Inside the Market’s roundup of some of today’s key analyst actions
RBC Dominion Securities analyst Paul Treiber thinks there is likely to be few surprises from Canadian technology companies during the approaching second-quarter earnings season, expecting results to largely fall in line with the Street’s expectations and most to reiterate annual guidance.
While he thinks the macro sector backdrop has not “materially” changed and remains “challenging,” he believes trends are “stable” for most, predicting organic growth may start to improve, given easier year-over-year comparables, and profitability is poised to increase.
“Our U.S. Software team recently published a note following meetings with 14 enterprise software companies that indicated the macro environment remains challenging, but trends are stable for many software companies,” said Mr. Treiber in a report released before the bell. “For stocks in our coverage that are dependent on consumer spending, though spending slowed through the quarter according to U.S. Census data, it was likely sufficiently resilient to keep topline growth in line or marginally ahead of consensus expectations. For those dependent on enterprise spending, we believe the environment remains similar to previous quarters, with sustained elongated sales cycles as a headwind to near-term growth.”
While noting Canadian technology stocks have underperformed broader markets in the quarter with the S&P/TSX Info Tech index down 6 per cent versus a 1-per-cent decline in the Composite and a 14-per-cent jump in the S&P 500 Info Tech index, Mr. Treiber thinks valuations remain “compelling” with the average stock in his coverage trading at a 22-per-cent discount to peers.
Predicting “improving growth and profitability,” he thinks Canadian tech stocks are likely to start to outperform in the second half of 2024.
“In our coverage, we believe the best positioned stocks for Q2 are Celestica, Kinaxis, and Constellation,” he said.
Mr. Treiber made a pair of target changes on Monday. They are:
* Celestica Inc. (CLS-N, CLS-T) to US$63 from US$53 with an “outperform” rating. The average is US$57.56.
“We expect Celestica to report strong Q2 results, with potential upside to consensus, driven by continued AI demand and data center build-outs. Similar to last quarter, Celestica may raise FY24 guidance, which we believe remains conservative with respect to hyperscaler demand. Given the likely beat and raise, we believe the re-rating in Celestica’s shares will continue,” he said.
* Constellation Software Inc. (CSU-T) to $4,700 from $4,300 also with an “outperform” rating. The average is $4,216.25.
“We expect Constellation to report healthy Q2 results, with adj. EBITDA up 26 per cent year-over-year, in line with consensus and consistent with Constellation’s 5-year average (26 per cent). Our forecast assumes organic growth is sequentially stable with Q1. While Q2 M&A was lighter than anticipated ($566-milion vs. $760-million in our model), we believe Constellation’s decentralized M&A model is likely to continue to scale over time. Increasing price target ... as we believe Constellation is likely to sustain a premium valuation multiple,” he said.
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Desjardins Securities analyst John Sclodnick says institutional investors are currently “far more concerned about the margins of gold producers versus the gold price” heading into earnings season.
“A regression analysis of producers’ operating margin and the XGD [iShares S&P/TSX Global Gold Index ETF] found an R2 of 0.89 over the past 10 years, higher than the 0.87 between the gold price and the XGD,” he said. “This aligns with our conversations with investors .... With the gold price reaching all-time highs and AISC [all-in sustaining costs] remaining relatively stable with inflation appearing to subside, we expect to see stable margins, if not continued margin expansion, beyond 2Q results and believe that the strong gold equity performance through 1H should continue.
“With the gold price hitting all-time highs, up nearly 15 per cent year-to-date, and silver outperforming gold over the same timeframe, we revisited our coverage companies’ leverage to changes in the gold and silver price. APM has the highest sensitivity to metals prices, with its NAV [net asset value] changing 44 per cent for a 10-per-cent change in our gold and silver price, followed by EQX at 35 per cent and OGC at 30 per cent.”
In a research report released Monday titled Recent gold equity performance not just a summer fling as higher margins look to stick around for longer, Mr. Sclodnick updated his metals price and foreign exchange projections, resulting in higher precious metals forecasts.
“Going into 2Q earnings, we are quite comfortable holding APM, K, LUG and SIL; however, given LUG and SIL have pre-released operating results, consensus could converge with our estimates,” he said. “We would look to lighten up on CG and EQX due to heavy rains in the quarter potentially impacting production results, although it appears that consensus has taken this into account. While OGC remains our top gold producer pick over the next 12 months, we believe that consensus estimates for 2Q EPS could be too high.”
