Inside the Market’s roundup of some of today’s key analyst actions
Following recent investor meetings with its management, BMO Nesbitt Burns Thanos Moschopoulos thinks Celestica Inc. (CLS-N, CLS-T) is “well-positioned to benefit from AI-driven hyperscaler capex,” pointing to accelerating demand in its Communications business.
“CLS’s Comms business was up 17 per cent year-over-year in Q1/24 and is expected to grow in the mid-40-per-cent range year-over-year in Q2/24,” he said. “We believe that CLS is a top-two ODM [original design manufacturer] (i.e., non-OEM) supplier of network switches to the large hyperscalers, counting all of the top five as customers—and AI, which has driven CLS’s server business over the past year, is now driving Comms. CLS saw a strong uptick in Comms demand from its largest hyperscaler customer in Q1/24, and this is now extending to a broader slate of hyperscalers in the current quarter. We believe a growing Comms mix might bode well for margins as, relative to CLS’s server business, the Comms business is more weighted towards higher-margin HPS [hardware platform solutions] (i.e., proprietary product designs).”
Mr. Moschopoulos sees the Toronto-based company hoping for more AI server wins, emphasizing it is now “scaling capex efficiently.”
“CLS is a key supplier of AI servers to its largest hyperscaler customer, but to our knowledge isn’t currently supplying AI servers to other hyperscalers,” he said. “CLS believes the fact that several other hyperscalers are ramping their spend on custom-silicon AI servers relative to NVIDIA might provide it with an opportunity for additional customer wins (as this should play to CLS’s strengths, with respect to managing customization and complexity).”
“Given that CLS already has a broad geographic footprint, its focus has been on adding capacity that’s adjacent to existing facilities, so that it can leverage existing G&A infrastructure and leadership teams. Its capex discipline has driven high utilization rates, contributing to margin expansion and FCF growth (with FY2024 guidance calling for $250-million of FCF, up 29 per cent year-over-year).”
Maintaining his “outperform” recommendation for Celestica shares, Mr. Moschopoulos raised his target to US$63 from US$53. The average on the Street is US$56.44.
“We view the stock’s valuation as attractive relative to CLS’s end-market exposure and our view that consensus FY2025 estimates, and our own (which currently call for 9-10-per-cent adj. EPS growth) are likely conservative, given end-market demand and the potential for further margin expansion,” he concluded.
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Desjardins Securities analyst Benoit Poirier warns TFI International Inc.’s (TFII-T) second-quarter results are likely to hurt by a “weaker than initially expected” seasonal pick-up in less-than-truckload activity, pointing to “depressed” truckload data and “uninspiring” operating updates from its peers.
“We believe TL spot rates will be a key indicator of an inflection in LTL stocks,” he said. “Unfortunately, U.S. TL spot rates continue to bounce along the bottom at US$2.05/mile, according to the latest DAT data. From a capacity perspective, there remain 92,000 more for-hire carriers in the US than existed pre-pandemic according to FTR, and on a seasonally adjusted basis, truck payrolls have declined just 2 per cent relative to the peak in July 2022. Overall, we continue to believe capacity exits will be a gradual process, and investors should not expect a sharp turnaround before year-end.
“With the exception of SAIA which posted strong tonnage growth (less of a read-through for TFII given its idiosyncratic growth from new facilities and Yellow volume), May operating updates from ODFL, XPO and ARCB underperformed typical seasonality in our view, despite lapping easy yearago comps. Combined with the ISM Manufacturing PMI coming in below 50 once again in May, we do not expect a material increase in TForce’s shipment count in 2Q. However, we look forward to analyzing the company’s progress on the weight front following four consecutive quarters of sequential expansion.”
While Mr. Poirier trimmed his second-quarter and full-year 2024 earnings expectations, he does not expect TFI’S management to cut its 2024 annual guidance, and he thinks the lower end of its US$6.75–7.00 guidance range “remains achievable.” He’s now projecting US$6.76, down from US$6.81.
Maintaining a “buy” rating for TFI shares, he trimmed his target to $207 from $208. The average is currently $196.79.
“We see sizeable potential opportunities for value creation given the catalysts on the horizon (eg TL spin-off, M&A, room for operational streamlining, dividends and buybacks),” said the analyst.
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Scotia Capital analyst Maher Yaghi thinks Cineplex Inc. (CGX-T) is suffering with the movie industry “feeling the pain from lower movie release volume and quality.”
“Many movies that were slated to be released in 2024 got pushed out to 2025 due to the Hollywood strike as movie production was shut down for months,” he said. “While movies are starting to come out again, the industry still has not recovered from that air pocket. We expect the pace of movie releases to return to a better rhythm late this year. The industry is also suffering from a lack of quality in the movies released to date. In 2022 and 2023, the average movie release was able to garner more revenues than in 2019 (up 18 per cent in 2022 and up 21 per cent in 2023 vs 2019) while this year, the average movie is trailing 2019 levels by 25 per cent. Hence, the combination of a lower number of movie releases and a weaker quality in released movies is causing a significant drag to box office revenues to date.
