Inside the Market’s roundup of some of today’s key analyst actions
Citi analyst Christian Wetherbee reduced his financial expectations for North American railway companies on Thursday in response to weaker-than-anticipated volumes thus far in 2022.
“While general trends across Transportation remain relatively stable, with pockets of weakness isolated to TL [truck load] spot rates and ecommerce package volume, we think it’s prudent to factor in a more cautious scenario for 2023 across rails and LTLs [less than truckloads] (we’ve already adjusted estimates for TL, brokers and parcel),” he said.
“We are lowering estimates for rail and LTLs for 2023, as we are expanding the more cautious modeling approach we’ve already applied to TL, brokerage and parcel to these groups. We are not fully baking in a recession across any of our coverage, but rather an environment in which the U.S. avoids a recession, but consumer spending pivots meaningfully toward services and goods are sluggish. Industrial and commodity activity remains positive in our modeling. For rails, volume flattens out in 2023 and incremental margins decelerate along with pricing. We are lowering 2023 US EPS growth to 6 per cent (vs. consensus’ 10 per cent). For LTLs, we assume industry tonnage flattens out and Old Dominion and Saia outperform the industry. We are lowering 2023 EPS growth to 3 per cent (vs. consensus’ 8 per cent). We continue to believe that estimate cuts are necessary to reset the value proposition, particularly in LTL.”
In a research report released Thursday, Mr. Wetherbee downgraded a trio of U.S. companies - CSX Corp. (CSX-Q), Norfolk Southern Corp. (NSC-N) and Union Pacific Corp. (UNP-N) - to “neutral” recommendations from “buy” previousl , noting rails have “outperformed” over the last six months and seen their relative valuations improvE. However, he said he’s “becoming broadly more cautious” and believes “sub-sectors that are more defensive (brokers) and have discounted more challenging outcomes (TLs and maybe FedEx) are better positioned near-term.”
Emphasizing “it pays to be selective in a slowing freight environment,” Mr. Wetherbee maintained “buy” recommendations for Canadian National Railway Co. (CNI-N, CNR-T) and Canadian Pacific Railway Ltd. (CP-N, CP-T), seeing " more volume opportunity in Canada.”
“If the major theme in Transports in the coming quarters is a deceleration of demand, we think investors need to be selective in the group,” he said. “We think Canadian rails can outperform given more commodity based volume opportunities and the KSU merger. We think it’s a bit too early to step away from brokers like CH Robinson in spite of the large contract/spot rate spread, given still softening TL fundamentals and potential activism. A special situation like XPO’s break-up is compelling for the brokerage fundamentals and implied LTL valuation. We also think washed out valuation for TL is getting more interesting along with FedEx’s valuation, when combined with the investor day catalyst coming in six weeks.”
The analyst’s target changes are:
* Canadian National Railway Co. (CNI-N, CNR-T) to US$132 from US$140. The average on the Street is US$133.43.
“We expect the company’s currently solid volume ramp-up to stand out relative to the rest of the rails,” he said. “In addition, we believe CN should perform well on a relative basis, as its guidance seems more achievable post management’s recent reset.”
* Canadian Pacific Railway Ltd. (CP-N, CP-T) to US$81 from US$84. Average: US$83.20.
“We are constructive on its continuing meaningful operational improvement, which we expect to drive year-over-year improvements in OR [operating ratio] in 2021-2023,” he said. “In addition, we expect a volume recovery and the realization of several actionable revenue catalysts to drive strong performance in 2021 and beyond.”
* CSX Corp. (CSX-Q) to US$35 from US$45. Average: US$40.
* Norfolk Southern Corp. (NSC-N) to US$260 from US$345. Average: US$303.65.
* Old Dominion Freight Line Inc. (ODFL-Q, “neutral”) to US$265 from US$295. Average: US$304.75.
* Saia Inc. (SAIA-Q, “neutral”) to US$190 from US$230. Average: US$268.53.
* Union Pacific Corp. (UNP-N) to US$235 from US$287. Average: US$273.41.
