Inside the Market’s roundup of some of today’s key analyst actions
Scotia Capital analyst Meny Grauman thinks recent economic data “highlights why further caution is warranted” for investors heading into the start of earnings season for Canadian banks later this week.
“In July, we co-authored a report with our quant team suggesting that Canadian banks were setting up well to play some catch-up not just versus U.S. peers, but also versus Canadian lifecos whose outperformance versus banks has looked increasingly stretched by historical standards,” he said. “In that report, we argued that this call was tactical in nature, and that we were still negative on banks longer term given ongoing risks of a hard landing if inflation did not slow enough to allow for rate cuts in 2024. In short, we saw a window of opportunity as investors got more confident in the outlook for rates and the economy.
“However, events over the last two weeks now suggest that this window of opportunity may have closed even before it really opened as stronger-than-expected economic data on both sides of the border (especially July’s CPI reading in Canada) has the market once again ratcheting up rate expectations. Not helping sentiment is Moody’s decision to downgrade 10 small and medium-size U.S. banks, and Fitch warning that it may do the same.”
In a research report released Monday titled Good News Is Bad News (and Bad News Is Probably Bad Too), Mr. Grauman predicted third-quarter results will not show signs of a recession, but he thinks “they are also unlikely to paint a particularly compelling picture either as bank earnings continue to be weighed down by slowing loan growth, sluggish fee income, flat-to-down margins, negative operating leverage, and normalizing PCLs with the potential for some lumpiness from U.S. office exposure.”
“Add to this rising capital levels (we assume another 50 bps increase to the DSB buffer in December), and the outlook for the banks remains very challenging barring a dream scenario of a soft economic landing, coupled with moderating inflation (back towards 2 per cent), and materially lower rate,” he added.
Mr. Grauman is now forecasting core cash EPS of $2.17 for the sector in Q3, up 2 per cent versus the prior quarter, which he attributes to a higher day count, but down 4 per cent year-over-year.
“As the banks get set to report Q3 results it is becoming abundantly clear that both the Canadian and U.S. economies are holding up better than expected,” he said. “While that seems like good news, the problem is that it is not good news for either inflation or more importantly rates. This inflation/rate dynamic remains the key risk to the outlook for banks in our view and is a key reason we remain quite cautious on prospects for the group as we look out to F2024. Our annual numbers continue to assume that PCL ratios continue to head higher, while loan growth continues to slow. At the same time we expect margins to be flat to down through our forecast horizon, and for operating leverage to be negative into next year when it begins to improve thanks in part to potential restructuring charges. Meanwhile, our outlook on fee income is conservative and certainly leaves room for improvement in wealth and capital markets-related revenue streams.
“Put it all together and our EPS estimates for F2023 declined by 3 per cent to $8.83. Meanwhile, our F2024 EPS estimates also fell 4 per cent $9.22. We continue to forecast regular dividend increases in line with medium-term EPS growth expectations, but are not modeling any share buybacks except for TD, which is sitting on an unusually large amount of excess capital in the wake of the cancellation of the FHN deal. Both our F2023 and F2024 EPS estimate are on average in-line with consensus.”
Mr. Grauman lowered his target prices for four banks:
* Canadian Imperial Bank of Commerce (CM-T, “sector perform”) to $62 from $66. The average on the Street is $62.79, according to Refinitiv data.
* National Bank of Canada (NA-T, “sector outperform”) to $107 from $109. Average: $105.09.
* Royal Bank of Canada (RY-T, “sector outperform”) to $141 from $143. Average: $136.52.
* Toronto-Dominion Bank (TD-T, “sector outperform”) to $101 from $103. Average: $93.23.
He maintained his targets for these banks:
* Bank of Montreal (BMO-T, “sector outperform”) at $143. Average: $132.02.
* Canadian Western Bank (CWB-T, “sector perform”) at $27. Average: $29.15.
* EQB Inc. (EQB-T, “sector outperform”) to $100. Average: $95.63.
* Laurentian Bank of Canada (LB-T, “sector perform”) at $38. Average: $44.31.
“It is probably not surprising that we take a conservative approach to numbers heading into another reporting season, and as a result come in below the Street for pretty much every name we cover,” he said. “We are not predicting anything dramatic this earnings season, but just a combination slower revenue growth and higher loan loss provisions.
“Although we are not above the Street for any of our names, we have a relatively more favourable view of CM and BMO given the underperformance of the shares heading into earnings, while NA looks relatively more vulnerable, as does CWB among the smaller banks. Bigger picture we highlight that results will likely take a back seat to macro data and rate moves for the foreseeable future.”
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Believing lower expectations are setting up for “a potentially positive” quarter, Barclays analyst John Aiken raised his target prices for stocks across the banking sector on Monday.
“With consensus estimates lowered coming out of Q2 (and heading into Q3), we believe the banks could surprise to the upside, posting better than expected thirdquarter earnings and continuing to fuel valuations ahead of the long-awaited and but now only potential recession,” he said.
