Inside the Market’s roundup of some of today’s key analyst actions
In response to Thursday’s second-quarter earnings release and shift in strategy, National Bank Financial analyst Gabriel Dechaine downgraded Toronto-Dominion Bank (TD-T) to “underperform” from “sector perform” previously, citing “the slim return to target relative to what we expect from other Big-6 banks.”
In a research report titled It could get tougher before it gets better, he trimmed his forecast for TD, expecting a reduction in share buybacks and believing its “AML [anti-money-laundering] program (and indirect) costs could be increasing.”
“It’s been two quarters since TD disclosed that it would incur $500-million in aftertax costs related to its AML program in 2024,” he said. “TD guided to a mid-single digit expense growth this year, (re-iterated this quarter). In our opinion, these costs could grow. For starters, we expect the bank will eventually confirm a similar amount of spending in 2025 (already in our 2025 EPS estimate). Second, we believe costs overall could increase as scrutiny of the bank’s AML issues increases in the domestic market. We also believe there will be indirect sources of cost inflation. These could be related to employee retention and branding initiatives to alleviate customer concerns given the nature of the AML issue.”
While the bank’s restructuring program has been finalized, Mr. Dechaine warned of the impact of higher costs and also emphasized support for buyback has “waned.”
“TD’s restructuring program will amount to $870-million of charges,” he said. “Cost savings associated with TD’s restructuring program will amount to an annualized $725-million figure, higher than the initial target of $600-million quantified during Q4/23. While management stated that it was simply looking for additional cost saving opportunities, we can’t help but think it was because they had to, given potentially higher costs the bank could be facing.
“TD’s 13.4-per-cent CET 1 ratio is sufficient to repurchase the 32 million of capacity remaining under its current program. However, we believe buyback activity will be restrained. Of note, the bank faces a 12 basis points CET 1 hit during Q3/24 resulting from a regulatory provision and a civil settlement during the quarter. Assuming AML-related penalties hit our $2-billlion estimate, we could see another 45-50bps CET 1 hit. TD could of course sell down its SCHW stake if needed, though another earnings headwind would emerge.”
With his lower financial projections and a cut to his target multiple, the analyst trimmed his target for TD shares to $75 from $84. The average target on the Street is $86.64, according to LSEG data.
Conversely, CIBC World Markets analyst Paul Holden upgraded TD to “outperformer” from “neutral” with a $88 target, jumping from $83.50.
“TD reported a better-than-expected quarter and we have revised our EPS estimates for this year and next as a result,” said Mr. Holden. “TD is now trading at 9.0 times P/E on our revised F2025E, well below the 5-year average of 10.3 times and below the group average. AML is the obvious overhang for the stock, but we think that is more than priced in. Our price target assumes that TD will trade in line with the group when AML unknowns become knowns. The implied return to target of 16% is the highest for the large cap banks we cover. We are upgrading TD.”
Other analysts making target adjustments include:
* RBC’s Darko Mihelic to $89 from $87 with an “outperform” rating.
“We believe results were solid, and even though credit quality was virtually unchanged quarter-over-quarter, TD built reserves, and we were not expecting new information on its AML problems,” said Mr. Mihekic. “We slightly increase our price target to $89 from $87 (on a lower multiple but higher EPS estimates) and maintain our Outperform rating. TD’s AML issues continue to weigh on the stock, and we will revisit its valuation multiple once we have more clarity on the outcome.”
* Desjardins Securities’ Doug Young to $91 from $93 with a “buy” rating.
“Adjusted pre-tax, pre-provision (PTPP) earnings were 6 per cent above our estimate; relative to our estimates, all divisions (with the exception of corporate) beat; however, the focus on the call was its U.S. AML issues (not surprising), and there wasn’t materially more it could provide on this topic. We lowered our target price to C$91 (from C$93), adjusted our estimates and maintained our Buy rating; however, we acknowledge that patience is required.”
“We like TD’s excess capital and Canadian/US P&C banking franchises. That said, U.S. regulatory matters will remain a near-term overhang.”
* Canaccord Genuity’s Matthew Lee to $93.50 from $91 with a “buy” rating.
“TD reported robust Q2 results this morning with a headline EPS beat driven by strength across multiple segments. While more disclosure around the firm’s monetary and non-monetary AML penalties is certainly required, we view the bank’s strong performance as a first step to winning back the favour of investors. We were particularly impressed by TD’s Canadian loan book growth of 7 per cent year-over-year, which reflects share gains in the mortgage business as well as some card growth. Looking forward, we foresee opportunities for the Wholesale business to benefit from structural U.S. tailwinds, augmented by the integration of Cowen. Despite the AML overhang, we remain constructive on the TD story given its discount valuation, impressive retail network, and capital position. As a result of a slight increase in estimates, we have raised our target,” said Mr. Lee.