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Saputo Inc.’s (SAP-T) improvement initiatives are likely to be “challenged” by difficult industry conditions, according to National Bank Financial analyst Vishal Shreedhar.
In a research report released Thursday, he said anticipates the Montreal-based company’s fourth-quarter 2022 results, scheduled to be released on June 9, will be “disappointing,” but he continues to expect improving results through its next fiscal year.
“Following disappointing results last quarter, we upgraded Saputo’s shares to Outperform,” said Mr. Shreedhar. “At that time, we acknowledged that while we were early with the call, we believed that management’s initiatives (pricing, efficiency) coupled with eventual normalization of dairy market conditions would support the shares. Since that upgrade, dairy market conditions have deteriorated further (more drastically than anticipated), coupled with challenging conditions in the stock market.”
For the quarter, he’s projecting revenue of $3.731-billion, in line with the Street’s estimate of $3.734-billion and rising from $3.438-billion a year ago. However, his earnings per share forecast of 22 cents is down from 30 cents during the same period a year ago and below the current consensus forecast on the Street of 25 cents.
“We project an approximate 28-per-cent year-over-year EPS decrease, largely reflecting continuing market challenges in the USA sector and milk intake/margin challenges in Australia; we anticipate year-over-year EBITDA improvements in Canada and Europe (acquisition contribution, pricing initiatives).
“We acknowledge heightened uncertainty with our estimates given meaningful changes in the backdrop associated with the pandemic and related shifts in consumer behaviour as well as heightened cost inflation (labour, transportation, energy, raw materials) and dairy market volatility.”
With that view, Mr. Shreedhar cut his 2022 and 2023 earnings per share projections to $1.23 and $1.69, respectively, from $1.40 and $1.81. Those changes led him to reduce his target for Saputo shares to $31 from $33, below the $35.63 average on the Street.
“While market factors continued to degrade in Q4, particularly in the USA sector, we expect conditions to eventually normalize, coupled with emerging benefits from SAP’s efficiency and pricing initiatives,” said Mr. Shreedhar, keeping an “outperform” rating. “In addition, valuation remains attractive with SAP trading at 17.5 times our NTM [next 12-month] EPS vs. the five-year average of 20.5 times. We anticipate improving performance for SAP through fiscal 2023.”
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Blackberry Ltd.’s (BB-N, BB-T) turnaround is “still in flux,” said RBC Dominion Securities’ Paul Treiber following its 2022 Analyst Summit.
“The highlight for investors was BlackBerry’s introduction of specific 5-year targets, with growth effectively in line and profitability 3-4 years earlier than the assumptions in our DCF,” he said. “However, near-term headwinds are restraining FY23 growth below these levels, which combined with BlackBerry’s historically lower growth, reduce investor visibility to the achievability of these targets, in our view.”
The Waterloo, Ont.-based company introduced its targets to reach goals of a revenue compound annual growth rate of 20 per cent for its Internet of Things (IoT) business and 10 per cent in Cybersecurity.
Mr. Treiber estimates that outlook points to 13-per-cent total revenue CAGR with US$1.213-billion revenue by fiscal 2027, which is just 3 per cent lower than his US$1.244-billion projection. Its targeted profitability is “higher than expected.”
However, he does think its fiscal 2023 guidance and historical growth “reduce investor visibility,” noting: “While M&A and IVY are potential upside to BlackBerry’s 5-year targets, we believe that the market may discount BlackBerry’s targets pending growth acceleration and improved KPIs (ARR, net revenue retention). FY23 guidance calls for IoT revenue up 15 per cent and flat Cybersecurity revenue. Moreover, IoT revenue has averaged just 13 per cent CAGR between FY17 and FY20 (pre-COVID), while Cybersecurity revenue has declined 6 per cent CAGR from FY20 to FY22 despite COVID.”
Maintaining a “sector perform” rating for Blackberry shares, Mr. Treiber cut his target to US$6.50 from US$7. The average is US$7.20.
