Inside the Market’s roundup of some of today’s key analyst actions
The valuations for Canadian railway companies look “more compelling,” according to National Bank Financial analyst Cameron Doerksen, pointing to “encouraging” second-quarter volume trends and more optimism on domestic grain shipments.
“Our incrementally more positive view on the Canadian rails is partially a function of a more constructive volume environment,” he said. “So far in Q2, CN’s volumes as measured by RTMs [revenue ton miles] are up 7.3 per cent year-over-year while CPKC’s are up 6.0 per cent. Persistently dry conditions through the winter in Western Canada previously had us concerned over the next grain harvest, but much better rainfall this Spring has set the stage for a solid harvest in the next crop year, which gives us greater confidence in our revenue estimates for both railroads.”
In a research report released Thursday, Mr. Doerksen acknowledged share price performances have been “uninspiring” thus far in 2024, but he now sees enticing valuations for investors, leading him to upgrade Canadian National Railway Co. (CNR-T) to “outperform” from “sector perform” previously. He reiterated a “sector perform” recommendation for peer Canadian Pacific Kansas City Ltd. (CP-T).
“Based on 2024 consensus, CN shares are trading at 20.2 times P/E [price to earnings], which is below the five-year forward average of 22.2 times for the stock,” he said. “CN is also trading at a 1.9 turn premium to the average of the U.S. rail peer group (18.3 times), which is below the historical premium of 2.5 turns.
“CPKC shares are currently trading at 24.9 times current year P/E, which is well ahead of the U.S. peers and ahead of its five-year average of 23.4 times. Given that CPKC has arguably the most compelling organic growth prospects in the industry, it is reasonable to see the stock at a premium valuation to the peers. However, there is already a significant amount of earnings growth built into expectations with 2024 consensus EPS growth at approximately 14 per cent and 2025 forecasted EPS growth at over 18 per cent.”
Mr. Doerksen did warn that the lone caveat to his “more constructive view” on the Canadian rails is potential disruptions related to labour actions by both CN’s and CPKC’s Canadian locomotive engineers and conductors. He sees that as “a headwind to railroad investor sentiment in the short term.”
“However, while even a short strike would hurt operations and profitability, we believe that either a new deal will be consummated or that the government will intervene more forcefully. As such, investors will ultimately look past this issue, in our view,” he added.
The analyst maintained a $190 target for CN shares. The average target on the Street is $182.08, according to LSEG data.
“Given the reasonably constructive volume environment and our growing confidence in the grain harvest, we believe CN management’s guidance for 10-per-cent EPS growth this year is achievable,” he said. “Furthermore, assuming broader freight markets cooperate, management’s target to generate 10-15-per-cent EPS growth over the 2024-26 period also looks achievable supported by a diverse range of volume drivers. In the shorter term, CN’s NCIB should remain active at current share price levels (7.6 million shares repurchased so far under the current authorization for 32 million shares, as of the end of May), which should provide some support for the stock.”
Mr. Doerksen’s CPKC target continues to be $119 per share, below the $124.43.
“In our view, CPKC has the most compelling long-term growth prospects of all the North American railroads as it will see benefits from merger synergies (target of $700 million in merger revenue synergies at 2024 year-end likely to be exceeded) as well as near-shoring of manufacturing to Mexico,” he said. “As such, a premium valuation for CPKC is justified, but we continue to believe that much of the expected growth over the next two years is reflected in the valuation. We therefore keep our Sector Perform rating but would be more disposed to add to positions on further share price weakness.”
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While warning transitory headwinds continue to impact the results from Alimentation Couche-Tard Inc. (ATD-T), Stifel analyst Martin Landry is seeing signs of improvement following the release of its fourth-quarter 2024 financial report.
“Management’s comment on the earnings call regarding Q1FY25 were encouraging,” he said. “Gasoline margins in the U.S. have normalized in recent weeks. Gasoline margins in Germany, which pressured fuel margins in Europe in Q4FY24, have also improved recently. U.S. merchandise same-store sales appear to have improved sequentially, which highlights ATD’s ability to gain market share in this difficult environment as the consumer environment remains largely unchanged sequentially, according to management.”
