Inside the Market’s roundup of some of today’s key analyst actions
While emphasizing an “uncertain freight backdrop,” Wells Fargo Securities analyst Christian Wetherbee remains “constructive” on railway companies, seeing their relative positioning looking “more attractive.”
“Canada sets up well for ‘25 on accelerating growth and easy comps,” he added.
With that view, Mr. Wetherbee raised his recommendation for Canadian National Railway Co. (CNI-N, CNR-T) to “overweight” from “equal weight” on Monday.
“While estimates for 3Q24 are coming down, the impact is largely from its strike and wildfires, which aid the set-up for ‘25,” he said. “Collectively, we see 40 cents of one time headwinds to ‘24, which helps bridge ‘25 to a return of DD EPS [double-digit earnings per share] growth. Further, in an uncertain macro/freight environment we feel more confident in Canadian volume growth fueling better EPS growth than some peers.
“Supporting the bull case for CN are both 4Q & ‘25 volume catalysts. In 4Q grain comps get easier as farmers held back crop in Nov & Dec ‘23 due to low prices, likely yielding accelerated growth for a highly profitable commodity. Into ‘25 we see a long awaited recovery in intermodal volume also aiding the top line, as CN’s lost share from labor disruptions in ‘23 & ‘24 finally return. Collectively, the ability to exceed HSD YoY [high single-digit year-over-year] EPS growth is possible in ‘25.”
Seeing its relative value as “compelling” despite a reduction to his third-quarter estimates, Mr. Wetherbee maintained his US$125 target for CN shares. The average target on the Street is US$130.20, according to LSEG data.
“CN is trading at 18.2 times our 2025 EPS estimate, putting its multiple below its long -term average (19.5 times) and well below its average relative multiple,” he said. “In fact, CN is trading more than one standard deviation vs. its historical average relative multiple to the group, with Union Pacific trading 1x above and Norfolk Southern trading at parity. This presents opportunity, in our opinion, as we expect CN’s earnings growth be ahead of UP’s and nearly match NS’s.”
“CN moves up to share the top spot on our preference list with Norfolk Southern. This is followed by Canadian Pacific, while Union Pacific drops to the bottom of our OW ratings. CSX rounds out the group and is our lone EW in the sector. CSX continues to perform well but is a victim of its own success in that without operational improvement, its earnings growth potential in 2025 appears to be at the bottom of the group.”
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While acknowledging the outlook and sentiment surrounding companies with exposure to North American housing sector has improved over the course of the past year, National Bank Financial analyst Zachary Evershed has a bearish stance heading into third-quarter results with “moderating” expectations.
“With central banks pivoting convincingly into easing mode and mortgage affordability improving as rates fall, stimulus to housing demand now looks to be more a question of when, rather than if,” he said.
“In the immediate term, however, continued downward pressure on product pricing and anemic demand in R&R markets have prompted negative guidance revisions from major retailers and distributor peers, indicating the previously hoped-for H2 inflection is unlikely. This dynamic leads us to lower our expectations for Q3 and Q4/24, even as the medium- and long-term outlook becomes increasingly bullish.”
In a report released Monday titled The times they are a-changin’ (but not just yet), Mr. Evershed introduced his forecast for building materials distributors for 2026 based on “high hopes” for U.S. housing.
“The Fed has caught up to the BoC with a double barrel 50-basis-points cut to interest rates, and its dot plot suggests another 50 bps of cuts before year-end, with 100 bps more in 2025, though the hot jobs report may see that schedule drift slightly,” he said. “We are nevertheless likely on the verge of a sustained pickup in housing activity south of the border at some point in 2025, as market research shows the improvements in affordability and consumer sentiment should ratchet higher as mortgage rates dip into the 5s, unleashing pent-up demand, none of which is yet reflected in prospective buyer traffic or current sales conditions.
“This bodes well for new residential construction end market demand for ADEN and DBM, both of which will feel the relief as periods of post-pandemic volume contraction and pricing pressure come to an end. Given RCH’s predominant exposure to R&R spending, we believe its time to shine will follow on a longer lag.”
With the introduction of his 2026 forecast, Mr. Evershed made these target adjustments:
* Adentra Inc. (ADEN-T) to $60 from $57 with an “outperform” rating. The average on the Street is $54.
Analyst: “We believe ADEN can continue to deliver strong margins and will soon find a floor on pricing; it remains our top pick given the high quality of the business and exposure to the U.S. housing theme coupled with a perplexingly attractive valuation compared to peers
“Our bullish stance is underscored by our conservative modeling, as we see upside to our target should ADENTRA achieve the pace of growth implied by its long-term target: if we match the pace required for $500 million in organic growth by 2028 (6.5 per cent vs. the 5 per cent we model), our target rises by $2.50/share, while the pace of acquisitions required for $800 million in incremental revenue by 2028 ($160 million/year vs. the $100 million reflected in our M&A premium) would add $2/share to our target. Assuming completion of ADENTRA’s target therefore warrants a $64.50 target today, and this at 11.5 times EPS, is a significant discount to the distributor peer average.”