“Our top gold producer pick is OGC, our top developer pick remains SKE and our top silver producer pick is still AYA. We are cautious on OGC going into 2Q reporting, but it remains our top pick for its peer-leading FCF yield and substantial year-over-year production and EBITDA growth; we would also be buying for the strong 2H expected, with 3Q results expected to demonstrate its FCF-generating ability. AYA continues to be our favourite silver company given it is the only pure-play silver producer and has the best silver leverage combined with an unmatched growth profile, highlighted by its Boumadine project. SKE is currently trading in line with gold developers; however, with the lowest AISC and average annual production above 300koz Aueq in a top-tier jurisdiction, and given it is now fully funded through to commercial production, we believe SKE should trade at a meaningful premium.”
With the changes to his forecasts, Mr. Sclodnick adjusted his targets for most stocks in his coverage universe. For his top picks, his changes are:
- Aya Gold & Silver Inc. (AYA-T, “buy”) to $26 from $21. The average is $20.69.
- OceanaGold Corp. (OGC-T, “buy”) to $5.50 from $4.90. Average: $4.88.
He maintained a $20 target for Skeena Resources Ltd. (SKE-T, “buy”). The average is $16.32.
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Stifel analyst Martin Landry expects the second-quarter financial report from Gildan Activewear Inc. (GIL-N, GIL-T) to be “noisy” due to the implementation of the global minimum tax and the retroactive impact of the first quarter included in its latest results.
He also warned not to expect a major strategic announcements from the Montreal-based clothing manufacturer in the first quarterly report with Glen Chamandy back as chief executive officer following a messy internal battle.
Ahead of the Aug. 1 release, the analyst is projecting earnings per share of 72 US cents, up 13 per cent year-over-year and in line with the consensus forecast. He attributed that gain to 2-per-cent revenue growth and “strong” operating margins, which he estimates will rise 4.75 per cent from the same period a year ago due to lower raw material costs, manufacturing efficiencies and expectations for tax credits to reduce SG&A expenses.
“We note that Q2/24 will be impacted by a one-time headwind from the retroactive impact of the GMT, which will flow into Q2/24,” he said. “Recall, that if the GMT had been implemented in Q1/24, EPS would have been lower by 5 cents. Hence, normalizing for this headwind, our Q2/24 EPS estimate would have been closer to 77 cents, up 21 per cent year-over-year.”
However, Mr. Landry said channel checks suggest that the U.S. printwear industry is “still depressed, particularly June and July, which appear to have been the worse months so far this year.” He also sees headwinds in supply chain with longer transportation times and higher freight costs due to the Middle East conflict.
“Discussions with industry participants in the U.S. printwear industry suggests that a marked deceleration occurred in mid-June, which continued into July,” said Mr. Landry. “It is difficult to assess if this is just a seasonal lull or a more persistent downturn but most industry participants don’t expect a rebound until the U.S. elections. In terms of end markets, live events continue to do well for the industry and appear to be sustaining the high volumes seen in 2023. Corporate promotional activity (representing 25 per cent of the industry) is the end market which is down the most, continuing a trend seen in 2023. Hence, given these comments, we do not expect any upward changes to Gildan’s full year guidance.”
“Following the post-COVID boost, production capacity in Central America has increased, but with the current industry slowdown, most manufacturers are faced with excess capacity. We believe this may result in some apparel manufacturers being more aggressive with promotions to keep capacity up and get better fixed cost absorption. Combined with cotton prices declining, this excess capacity could result lower price realization for the industry and Gildan in H2/24 and into 2025.”
To reflect the recent valuation expansion of Canadian discretionary companies, Mr. Landry raised his target for Gildan shares by US$3 to US$39, but he reaffirmed a “hold” rating based on an “expanded” valuation. The average target on the Street is US$41.60.
“We believe Gildan continues to gain market share in the U.S. screenprint industry and hear that the Comfort Colors brand is doing well,” he said. “However, there are no signs of recovery in industry volumes, which is disappointing. Production ramp-up in Bangladesh also appear slower than previously planned. Hence, given supply chain headwinds, weak industry volumes and potential pressure on selling prices, we remain on the sidelines currently. We like Gildan’s shareholder friendly measures, including strong share buybacks, and Browning West’s aggressive long-term plans. We also believe Glenn Chamandy will succeed again at creating shareholder value. We would turn positive once we see more favorable industry conditions.”
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In a separate report released late Monday morning, Mr. Landry said Sleep Country Canada Holdings Inc.’s (ZZZ-T) friendly takeover agreement with a subsidiary of Fairfax Financial Holdings Ltd. (FFH-T) for a purchase price of $35.00 per share “appears slightly lower than what we would have expected.”
