Inside the Market’s roundup of some of today’s key analyst actions
RBC Dominion Securities analyst Darko Mihelic sees Canadian Imperial Bank of Commerce (CM-T) “running a very straightforward strategy, and it is executing well, though balance sheet growth is still below peers.”
He raised his forecast for CIBC in response to better-than-anticipated third-quarter financial report, which he said largely reflected lower-than-expected U.S. impaired provisions for credit losses (office and diversified commercial) and “a few one-off items that helped results as well.”
“Updates to our models were modest and mostly offsetting as we opted for some conservatism on expenses and PCLs, though we now include a buyback,” he said. “CM announced its intent to repurchase up to 20 million common shares (2 per cent of shares outstanding) and we model the bank to repurchase 50 per cent of its NCIB evenly over the next 4 quarters, which has a positive impact on our 2025 and 2026 core EPS estimates of $0.06 and $0.09, respectively. Overall, our core EPS estimates move modestly higher to $7.34 (was $7.22) in 2024, $7.55 (was $7.51) in 2025, and $8.25 (was $8.20) in 2026.”
A breakdown of the big banks’ third-quarter earnings
Before the bell on Thursday, CIBC reported adjusted earnings per share of $1.93, exceeding both Mr. Mihelic’s $1.80 estimate and the consensus forecast on the Street of $1.74.
“We adjust for higher than anticipated earnings from Corporate and some one-time expenses that were not removed from adjusted earnings and we think earnings ‘power’ looked closer to $1.96 per share and even here it is somewhat elevated by some provision for credit loss (PCL) recoveries,” he added. “Relative to our estimates, the primary driver of higher than expected results was impaired PCLs mostly in the U.S. Commercial segment, where we forecasted $167-million but impaired credit losses came in at $15-million. The Corporate segment disclosed bottom line losses for nearly 4 years, but this quarter’s results were $87-million in earnings while we expected a loss of $21-million (a $108-million positive variance). Solid Corporate results were attributed to market-related treasury revenues and lower funding costs.”
Reiterating his “sector perform” rating for CIBC shares, Mr. Mihelic raised his target to $74 from $69 after raising his target multiple a half turn. The average target on the Street is $76.91, according to LSEG data.
Elsewhere, a pair of analysts upgraded CIBC:
* BoA Global Research’s Ebrahim Poonawala to “buy” from “neutral” with a $90 target, up from $74.
“We are upgrading our rating on CIBC (CM) shares to Buy from Neutral on increasing confidence around EPS/ROE outlook,” he said. “Why the increased confidence? Combination of steady execution from the management team which has the potential to improve investor perception of Commerce as a bank that had frequently tripped-up due to execution missteps (going back to the last 10-20yrs). Strong execution and an improving ROE outlook should allow the stock to narrow the relative valuation gap vs. best-in-class peer Royal Bank of Canada-RY, with CM trading at 10.3 times 2025 P/E vs. 12.7 times for RY.”
* Cormark Securities’ Lemar Persaud to “buy” from “market perform” with an $83 target, rising from $75.
Analysts making target adjustments include:
* Desjardins Securities’ Doug Young to $83 from $77 with a “buy” rating.
“Adjusted pre-tax, pre-provision (PTPP) earnings were 10 per cent above our estimate, or 2 per cent above excluding corporate,” said Mr. Young. “Even if we remove the corporate outperformance, cash EPS was above our estimate. The messaging around NIMs, expenses and credit was encouraging, and progress in these areas is what drove us to upgrade the stock in our 3Q FY24 preview.”
* National Bank’s Gabriel Dechaine to $86 from $78 with an “outperform” rating.
“Q3/24 PCLs were 20 per cent below our forecast,” he said. “Importantly, PCLs were heavily influenced by lower losses in the U.S. Office CRE portfolio, which fell to $9-million from around a $145-million average over the prior four quarters. Consolidated GILs also fell on a sequential basis (i.e., down 3 per cent), owing to the same factor. This trend confirms guidance that peak CRE losses are in the rearview mirror, though management cautioned that we could see higher CRE losses than this quarter’s figure in the future (albeit still below peak levels). As discussed previously, the decline in CRE losses provides a hedge against rising impairments in other portfolios. As such, CM should exhibit a lower ramp-up of impaired provisions than its peers in coming quarter.”