“Pace of movie release is expected to improve in 2H24. An exciting list of movies is expected in the coming months including Despicable Me 4, Deadpool & Wolverine, Beetlejuice Beetlejuice in Q3 and Venom 3, Gladiator II, Moana 2, and Mufasa in Q4 to name a few. We expect the number and quality of movie releases in the second half to improve, leading to a pickup in box office revenues for Cineplex.”
The analyst emphasized North American box office revenues are down 26 per cent year-over-year thus far in 2024 and down 42 per cent versus the pre-pandemic levels seen in 2019.
“Although Cineplex has been able to outperform North American industry performance with a strong showing from international content (down 19 per cent vs 2023 and down 35 per cent vs 2019), the industry wide decline in revenues has been too steep to allow the company to maintain the cash generation level achieved last year,” he said.
Given the weaker-than-expected performance in the second quarter, Mr. Yaghi “materially” reduced his estimates for the quarter.
“We expect revenues and cash generation to be stronger in Q3 and Q4 as the number and quality in new movies improve. Overall we have reduced our target price on the stock as a result of a lower level of FCF generation,” he said. “We expect the stock to remain pressured until we see a clearer path to a more sustainable revenue run rate, which could take a few months.”
“Q2 QTD box office revenues represent only 47 per cent of 2019 levels. This compares to our previous forecast of $148-million for Q2 (78 per cent of 2019 levels), which we have revised downward today to $104-million. Our new Q2 estimate represents 55 per cent of 2019 levels, a more realistic expectation given softer 1H/24 blockbuster releases and results to date. In June, we will likely see a few strong performing titles such as Inside Out 2 and A Quiet Place; Day One, but in our view, this is not enough to close the gap between Q2 quarter-to-date results and our previous expectations hence the reduced expectations. Our new quarterly estimate for Q2 box office revenues would be the lowest print since Q1/22.”
Mr. Yaghi trimmed his Street-low target to $10 from $11, keeping a “sector outperform” rating. The average is $12.58.
“We expect the current deep discount to peers to diminish as investors gain confidence in the sustainability of financial results,” he said.
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Desjardins Securities analyst Chris Li expects a “tough macro backdrop” will be very evident when Alimentation Couche-Tard Inc. (ATD-T) reports fourth-quarter 2024 results on June 25.
He’s now projecting adjusted earnings per share of 44 US cents, below the consensus estimate of 51 US cents. He attributed that gap to more conservative assumptions for TotalEnergies in its first full quarter in Couche-Tard results. He’s also predicting soft merchandise same-store sales growth across all regions (U.S. down 2 per cent, Europe and other regions down 1 per cent, Canada down 2 per cent).
“We expect FY25 to be a tale of two halves, with macro challenges weighing on results in 1H before improving in 2H,” said the analyst. “We are forecasting FY25 adjusted EPS growth of 7 per cent (vs consensus of 11 per cent), an improvement from the 9-per-cent decline expected in FY24 (sameweek). We expect adjusted EPS growth to accelerate to 15 per cent in FY26, driven by a healthier consumer backdrop from lower interest rates and execution of ATD’s strong pipeline of organic growth initiatives (food, beverages, private brands, fuel, loyalty, digital, new store growth, cost optimization, etc) detailed at last year’s investor day.”
While he reduced his earnings projections through fiscal 2026, Mr. Li maintained a “buy” rating and $86 target for Couche-Tard shares. The average is $87.93.
“While share price volatility will persist, our positive view is based on ATD’s attractive long-term growth and strong financial position,” he said.
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National Bank analyst Maxim Sytchev sees Stella-Jones Inc.’s (SJ-T) fate “increasingly tied to poles as realized pricing reaches record highs.”
In a research report released Monday, he said the medium-term outlook for the Montreal-based company’s Poles business is “robust,” however he earned the second half of 2024 could “create volatility if industry volumes impact pricing.” He empahsized the market is “not imputing that dynamic.”
“SJ’s share price momentum (up 35 per cent vs up 12 per cent for TSX) since our upgrade 9 months ago has largely been due the growth seen in utility poles as management remains committed to a 15-per-cent CAGR [compound annual growth rate] in this vertical over 2024/2025,” he said. “The guide is backed by strong secular growth in the U.S. for grid strengthening and electricity demand, as well as the start of the long-awaited mass replacement cycle for poles. Let’s not forget IIJA funds for utilities, transport, and telecoms haven’t even started flowing through yet, and with SJ gaining market share over KOP since 2020, they are in ‘pole’ position to benefit.