His changes are:
- Bank of Montreal (BMO-T, “overweight”) to $131 from $123. The average on the Street is $132.02.
- Bank of Nova Scotia (BNS-T, “underweight”) to $65 from $63. Average: $70.14.
- Canadian Western Bank (CWB-T, “overweight”) to $29 from $26. Average: $29.15.
- Laurentian Bank of Canada (LB-T, “equalweight”) to $44 from $34. Average: $44.31.
- National Bank of Canada (NA-T, “underweight”) to $96 from $92. Average: $105.09.
- Royal Bank of Canada (RY-T, “underweight”) to $124 from $122. Average: $136.52.
- Toronto-Dominion Bank (TD-T, “equalweight”) to $84 from $81. Average: $93.23.
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Decisive Dividend Corp.’s (DE-X) “winning, repeatable M&A playbook [is] proving to be a well-oiled machine,” according to Echelon Partners analyst Mike Stevens.
Touting the Kelowna, B.C.-based acquisition-oriented company’s “supreme historical outperformance,” he initiated coverage with a “buy” recommendation.
“While recognizing that new investors won’t be rewarded for past performance, we view Decisive’s track record of delivering immense shareholder value over eight-plus years as validation of the Company’s stellar M&A strategy and operational competency,” said Mr. Stevens. “Early investors holding shares since the Company’s qualifying transaction in 2015 have enjoyed total returns in excess of 410 per cent (capital gains + cash dividends), compared to the S&P/TSX Total Return and Small Cap indices netting gains of just 72 per cent and 48 per cent, respectively, across the same period.”
The analyst applauded Decisive’s “disciplined buy, build, and hold” M&A strategy, which has seen it acquire almost $97-million in enterprise value (EV) across 11 manufacturing businesses “at immediately accretive acquisition multiples (average of 3.9 times EV/EBITDA) before seeking to reinvigorate growth through strategic investments.”
“The Company’s founder-friendly core tenets and access to capital have favourably positioned Decisive as an attractive acquirer,” he said. “This, coupled with surging macro tailwinds, as 56 per cent of Canada’s baby boomer business owners plan to exit over the next five years (representing $1.5-trillion-plusworth of assets) (CFIB), helps forge a rich pipeline of opportunities to flow for many years to come. With our headline PT derived from a strictly organic forecast outlook (i.e., assuming no further acquisitions), our more plausible M&A Scenarios point to current per share valuations of $12.63/$14.53 across our Base/Bull cases, implying considerable upside beyond our [price target].”
Also seeing “sustainable” dividend growth, Mr. Stevens set a target of $10.75, which implies a total return upside of over 45 per cent from its current price. The average target on the Street is $10.63.
“In the wake of a COVID-19-depressed 2020, the Company has put together a string of robust year-over-year organic growth rates – 29 per cent/30 per cent/13 per cent across 2021/2022/H123 – translating into substantial free cash flow (FCF) generation and dividend growth,” he said. “With two hikes already implemented in 2023, Decisive’s dividend now sits 33 per cent higher with plenty of runway for future growth given the Company’s 15-per-cent organic growth target, modest payout ratio, and largely untapped potential synergies.”
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CIBC World Markets analyst Mark Jarvi thinks the recent pullback in renewable energy stocks is “not justified by higher bond yields alone” and thinks investors are “pricing in overly bearish discount rates/valuations.”
“Performance across our power/renewables coverage has been poor, with 18-per-cent and 40-per-cent declines on three- and 12-month bases, respectively,” he said. “Other clean energy-related segments and ETFs have shown similar declines— clearly the outlook for this space is more bearish today and investor sentiment is poor. Higher bond yields explain some of the headwinds for our coverage, but on a pure valuation perspective can only really explain roughly half the decline (around 10 per cent for the average company), with perceived risks on supply chain, costs, funding and returns, as well as poor Q2/23 results, compounding the bond yield impacts.”
“Factoring in our new cost-of-equity assumptions (approximately 9 per cent on average), we believe current share prices are not even valuing current operations, let alone funded and prospective growth. We estimate stocks currently imply an average cost of equity of 11 per cent, which we see as punitive. Further, our EV/EBITDA analysis implies current valuations are 0.7 times lower than a 10-per-cent cost of equity implies.”
In a research report released Monday, Mr. Jarvi increased his cost-of-equity assumptions, leading him to reduce his target prices for several stocks.
“Even with lower targets, we foresee favorable upside on price appreciation at current levels (30 per cent, on average, before dividends),” he emphasized.
His changes were:
* Algonquin Power and Utilities Corp. (AQN-N/AQN-T, “neutral”) to US$8.75 from US$9. The average is US$9.15.
* Boralex Inc. (BLX-T, “outperformer”) to $43 from $44. Average: $44.69.
* Capital Power Corp. (CPX-T, “neutral”) to $46 from $47. Average: $49.83.
* Northland Power Inc. (NPI-T, “outperformer”) to $34 from $35. Average: $37.