“Sleep Country’s trailing twelve months EBITDA is depressed currently, at $194 million, vs a more normalized level of $215-225 million,” he said. “Hence, we would have expected the valuation multiple paid to reflect this and be slightly higher. Having said that, we expect that shareholders will support the transaction given the low likelihood of other bidders and certainty of value realization.”
Seeing the valuation as “slightly opportunistic,” Mr. Landry moved his rating for Sleep Country to “hold” from “buy” and raised his target to the offer price of $35 from $31. The current average is $30.50.
“Sleep Country commands a leading share of the mattress industry in Canada with an estimated 40% market share,” he said. “The company is well entrenched allowing it bargaining power with mattress manufacturers. This translates into much higher profitability than other North American retailers in the bedding industry. We believe these attributes warrant a higher valuation multiple than recent transactions in the industry. Given Sleep Country has had depressed earnings in the last year, we would have liked to see the valuation multiple reflect this dynamic. In our view, 9 times trailing EBITDA would be fair in a normal earnings cycle but we feel it is slightly low in light of the trailing EBITDA, which is 12 per cent lower than what we view as a normalized EBITDA run rate of $215-225 million.”
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With copper hitting an all-time high, the second quarter of 2024 was “another positive one” for Canadian base metals producers, according to Stifel analyst Cole McGill.
“Commodity price increases continue to translate into equity gains, with our coverage up an average 18 per cent in the quarter and now showing an average year-to-date gain of 49 per cent (compared to 8.4 per cent for the TSX),” he said. “This outperformance is partly thanks to multiple expansions as investors have turned optimistic about the rising cash spread between commodity prices and costs. We will continue to focus on costs this quarter for a read-through on whether this trend is likely to continue, with implications for free cash flow generation in H2 across our coverage, which we expect to be production back-half weighted.”
In a research report released Monday, Mr. McGill said he continues to see “a constructive asymmetric outlook” for copper, “as even amidst a snoozing Chinese recovery, copper concentrate tightness, and scarce new quality sources of supply entering the market provide a backdrop where price risk is to the upside.”
“Copper’s relative resilience in the face of China weakness could mean more upside if and when the Chinese recovery ever gains traction,” he said. “We saw a hint of this on July 5th when the Yangshan copper premium crossed into positive territory after being in a deficit since mid-May. The metric, which measures the premium paid in the spot market in Shanghai vs the London Metals Exchange, is typically seen as an indicator of Chinese physical demand and traders pounced on the news by bidding up the copper price as high as 3.8 per cent that day.
“The potential for demand upside continues to be met with a tight supply picture, where TC/RCs indicate a tight market, alongside legacy South American assets struggling to keep up.”
Mr. McGill made a pair of target changes on Monday:
- Capstone Copper Corp. (CS-T, “buy”) to $12 from $11.50. The average is $13.48.
- Hudbay Minerals Inc. (HBM-T, “buy”) to $16 from $15. Average: $16.46.
“With volatility comes opportunity. Increased copper price volatility in the quarter could translate to increased revenue variability, depending on marked-to-market timing of shipments. The overall positive copper price trend in the quarter should also mean positive provisional pricing adjustments as concentrate shipments originally marked to Q1 prices are priced upon arrival at their smelter destinations,” he said.
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CIBC World Markets energy infrastructure and power and utilities analysts Robert Catellier and Mark Jarvi made a group of target price adjustments to stocks in their coverage universe on Monday.
“We have modified estimates for the Midstreamers under coverage to reflect warmer-than-expected weather and generally higher marketing results, notably frac spreads. Improved egress options are expected to benefit the industry as a whole, and optimism around liquids production growth is improving due to the Trans Mountain Expansion Pipeline (TMX),” they said in a report. “While Power names fared well through Q1 reporting, North American wind improved year-over-year and the stocks came off the lows through Q2; we don’t expect Q2 results to be a catalyst given likely muted results for most. For the regulated utilities, quality and consistency should continue to drive relative performance. We’re 3 per cent below consensus for the Power names and relatively in line for the Utility names we cover, on average.”
Their changes include:
- Boralex Inc. (BLX-T, “outperformer”) to $42 from $41. The average is $40.40.
- Capital Power Corp. (CPX-T, “neutral”) to $42 from $41. Average: $42.18.
- Emera Inc. (EMA-T, “neutral”) to $50 from $51. Average: $49.33.
- Hydro One Ltd. (H-T, “neutral”) to $41 from $40.50. Average: $40.61.
- Innergex Renewable Energy Inc. (INE-T, “neutral”) to $11.50 from $11. Average: $11.78.