* Doman Building Materials Group Ltd. (DBM-T) to $12 from $8.50 with an “outperform” rating. The average is $9.71.
Analyst: “The company remains well positioned to benefit from long-term drivers of housing market dynamics on both sides of the border and can continue to supplement growth as the balance sheet rapidly clears through FCF, with a proven track record of accretive acquisitions.”
He maintained his Richelieu Hardware Ltd. (RCH-T) target of $45.50 with a “sector perform” rating. The average is $44.75.
Analyst: “With renovation superstores cutting guidance for H2/24 as discussed above, we lower our organic growth forecast for 2024 to down 0.8 per cent from up 0.5 per cent as we no longer expect a lift before year-end. We believe RCH will suffer from depressed volumes for slightly longer than ADEN and DBM given its greater exposure to R&R end markets, which in addition to the same interest rate dampers, must also contend with a more pronounced sentiment component for nesting.”
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ATB Capital Markets analyst Amir Arif sees Peyto Exploration & Development Corp. (PEY-T) possessing “relative cashflow resilience” among gas-weighted producers.
In a research report released Monday, he “slightly” reduced his third-quarter production estimates for the Calgary-based company to reflect field level estimates. He also trimmed his fourth-quarter expectations due to shut-in volumes.
“We do estimate that unit operating costs, which have been trending lower, will be higher this quarter to reflect the shut-in volumes and turnaround activity,” Mr. Arif said. “However, we remain comfortable in the declining nature of total cost structure into 2025.”
The analyst said Peyto’s cashflow position will be a “key differentiator” compared to its peers moving forward.
“While AECO gas spot prices are down from $1.19/mcf [thousand cubic feet] in Q2/24 to $0.69/mcf in Q3/24, we estimate that the CFPS for PEY will only decrease 5 per cent, reflecting its high hedge levels as well as its low AECO spot gas exposure,” he said. “Additionally, the Company’s Cascade Power feedstock agreement started up on September 1, 2024, further reducing its AECO exposure to minimal levels for the remainder of 2024.
“The key takeaways from the Company’s monthly shareholder update that was released October 3, 2024 after market close include field level production estimate of 120 mboe/d [thousand barrels of oil equivalent per day] for the quarter, shut in volumes of 5.5 mboe/d (reflecting approximately 4.5 per cent of corporate volumes), expected restart of these volumes in October/November dependent on gas pricing, and a data point to estimate gas price realizations from its recent Cascade agreement.”
Maintaining his “outperform” recommendation, Mr. Arif raised his target for its shares by $1 to $18.50. The average is $17.90.
“In our view, PEY remains a lower risk avenue to obtain gas exposure given the structural uplift in demand coming from the LNG projects being built out in the U.S.,” he said. “Its low opex structure, low AECO exposure, high fixed hedges, and lower EV/DACF valuation relative to its gas peers reduce the risk profile. At the same time, its 8-per-cent dividend yield provides a return while investors wait for the upcoming structural improvement in gas demand from LNG buildouts. We are increasing our PT from $17.50 to $18.50, which reflects 4.6 times 2025 strip EV/DACF. At strip, PEY trades at 4.1 times 2025 EV/DACF relative to its Canadian gas weighted peers which trade at 4.9 times.”
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Heading into third-quarter earnings season, Citi analyst Scott Gruber continues to see “some negative sentiment around” Ovintiv Inc. (OVV-N, OVV-T), however he thinks its operations “appear to be going well, with management continuing to maintain Permian well productivity guidance.”
While he sees the Denver-based company possessing the potential to reach the top end of the production guide in the basin, he trimmed his quarterly cash flow per share projection to US$3.49 from US$3.58 due to lower gas realizations.
“3Q and FY 2024 capital appears in-line with guidance, as are most expense items, with GP&T coming in a bit lower given a lower commodity price environment,” he added.
Reiterating a “buy” rating for its shares, Mr. Gruber lowered his target to US$55 from US$58. The average is US$56.55.
“We see better performance in early FY2024 given upside to production estimates, as we sit 2-per-cent-plus above consensus on oil and condensate production,” he said. “We believe its portfolio is under-appreciated (particularly the Montney), and see continued outperformance on the anticipation that gas markets tighten in FY2025. This not only would improve CF, but could spur better appreciation for OVV’s Montney position. Further, we find OVV trading attractively relative to its inventory life in part due to a heavier discount on its Canadian gas position.”
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Calling it “a domestic leader at a bargain price,” Canaccord Genuity analyst Luke Hannan initiated coverage of Andrew Peller Ltd. (ADW.A-T) with a “buy” recommendation.
“APL has grown to become Canada’s second-largest domestic wine producer (excl. Quebec) through both organic and acquisitive growth,” he said. “That said, the stock trades at a 40-per-cent discount to its book value per share, with the gap widening substantially when considering the fair value of APL’s vineyards and estates. We believe the company has multiple avenues for near and long-term volume growth, including through wine clubs and Ontario convenience and grocery stores, which should improve both sales and margins over time. Combined with the surfacing of value through asset sales, we believe the stock’s discount to book value should close, with investors receiving a 6-per-cent dividend yield and the dividend growing at a (5.5-per-cent CAGR since F2009) in the meantime.”
