Inside the Market’s roundup of some of today’s key analyst actions
Seeing macroeconomic conditions continuing to be a headwind, National Bank Financial analyst Maxim Sytchev is “biding [his] time on the sidelines” with AutoCanada Inc. (ACQ-T) following a fourth-quarter 2023 earnings miss.
“We maintain our ‘consumer under pressure’ view, making a positive investment thesis more challenging at the moment, even at what we deem as a reasonable valuation for ACQ shares,” he said in a research report. “The U.S. division continues to produce volatile outcome as not having a wide platform does not help. Self-improvement initiatives should pay dividends down the road but this likely a 2025 event, delaying the need to step in right at this moment. We hear from investors that expectations are not aggressive but if the shares do not seem to work in a relatively buoyant market, we could be presented with a more compelling opportunity in case there is any general downdraft.”
Shares of the Edmonton-based company rose 2.2 per cent on Thursday after it reported revenue for the quarter of $1.484-billion, up 7 per cent year-over-year and exceeding both Mr. Sytchev’s $1.449-billion estimate and the consensus projection of $1.419-billion. However, adjusted EBITDA slipped 9 per cent to $46.4-million, missing expectations ($55.5-million and $53.2-million, respectively).
“Increasing new vehicle production has led to a recovery in inventory – running ahead in the U.S. but also well underway in Canada – likely means prices will pull back from recent highs, hurting margins and increasing the importance of lowering the time to sale to turn over expensive inventory,” the analyst said. “We expect a similar dynamic to continue playing out in the used market, where it is further along, especially in terms of a pullback in market prices.”
“While increasing new auto production is expected to drive positive year-over-year volume growth (though off a relatively soft base by pre-pandemic standards), discretionary spending is likely to remain soft (more so in Canada) on persistent inflation and general affordability challenges facing an indebted consumer base. Management notes that buyers are actively seeking to migrate to more affordable options, so rebuilding inventory at the lower end of the price spectrum will be an important focus. Higher rates are also lowering the proportion of buyers using dealer-provided financing, pressuring the F&I vertical. This setup is also likely pushing EV adoption to the right where, despite recent price declines, offerings are still more expensive while the necessary infrastructure buildout is far from complete. Management is optimistic that mild and plug-in hybrids could benefit as they serve as a bridge from traditional ICEs to EVs.”
Reducing his gross margin projections, Mr. Sytchev expects AutoCanada’s revenue to be “flattish as growth in New sales should be offset by Used as New availability improve.” That led him to trim his target for the company’s shares to $22 from $24.50, keeping a “sector perform” recommendation. The average on the Street is $28.70.
Elsewhere, other analysts making changes include:
* Scotia’s Michael Doumet to $28 from $26 with a “sector outperform” rating.
“ACQ’s Project Elevate is intended to ‘substantially close the gap to normalized peer profitability,’” said Mr. Doumet. “This follows the previous strategic initiative, the Go Forward plan (implemented in 2019), which we viewed as a grow-at-all-cost initiative. As industry dynamics normalized (i.e., higher inventories, lower GPUs, more competitive sales dynamics, etc.) the ‘old way’ of doing business led to too much operating deleveraging. In comes Project Elevate to optimize certain pockets of growth, refine the cost base, and professionalize the platform. In our view, the new initiatives will help drive higher and more sustainable profit margins, but will likely take several quarters to play out. Once completed, the improved platform should drive higher synergies from a roll-up strategy. Before ACQ gets there – and our profit expectations are modest for 1Q – we believe the best argument (now, until results get better) for upside is ACQ’s cheap valuation and its ability to buy back shares (while generating healthy FCF).”
* Canaccord Genuity’s Luke Hannan to $20 from $22 with a “hold” rating.
“We came away from the quarter incrementally negative on the outlook for ACQ. We’re cautiously optimistic that Project Elevate can deliver upside on several fronts (namely used volumes and opex ratios), though it’s early days here. In the near term, we expect a soft consumer spending environment and normalizing new vehicle inventories to continue to weigh on ACQ’s new/used/F&I GPU performance. Combined with higher floorplan rates and elevated capex, ACQ’s near-term FCF generation will be muted, in our view,” said Mr. Hannan.
* Acumen Capital’s Trevor Reynolds to $24.50 from $33 with a “speculative buy” rating.
“Moving forward the question remains as to how resilient the market will be for vehicles in the current interest rate environment,” he said. “PS&CR [parts, service and collision repair] remains very well positioned to benefit as cars are maintained for longer while new vehicle margins are expected to normalize as inventory levels continue to stabilize. F&I [finance and insurance] is expected to be increasingly challenged as consumers utilize cash whenever possible.”
