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Inside the Market’s roundup of some of today’s key analyst actions

After meeting with management last week, Desjardins Financial is keeping Canadian National Railway Co. (CNR-T; CNI-N) as one of its preferred stocks for 2019.

“CN is strategically positioned for growth, both on the domestic and the international side. Among Class I railroads, CN has the biggest exposure to the intermodal market (about 25 per cent of total revenue in 2017 versus about 20 per cent on average for peers) due to its tri-coastal network and unique positioning with key ports such as Prince Rupert, Halifax and Vancouver. CN anticipates incremental revenue of $505-million to $550-million in 2018–20 from this market. Additionally, there are significant growth opportunities with key ports (Halifax, Montréal, Québec) to leverage its excess capacity in the east,” wrote analyst Benoit Poirier.

“CN previously indicated (alongside 3Q18 results) that it was running at 200,000 bbl/d (barrels per day) (annualized run rate of 130,000 carloads) although it has since expanded CBR capacity further. We estimate the company is now running at 240,000–260,000 bbl/d (we previously assumed 186,000 bbl/d in 4Q18) and expect this to increase to 300,000 bbl/d toward the end of 2019 (vs our initial forecast of 217,000 bbl/d; its entire CBR capacity is sold out). Interestingly, CN’s CBR contract enables it to adjust volumes at the same contracted pricing if necessary,” he said.

He maintained his $127 price target on the stock. “Our target represents the average of (1) a 17.0 times P/E multiple on our 2021 adjusted EPS estimate, (2) an 11.0 times EV/EBITDA [enterprise value to earnings before interest, taxes, depreciation and amortization] multiple on our 2021 estimate, and (3) a DCF [discounted cash flow] value of $128.73 (was $128.46),” he said. The median price target on the stock is $113.47, according to Zack’s Investment Research.

He also kept his “buy” recommendation on the stock. “Overall, we continue to like the name for its growth opportunities in intermodal, grain, coal and CBR. The market environment should continue to push core pricing above rail inflation in 2019, and the weaker Canadian dollar versus the U.S. dollar should help exports and the company’s bottom line. In addition, CN’s strong balance sheet and unmatched network make the stock a defensive play in the current environment.”

**

After Pier 1 Imports Inc. (PIR-N) reported another dismal quarter of results, Citi analyst Geoffrey Small cut his price target on the decor retailer.

Pier 1 reported third-quarter loss per share of 62 cents US or 37 cents US excluding a non-cash charge related to deferred tax assets. That was far below the consensus for a loss of 6 cents per share.

"The miss was largely due to another abysmal top-line result, with SSS [same-store sales] down 10.5 per cent despite a 6 point benefit from the shift of holiday selling days. This follows a 10-per-cent decline in 1H18 and cements as a failure the turnaround plan revealed earlier this year. As a result, Alasdair James has stepped down as CEO and board member Cheryl Bachelder (former CEO of Popeyes Louisiana Kitchen) has stepped in as interim CEO.

“PIR announced today it is now pursuing strategic alternatives and has taken near-term steps to stabilize the business including a narrowed strategic focus on the Pier 1 style and value proposition, a more rigorous cost reduction program to benefit next year, continuing to manage day-to-day execution with a consulting firm, reducing this year’s capex to US$40-million (from US$60million), and increasing its credit facility to US$400-million via a US$50-million FILO [first lien, last out] tranche,” he wrote.

“We have expressed skepticism that PIR’s turnaround plan would prove effective given the company’s internal issues and external headwinds including competition, tariffs and housing. At this stage, we think PIR’s ability to exist as a retail entity is dependent on an acquisition taking place. But it’s difficult to envision external interest in a business that has too many stores, under-developed digital capabilities, declining traffic, no strategic direction, and that is bleeding cash. One might argue the Pier 1 brand holds value, but recent sales trends suggest its equity might be damaged, perhaps irreparably so,” he said.

“With a market cap of just US$75-million, we cannot rule out of possibility of M&A. But without any concrete evidence that a top-line inflection is forthcoming, PIR’s long-term status as a going concern is an issue. And in the near term its ability to remain listed on the NYSE is a factor to watch. Given this risk/reward paradigm, we maintain our Neutral/High Risk rating on PIR. Our target price is now US$1.00” which is down from US$1.60. The median price target is US$1.25.

**

After Whitecap Resources Inc. (WCP-T) updated its guidance for its capital spending budget and production, Desjardins analyst Kristopher Zack updated his estimates on the company.

"Our CFPS [cash flow per share] is down slightly as a result, but we believe that balance sheet preservation is the right priority in the current environment. That said, despite the indiscriminate sell-off across the energy space, we expect that softening oil prices and tax loss selling could remain a significant headwind for the stock going into year-end.

“Our production estimate is down 6 per cent using the guidance midpoint and our CFPS estimate is down 3 per cent as a result, with minor offsetting revisions in our calculated price realizations – specifically, to better reflect the current market for the company’s light- and medium-grade oil production in southeast Saskatchewan. While annual capex ultimately was in line with our recently revised estimate, the implied efficiencies are lower than we expected on a 4Q/4Q basis, likely due to the timing of the growth; the company will look to manage the higher decline associated with the new production with mitigation projects through the year,” he said.