* Scotia’s Meny Grauman to $87 from $90 with a “sector outperform” rating.
“Even a 10-per-cent core EPS beat in Q2 was not enough to get TD bank shares going after months of underperformance,” said Mr. Grauman. “That is not all that surprising given that we headed into reporting season with the view that the quarter itself was largely irrelevant in the face of ongoing AML issues that are yet to be resolved. The big risk that U.S. segment results would miss Street expectations did not come to pass, and in fact results there actually beat. But despite a solid quarter the shares underperformed, albeit modestly, as management acknowledged that branch growth in the U.S. would take a back seat to remediation efforts. Management reiterated expense guidance for this year, but in the absence of explicit guidance for F2025 it is reasonable to assume that expense growth accelerates into F2025 tied to direct and indirect spending related to the bank’s AML issues. We continue to believe that the sell-off in the shares has gone too far and that a worst-case scenario for the U.S. business is already being priced in. That said, the quarter clearly illustrates that whatever happens to EPS estimates, TD’s discount to the group is unlikely to materially narrow until the bank announces a full resolution with U.S. regulators.”
* BMO’s Sohrab Movahedi to $84 from $86 with a “market perform” rating.
“This was a broad-based beat to us, with noteworthy mention of results above expectations in Wealth & Insurance (higher insurance premiums; market appreciation) and Wholesale Banking (higher lending, underwriting and trading revenue), notwithstanding higher PCL of 47 basis points (vs. us at 40bps). CET1 ratio 13.4 per cent (down 50 bps quarter-over-quarter),” he said.
* Jefferies’ John Aiken to $76 from $74 with a “hold” rating.
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With former chief executive Glenn Chamandy set to retake the helm of Gildan Activewear Inc. (GIL-T) with backing from activist fund manager Browning West, National Bank Financial analyst Vishal Shreedhar thinks it’s “a time for increased focus” for the Montreal-based clothing manufacturer.
“We believe the implementation of an activist slate of directors, operating strategy and reinstatement of Mr. Chamandy as CEO will represent a period of increased focus and execution for Gildan,” he said. “That said, in the near term, suspension of a sale process may weigh on investor sentiment, although this was already partly reflected in the share price (was US$33.80 before the sale process).
“The key issue for Mr. Chamandy and Gildan will be reinvigorating growth against an uncertain backdrop. Recall, Gildan has historically delivered a revenue CAGR [compound annual growth rate] of 2.0 per cent (5-year) and 3.7 per cent (10-year), as well as an EPS CAGR of 10.0 per cent (5-year) and 7.1 per cent (10-year).”
Mr. Shreedhar emphasized the activist proposal previously suggested its approach would support a share price of US$65 by 2025 and US$102 by 2028. He added, assuming a 9.9-per-cent cost of equity, that would lead to a share price of approximately US$55-US$65 today.
“The proposal outlined the following: (i) Gain market share in fashion basics by lowering unit costs; (ii) Gain market share in fleece; (iii) Gain share in private label (program wins); (iv) Enhance capital allocation and capital structure; and (v) Introduce aspirational compensation plan tied to value creation,” he said. “The proposal (2023-2028) contemplates a 6-per-cent revenue CAGR, 510 bps EBIT margin expansion and 19-per-cent EPS CAGR. Our estimates fall short of these aspirations as we await concrete signs of improving business momentum.
“We are supportive of several ideas in the proposal, including increasing buybacks (slightly higher leverage) and driving efficiencies.”
Keeping his “outperform” rating for Gildan shares, Mr. Shreedhar cut his target by $1 to $57 to reflect “the removal of a 50-per-cent acquisition likelihood.” The average target is currently $55.28.
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Predicting Descartes Systems Group Inc. (DSGX-Q, DSG-T) will report “solid” first quarter results on May 29, with adjusted EBITDA rising 18 per cent year-over-year, RBC Dominion Securities’ Paul Treiber believes its “valuation may continue to re-rate higher as organic growth is sustained above historical averages.”
The analyst is projecting adjusted EBITDA of US$67.8-million, up from $57.7-million a year ago, exceeding the consensus forecast of US$66.5-million and above Descartes’ long-term target of 10-15-per-cent growth. He sees revenue growing 13 per cent to US$154-million, topping the Street’s forecast of US$151.3-million.