- TransAlta Corp. (TA-T, “outperformer”) to $15.50 from $16.50. Average: $13.75.
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In other analyst actions:
* TD Cowen’s Michael Van Aelst upgraded Metro Inc. (MRU-T) to “buy” from “hold” and raised his target to $92 from $80. The average on the Street is $79.63.
* Mr. Van Aelst also hiked his targets for George Weston Ltd. (WN-T, “buy”) to $242 from $226 and Loblaw Companies Ltd. (L-T, “buy”) to $186 from $172. The averages are $220.67 and $167, respectively.
* BMO’s Kevin O’Halloran reinstated coverage of Aya Gold & Silver Inc. (AYA-T) with an “outperform” rating and $21.50 target. The average is $20.69.
“Aya’s first mover advantage in Morocco has yielded an attractive portfolio of assets: the Zgounder silver mine is in the final stages of an expansion bringing elevated silver production starting in H2 2024,” he said. “The Boumadine project displays potential to evolve into a large, flagship asset. And the company is strongly positioned in Morocco for additional growth via exploration and acquisition. We expect shares to command a premium valuation as growth is delivered.”
* TD Cowen’s Vince Valentini raised his target for BCE Inc. (BCE-T, “hold”) to $48 from $47. He lowered his targets for Quebecor Inc. (QBR.B-T, “buy”) to $35 from $37, Rogers Communications Inc. (RCI.B-T, “buy”) to $70 from $74 and Telus Corp. (T-T, “buy”) to $26 from $27. The averages are $49.62, $37.25, $69.20 and $24.95, respectively.
* RBC’s Doug Miehm bumped his Bausch + Lomb (BLCO-N, BLCO-T) target to US$20, above the US$18.88 average, from US$18 with an “outperform” rating.
“BLCO will report Q2/24 results before market open on July 31,” he said. “We estimate Q2/24 revenue of $1,187-million (cons. $1,170-million) and adj. EBITDA of $209-million (cons. $204-million). Q2/24 will continue to be influenced by FX headwinds (RBCe: $20–25-million). We expect the focus to be on the company’s DED Rx drugs (Miebo/Xiidra), new launches, and the impact from a recall in the surgical segment. IQVIA TRx trends indicate a strong launch for Miebo but struggling performance for Xiidra. We increase our price target to $20 from $18 to largely reflect the re-rating of comps and to a lesser degree our updated outlook.”
* Desjardins Securities’ Lorne Kalmar increased his Choice Properties Real Estate Investment Trust (CHP.UN-T) target to $15.50 from $15. Other changes include: BMO’s Michael Markidis to $15.50 from $15 with an “outperform” rating, Raymond James’ Brad Sturges to $15.50 from $15 with an “outperform” rating an Scotia’s Himanshu Gupta to $15.50 from $15 with a “sector outperform” rating. The average is $15.19.
“While 2Q had a bit of noise, the REIT’s core businesses continued to perform well, including 3-per-cent SP NOI [same-property net operating income] growth in its retail portfolio and a nice rebound in industrial SP NOI,” Mr. Kalmar said. “Looking ahead, we forecast average FFOPU [funds from operations per unit] growth of 4 per cent in 2025/26, as well as steady distribution increases. While CHP’s performance has rebounded, we still see further upside and continue to view the REIT as a high-quality name with a defensive, in-demand portfolio deserving of a premium valuation.”
* Raymond James’ Patrick Brown raised his targets for GFL Environmental Inc. (GFL-N, GFL-T) to US$45 from US$43 with an “outperform” rating and Waste Connections Inc. (WCN-N, WCN-T) to US$207 from US$190 with a “strong buy” recommendation. The averages are US$44.66 and US$191.35, respectively.
* JP Morgan’s Ryan Brinkman cut his Magna International Inc. (MGA-N, MG-T) target to US$63 from US$69 with an “overweight” rating, while BMO’s Tamy Chen reduced her target to US$55 from US$60 with an “outperform” rating. The average is US$54.85.
“According to IHS, the production outlook has deteriorated in recent months. In the U.S., it appears OEMs such as the Detroit Three continue to prioritize profit per vehicle and are responding to elevated inventory on certain platforms with production cuts rather than higher incentive spending. This is a negative for suppliers. We have lowered estimates for our coverage. Although current valuations are at or towards the low end of historical ranges, which suggests we may be at peak pessimism, we do not yet see signs of positive industry greenshoots on the horizon,” said Ms. Chen.
* TD Cowen’s Graham Ryding raised his TMX Group Ltd. (X-T) target to $41 from $37 with a “hold” rating. The average is $40.78.