Friday’s analyst upgrades and downgrades

Inside the Market’s roundup of some of today’s key analyst actions

Pointing to the potential for “uncertain” returns from its growth ventures, Desjardins Securities analyst Jerome Dubreuil downgraded his recommendation for Cogeco Communications Inc. (CCA-T) to “hold” from “buy” previously.

“CCA’s outperformance since the end of the last telco earnings season (up 14 per cent vs up 5 per cent average for other Canadian telcos) has prompted us to move to the sidelines as network convergence between wireless and wireline finally appears to be gaining traction,” he said. “Moreover, despite elevated capex for several years, top-line growth remains under pressure at CCA, which, with higher leverage, a tighter valuation gap and little potential for meaningful short-term catalysts, takes us away from buy territory.”

In a research note following the release of its first-quarter fiscal 2024 results that were narrowly higher than his expectations on Wednesday after the bell, Mr. Dubreuil warned Cogeco is likely to continue to “intense” competitive pressure in the near term. He also predicted its return on investment may not be “strong enough” over the medium term to satisfy the Street’s expectations.

“BCE has slowed its FTTH deployment but has not halted it, which means CCA’s network speed advantage will continue to erode,” he said. “We further expect that BCE will continue to add market share for several years, which should affect customer loading on CCA’s facilities-based network (footprint excluding oxio). In the U.S., FWA continues to have traction in the broadband market. Capacity issues for FWA operators may eventually emerge, but recent spectrum allocations in the U.S. (C-band) and AT&T’s inroads in the field are concerns for us. Moreover, U.S. cable has not performed well since early December given the weak outlook provided by some peers during industry conferences, but these comments had little impact on CCA’s share price.”

“We do not anticipate that growth ventures (oxio, wireless, edgeouts) will deliver solid ROI in the medium term. We agree with the wireless strategy given the growing importance of bundling and network convergence, but that does not mean the company’s asset portfolio is well-positioned in connection with this trend. We are certain management has done its homework regarding expected returns of investment projects, but we do see significant capital allocation risk at this point.”

Shares of the Montreal-based company nudged higher by 0.2 per cent on Thursday in response to the quarterly earnings release that featured “robust” internet subscriber additions domestically but an “unsurprisingly weak” update from its U.S. operations. Revenue of $748-million fell in line with the Street’s expectation of $752-million, while adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $359-million was narrowly higher than projected ($349-million).

“CCA could perform well if M&A activity in the US cable market (not by CCA) resumes, as we believe potential transaction multiples would be higher than CCA’s current multiple. More announcements by CCA of efficiencies could also lead to better-than-expected EBITDA growth,” said the analyst, who made modest increases to his 2024 and 2025 adjusted earnings per share projections.

Seeing Cogeco Communication’s valuation becoming “less attractive” recently, Mr. Dubreuil reiterated his 12-month target of $70 for its shares. The average on the Street is $71.40, according to Refinitiv data.

“Given the stock’s recent performance, the spread between CCA’s EV/NTM [next 12-month] EBITDA and that of U.S. peers is now one standard deviation tighter than the two-year average,” he concluded. “While we note that several historical U.S. cable transactions were completed at higher valuations than the multiple we assign to CCA’s U.S. operations, the company needs to be willing to sell some assets for investors to unlock the higher valuation. In addition, we would note that the stock currently has only a negative 0.6 times EV/2025E EBITDA multiple spread vs QBR, which we would rather own given its more attractive growth profile.”

Elsewhere, others making changes include:

* BMO’s Tim Casey to $65 from $64 with a “market perform” rating.

“Q1 revenue was in line, while EBITDA beat expectations by approximately 3 per cent (both decreased by 2 per cent),” said Mr. Casey. “EPS was $2.33 vs. $1.81 Street. Subscriber metrics were better than expected with continued strong Canadian internet loading (+11k) and slower U.S. declines (-8k). F2024 guidance was reaffirmed. Cogeco is beginning to build out FTTH expansions in Ontario with the support of government subsidies. A U.S. wireless launch seems likely this fiscal year. As previously announced, Cogeco repurchased 2.3 million shares from the Caisse (Rogers’ Cogeco holdings). Reported leverage is expected to remain flat through FYE24.”