* BMO’s Tamy Chen to $23 from $24 with a “market perform” rating.
“Q4/23 headline EPS miss was due to unusual items in opex and higher-than-forecast underlying opex. The other parts of ACQ’s Canadian business performed largely in line with our expectations. The stock is trading at 6 times our revised 2025E EBITDA vs. historical range of 6-8 times. We wonder if there is still some opex volatility over the coming quarters and, thus, believe there may be a better entry point in the stock later this year,” said Ms. Chen.
* CIBC’s Krista Friesen to $22 from $22.50 with a “neutral” rating.
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ATB Capital Markets analyst Martin Landry predicts “patience will be rewarded” with Sleep Country Canada Holdings Inc. (ZZZ-T), seeing its integration of recent acquisitions “progressing well potentially leading to strong earnings growth potential in 2025.”
“While ZZZ’s Q4/23 results reflect a slowdown in consumer spending, they were nonetheless better than expected,” he said. “In 2024, the company will have an easier set of comparable periods, and we expect organic revenue growth and EPS growth to return as early as Q2/24. Sleep Country has accumulated a portfolio of complementary DTC brands which could generate growth in the coming years and accelerate market share gains by expanding to brick & mortar locations. Early tests suggest good traction with customers and limited cannibalization. While Canadian consumer confidence is expected to remain fragile in 2024, there is a potential for significant earnings torque in 2025. Integration benefits should become more apparent leading to potential 2025 EPS growth in excess of 20 per cent year-over-year.”
Shares of the retailer rose over 3 per cent on Thursday after it reported better-than-expected fourth-quarter 2023 financial results. Earnings per share fell 16 per cent year-over-year to 56 cents, but exceeded the Mr. Landry’s 53-cent estimate. While same-store sales slid 3.2 per cent from fiscal 2022, it was the slowest rate of decline in the last six quarters.
“While positive, management mentioned having experienced volatile consumer demand in Q4/23 with October being soft, offset by a rebound in consumer demand in November and December. According to management, consumers responded to promotions in the later part of the quarter, which resulted in a better same-store-sales performance,” the analyst said.
Touting its “strong” online sales growth and seeing its new store concepts, including a Endy brick-and-mortar store and a premium retail concept called “he rest at the Yorkdale Shopping Centre in Toronto, “performing well,” Mr. Landry expects further gains as synergies from recent M&A activity accelerate.
“Several projects are under way including (1) the consolidation of product sourcing (2) renegotiation of carrier contracts, (3) exiting contracts with third-party logistic providers and (4) centralizing back office functions such as HR, accounting and IT,” he said. “These integration steps are progressing well and should lead to margin expansion of Sleep Country’s DTC brands, some of which broke even in 2023 such as Casper. These steps could lead to more than 20-per-cent EPS growth in 2025, according to our forecasts.”
“With the acquisition of Endy, Hush and Silk & Snow, Sleep Country has built a strong ecosystem of direct-to-consumer brands, creating an opportunity for the company to capture market share and accelerate growth. Additionally, the recent acquisition of Casper Canada could become another important growth vector for the company. In our view, these opportunities provide investors with better visibility into future capital deployment and growth vectors for Sleep Country, something that was less apparent before.”
While he cut his 2024 EPS estimate by 5 per cent “on the back of lower same-store sales assumptions resulting in less margin improvement than we previously expected,” Mr. Landry hiked his target for Sleep Country shares by $5 to $33.50 with a “buy” rating. The average is $31.75.
“Sleep Country’s shares trade at 10 times our 2025 earnings estimate, which is three turns lower than historical levels,” said Mr. Landry, touting its “appealing” valuation.
“After two years of sales decline, the comparable periods are becoming easier to beat. This can be seen by the cadence of same-store-sales and EPS decline which is abating with Q4/23 showing the lowest decline of all quarters in 2023. We expect same-store-sales and EPS growth to return in Q2/24, which could be an inflection point for the company.”
Elsewhere, CIBC’s John Zamparo downgraded Sleep Country to “neutral” from “outperformer” with a $32 target, up from $27.
“We are changing our rating to Neutral ... after the stock’s 35-per-cent run since November. In our view, investors are rightly giving credit to the strength of this business, which has seen GM% expand despite a softer environment for big-ticket discretionary purchases. We remain constructive on ZZZ’s long-term outlook, and believe the stock could reach $40 in 2-3 years, but we expect more moderate upside in 2024 as valuation—now more than 12 times 2024 —has normalized,” said Mr. Zamparo.