“With the rise in interest rates, which limits the availability of highyield debt and sidelines private equity players, ATD is seeing better prospects for future M&A. Several M&A files with size ranging from small tuck-ins all the way to approaching the size of TotalEnergies are currently active. Management appears confident in its ability to deploy capital towards acquisitions over the coming quarters, which should be well-received given ATD’s track record of creating shareholder value through M&A.”
After the bell on Tuesday, the Montreal-based retailer reported adjusted earnings per share of 48 cents, down 32 per cent year-over-year and lower than both Mr. Landry’s expectation of 57 cents and the consensus forecast of 51 cents. He attributed that gap to lower gasoline margins in the U.S., which hurt results by approximately 6 cents.
The analyst called thinks the results “marked the end of a difficult year” for the Couche-Tard. While he acknowledged the earnings decline “appears worrisome,” he pointed to “several factors which created noise during the quarter including (1) the impact of one less week in Q4FY24 vs. last year, which had a $100 million-plus impact on Q4FY24 EBITDA and (2) lower fuel gasoline margins in the United States. Adjusting for both of these factors, ATD’s adjusted EBITDA could have been flattish year-over-year, which tells a much different story relative to the 14-per-cent year-over-year decline reported.”
“Unexpected low fuel margins at TotalEnegies combined with soft consumer demand created headwinds in ATD’s results,” he added. “We view the low fuel margins as transitory and expect improvements as early as Q1FY25. However, earnings estimates are going down to reflect higher D&A expenses and higher interest expenses related to the TotalEnergies acquisition. On the positive side, Couche-Tard’s initiatives to reach $10 billion of adjusted EBITDA by FY28 are already well-underway and progressing as planned. Cost-cutting measures are showing positive results and ATD is already halfway through its $800 million cost reduction journey. An active M&A environment could accelerate Couche-Tard’s acquisition pace, a potential near-term catalyst. Valuation remains reasonable at 17 times forward earnings, in-line with historical average.”
Believing the company’s CEO transition “should not be seen as a risk” given incoming boss Alex Miller’s long track record with the company, Mr. Landry trimmed his target for its shares to $86 from $89, reiterating a “buy” recommendation. The average is $90.11.
“We are reducing our FY25 EPS estimates by 12 per cent on the back of (1) higher depreciation and amortization expense assumption, (2) higher interest expenses and (3) lower merchandise same-store-sales assumptions in both Canada and Europe to reflect a softer demand environment,” he said. “This is partly offset by higher merchandise gross margin estimates to reflect recent trends and lower SG&A expenses. Our FY26 EPS estimates are also reduced by 8 per cent to $3.29, which would represent a growth of 11 per cent year-over-year. We derive our $86 target price using an average of: (1) an 18.5 times multiple on our FY26E EPS, (2) a 12 times multiple on our FY26E EBITDA, and (3) a DCF.”
Other analysts making target adjustments include:
* Desjardins Securities’ Chris Li to $85 from $86 with a “buy” rating.
“While 4Q results reflected continuing macro challenges, trends are improving sequentially — a key catalyst. We expect ATD to remain range-bound pending signs of sustainable improvement in consumer trends, likely in 2H. Our positive long-term view is supported by ATD’s robust organic growth initiatives and M&A opportunities, solid balance sheet, and FCF driving outsized earnings growth once macro conditions improve. We have fined-tuned our estimates,” said Mr. Li.
* CIBC’s Mark Petrie to $89 from $88 with an “outperformer” rating.
“Q4 showed mixed results across regions and segments but most importantly brought improvements in our two focus metrics: U.S. merchandise same-store sales (SSS) growth and U.S. fuel margins. A weaker consumer remains a headwind in all regions, but ATD is executing on multiple sales growth drivers and we are more confident in overall sales momentum. Our F25 EBITDA forecast holds steady, while EPS falls on higher D&A,” said Mr. Petrie.