“We now estimate a capex-adjusted payout of about 116 per cent and a D/CF [discounted cash flow] of 2.7 times using the current strip. With protecting the balance sheet the first priority, we expect that the growth capex planned for 4Q19 and/or the dividend may ultimately need to be adjusted lower if oil prices continue falling, although we would anticipate similar moves across the sector in that case. We estimate that removing the growth expected in 4Q reduces annual cash flow by about 4 per cent at strip prices,” he said.

He maintained his $8 target price “which reflects a 6.0 times multiple on 2019 DACF [debt-adjusted cash flow] at our current US$65/bbl WTI price deck; moving to the current strip, our target multiple implies $4.83, still above Tuesday’s close of $3.86.” The media price target is $12.38, according to Zack’s Investment Research.

He increased his 2018 DACF estimate to $798-million from $796-million but cut his 2019 DACF estimate by $741-million from $766-million. He reduced his 2019 total production estimate to 71,000 barrels of oil equivalent per day, down from 76,000 and cut his CFPS estimate for 2019 to $1.67 from $1.72.

“The stock closed Tuesday at 5.3 times our revised DACF at strip (below the average of 5.8 times across our dividend-paying coverage group) as the late-year market sell-off continued. Despite the more attractive entry point, we expect that softening oil prices and tax loss selling could remain a significant headwind for the stock going into year-end,” he said.

RBC reiterated its “outperform” rating on the stock and its $13 price target.

“Our one-year price target reflects a 1.1 times multiple of the $12.01/share sum of our $8.97/ adjusted base NAV [net asset value] plus $3.04/share from risked development. Our target 1.1 times multiple reflects Whitecap’s strong track record of execution, above-average recycle ratios, and diversified portfolio strategy.”

**

As equity markets continue to struggle, CIBC has cuts its price target and revised its estimates for Sun Life Financial (SLF-T) following its GreenOak transaction.

“The GreenOak transaction is strategically on point, provides immediate financial benefits (not contingent on cost synergies) and leaves SLF with loads of capital for more M&A. While we provide full credit for expected EPS accretion, our estimates are down on lower assumed AUM [assets under management] for MFS. Our price target also comes down as a result (from $55 to $53). SLF is trading at 1.3 times BV [book value] versus peers at 1.1 times and 8.8 times 2019E EPS versus 7.7 times for peers. No change to our Neutral rating," said analyst Paul Holden.

He lowered his 2018 earnings per share estimate to $4.65 from $4.67, and cut his 2019 EPS estimate to $5.02 from $5.11.

“SLF is merging its real estate manager, Bentall Kennedy, with GreenOak, a partner-owned firm. SLF is contributing $24-billion of AUM and $195-million in cash in return for an ownership interest of 56 per cent on combined AUM of $38-billion. Management expects the transaction to be $0.04 accretive to 2019E underlying EPS (about 1 per cent.). We have adjusted our estimates accordinglym” he said.

“The strategic merits of the transaction are straightforward: i) it fits the objective of growing Sun Life Investment Management (non-traditional investment mandates); ii) it diversifies the geographic reach of the real estate business beyond North America; and iii) it adds higher-margin value-add real estate management capabilities,” he said.

“We also take this opportunity to reduce our estimates for the recent slide in equity markets. Our 2019E underlying EPS is reduced by nearly 2 per cent (-3 per cent for lower AUM, net +1 per cent for GreenOak). We also introduce our 2020E underlying EPS of $5.46, which implies growth of 9 per cent, right in the middle of management’s target. Growth in 2020 includes 7 per cent from organic means and 2 per cent from a reduced share count.”

**

Next year “is shaping up to be an eventful year” at Weyerhaeuser Inc. (WY-N), said BMO analyst Mark Wilde, as the company gets a new CEO and deals with pricing pressures.

“Devin Stockfish will assume the CEO role Jan. 1. From a market standpoint, he’ll be walking into some very challenging conditions,” said Mr. Wilde.

“Two of WY’s three primary wood products businesses, lumber and OSB [oriented strand board], have seen steep price declines over the past six months. Moreover, western log prices have dropped sharply over the past three months,” he said.

“On our current estimates, we expect WY to fall short of covering the dividend in 2019,” he said.

He cut his price target to $32 from $33 but kept his “market perform” rating on the stock. The consensus price target is $32.46, according to Bloomberg.

**

In other analyst actions:

* ATS Automation Tooling Systems : National Bank of Canada cuts to sector perform from outperform and cuts TP to C$20 from C$23; TD Securities cuts price target to C$22 from C$25

* Chartwell Retirement Residences : RBC raises to outperform from sector perform

* Home Capital Group Inc : Raymond James raises to outperform from market perform

* Morguard North American Residential REIT : RBC raises target to C$18 from C$17 and cuts to sector perform from outperform

* Neo Performance Materials Inc : Raymond James cuts target to C$19.25 from C$24 and cuts to outperform from strong buy

* Prometic Life Sciences Inc : TD Securities cuts price target to C$0.30 from C$0.60 and cuts to reduce from hold

* Sun Life Financial Inc : CIBC cuts price target to C$53 from C$55

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 08/11/24 0:54pm EST.

SymbolName% changeLast
CNI-N
Canadian National Railway
-1.86%111.23
CNR-T
Canadian National Railway Co.
-1.55%154.73
WCP-T
Whitecap Resources Inc
-1.98%10.41
WY-N
Weyerhaeuser Company
+0.95%32.04
SLF-T
Sun Life Financial Inc
-0.17%82.49

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