* Scotia’s Meny Grauman to $85 from $77 with a “sector outperform” rating.
“CIBC’s Q3 result was messy with an unusually strong performance from the Corporate segment, offset by some unusual expense items including a legal provision and software impairment charge,” said Mr. Grauman. “Yet underneath it all was better-than-expected revenue growth, helped by material margin expansion, positive operating leverage, and lower loan loss provisions. Credit was certainly not the only story here as PTPP earnings beat the Street by 7 per cent, but it was certainly a key part of the story especially considering the elevated U.S. office losses that weighed on results last year and into Q1. On top of that we got a 2-per-cent buyback, and clear messaging from Management that organic capital deployment remains the priority, and that the bank is only interested in tuck-in acquisitions. That all added up to a strong performance on earnings day, but we believe the stock can go materially higher. Yes, CIBC is the best-performing Big Six bank over the past 12 months, but no we don’t believe that this story has fully played out given that the stock is trading at just under 10 times our new EPS estimate for F2025. Beyond further multiple expansion we also believe that forward estimates have room to go materially higher.”
* BMO’s Sohrab Movahedi to $81 from $77 with an “outperform” rating.
“We like CM’s momentum in its domestic franchise and believe its strength will persist through 2024-25, supported by its focus on its affluent customer acquisition strategy. While CM has faced valuation pressure from the bank’s exposure to Canadian housing and U.S. office CRE, we expect the valuation discount to unwind as investor fears abate; we see ROE trending favourably through FY25,” he said.
* TD Cowen’s Mario Mendonca to $91 from $93 with a “buy” rating.
“While elevated treasury gains added approximately 7 cents per share this quarter, we view this quarter favourably in several respects including a) an improving capital ratio and the 2-per-cent NCIB, b) solid PTPP despite elevated spending particularly in the US, c) good growth in marketsensitive higher ROE business, and d) solid credit metrics as well as credit guidance. In our view, results support a higher relative P/E,” he said.
* Barclays’ Brian Morton to $77 from $71 with an “underweight” rating.
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Like the volatile after-hours response from investors, equity analysts also had a mixed response to the quarterly report from Lululemon Athletica Inc. (LULU-Q), which featured better-than-expected earnings but a reduction to its full-year guidance due to tepid U.S. demand.
The Vancouver-based activewear company reported earnings per share for its second quarter of US$3.15, topping the consensus forecast of US$2.93. However, it now expects fiscal 2024 net revenue in the range of US$10.38-billion to US$10.48-billion, down from a prior forecast of US$10.70-billion to US$10.80-billion, with EPS of US$13.95 to US$14.15, falling from US$14.27 to US$14.47.
Analysts raising their targets for Lululemon shares include:
* Piper Sandler’s Anna Andreeva to US$260 from US$250 with a “neutral” rating.
“LULU had a 2Q24 beat and lowered estimates for ‘24 -- we worry not enough. We think the stock likely gets a pass for now given share underperformance, albeit we expect valuation to stay constrained until US comps revert to positive,” she said.
* TD Cowen’s John Kernan to US$382 from US$375 with a “buy” rating.
* Deutsche Bank’s Krisztina Katai to US$292 from US$291 with a “neutral” rating.
Those lowering their targets include:
* BoA Securities’ Lorraine Hutchinson to US$355 from US$440 with a “buy” rating.
“We reiterate our Buy; we think valuation at 10x EV/EBITDA is overly discounting the slowdown embedded in the updated guidance,” she said. “LULU reported 2Q EPS of $3.15, beating our $2.96 estimate as better GM and lower SG&A more than offset a sales miss. Revenue increased 7 per cent, below guidance due to continued product issues. 2Q results included Americas comps down 2 per cent and int’l comps up 22 per cent. Management lowered its F24 sales growth to 8-9 per cent (or 6-7 per cent excluding 53rd week); this guidance incorporates similar trends in 2H as 2Q, macro uncertainty from the election, and shorter holiday shopping season.”