“Descartes has deployed US$151-million capital on two acquisitions (OCR, ASD) in FY25, up from $144-million deployed in all of FY24,” said Mr. Treiber. “While Descartes is paying slightly more than its historical average (estimate 15 times vs. 14 times), we believe Descartes is likely to realize strong cost synergies on the acquisitions, which will likely drive IRRs to levels similar or better than previous acquisitions. We are updating our financial estimates to reflect the acquisitions. As a result, our adj. EBITDA estimates move to $286-million for FY25 and $327-million FY26, up from $278-million and $316-million previously.
“Organic growth [is] likely to sequentially improve. We forecast organic growth of 10.1 per cent year-over-year Q1, above 9.5-per-cent Q4 due to the continued recovery in freight markets (e.g. U.S. import volumes up 16 per cent year-over-year vs. 9 per cent previous quarter) and 100 basis points easier year-over-year comps. Beyond Q1, we expect organic growth to remain in the high-single-digits, above Descartes’ historical average of low-to-mid single-digit organic growth.”
With the recent acquisitions of OCR Services Inc. and Aerospace Software Developments and its higher-than-average organic growth, Mr. Treiber thinks Waterloo, Ont.-based Descartes may provide baseline projections for the second quarter that top the Street’s projections. He predicts it will guide to revenue of US$138-million and adjusted EBITDA of US$52-million.
“Given the historical delta between actuals and baseline, our baseline expectations imply Q2 actuals of $161-million revenue and $71-million adj. EBITDA, above consensus of $156-million and $69-million,” he added.
Maintaining an “outperform” recommendation for Descartes shares, Mr. Treiber raised his target to US$115 from US$110. The average on the Street is US$99.89.
“Descartes is trading at 29 times FTM [forward 12-month] EV/ EBITDA, below supply chain and fleet management peers (36 times), though above Canadian software consolidators at 17 times,” he said. “On an NTM [next 12-month] EV/S basis, Descartes is trading at 13 times, in line with supply chain and fleet management peers (13 times), though above Canadian software consolidators at 5 times. We believe Descartes is likely to increasingly trade closer to supply chain and fleet management peers as the company’s market cap increases and organic growth stabilizes in the high-single digit range.”
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Echelon Capital Markets analyst Amr Ezzat sees “a cultural evolution” at Computer Modelling Group Ltd. (CMG-T).
“During our recent site visit in Calgary, we sensed a significant shift in the Company’s culture,” he said. “In our casual conversations with CMG employees, the heightened engagement was palpable, as they demonstrated a strong grasp of the Company’s strategic direction. Compared to our visits over the past 15 years, this time we noticed a pronounced commitment to fostering a performance-oriented workplace.
“This dedication is evident in the Company’s ongoing organizational evolution, as detailed in this quarter’s CEO letter, which includes: 1) The implementation of performance-based compensation, which includes equity contributions linked to a share purchase plan, effectively aligns employee incentives with company performance, fostering a culture of ownership among staff. 2) Enhanced financial transparency and accountability have been achieved through the restructuring of bonus schemes, ensuring that executive compensation is not only tied to KPIs such as revenue growth and adjusted operating profit but also ROIC (a key KPI for a company that will be deploying more capital into M&A). 3) The decentralization of internal operations into business units with dedicated leaders who have complete P&L ownership and accountability for core simulators, consulting, and CoFlow initiatives. This realignment allows for prioritizing competing R&D demands, enabling smaller, autonomous teams to effectively execute strategies and achieve results that support both immediate and long-term objectives.”
After the bell on Wednesday, the Calgary-based company, which produces reservoir simulation software for the oil and gas industry, reported sales of $32.3-million for its fourth quarter of fiscal 2024, up 59.3 per cent year-over-year and above both Mr. Ezzat’s $30.6-million estimate and the Street’s expectation of $32-million driven by stronger perpetual licence sales, which he noted “are sporadic in nature.”
“EBITDA aligned with our conservative Street-low estimate,” said Mr. Ezzat. “Prior to the release, we noted a broad dispersion in EBITDA estimates across the Street, ranging from $10.2-million to $12.0-million, underscoring the volatility associated with BHV [Bluware]. We were pleased to see A&M [annuity and maintenance] revenues grow 13.0 per cent year-over-year, marking eight consecutive quarters of double-digit A&M growth. We were also pleased to see strong FCF generation for the year, with FCF per share up to 44 cents per share from 27 cents per share in F2023, a 63-per-cent year-over-year increase.”
Raising his expectations for the company’s fiscal 2026, Mr. Ezzat increased his target to $13 from $11.50, keeping a “buy” recommendation. The average is $12.17.