* Canaccord Genuity’s Aravinda Galappatthige to $63 from $64 with a “hold” rating.

“The Cogeco Communications’ Q1/24 results were net neutral, in our view, with the robust subs performance in its Canadian business offsetting sustained weakness in the U.S.,” he said. “The internet net adds in Canada were a highlight again this quarter with subs coming in significantly ahead of expectations, assisted by the ongoing fibre expansion and the strong growth trajectory of the newly acquired Oxio asset. On the other hand, U.S. trends continue to be soft with Ohio losses still meaningful at 3,882 in Q1 and nearly 4,600 losses in the remainder of the U.S. footprint. Though expected, the US financials were also quite light with revenues down 6 per cent on a constant currency basis and adj. EBITDA down 3.6 per cent.”

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RBC Dominion Securities analyst Greg Pardy expects fourth-quarter 2024 results for large-cap energy producers to “reinforce trends that have been in place for some time, including an ongoing commitment to capital discipline, net debt reduction and shareholder returns, albeit at a slower pace.”

“We estimate that Canada’s oil sands weighted majors — Canadian Natural Resources, Suncor Energy, Cenovus Energy and Imperial Oil — generated free cash flow (before dividends and working capital movements) of $6.5 billion in the fourth-quarter (down 32 per cent sequentially), increased net debt by $1.45 billion (partly due to Imperial’s $1.5 billion SIB and Suncor’s acquisition of the remaining 31.23 per cent working interest of Fort Hills), repurchased $5.1 billion of their common shares (up 75 per cent sequentially) and paid/accrued cash taxes (to all jurisdictions) of about $1.3 billion.,” he said.

In a research report released Friday previewing the quarterly results titled Quite the Mixed Bag, Mr. Pardy reaffirmed Canadian Natural Resources Ltd. (CNQ-T) as his “favourite senior producer” heading into earnings season. The Calgary-based company remains on the firm’s “Global Top 30″ and “Global Energy Best Ideas” lists.

“Our fourth-quarter outlook for CNQ reflects production of 1.42 million boe/d, up 2 per cent sequentially which includes record quarterly SCO production of 494,100 bbl/d from CNQ’s Horizon/AOSP segment, with oil sands mining operating costs of $22.29/bbl amid realizations of $101/bbl and a 14-per-cent royalty rate,” he said. “Our production outlook also factors in Canadian oil & liquids volumes (excluding mining) of 525,000 bbl/d, with Canadian natural gas volumes of 2.2 bcf/d. Also included within our fourth-quarter outlook are cash taxes of $571 million, capital spending of $1.13 billion and share repurchases of $1.55 billion. All said, we peg CNQ’s fourth-quarter operating cash flow at $4.1 billion ($3.73 per share) and free cash flow (before estimated dividends of circa $1.1 billion and working capital movements) at about $2.9 billion. We peg CNQ’s net debt (company definition, excluding working capital) at $11.22 billion as of December 31, down from $11.52 billion on September 30. Our 2024 outlook for CNQ factors in production of 1.36 million boe/d amid capital spending of $5.42 billion (excluding abandonment expenditures of circa $635 million), which follows the announcement of the company’s 2024 budget in December.”

He has an “outperform” rating and $94 target for CNQ shares. The average on the Street is $96.56.

Mr. Pardy said Suncor Energy Inc. (SU-T), which is on the “Global Energy Best Ideas” list, is his favourite integrated company. He has an “outperform” recommendation and $51 target, which falls 68 cents below the average.

MEG Energy Corp. (MEG-T), also on the “Global Energy Best Ideas” list, is his favourite intermediate producer. He has an “outperform” rating and $31 target, exceeding the $30.42 average.

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Analysts at Raymond James lowered their 2024 commodity price forecast for base metals on Friday to reflect a “more uncertain outlook related to China demand,” however the firm raised its long-term copper price assumption to align with its longer-term thesis of “growing supply shortages in copper reflecting good demand and ongoing challenges (e.g., permitting risks, jurisdictional risks) in developing new supply, lower industry grades and inflationary pressures such as labour.”