* Barclays’ Adrienne Yih to US$261 from US$263 with an “equalweight” rating.
“LULU posted lackluster 2Q24 top-line sales results with a sales and comp miss, led by a negative inflection in the Americas region with a negative 3-per-cent comp (down 2 per cent in constant currency), resulting in lowered top-line and EPS guidance for FY24. International remained strong at up 19 per cent (up 22 per cent constant currency),” she said.
* KeyBanc’s Ashley Owens to US$350 from US$415 with a “overweight” rating.
“LULU delivered mixed 2Q results; adjusted full-year guidance down. Int’l continues to display strength (up 29 per cent year-over-year; China up 34 per cent year-over-year), though management noted ongoing U.S. softness was related to missed conversion opportunity,” she said. “Though LULU adjusted women’s size availability in the U.S. after 1Q learnings, management feels there’s newness opp. within color, print, patterns, and silhouettes, which the newly structured product and brand teams are actively addressing. Noting a full innovation pipeline, LULU expects to return to historical levels of newness by Spring 2025, with sequential improvement in 3Q & 4Q. We lower our PT to $350 (prev. $415, on our lower estimates), though we think LT fundamentals remain intact and continue to believe in management’s ability to execute on its Power of Three x2 plan.”
* Bernstein’s Aneesha Sherman to US$325 from US$345 with a “market perform” rating.
* Guggenheim’s Robert Drbul to US$350 from US$525 with a “buy” rating.
* Raymond James’ Rick Patel to US$325 from US$350 with an “outperform” rating.
* Morgan Stanley’s Alex Straton to US$326 from US$329 with an “overweight/cautious” rating.
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After plummeting 23.6 per cent on Thursday, Eight Capital analyst Phil Skolnick is expecting further declines for shares of Parex Resources Inc. (PXT-T) following its “disappointing” quarterly update.
Predicting the stock will “remain in the penalty box,” he dropped his recommendation for the Calgary-based company to “neutral” from “buy” previously.
“Why not a SELL rating?,” he said in a research note. “We could see the stock continue to underperform. However, we believe most of the damage has been done with the stock down 24 per cent as of Thursday’s close. Also at STRIP pricing on our new estimates, we see a 18.2-per-cent FCF [free cash flow] yield, and a 6.6-per-cent FCF yield after the divided, which supports further buybacks. Finally, we continue to see a strong balance sheet with the company ending this year and next year at an estimated 0.0 times and 0.1 times net debt/CF on STRIP pricing. Nonetheless, we do not see a reason to remain BUY rated.”
Mr. Skolnick’s rating change comes after Parex, which focus on operations in Columbia, made a “meaningful” reduction to its 2024 production guidance (by 8,000 barrels of oil equivalent per day) and now sees declining year-over-year output.
“What likely negatively impacts market perception, in our view, is that just on July 31st PXT stated in its Q2 release that it is positioned to grow production into year-end by executing a workover at Arauca-8, bringing online new wells at Arauca and Capachos, in addition to multiple planned appraisal and development wells at LLA-32,” he said. “The only cautionary note that the company included in the Q2 release is that the then reaffirmed FY 2024 average production guidance of 54-60 MBOE/d and capital expenditure guidance of US$390- to US$430-million were trending toward the lower end of their respective ranges.”
The analyst also expressed concern over the “uncertainty” around its three-year plan after it withdrew its development strategy and predicted Parex is also “likely to disappoint” on resources.
“Given recent results from the Arauca assets, we expect the company had overestimated the growth potential of the assets and/or was surprised by its underperformance to-date and will now need to either reduce longer term guidance or find a suitable replacement for the growth wedge expected from the Arauca bloc, which requires either Big E success or an acquisition, in our view,” he said.
Seeing the abrupt departure of chief financial officer Sanjay Bishnoi adding “further uncertainty,” Mr. Skolnick dropped his target for Parex shares to $16 from $32.50. The current average is $25.72.