Others making changes include:
* BMO’s Stephen MacLeod to $35 from $28 with an “outperform” rating.
“Sleep Country is well-positioned to weather the weakness and achieve market share gains for everything “sleep”, while continuing to invest in its sleep ecosystem. Acquisitions and strategic initiatives position Sleep Country well for 2024E+. We see attractive riskreward,” said Mr. MacLeod.
* National Bank’s Vishal Shreedhar to $31 from $28 with a “sector perform” rating.
“We consider the outlook to be uncertain; however, we are encouraged by gross margin stability and upcoming efficiency initiatives,” said Mr. Shreedhar.
* RBC’s Sabahat Khan to $28 from $24 with a “sector perform” rating.
“Looking ahead, an uncertain macro/consumer backdrop leaves our cautious stance on the company unchanged,” said Mr. Khan.
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Following earnings season for Canadian banks, CIBC World Markets analyst Paul Holden is remaining “cautious” given credit trends.
“The sector outlook does feel a little better following FQ1 results,” he said. “Five of the six banks beat consensus expectations and capital ratios ended the quarter higher than expected. F2024 consensus EPS estimates were effectively unchanged on average, which may not get us jumping up and down, but it is a noteworthy shift in trend. Following each of the prior three quarters, consensus EPS dropped by 3.9 per cent, 2.9 per cent and 5.1 per cent, respectively. The fact that consensus estimates did not drop following this quarter is a noteworthy change. One crux of our cautious stance on bank stocks is our view that it is hard for the stocks to sustainably rally if earnings estimates are falling. If earnings estimates are no longer falling, then a rally off of low valuation multiples becomes more plausible.
“The stocks are well off their 52-week lows (up 24 per cent on average). Is it time to jump onboard that trade? We just don’t see the risk/reward as being that compelling. Credit losses are rising, borrowing costs remain high and the banks told us that peak losses have yet to come. There is a lot of EPS sensitivity for all these banks related to PCLs. Consensus PCLs are implying a shallow recession/soft landing and valuation multiples are also pricing for a shallow recession/soft landing. P/BV multiples tell us there might be an additional 10-per-cent upside, but if things go south there could be 20-per-cent downside. With expected EPS growth of roughly 0 per cent in F2024 and still looming credit risk, we think there are better places to be.”
In a research report released Friday, Mr. Holden lowered his fiscal 2025 earnings per share projections by an average of 2 per cent, saying: “We now assume an elongated credit cycle.”
That led him to lower his target prices for these banks:
- Bank of Montreal (BMO-T, “neutral”) to $120 from $125. The average on the Street is $132.38.
- Bank of Nova Scotia (BNS-T, “neutral”) to $64 from $66. Average: $66.81.
- National Bank of Canada (NA-T, “outperformer”) to $109 from $110. Average: $109.73.
- Royal Bank of Canada (RY-T, “neutral”) to $135 from $140. Average: $141.69.
- Toronto-Dominion Bank (TD-T, “neutral”) to $86 from $88. Average: $88.36.
“We maintain our defensive bias and prefer lifecos and P&C insurers where there is better EPS growth and more catalysts for EPS upside. Within banks, NA remains our top pick given its strong defensive attributes based on: i) strong capital position; ii) lower exposure to U.S. commercial real estate; and iii) higher proportion of lending in Quebec (lower credit risk),” said Mr. Holden.
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Desjardins Securities analyst Frederic Tremblay saw Savaria Corp.’s (SIS-T) fourth-quarter results as a “good way to end 2023,” calling the release “a nice appetizer whetting our appetite for more at next month’s investor day.”
After the bell on Wednesday, the Laval, Que.-based manufacturer of accessibility products reported quarterly revenue of $216.8-million, up 2 per cent year-over-year and above both Mr. Tremblay’s $216.5-million estimate and the consensus projection of $215.3-million. Adjusted EBITDA grew 5.4 per cent to $35.1-million, largely in line with expectations ($35.8-million and $35.4-million, respectively).
“Savaria’s organic top-line trajectory remained strong thanks to demand, pricing and cross-selling,” the analyst said. “Adjusted EBITDA of $35.1-million was consistent with expectations. Accessibility had a robust quarter, featuring 9.5-per-cent organic growth and margin expansion. Looking ahead, we believe the North American segment will continue to lead the way while Europe should continue to recover gradually.”
At its first-ever Investor Day event on April 9, Mr. Tremblay is expected incremental information about the company’s ongoing Savaria One improvement project, which he views as “a key lever for the company to reach its revenue and margin objectives, and for estimates/valuation to continue moving higher.”