At the same time, the group increased its 2024 gold price estimate on “an expectation of a weakening U.S. dollar and lower interest rates .”

“We have updated target prices with our commodity price changes,” the analyst said. “In precious metals, we prefer AEM amongst the senior gold producers for its lower jurisdictional risk profile and steady to growing production profile with a full-year of Canadian Malartic. We also favour EDV for its low cost and attractive valuation. Among intermediate producers, we favour CXB for its strong cash flow and new growth with the potential acquisition of the Valentine gold project. We prefer OR and WPM in the royalty space and SKE amongst juniors for its high grades and near-term potential catalysts, including project financing and an economic study on Snip.”

“For the copper producers, target prices generally increased modestly benefiting from our increased long-term copper price offset by our lower near-term forecasts. We continue to favour IVN and TECK amongst the base metals producers given both have near-term copper growth, long mine lives, and potential catalysts. We also note ERO has organic growth on the horizon with the Tucuma project expected to enter production in 2024. We also remain constructive on uranium and recommend CCO, NXE and DML.”

For their preferred picks, the analysts’ ratings and targets are now:

• Agnico Eagle Mines Ltd. (AEM-T/AEM-N, “outperform”) with a US$71 target, up from US$66. The average on the Street is US$67.02.
• Calibre Mining Corp. (CXB-T, “outperform”) with a $2 target. Average: $2.28.
• Cameco Corp. (CCO-T, “outperform”) with a $74 target, up from $71. Average: $70.23.
• Denison Mines Corp. (DML-T, “outperform”) with a $2.90 target. Average: $3.23.
• Endeavour Mining PLC (EDV-T, “outperform”) with a $36 target. Average: $40.20.
• Ero Copper Corp. (ERO-T, “market perform”) with a $27 target, up from $25. Average: $24.23.
• Ivanhoe Mines Ltd. (IVN-T, “outperform”) with a $18 target. Average: $15.63.
• NexGen Enegry Ltd. (NXE-T, “outperform”) with a $11 target. Average: $11.02.
• Osisko Gold Royalties Ltd. (OR-T, “outperform”) with a $26 target, up from $25. Average: $24.38.
• Skeena Resources Ltd. (SKE-T, “strong buy”) with a $13 target, up from $12.50. Average: $15.27.
• Teck Resources Ltd. (TECK.B-T, “outperform”) with a $66 target. Average: $63.64.
• Wheaton Precious Metals Corp. (WPM-N/WPM-T, “outperform”) with a US$60 target, up from US$57. Average: US$56.50.

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CIBC World Markets analyst Jacob Bout is “constructive” on the Canadian engineering and construction industry heading into 2024, citing “the growing backlog levels, high exposure to resilient transportation, environment/water (and/or nuclear) end-markets, strong balance sheet positions, and ability to protect/grow margins.”

In a research report released Friday, he upgraded Aecon Group Inc. (ARE-T) to an “outperformer” recommendation from “neutral” previously to “reflect significant potential upside in forward results and backlog in the back end of 2024 and 2025, as well as the transition to a much less riskier business model.”

“While legacy fixed-price project risk remains near term, cash flow should improve,” Mr. Bout.

His target for Aecon shares rose to $18 from $12.50. The average on the Street is $13.21.

The analyst named AtkinsRéalis (ATRL-T) his “top pick” for the year ahead, reaffirming an “outperformer” rating with a $57 target, up from $51 and above the average on the Street of $50.67.

“ATRL’s strategy to pivot towards a fully integrated professional services and project management company is working, and we continue to believe that as ATRL works through the LSTK backlog (and significantly improves its cash flow conversion), the valuation gap vs. peers should continue to narrow,” he said. “Organic growth should continue to remain strong in 2024 (though should moderate vs. very solid levels in 2023) on the back of record Services backlog, strong fundamentals in key regions, and an improved nuclear backdrop. Catalysts for 2024 include an Investor Day on June 13, possible divestment of Linxon, potential LSTK project cost recoveries, and M&A optionality towards the back end of 2024 following a step-up in FCF/balance sheet improvement. With this report, we are rolling out our 2025 estimates.”