Elsewhere, other analysts making target changes include:
* Acumen Capital’s Nick Corcoran to $13 from $12 with a “buy” rating.
“The results demonstrated strong momentum. Management continues to execute on its strategy and generate strong FCF,” he said.
* Canaccord Genuity’s Doug Taylor to $12 from $11 with a “buy” rating.
“A more stable energy market backdrop supports ongoing recurring revenue growth – this was up 13 per cent year-over-year in the quarter for CMG ex-Bluware. Combined with strong profit/FCF generation, we expect CMG to maintain a premium valuation; shares currently trade at 18 times forward EBITDA. We therefore expect further share performance to be tied to ongoing revenue growth execution and margin expansion within Bluware. Further upside comes from additional capital deployment on M&A; this is not discounted in our estimates,” said Mr. Taylor.
Meanwhile, CIBC’s Scott Fletcher initiated coverage of Computer Modelling Group with an “outperformer” rating and $13.50 target.
“CMG is a well-established leader in the reservoir simulation market with a steady, cash-flowing core business that reflects its market position. The new leadership team’s efforts to reaccelerate organic growth, embrace energy transition opportunities, and pursue an M&A agenda offer a compelling reason to revisit the CMG story. We believe that execution on growth strategies should lead to a more diverse, growth‑oriented business that warrants a premium software multiple,” said Mr. Fletcher.
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In other analyst actions:
* CIBC’s Todd Coupland upgraded Lightspeed Commerce Inc. (LSPD-T) to “outperformer” from “neutral” with a $33 target, up from $26 and above the average on the Street of $26.19.
“Lightspeed CFO, Asha Bakshani’s presentation at CIBC’s Technology & Innovation conference on May 22 provided greater detail on, in our view, the credible sources of growth and EBITDA expansion that underpin its strategic pivot,” he said. “These factors give us confidence that Lightspeed is better positioned to execute on its growth and margin expansion priorities this year, and provide support for an increase to our valuation multiple and price target. The shares are attractive and can be purchased.”
He added: “Lightspeed is undergoing a pivot and now expects to meaningfully expand adjusted EBITDA in the coming year while growing its high-GTV customer base, subscription revenues, payments adoption and merchant cash advances (MCA). The company expects software revenue growth to increase from 7 per cent in FQ4 2024 to 10-15 per cent by year end. This will be driven by a selective and targeted price increase, which Lightspeed plans to implement in the second half of this year, and the re-deployment of 100+ members of its salesforce to a focus on new customer additions. Specifically, sales team members will be tasked with adding new customers that fit Lightspeed’s ideal customer profile (ICP) of high GTV complex businesses within its focus verticals.”
* JP Morgan’s Seth Seifman raised his Bombardier Inc. (BBD.B-T) target to $91 from $75, while he cut his ATS Corp. (ATS-N, ATS-T) target to US$38 from US$43 with “neutral” ratings for both. The averages are $87.93 and $61.29 (Canadian), respectively.
* Stifel’s Stephen Soock trimmed his i-80 Gold Corp. (IAU-T) target to $4.10, below the $4.18 average, from $4.75 with a “buy” rating.
“Following the recent successful equity raise of $115-million, we are updating our valuation,” he said. “This cash injection (along with revenue from Granite Creek ore sales) provides runway through to 2H25, funding initial construction of the Ruby Hill base metals mine. This is a key to establishing cash flow to fund the rest of the growth pipeline, culminating in 230koz/yr produced from the Lone Tree autoclave (generating $270-million per year in site level FCF at spot prices). Our NAV has decreased due to the equity dilution and cash flow timeline and we are revising our target price to $4.10 per share. We maintain our BUY rating and think the stock trades too cheap for a company with assets in an ultra-low-risk jurisdiction, with a differentiated asset that sets it up to be a consolidator and runway to generate significant free cash flow. Watch for Ruby Hill JV announcement, construction decision and SPZ inaugural resource.”
* Bernstein’s Aneesha Sherman reduced his Lululemon Athletica Inc. (LULU-Q) target to US$376 from US$384, keeping a “buy” rating. The average is US$438.89.
* National Bank’s Dan Payne increased his target for Spartan Delta Corp. (SDE-T) to $6 from $5.50 with an “outperform” rating. The average is $5.52
“SDE might be one of the highest impact ways to play the Duvernay thematic. The resonance of the Duvernay’s value potential to SDE shareholders is a function of the pillars of its construction, where its foundational Deep Basin asset will serve as the funding mechanism for high-impact growth in the Duvernay,” he said.
David Leeder