“While investors are of course pleased, it would be disingenuous to ignore the fact that SJ’s performance has become increasingly dependent on the poles vertical. The co has cautioned investors about some near-term pricing weakness in the spot market for poles (due to oversupply).”
Mr. Sytchev said utility poles have always been integral to Stella-Jones’s product offering, however its proportion of the sales mix has jumped to a record high of 47 per cent from 34 per cent less than three years ago. He expects that to further increase with management’s commitment to a 15-per-cent CAGR.
“On balance, our calls suggest that moving Poles volume into the spot market is easier said than done due to logistical challenges; input costs have also been relatively elevated, making a compression to 2019 levels unlikely,” he said. “While there is uncertainty, some sort of collapse is not what is being observed by buyers at ground level.
“The bigger question is whether there is incremental upside from current trading levels and both us and consensus are not seeing much potential appreciation vs. the current share price as SJ shares have moved up 10 per cent year-to-date despite some uncertainty. So here is the trade-’off’. Fundamentals are likely not as bad as some fear but upside or re-rating cycle could be potentially limited in the short-term.”
Seeing its valuation as “reasonable,” Mr. Sytchev maintained an “outperform” rating and $91 target for its shares. The average on the Street is $93.14.
“While there is uncertainty, some sort of collapse is not what is being observed by buyers at ground level or expected by consensus/co’s guide,” he concluded. “Modelling a 25-per-cent decline in spot pricing compresses the poles vertical revenue down 8 per cent for the next 18 months. Combined with a proportionate compression in margins and target multiple, our downside NAV imputes SJ at $64.00 as a worst-case scenario (or 25 per cent below current share price). While we don’t think such an event is likely, investors should be aware of the per share impact of a black swan event.”
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In other analyst actions:
* Touting its organic and inorganic growth, Raymond James’ Steven Li initiated coverage of Computer Modelling Group Ltd. (CMG-T) with an “outperform” rating and $15 target. The average on the Street is $13.14.
“We still see a rare combination of solid double-digit organic growth (10 per cent plus) with a very strong margin profile (high-30s margin), he said. “As a result, we believe CMG deserves to trade at a premium against some of its peers. Given the potential for organic growth to be augmented by M&A (a new element to the CMG model, not factored in), potential for further margin expansion and Rule of 40 status, we believe CMG deserves to trade at least in-line with some other high organic growers in our coverage.”
* Calling it “a U.S. copper growth opportunity,” BMO’s Rene Cartier initiated coverage of Faraday Copper Corp. (FDY-T) with an “outperform” recommendation and $1 target, below the $1.29 average.
“In our view, continued exploration success to further define the potential at Copper Creek is underpinned by an established open pit and underground resource at the project, which has been wrapped into a preliminary economic assessment,” he said.. “The Copper Creek project proximity advantages itself for the introduction of a strategic partner, project synergies, or potential M&A.”
* Scotia Capital’s Eric Winmill initiated coverage of Snowline Gold Corp. (SGD-X) with a “sector outperform” rating and $9 target.
“The company’s flagship project is Rogue, an exploration stage gold project in the Yukon,” he said. “In our view, the Valley discovery at Rogue represents one of the most exciting gold discoveries in recent years, with long intervals of near-surface gold mineralization encountered over a large target area, multiple areas remaining open, and many nearby targets requiring follow-up exploration work.”
“Not only does Valley exhibit strong gold grades across long intervals, but it also boasts a notable vein density, with many areas returning 10 plus veins per metre, meaning fewer tonnes needed to build gold ounces. Management has described this feature as ‘monotonously exciting,’ referring to the regularity and consistency of veins encountered in drilling to date. Indeed, in our indicative base case resource model, we estimate 6.4 million ounces (Moz) Au could be contained at Valley, supporting future production potential of ~300 koz Au annually over a 20 plus year horizon, subject to resource definition, favourable economic studies, permitting, financing, infrastructure, development, and other factors.”
* CIBC’s Kevin Chiang raised his Cargojet Inc. (CJT-T) target to $172, above the $156.45 average, from $159 with an “outperformer” rating.
“CJT’s agreement with Great Vision HK Express directly addresses many of the pushbacks we often hear regarding our favourable outlook on the company. This new revenue source highlights that CJT still has a healthy growth pipeline and a path to improve its ROIC, and it is not offering a commoditized service (i.e., it deserves a premium valuation). We have updated our model to reflect this new charter revenue and management’s comments from our recent marketing trip,” said Mr. Chiang.
* Canaccord Genuity’s Doug Taylor increased his target for Sylogist Ltd. (SYZ-T) to $12 from $10 with a “buy” rating. The average is $12.75.
David Leeder