Mr. Bout also expressed a positive stance on a pair of other companies:

* Stantec Inc. (STN-T, “outperformer”) with a $116 target, up from $111. Average: $116.73.

“Recall STN held an Investor Day on December 5, where the company announced fresh three-year (2024-2026) strategic plan targets and financial guidance for 2024,” he said. “The event showcased a number of industry and company-specific factors that should lend support for continued strong organic growth (more than 7 per cent per year), further EBITDA margin expansion (average of 30 basis points per year), and accretive M&A. Given STN’s robust M&A pipeline and improved balance sheet capacity, we expect it to continue to be active on M&A over the next year (recent Morrison Hershfield and ZETCON acquisitions combined represent 6 per cent of STN’s current employee base).”

* WSP Global Inc. (WSP-T, “outperformer”) with a $234 target, up from $208. Average: $209.79.

“Overall, the outlook for 2024 is solid, and we expect to see continued strong net revenue organic growth (supported by current record backlog levels) and margin expansion,” he said. “While we do anticipate growth in the U.K. and APAC to moderate, this should be offset by continued strong underlying engineering/design fundamentals in North America. We continue to view WSP as a reliable compounder delivering profitable growth and well positioned to continue to benefit from a multi-year global investment cycle in infrastructure and energy transition. With this report, our price target increases from $208 to $234 with the rollout of our 2025 estimates (assumes 10 per cent-plus net revenue growth including M&A, and further margin expansion from productivity and digital initiatives). We maintain our Outperformer rating.”

His other target changes were:

• Bird Construction Inc. (BDT-T, “outperformer”) to $17 from $14.50. Average: $15.84.
• Finning International Inc. (FTT-T, “outperformer”) to $48 from $47. Average: $48.11.
• Toromont Industries Ltd. (TIH-T, “neutral”) to $123 from $116. Average: $126.22.
• Westshore Terminals Investment Corp. (WTE-T, “neutral”) to $30 from $29. Average: $27.25.

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In a research report previewing 2024 for North American paper and wood products companies, CIBC World Markets analyst Hamir Patel said he continues to favour the packaging names over wood/building products.

“For our housing-leveraged names, we are cautiously optimistic on demand prospects for the spring selling season (which kicks off in early February),” he said. “That being said, the group has already rallied since mortgage rates began their latest 100 bps move lower. While headline mortgage rates will likely trend lower in coming months, effective 30-year buydown rates (4.5-5.75 per cent today vs. headline 6.8 per cent) may not decline as much, with builders likely to ease up on incentives as they recoup margins.

“At the same time, much stronger lumber prices still seem to be a 2025 story given how R&R (biggest lumber end-market) lags new residential (typically by 12-15 months) and with the ongoing lack of pricing tension because of European imports (which should fade more in 2025 as domestic demand rebounds on the continent). Our preferred name in wood products is West Fraser given its low-cost position, diversified commodity exposure (lumber/OSB), and M&A optionality. On the building products side, Doman appears best positioned to benefit from near-term demand improvement. At the same time, the whole group may benefit later this year as Brad Jacobs’ QXO is expected to make its first moves to build up a building products consolidator (targeting run-rate revenues of $5+ billion within three years).”

On Friday, he raised his recommendation for a pair of stocks:

* Cascades Inc. (CAS-T) to “outperformer” from “neutral” with a $17 target, up from $14. The average on the Street is $15.30.

“For Cascades, as we noted in late November, a successful January containerboard price hike would represent substantial upside to consensus estimates (potentially boosting consolidated annualized EBITDA by as much as 27 per cent by H2/24 if the full $70/ton initiative is implemented),” he said. “We have raised our 2025 EBITDA estimate on the company by 13 per cent (now higher than consensus by over 15 per cent), reflecting our assumption of a $50/ton increase being realized in H1/24. The company’s open-market volumes (50 per cent of containerboard mix) should see the full effect of a benchmark price increase within 30 days of the index moving higher, while its integrated volumes (50 per cent of containerboard mix) are subject to a longer lag. Benchmark pricing changes generally take between four and six months to flow through to the company’s index-contracted business.”