“What could help the stock? Restructuring its strategy, but this must yield a credible low-risk and low-cost plan to increase production and reserves, and meeting expectations consistently,” he said. “However, meeting a low bar alone likely won’t excite investors. Therefore, exploration success would be key; but PXT’s program is high-risk in nature and it hasn’t provided positive results to-date. The company continues to drill the Arantes well in the Llanos Foothills. The well is expected to reach total depth of roughly 19,500 feet in Q4 2024, with preliminary results by year-end 2024. However, Wednesday night PXT also announced that the Hidra well, which was expected to spud Q3 2024, has been deferred by the company. While the well is drill-ready, social-related issues have resulted in the decision to pause the spud of the well to limit and safeguard capital. This once again highlights the high-risk nature of PXT’s strategy.”
Elsewhere, others making target adjustments include:
* Haywood Securities’ Christopher Jones to $25 from $33 with a “buy” rating.
“The budget reduction will support the Company’s return of capital framework that aims to return 33 per cent of funds flow back to shareholders,” he said. “Additionally, PXT announced that Sanjay Bishnoi (CFO) is stepping down from his position as CFO, which he has held for 11 months and has been named as CEO of Entropy Ltd. The Company has already engaged an external search for a permanent replacement. In the interim, VP Finance and Controller, Cameron Grainger will assume the role as interim CFO until a replacement has been named. As a result of the lower 2024 guidance, we are lowering our 2024 production and cashflow estimates, and our target price as well. We have left our Buy rating unchanged but believe that two consecutive negative releases over the past month, has eroded investor confidence which could take some time to regain.”
* Scotia’s Kevin Fisk to $19 from $23 with a “sector perform” rating.
“Our updated 2024 and 2025 free cash flow estimates have dropped by 23 per cent and 18 per cent, respectively,” said Mr. Fisk. “Further, we have decreased our target price to $19/sh to reflect the possibility of negative reserve revisions. We estimate that PXT’s current share price reflects a 20-per-cent reduction in PDP reserves. This priced in reserve reduction is modestly higher than we would expect, but it is plausible given the information available. In our view, PXT may be attractive to some value-oriented investors as it is likely trading at a modest discount to its adjusted PDP NAV. However, we continue to rate the stock as sector perform and are looking for more information on PXT’s production outlook and reserves.”
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In other analyst actions:
* Ahead of the Sept. 11 release of its second-quarter 2025 financial results, TD’s Brian Morrison raised his Dollarama Inc. (DOL-T) target to $150 from $126 with a “hold” rating. The average is $134.91.
“We visited Dollarcity to improve our knowledge on the catalysts driving Dollarama’s share price to all-time highs,” he said. “We returned convinced there is attractive long-term share price upside supported by Dollarcity’s relative value advantage, store growth potential, and likely portable model. We maintain an equal weight position and believe long term investors will be rewarded with outsized returns.”
“With a 15-per-cent hurdle rate requirement, strong year-to-date appreciation, and our desire for visibility into the cadence of growth slowing in Canada following an extended period of outsized growth, we are maintaining our HOLD rating. That said, over a midto-long term horizon, we expect Dollarama investors to be handsomely rewarded with outsized returns to the market presuming that its growth ambitions in LATAM and Mexico generate similar returns to that experienced in Canada, that we now see as increasingly probable. We are increasing our target to $150.00, and expect others to follow suit as more value is ascribed to Dollarcity.”
* TD Cowen’s Graham Ryding lowered his EQB Inc. (EQB-T) target to $109 from $112 with a “buy” rating. Other changes include: BMO’s Étienne Ricard to $106 from $104 with an “outperform” rating and Cormark Securities’ Lemar Persaud to $111 from $121 with a “buy” rating. The average is currently $104.22.
“Higher provisions for credit losses could remain topical for another quarter while fiscal 2025 looks more constructive as EQB works through loan resolutions in equipment finance and commercial mortgage lending combined with a normalizing monetary policy,” said Mr. Ricard. “We rate EQB Outperform and view the stock’s 1.2-times book valuation as attractive for a 15-per-cent-plus through-the-cycle ROE bank.”