Overall, we continue to recommend high-quality, double-digit (or near double-digit) FCF yields poised for valuation upside, while updating our top pick list to include ALA, TRP, TA, GEI and SES.”
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In the wake of second-quarter earnings season for Canadian base metals producers, Stifel analyst Cole McGill continues to expect the price of copper to end the year higher than where it started, “with FCF horsepower of our coverage continuing to drive deleveraging profiles, positive for valuation.”
“The main themes in 2Q24 were highlighted by i) deleveraging (positive for valuation), ii) M&A (also positive for valuation, albeit for longer-dated assets) and iii) cost control ex labour issues,” he said.
In a research report released Friday, Mr. McGill named two companies as his “best ideas” for investors moving forward.
* Capstone Copper Corp. (CS-T) with a “buy” rating and $12 target. The average on the Street is $13.50.
Analyst: “While there are always risks associated with ramp-ups, the recent Q2 update on the Mantoverde Development Project (MVDP), progressing largely on-time and on budget, has provided additional confidence that the ramp-up of operations is progressing as planned. The next hurdle, and in our view a key catalyst for the story, will be achieving commercial production rates at the MVDP, with Capstone targeting Q3. The successful achievement of nameplate operating rates will be a key de-risking milestone for the stock, signifying the transition from the spend phase of development into the harvest phase – production growth and FCF generation.”
* Hudbay Minerals Inc. (HBM-T) with a “buy” rating and $16 target. The average is $15.95.
Analyst: “The successful optimization of the New Britannia mill in gold-rich Manitoba will allow the company to make hay while the sun shines as the yellow metal hovers around all-time highs. Together with higher H2 grades in Peru (where a newly-signed collective agreement has lowered the near-term risk profile), this supports our thesis on the stock as a strong current FCF generator (modelled FCF yield at spot prices of 10 per cent/13 per cent in 2024/2025). Finally, management has intimated strong confidence in receiving key state permits for Copper World in Arizona, for a potentially catalyst-rich year-end on growth avenues.”
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RBC Dominion Securities retail equity analyst Irene Nattel reiterated her constructive stance on Dollarama Inc. (DOL-T) ahead of the Sept. 11 release of its second-quarter fiscal 2025 results, calling it “the best positioned Canadian retailer for pinched consumer budgets and the value-seeking spending backdrop that likely continues into 2025 as mortgage resets accelerate.”
“Notwithstanding recent valuation expansion, we believe the stock remains highly attractive with excellent visibility and sustainability of the growth runway, further Dollarcity optionality including planned expansion into Mexico starting 2026, and perennial return of capital to shareholders through both dividend growth and share buyback,” she added.
Ms. Nattel is currently projecting earnings per share for the quarter of 97 cents, matching the Street’s expectation and up 13 per cent year-over-year. That’s driven by same-store sales of 4.5 per cent, which is at the top end of the retailer’s guidance range (3.5-4.5 per cent).
“Our forecasts for FQ2 and beyond are predicated on SSS consistent with mid-point of the long-term target range 4-5 per cent, normalizing from high single digits to mid-teens last two years,” she said.
“Our FQ2 SSS estimate is normalizing from fiveyear Q2 SSS CAGR [compound annual growth rate] 6.5 per cent, boosted by the torrid pace of F2023-F2024 two-year stacked 24.8 per cent. Nonetheless, DOL relative same-store performance clearly stands out against the backdrop of stretched consumer wallets and value-seeking behaviour that show no sign of abating. Our FQ2 estimated GM% [gross margins] 44.6 per cent up 70 basis points primarily reflects easing shipping and logistics costs year-over-year, which is a recurring theme across our retail coverage. Duration of rail strike is a caveat for FQ3 but we currently do not anticipate meaningful disruption, particularly as stores are already stocked for back to school and most of the Halloween/Christmas seasonal merchandise is likely already in warehouse. Our FQ2E SG&A ratio up 35 bps reflect labour pressure partly offset by scaling and efficiencies.”
Calling Dollarama “a stock to own across cycles,” Ms. Nattel raised her target to $144 from $138, reiterating an “outperform” rating. The average is $132.09.
“Notwithstanding potential temporary demand shifts heading into a potential recession, in our view, the long-term thesis remains strong and undisturbed by transient macro headwinds,” she said. “With a deep value positioning and an offering that skews to everyday household needs, DOL’s business model is largely unaffected by the economic backdrop.”
“We are confident in management’s ability to execute on its long-term strategy to deliver unit growth of 4–5 per cent on average, long-term sustained SSS growth at the high end of our coverage universe. Achievement of store count potential remains many years into the future at the current pace, while the ongoing evolution of product offering among existing price points and midF23 introduction of price points up to $5 should provide a tailwind to SSS for the foreseeable future. DOL’s superior merchandising skills should enable the company to profitably grow its market share both geographically and on a category basis to drive strong, consistent growth.”
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In other analyst actions:
* Piper Sandler’s Anna Andreeva assumed coverage of Lululemon Athletica Inc. (LULU-Q) with a “neutral” rating and US$250 target, while Wells Fargo’s Ike Boruchow reduced his target to US$285 from US$350 with an “equal weight” rating.. The average on the Street is US$346.68.