“Our view remains that enhanced disclosures around this company-wide effort could increase the Street’s comfort on the constructive outlook at Savaria and, hence, potentially fuel upward forecast revisions,” he added. “We believe management will likely comment on the path to its previously stated adjusted EBITDA margin ambition of 20 per cent (vs 2025 consensus of 17.5 per cent).”
Raising his revenue and earnings expectations for fiscal 2024 and 2025, Mr. Tremblay increased his target for Savaria shares to $22.50 from $20.50, maintaining his “buy” rating. The average is $20.64.
“While our target multiple is currently aligned with the historical average, we see potential for the stock to warrant an above-average multiple in the future based on developments related to the Savaria One project (ie details at investor day, solid execution visible in subsequent quarterly results),” he conclude.
Elsewhere, other changes include:
* Scotia Capital’s Michael Doumet to $21.50 from $17 with a “sector outperform” rating.
“The $25 million to $30 million in costs associated with executing Savaria One was a negative surprise to investors. But — this shows SIS is putting its money where its mouth is,” said Mr. Doumet. “And more than before, we believe Savaria is more likely to achieve its Savaria One goal (EBITDA of $200-million). We remain somewhat cautious on the timing, but believe there is sufficient evidence to raise our estimates (and our valuation) to reflect favorable momentum from the initiatives (as well as the improved macro backdrop).
“In the end, SIS usually ‘gets there.’ As background for that statement, following the acquisitions of Garaventa and Handicare, SIS disappointed on the timing of achieving synergies, but ultimately exceeded on profit growth at a later point. Therefore, we understand investor caution on the Savaria One financial target. That said, we think there are several reasons to remain optimistic — (i) North America operations are humming, (ii) Europe is improving, (iii) Patient Care meaningfully improved, and (iv) having started Savaria One more than six months ago, management is seeing incremental evidence of the initiatives working (not to mention the company is planning its inaugural Investor Day). We would be buyers.”
* Stifel’s Justin Keywood to $23 from $25 with a “buy” rating.
“Our view of continued strong growth remains, consistent with Savaria’s target of $1-billion in sales by 2025, expected to be achieved organically,” said Mr. Keywood. “Secular strength continues with an aging population and preference among the older demographic to avoid nursing homes, where assisted lift solutions are likely needed. Savaria also has a history of meeting and exceeding long-term goals. The prospects for 20-per-cent EBITDA margins at $1-billion in sales is very compelling but does highlight work ahead. We also hold the view that if Savaria can achieve EBITDA margins at 18 per cent or half of the expansion goal, the stock should still re-rate considerably.”
* National Bank’s Zachary Evershed bumped his to $20.50 from $19.50 with an “outperform” rating.
“We rate SIS OP as we remain confident in its ability to capture share in a growing market benefiting from brisk demographic tailwinds,” said Mr. Evershed.
* Raymond James’ Michael Glen to $19 from $18 with an “outperform” rating.
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Scotia Capital analyst Maher Yaghi thinks Cineplex Inc.’s (CGX-T) recent debt refinancing is a “postive for the stock and company” and “provide flexibility to operate the business at a time when we think FCF generation should be more predictable.”
“We continue to believe that the shares are undervalued,” he said. “Delivering steady results and continued deleveraging over the coming months should position the company to potentially reintroduce a dividend in 2025 providing multiple catalyst opportunities for share appreciation. Overall, we expect the second half of 2024 to show much stronger growth as the movie release schedule continue to improve.”
Mr. Yaghi expects that movie slate to help drive revenue and EBITDA growth.
“In our discussion with the company at our recent TMT conference, management highlighted that consumers continue to want the best theater experience and are therefore willing to pay premiums for top value,” he said. “Q1 experienced a slower start to the year in the box office; however, March will likely see a strong finish driven by the release of Dune 2. As the year progresses, the movie slate is expected to improve, with Q4 projected to be the strongest. This should provide a lift to revenue and EBITDA in 2H/24 while the company continues to deleverage and optimize their capital structure.”
Maintaining his “sector outperform” recommendation, Mr. Yaghi bumped his target to $11.25 from $11. The average is $12.88.