“BLX and TA remain our preferred names in this group, reflecting clear strategies, stronger funding positions and solid execution through turbulent times,” Mr. Jarvi said. “Valuations for both remain very attractive, in our view. We believe NPI and NEP offer very good value (trading well below what we view as intrinsic values) and buying at current levels could create strong returns for patient investors as these firms de-risk ongoing growth objectives.”
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After conducting his semi-annual price point and basket analysis of Dollarama Inc. (DOL-T), Stifel analyst Martin Landry expects the discount retailer to raise its full-year same-store growth forecast when it reports its second-quarter 2024 financial results on Sept. 13.
“We analyzed more than 4,000 SKUs to assess the pace of the $4-plus product roll-out, and we reviewed our basket of 71 legacy products to determine the extent of inflation passed to customers,” he said. “Our analysis suggests that the roll-out of the $4-plus products is progressing well with 15 per cent of DOL’s products priced above $4.00, 800 basis points higher than in September 2022. Additionally, our analysis of DOL’s legacy products suggests that prices are 4.3 per cent higher year-over-year, which bodes well for SSS growth.”
Mr. Landry is now projecting quarterly revenue of $1.396-billion, up 14.7 per cent year-over-year on a comparable same-store sales growth assumption of 10.1 per cent and a 5-per-cent gain in store network. His earnings per share forecast of 75 cents is a gain of 13.6 per cent, but it sits 2 cents below the consensus on the Street due to a lower margin expectation.
“Over the last year, Dollarama has benefited from Canadians becoming more frugal to offset inflation and rising interest rates,” he said. “The number of transactions in Dollarama’s store grew 15.5 per cent year-over-year in Q1FY24, supporting our view that the company is gaining significant market share. Additionally, Walmart Inc. (WMT-NYSE) mentioned on its Q2FY24 call that they are continuing to gain market share across all markets, categories and income demographics, which we view has a positive read-through for Dollarama and a strong indication that consumers continue to trade down.”
Mr. Landry reiterated his “buy” recommendation and a $96 target for Dollarama shares. The current average is $91.18.
“Dollarama’s shares did not move much the day the company reported its stellar Q1FY24 results as investors were trying to assess the implication of the unchanged same-store-sales guidance,” he said. “However, we expect management to increase its FY24 same-store-sales guidance ... This increase should confirm continued market share gains and consolidate Dollarama’s position as the leading Canadian retailer during this economic slowdown. Hence, with strong organic growth rates, 500 basis points above historical levels, and not expected to abate near-term, Dollarama should garner a higher valuation, in our view.”
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Cormark Securities real estate analyst Sairam Srinivas downgraded a pair of stocks on Monday:
* Northwest Healthcare Properties REIT (NWH.UN-T) to “market perform” from “buy” with a $9.50 target, down from $10.50. The average is $8.50.
* Slate Office REIT (SOT.UN-T) to “reduce” from “market perform” with a $1.20 target, down from $2.20. The average on the Street is $1.70.
He also made these target changes:
* Boardwalk REIT (BEI.UN-T, “buy”) to $72 from $68. Average: $74.23.
* CAP REIT (CAR.UN-T, “buy”) to $56 from $55. Average: $56.87.
* Dream Impact Trust (MCPT.UN-T, “buy”) to $15 from $17.80. Average: $16.25.
* Dream Office REIT (D.UN-T, “buy”) to $15.50 from $17. Average: $14.31.
* NexLiving Communities Inc. (NXLV-X, “buy”) to $3.60 from 18 cents. Average: $3.87.
* Slate Grocery REIT (SGR.UN-T, “buy”) to US$13 from US$12.50. Average: US$11.30.
* Storagevault Canada Inc. (SVI-T, “buy”) to $7 from $7.25. Average: $6.39.
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In other analyst actions:
* JP Morgan initiated coverage of Restaurant Brands International Inc. (QSR-N, QSR-T) with an “overweight” recommendation and US$82 target. The average is US$79.81.
* Canaccord Genuity’s Tania Armstrong-Whitworth lowered her Street-low Eupraxia Pharmaceuticals Inc. (EPRX-T) target to $12.25 from $13, keeping a “speculative buy” rating. The average is $18.08.
* “Following another challenging quarter and further drawdown of cash resources,” Raymond James’ Steve Hansen trimmed his Farmers Edge Inc. (FDGE-T) target by 5 cents to 10 cents, reiterating an “underperform” rating. The average is 18 cents.
“While management has made tremendous strides with respect to cost containment, including a sweeping shift to a virtual service model (vs. in-field), less clear has been traction on new product introduction, high-value acre addition, enterprise customer adoption, and renewed revenue growth. We will continue to monitor,” said Mr. Hansen.
* Credit Suisse’s Fahad Tariq cut his targets for Hudbay Minerals Inc. (HBM-T, “outperform”) to $8 from $9 and Lundin Mining Corp. (LUN-T, “neutral”) to $11 from $12. The averages are $9.94 and $11.55, respectively.
* TD Securities’ Towaki Dojima lowered his Overactive Media Corp. (OAM-X) target to 20 cents from 25 cents with a “hold” rating.
David Leeder