* Mercer International Inc. (MERC-Q) to “neutral” from “underperformer” with a US$9, up from US$8. Average: US$8.88.

“For Mercer, with limited near-term downside risks to pulp prices, and potential for additional supply shocks (if further capacity is permanently removed by other industry participants in Canada), we expect the shares to perform in line with the broader forestry space,” he said. “MERC has a strong track record of accretive growth and should benefit from a recovery in European lumber demand in 2025.”

Mr. Patel named CCL Industries Inc. (CCL.B-T) his top pick for the year ahead, reiterating an “outperformer” rating and $72 target for its shares. The average is $73.

“We believe CCL’s diversified global platform and end-market exposure should support steady top-line growth over the cycle,” he said. “With leverage of only 1.4 times, the company is also well positioned to be opportunistic on the M&A front and invest in organic growth. At the company’s Investor Day last month, management pointed to achieving over $10-billion in revenues from its existing verticals over the medium term (five to seven years), while maintaining 20-per-cent-plus EBITDA margins. The implied 6-8.5-per-cent sales CAGR represents upside to our forecast, which is only building in $8.1-billion of revenues for 2028. While CCL’s demand growth is largely tied to global GDP, above-market growth should continue in coming years, supported by the company’s exposure to RFID (growing double digits) and alignment with higher-growth customers (recent GLP-1 investments come to mind).”

He also made these target adjustments:

• Adentra Inc. (ADEN-T, “outperformer”) to $40 from $34. The average is $41.17.
• Doman Building Materials Group Ltd. (DBM-T, “outperformer”) to $10 from $9. Average: $9.33.
• Interfor Corp. (IFP-T, “outperformer”) to $30 from $26. Average: $29.60.
• KP Tissue Inc. (KPT-T, “neutral”) to $10 from $11. Average: $10.63.
• Richelieu Hardware Inc. (RCH-T, “neutral”) to $49 from $44. Average: $48.25.
• Stella-Jones Inc. (SJ-T, “neutral”) to $86 from $83. Average: $88.43.
• Trancontinental Inc. (TCL.A-T, “outperformer”) to $16 from $15. Average: $17.70.
• West Fraser Timber Co. Ltd. (WFG-T, “outperformer”) to $142 from $119. Average: $101.80.
• Western Forest Products Inc. (WEF-T, “neutral”) to 75 cents from 85 cents. Average: 74 cents.
• Winpak Ltd. (WPK-T, “outperformer”) to $48 from $47. Average: $51.75.

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In a report previewing 2004 for base metals producers titled (Almost) cleared for take-off, Canaccord Genuity metals and mining analyst Dalton Baretto downgraded a pair of stocks based largely on valuation concerns on Friday:

* Lundin Mining Corp. (LUN-T) to “hold” from “buy” with $11.50 target, up from $11. The average target on the Street is $11.76.

* Champion Iron Ltd. (CIA-T) to “hold” from “buy” with $7 target, up from $6.25. Average: $8.10.

“We see a clearing runway ahead for commodities as the economic cycle bottoms, central banks pivot to rate cuts, and sentiment improves,” said Mr. Baretto. “We also see more aggressive policy responses by the Chinese government as a nontrivial probability that could serve as a significant tailwind for commodity pricing. That said, in the biggest election year in history (where more than 50 per cent of the global population will go to the polls), we see geopolitics as a wild card that could impact supply, demand, and sentiment in unpredictable ways, particularly given proxy wars between the two geopolitical blocs in Ukraine, Palestine and potentially Guyana and Taiwan.