“We believe that BlackBerry’s valuation appropriately reflects BlackBerry’s near-term fundamentals, opportunities, and potential risks,” he said. “BlackBerry is trading at 3.6 times FTM EV/S [forward 12-month enterprise value to sales], below cybersecurity peers at 6.8 times. BlackBerry’s valuation is now below its 5-year average of 4.5 times, down from a peak of 10.0 times.”
Elsewhere, Canaccord Genuity’s T. Michael Walkley lowered his target to US$6 from US$7 with a “hold” rating.
“We participated in BlackBerry’s Analyst Day and come away incrementally positive on the company’s more detailed strategy to grow its software and services segments as it targets $1.2-billion in revenue by F2027 with increasing profitability. This includes double-digit growth in both the security and IoT verticals by solidifying the company’s commitment to aligning operations with sales. Improving go-to-market execution is critical to driving future growth,” said Mr. Walkley. “While management has created a cogent long-term strategy and several parts of the business are turning the corner toward improving growth trends, we await more proof in execution on the new cybersecurity product roadmap, evidence of cross-selling opportunities emerging, growing software and services revenue, and the potential for upside to our estimates before becoming more constructive on the shares. Further, management indicated the sale of the licensing business is on track to potentially close by the end of Q2/F2023, which we believe provides an initial $450-million capital infusion to drive accelerated software and services growth both through ongoing investments and potential acquisitions.”
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Despite delivering “robust” growth and positive earnings and free cash flow generation, East Side Games Group Inc. (EAGR-T) remains “undervalued” by investors, according to iA Capital Markets analyst Neehal Upadhyaya.
In a research report released Thursday, he initiated coverage of the Vancouver-based mobile game developer with a “buy” rating, touting the “unique” licensing of its technology and access to “captive” audiences through its intellectual property partnerships.
“While most mobile gaming companies just develop and publish games, EAGR has also developed its own proprietary Game Kit technology, enabling it to be a true gaming technology company,” said Mr. Upadhyaya. “EAGR licenses its Game Kit framework which aids the Company in quickly ramping up the games it publishes and stacking meaningful revenue to supplement its robust organic growth. Currently, EAGR is developing over a dozen new games with plans of launching two super marquee games and ten games, in total, in 2022.”
“AGR has partnered with strong IP partners to develop games for underserved fandoms, which has helped increase retention rates, game adoption, and decreased churn and user acquisition costs, helping the Company create a robust and stable base of game users. With a strong pipeline of unannounced IP partners and other super marquee games on the way, we expect a solid increase in its overall DAU, MAU and ARPDAU metrics, which should help the Company achieve strong growth for the foreseeable future.”
Forecasting “solid revenue growth backed by multiple organic growth initiatives” and expecting “robust” gross margins, the analyst set a $5 target for East Side shares. The current average is $5.83.
‘AGR is trading at just 0.9 times our 2023 revenue estimate, well below its North American Gaming and Platform comps at 3.7 times, Global Mobile Gaming and Platform comps of 1.8 times, IP-Based Gaming Companies at 4.8 times, and the overall peer group average of 3.2 times,” said Mr. Upadhyaya.
“Although we believe that some of the discount valuation reflects EAGR’s smaller size, lower EBITDA margin profile, and liquidity risk, the Company is expected to generate vastly superior growth, especially on an organic basis. We believe the valuation gap should narrow as EAGR executes on its growth plan by launching super marquee games and introducing new Game Kits across different genres, amongst other things. We also expect the EBITDA margin profile to improve in later years as its super marquee games enter the earn stage and OpEx levels out.”
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In a research note reviewing first-quarter earnings season for midstream companies, Canaccord Genuity’s John Bereznicki made these target changes:
- AltaGas Ltd. (ALA-T, “buy”) to $35 from $34. Average: $33.52.
- Keyera Corp. (KEY-T, “buy”) to $38 from $37. Average: $36.40.
- Tidewater Renewables Ltd. (LCFS-T, “speculative buy”) to $22 from $21. Average: $22.05.