* Canaccord Genuity’s Luke Hannan to $85 from $87 with a “buy” rating.
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Desjardins Securities analyst Gary Ho thinks accounting “noise” related to its recent $45-million acquisition of a majority stake in private equity fund manager Kensington Capital Partners overshadowed “an otherwise decent” second quarter from AGF Management Ltd. (AGF.B-T), which reported adjusted earnings per share, EBITDA and retail net flows that all essentially met his expectations.
“We note that its fund performance was particularly strong, with 60 per cent of strategies beating peers on a three- and five-year basis,” he said. “Offsetting these, the Kensington (KCPL) acquisition added some accounting noise but will be a contributor looking out. With $4.50 per share in net investments, the shares are trading at a compelling less than 2.5 times EBITDA.”
Raising his earnings expectations for both 2024 and 2025, Mr. Ho reiterated a “buy” recommendation for AGF shares with a $12 target. The average on the Street is $10.82.
“We foresee a few near/medium-term catalysts: (1) retail net flows trending at or above industry; (2) capital redeployment for organic growth, to seed new alt strategies and for buybacks; (3) growth in fees/earnings from private/liquid alts; (4) M&A should be EPS-accretive; and (5) potential Dividend Aristocrats inclusion,” he said.
Elsewhere, maintaining a “sector perform” rating and $10.75 target, Scotia Capital analyst Phil Hardie thinks AGF stock is “looking oversold after delivering decent operating results.”
“Operationally, we view the quarter positively but attribute some weakness in the stock to some initial confusion and concerns stemming from several income statement and balance sheet entries booked relating to AGF’s recent investment in Kensington Capital,” he said. “Q2/24 Adj. EPS were in line with Street expectations but ahead of forecast driven by better-than-expected contribution from AGF’s alternative platform, AGF Capital Partners. A positive surprise in the quarter was better-than-expected sales momentum. Although mutual fund flows remain in redemptions, we believe the company continues to perform well against a challenging industry-wide sales environment and are pleased with its relative operating momentum.”
“AGF’s high exposure to equities can provide torque in an upward equity market swing, and its strong balance sheet helps provide a floor to the stock. Shares continue to trade at a wide discount relative to peers and offer an attractive 5.3-per-cent dividend yield, but we remain on the sidelines given a challenging operating environment and uncertain market outlook following a strong and unexpected rally from late 2023.”
Meanwhile, RBC’s Geoffrey Kwan reduced his target for target to $9 from $10 with a “sector perform” rating.
“Q2/24 Adjusted EPS was below our forecast but right in line with consensus, with net redemptions worse than our forecast. Big picture, industry net redemptions remain weak but directionally are showing very gradual signs of improvement. However, with four consecutive quarters of retail net redemptions (following 2.5 years of positive net sales), it appears more likely that AGF may remain in net redemption status until we see substantial improvement in industry net redemptions. As such, we think this could limit valuation upside in the near term, absent a rally in equity markets,” said Mr. Kwan.
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Highlighting its international presence and potential sales and earnings gains after a period of active investment in its business, Acumen Capital analyst Nick Corcoran initiated coverage of Exco Technologies Ltd. (XTC-T) with a “buy” recommendation on Thursday.
He emphasized the Toronto-based manufacturer of tooling for the light metal industry and interior trim components for the automotive industry now has 21 facilities across nine countries, though customers are primarily located in North America and Europe (approximately 75 per cent and 20 per cent of sales, respectively).
“Management has actively invested in the business through: (1) the acquisition of Halex, the second-largest manufacturer of extrusions dies in Europe, for €40-million ($58-million) in mid-2022, and (2) strategic initiatives to drive organic growth and improve margins totalling close to $150-million from FY/21 to FY/26,” he said. “Strategic initiatives include greenfield facilities, facility additions, and new equipment. Growth capex peaked in FY/22 at $38-million (well above typical levels of $15-20-million).