“Over the longer term, we continue to see structural positive changes in the demand for key industrial commodities, at least through the end of the decade. These include: • An acceleration of the decarbonization trend as the world (particularly the developed world) moves to improve energy security and reduce its dependence on fossil fuels imported largely from kleptocracies. • Stockpiling of strategic minerals as a bipolar economic world evolves. • The de-dollarization of the commodity trade by both major producers and buyers. • Inflationary and demand impacts from the restructuring of supply chains and onshoring of manufacturing capabilities as globalization reverses course.”

He also made these target changes:

• Arizona Sonoran Copper Co. Inc. (ASCU-T, “speculative buy”) to $2.75 from $4. The average is $3.36.
• Ero Copper Corp. (ERO-T, “buy”) to $27 from $29. Average: $24.23.
• Faraday Copper Corp. (FDY-T, “buy”) to $1.25 from $1.50. Average: $1.53.
• Filo Corp. (FIL-T, “speculative buy”) to $29 from $26. Average: $30.11.
• First Quantum Minerals Inc. (FM-T, “buy”) to $19 from $18. Average: $17.21.
• Hudbay Minerals Inc. (HBM-T, “buy”) to $9.25 from $9. Average: $9.84.
• Ivanhoe Mines Ltd. (IVN-T, “buy”) to $16 from $13. The average is $15.63.
• Magna Mining Inc. (NICU-X, “speculative buy”) to $1 from $1.50. Average: $1.76.
• Marimaca Copper Corp. (MARI-T, “speculative buy”) to $6 from $6.50. Average: $5.85.
• Solaris Resources Inc. (SLS-T, “speculative buy”) to $13.50 from $14. Average: $16.19.
• Teck Resources Ltd. (TECK.B-T, “buy”) to $62 from $63. Average: $63.64.

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In other analyst actions:

* Following Thursday’s release of its fourth-quarter production results and an update to its three-year guidance, Desjardins Securities’ Jonathan Egilo trimmed his Alamos Gold Inc. (AGI-T) target to $18.75 from $19.50, keeping a “hold” rating. The average is $20.34.

* B. Riley’s Lucas Pipes raised his Champion Iron Ltd. (CIA-T) target to $10 from $8 with a “buy” rating. The average is $8.10.

* Barclays’ Raimo Lenschow raised his target for Lightspeed Commerce Inc. (LSPD-N, LSPD-T) to US$23 from US$20 with an “overweight” rating, while Truist Securities’ Andrew Jeffrey bumped his target to US$27 from US$25 with a “buy” rating. The average on the Street is US$19.31.

“After a strong 2023 (IGV up 58 per cent), software needs to deliver in 2024 on the promise of AI and recovery,” said Mr. Lenschow. “We think the larger players are actually better positioned to do so.”

* KeyBanc’s Noah Zatzkin raised his Lululemon Athletica Inc. (LULU-Q) target to US$570 from US$500, exceeding the US$506.21 average, with an “overweight” recommendation.

* In a report preview quarterly earning for the oilfield services industry, RBC’s Keith Mackey cut his Precision Drilling Corp. (PD-T) target to $122 from $125, keeping an “outperform” rating. The average is $125.78.

“Our estimates generally sit below street consensus reflecting softer year-end activity in the Lower-48,” he said. “We expect service companies to provide initial 2024 outlooks which, for the most part, will be light on revenue growth but heavily focused on maximizing FCF generation. Our favourite stocks include those with what we view as differentiated business models, offering unique thematic exposure, basin diversification, and strong or improving FCF fundamentals. Our preferred list remains: SLB (SLB), Baker Hughes (BKR), Enerflex (NYSE: EFXT, EFX-CA), Liberty Energy (LBRT), and Trican Well Service (TCW-CA), and Pason Systems (PSI-CA).”

* In response to Thursday’s announcement of its $130-million private placement with an affiliate of Zijin Mining, BMO’s Rene Cartier cut his Solaris Resources Inc. (SLS-T) target to $15 from $17. The average is $16.19.

“Beyond the baseline funding with Orion, the announcement with Zijin provides meaningfully more capital to deliver a larger and more technically robust project. While we view the announcement as a net positive for Solaris, incorporating the share dilution results in a slight lowering of our target price,” said Mr. Cartier.