Mr. Hannan set a $8.50 target for APL shares. The current average is $9.
“In our view, APL’s leading positioning in the Canadian wine market, combined with its opportunities for portfolio expansion, volume growth through wine clubs/estate traffic normalization, the Ontario retail modernization, and the implementation of financial support programs, all point towards APL capturing market share and expanding margins,” he said. “When considering the stock’s deep discount to book value, which understates the true value of its assets, we believe APL shares have a compelling risk-reward profile.”
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Greg Pardy, RBC Dominion Securities’ Head of Global Energy Research, says he’s “unapologetically bullish on Canada” heading into third-quarter earnings season.
“Oil price volatility is not going away, but the reengineered model that energy producers have embraced has afforded investors with a sector that has financial resiliency and shareholder return optionality like never before,” he said. “With the 590,000 bbl/d Trans Mountain Pipeline Expansion having come on-stream in May (and operating smoothly), western Canada is long export pipeline for the first time in well over a decade. Oil Sands producers have enhanced global market optionality for their crude streams and greater surety that WCS-WTI spreads should remain contained. With most oil sands weighted producers having achieved their net debt targets—most recently MEG Energy and Cenovus—shareholder returns have moved to/towards 100 per cent of excess free cash flow returns with an accent on share repurchases. The pace of buybacks may vary, but the direction of travel is unmistakable. And so, we remain unapologetically bullish on Canada’s oil sands majors in particular, despite a mixed macro backdrop, as companies shrink their common share counts and bolster per share dividends over time.”
While his funds from operations per share estimates for the Canadian majors fall below the Street’s expectations, which he said reflects downstream inventory revisions, Mr. Pardy thinks they may “move more into line as formal corporate surveys are released.”
“We estimate that Canada’s oil sands weighted majors—Canadian Natural Resources, Suncor Energy, Cenovus Energy and Imperial Oil—generated relatively stable free funds flow (before dividends and working capital movements) of $5.5 billion in the third quarter, and repurchased about $3.6 billion of their common shares—up sharply from about $2 billion in the second quarter,” he said. “Our updated 2024/25 operating earnings/FFO estimates reflect third-quarter actual commodity prices, disclosed share buybacks and other various fine-tuning adjustments. We have also introduced our 2026 estimates under our transition year (placeholder) price outlook.”
Mr. Pardy reaffirmed Canadian Natural Resources Ltd. (CNQ-T) as his favourite senior producer. It remains on the firm’s “Global Top 30″ and “Global Energy Best Ideas” lists with an “outperform” rating and $59 target. The average target on the Street is $54.48.
“With the achievement of its $10 billion net debt floor at the end of 2023, this marks the third quarter in which CNQ is allocating 100 per cent of its excess free funds flow on an annual (forward-looking) basis as incremental returns to shareholders,” he said.
Suncor Energy Inc. (SU-T), which is a member of the “Global Energy Best Ideas” list, remains his preferred integrated company with an “outperform” rating and $64 target. The average is $60.17.
“We are looking forward to Suncor’s third-quarter conference call for an energetic update on several operating fronts,” he said.
MEG Energy Corp. (MEG-T), also on the “Global Energy Best Ideas” list, is his favorite intermediate producer with an “outperform” rating and $35 target. The average is $33.61.
“Our constructive stance toward MEG reflects its strong leadership, enhanced market access via Flanagan-Seaway to the U.S. Gulf Coast, strengthening balance sheet, and long-life assets,” said Mr. Pardy.
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In other analyst actions:
* RBC’s Sabahat Khan cut his ATS Corp. (ATS-T) target to $54 from $55 with an “outperform” rating. The average is $57.33.
“ATS hosted investor site tours across Munich, Bologna, and Parma, highlighting its capabilities across Life Sciences and Food & Beverage,” he said. “We heard from a number of senior leaders (CEO, CFO, segment/division leads) as they outlined the opportunity set and discussed the company’s strategy, market positioning, and ATS’s offerings across these two significant business lines.”
“ATS shares have pulled back in recent quarters given the tougher comparables and some headwinds in the Transportation (EV) market, which has led to investor questions regarding the potential cyclicality of the overall business. The investor event and management commentary at our recent Global Industrials Conference highlighted that the company is trending toward its historical revenue mix, where 75 per cent of the business is relatively stable through the cycle (Life Sciences + F&B + energy). Implicit in this commentary is that the Transportation/EV mix is trending toward high single digits to low double digits percentage of revenue. Our forecasts for yearend F25 (March 2025) reflect Life Sciences at 50 per cent of full-year revenue. Recall that management recently announced plans to reallocate resources from Transportation to other business lines (while also undertaking a cost/ headcount reduction within this business). Overall, we expect ATS shares to trend higher as the macro environment stabilizes and as ATS’s revenue mix reverts toward its historical ‘staples-like’ exposure.”