- Pembina Pipeline Corp. (PPL-T, “buy”) to $56 from $54. Average: $53.
“Despite rising interest rates and recessionary fears, domestic midstream equities have risen an average of 18 per cent year-to-date,” he said. “Midstream dividend yields are now at the lower-end of their historic spreads to the Canada 10-year bond, which we believe is reflective of strong industry fundamentals. In our view, the sector’s ability to grow free cash flow in an inflationary environment also makes it appealing to investors.
“There are no changes to any of our recommendations as a result of these changes. For those looking for relative commodity price beta we recommend KEY, while ALA remains our defensive pick. We also believe PPL enjoys strong growth optionality given its large, integrated asset base.”
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RBC Dominion Securities analyst Pammi Bir thinks Sienna Senior Living Inc. (SIA-T) is making “good overall progress.”
However, following an in-line first quarter, he reduced his financial projections for the Markham, Ont.-based retirement home and long-term care facility operator, expecting cost pressures to create “some headwinds.”
“Operationally, we’re encouraged by solid occupancy advances in the retirement portfolio, with the pace of recovery suggesting room for upside to SIA’s unchanged guidance,” said Mr. Bir. “As well, the recent retirement portfolio acquisition moves the dial forward in raising the exposure to private pay seniors housing. While elevated cost pressures prompted us to curb our earnings estimates, we like the overall progress being made.”
Keeping a “sector perform” rating, he trimmed his target to $16 from $16.50. The average is $16.69.
“From our vantage point, valuation reasonably balances SIA’s growth profile and the composition of its portfolio,” said Mr. Bir.
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In other analyst actions:
* BMO Nesbitt Burns’ David Gagliano lowered his targets for Algoma Steel Group Inc. (ASTL-T, “outperform”) to $18 from $23 and Stelco Holdings Inc. (STLC-T, “outperform”) to $62 from $71.
* Deutsche Bank’s Brian Bedell lowered his Brookfield Asset Management Inc. (BAM-N, BAM.A-T) target to US$57 from US$60 with a “hold” rating. The average is US$70.55.
* CIBC World Markets’ John Zamparo cut his Canopy Growth Corp. (WEED-T) target to $6.50 from $9, maintaining an “underperformer” rating. The average is $9.56.
“We are lowering our FQ4 sales and EBITDA forecasts for Canopy Growth,” he said. “We anticipate results will reflect ongoing share losses in a seasonally softer period, with weakness from other parts of the business as well. Furthermore, we believe the company’s recent plan to significantly cut costs portends a result below current consensus EBITDA. Even assuming all $150MM of targeted cost cuts reach the bottom line, we still estimate WEED will need sales to more than double to reach positive EBITDA in late F24.”
* Canaccord Genuity’s Derek Dley cut his Cresco Labs Inc. (CL-CN) target to $9.50 from $12, keeping a “buy” rating, while Stifel’s Andrew Partheniou reduced his target to $5 from $8 with a “hold” rating. The average is $16.73.
“We have lowered our EBITDA estimate for 2022 to reflect the relatively muted growth expected over the front half of the year and a lower revenue growth estimate in Massachusetts for the remainder of the year,” Mr. Dley said.
* National Bank Financial’s Dan Payne increased his Kiwetinohk Energy Corp. (KEC-T) target to $20 from $18, maintaining an “outperform” rating. The average is $19.75.
“A unique & opportunistic acceleration of capital plans should serve to augment its value profile through the upstream lens, while the embedded energy transition call option remains intact; KEC is poised for a 60-per-cent return profile (vs. peers 47 per cent) on leverage of 0.1 times (vs. peers negative 0.5 times), while trading at 1.6 times 2023 estimated EV/DACF (vs. peers 3.3 times),” he said.
* Barclays’Brian Johnson reduced his Lion Electric Co. (LEV-N, LEV-T) target to US$10 from US$17 with an “overweight” rating. The average is US$10.06.
David Leeder