“Management is targeting $750-million of sales and $120-million of EBITDA in FY/26. Sales are expected to grow from $619-million in FY/23 to $750-million in FY/26 driven by organic growth. Industry trends, such as increasing aluminum/casting content in vehicles and above-market growth of SUVs, CUVs and EVs, are expected to support above-industry growth of 5-10 per cent per year (with fluctuations based on macro factors). EBITDA is expected to grow from $74.5-million (12.0-per-cent margin) in FY/23 to $120.0-million (16.0-per-cent margin) in FY/26 driven by organic growth and margin expansion from capital investments.”
Seeing Exco generating “strong” free cash flow, rising from $7-milion in fiscal 2022 to $66-milion in 2026, to delver its balance sheet, which could lead to potential return of capital to shareholders through an increased dividend and buybacks, Mr. Corcoran thinks its shares now trade at an attractive valuation, setting a target of $11. The average on the Street is $14.
“Based on our FY/26 estimates(in line with targets), XTC currently trades at 2.8 times EV/EBITDA and 23-per-cent FCF yield (well above industry average),” he said. “This compares to recent transactions in the industry: (2) Halex (private) was acquired by XTC for 7.5 times in May 2022, and (2) ABC Technologies (ABCT-TSX) was taken private by Alpha Holdings for 6.5 times in September 2023. We expect multiple expansion as XTC demonstrates strong organic growth, margin expansion and strong FCF.”
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Raymond James analyst Craig Stanley initiated coverage of Vancouver-based West Red Lake Gold Ltd. (WRLG-X), which is focused on restarting production at the Madsen Gold Mine in Red Lake, Ont., with an “outperform” recommendation on Thursday.
“With 2.5 million ounces of historic production, Madsen is the third largest gold mine in the 30 million ounces Red Lake camp,” he said. “Nevertheless, Pure Gold, the most recent owner, declared bankruptcy in 3Q22 after just 14 months of production. An incorrect understanding of the geology led to high dilution, which was compounded by debt repayment obligations and high costs. We highlight WRLG is drilling 27 km in 2024 on closed-space holes (5 – 10 m spacing), all from underground, to increase the confidence of the resource. As well, ongoing underground development will allow additional drill stations plus prepare stopes for test mining. Construction of a 1,200 m connection drift will commence this summer to connect the East and West Ramps.
“We believe the combination of underground tight-spaced drilling and test mining are key de-risking events for restoring the market’s confidence in the deposit that operated for decades before recent issues.”
Ahead of the release of a pre-feasibility study (PFS) in the first quarter of 2025 followed by the expectation of production in the second half of that year, Mr. Stanley set a $1.40 target, which falls 40 cents below the average.
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In other analyst actions:
* Following its late Wednesday quarterly report, Canaccord Genuity’s Kingsley Crane lowered his target for BlackBerry Ltd. (BB-N, BB-T) to US$2.70 from US$3.25, below the US$3.44 average, with a “hold” rating, while TD Cowen’s Daniel Chan moved his target to US$2.75 from US$3 with a “hold” rating.
* BMO’s Andrew Mikitchook raised his Street-high target for Skeena Resources Ltd. (SKE-T) to $20 from $18 with an “outperform” rating. The average is $15.89.
“On Tuesday, Skeena announced a financing package with Orion to cover redevelopment of the Eskay project,” he said. “Total proceeds are US$750-million and consist of an equity investment (US$100-million), gold stream (US$200-million), senior secured loan (US$350-million), and a cost over-run facility (US$100-million). We have updated our model to reflect the financing agreement, and we are raising our target price to $20 (from $18) to reflect reduced risk from securing financing. Next steps for the company are securing a technical sample permit in 2024 and a full permitting by year-end 2025.”
* Berenberg’s Richard Hatch raised his Wheaton Precious Metals Corp. (WPM-N, WPM-T) target to US$66 from US$64 with a “buy” rating. The average is US$63.21.
David Leeder