“Improving the balance sheet and reducing financing risk was a top priority for both the company and investors,” he said. “Despite strong operational cash generation, we had suggested any action to push out the $316-million in convertible debentures or $250-million of notes payable would go a long way to bring the stock back to its intrinsic valuation. On a pro-forma basis, the company’s current leverage ratio is 3.5 times. Management is confident that they would be able to achieve their target of 2.5-3.0 times within the next 18-24 months although they are hoping to achieve this sooner. With greater financial flexibility for growth, management also hinted at potentially reinstating a dividend as covenants are lifted, repayment of the revolver progresses, and their target leverage ratio of 2.5-3.0 times is achieved. For now, we are not forecasting any dividend payments for F2024, but sometime in 2025, we could see management announce a reinstatement.”
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In other analyst actions:
* Citing valuation concerns and a slower ramp-up at its Tucuma project in Brazil, PI Financial’s Connor Mackay downgraded Ero Copper Corp. (ERO-T) to “neutral” from “buy” with a $27 target, up from $24. Other changes include: BMO’s Jackie Przybylowski to $23.50 from $23 with a “market perform” rating and TD Securities’ Craig Hutchison to $25 from $24. The average is $24.70.
“The Company eked out a slight beat on adj. EPS while operating cash flow (CF) was in line with our estimates,” said Mr. Mackay. “With Tucume nearing commissioning, we see our forward-looking CFPS estimates continuing to grow over the next 12-months in anticipation of Ero’s copper production doubling in 2025, over 2023 levels. However, this is somewhat offset by a slower ramp-up of production through 2024 and cost creep impacting our NAV estimates. On balance, we see our expected 2025 windfall for the Company continuing to earn it a premium valuation (hence our target increase), but see the stock being range-bound near our target over our 12-month rating outlook period.”
* Morgan Stanley’s Ioannis Masvoulas upgraded First Quantum Minerals Ltd. (FM-T) to “overweight” from “equal weight” with a $17 target, rising from $14.20. The average is $16.27.
* CIBC’s Kevin Chiang increased his Airboss of America Corp. (BOS-T) target to $4.75 from $3.75, keeping an “underperformer” recommendation. The average is $5.56.
* CIBC’s Hamir Patel cut his Canfor Pulp Products Inc. (CFX-T) target to $1.75 from $2 with a “neutral” rating. The average is $1.98.
* Jefferies’ Roger Agarwal raised his Enbridge Inc. (ENB-T) target to $54 from $53 with a “buy” rating. The average is $53.39.
* CIBC’s Krista Friesen lowered his Linamar Corp. (LNR-T) target to $91.50 from $93 with an “outperformer” rating. The average is $82.75.
* RBC’s Jimmy Shan increased his target for Minto Apartment REIT (MI.UN-T) to $22.50 from $22 with an “outperform” rating. Other changes include: Raymond James’ Brad Sturges to $21.25 from $20.25 with an “outperform” rating, Canaccord’s Mark Rothschild to $20 from $18.50 with a “buy” rating, Desjardins Securities’ Kyle Stanley to $21 from $19.50 with a “buy” rating, Scotia’s Mario Saric to $19.25 from $18.75 with a “sector perform” rating, National Bank’s Matt Kornack to $20 from $19.25 with an “outperform” rating and CIBC’s Dean Wilkinson to $21 from $19 with an “outperformer” rating. The average is $19.95.
“Despite the 3-per-cent move [Thursday], MI NTM [next 12-month] ROR of 15 per cent exceeds the 11-per-cent peer average, albeit below the 23-per-cent sector average (20-per-cent market-cap weighted),” said Mr. Saric. “We expect year-over-year FFOPU outperformance again in Q1/24, before stabilizing as interest expense comps become less of a tailwind. Previously, we classifed MI as a Top Upgrade candidate and we still feel that, but its 26-per-cent move post Q3 results (vs. 15 per cent for peers and 8 per cent for sector) makes this more of a relative than absolute call it was before. That said, we’re still good buying MI in the low-$17 range.”
* HSBC’s Santosh Seshadri lowered his Nutrien Ltd. (NTR-N, NTR-T) target to US$57 from US$63 with a “hold” rating. The average is US$66.98.
* JP Morgan’s Arun Jayaram cut his Vermilion Energy Inc. (VET-T) target to $21 from $23 with an “overweight” rating. Other changes include: Canaccord Genuity’s Mike Mueller to $20 from $22.50 with a “buy” rating and RBC’s Greg Pardy to $20 from $23 with a “sector perform” rating. The average is $20.63.
* ATB Capital Markets’ Amir Arif lowered his Yangarra Resources Ltd. (YGR-T) target to $1.60 from $2, which is the current average, with a “sector perform” rating, while National Bank’s Dan Payne moved his target to $1.50 from $2 with a “sector perform” rating.
David Leeder