Inside the Market’s roundup of some of today’s key analyst actions
While increased volatility has emerged in the technology sector recently, National Bank Financial analyst Richard Tse and John Shao expect to see rising estimate revisions as many companies “continue to lean-in on capital allocation/efficiency discipline.”
“With Technology having paused its run over the past 4–6 week(s) under a growingly uncertain backdrop on the scale of interest rate cuts this year, calendar Q1 earnings season will be notable to setting up the rest of the year for the sector,” they said. “Adding to that, we believe flattening estimate revisions for the group ex mega cap U.S. Tech has given investors further pause given the backdrop. But that does not take away our enthusiasm for the sector looking out over the next 12 months; it merely underscores the importance of this coming earnings season in supporting that outlook.”
In a research report released Thursday titled Down but Not Out, the analysts emphasized “capital-efficient growth will prevail” across the sector despite the rate environment.
“When it comes to Technology, the market has made a hard pivot towards capital-efficient growth over the past year and in our view, the backdrop will continue to reward those names on a relative basis under the uncertain rate environment,” he said. “One such measure for capital-efficient growth has been The Rule of 40 (Rof40) which over the past year has seen a shift in weighting towards profitability with revenue growth still being notably important. For reference, every 10-per-cent increase in Rule of 40 translates to a 0.4 times multiple expansion. With that in mind, names executing at or close to the Rof40 are Constellation Software (47 per cent), Computer Modelling Group (88 per cent/46 per cent excluding acquisitions), Docebo (37 per cent) and Shopify (36 per cent) according to current consensus estimates on LSEG.”
Heading into earnings season, the analysts pointed out a pair of companies they see possessing potential upside from the results:
* Shopify Inc. (SHOP-T, “outperform” and US$100 target), believing “pickup in merchant growth additions and robust retail sales data equal upside to GMV & operating leverage potential.”
* Tecsys Inc. (TCS-T, “outperform” and $50 target), pointing to “consistent market share gains in healthcare.”
Conversely, they see potential downside for Telus International Inc. (TIXT-T, “sector perform” and US$10 target), citing “continued market headwind for digital services and premium valuation to CX Services peers.”
“While the above are names where we see upside/downside in the upcoming quarterly results vs consensus, the following names are ones we currently favour over the next 12 months (over the short-term). Those names are: Converge, Constellation Software, Docebo, OpenText, Shopify and Tecsys,” they added.
Mr. Tse made a pair of target adjustments to stocks in his coverage universe. They are:
* Altus Group Ltd. (AIF-T) to $55 from $50 with a “sector perform” rating. The average on the Street is $54.39.
“We’re expecting in-line FQ1 results from Altus,” he said. “We expect to see a return to positive year-over-year growth in bookings given an easy comparable period in FQ1′23 (‘banking crisis’) and improving sentiment from CRE asset managers. Per Altus’s Q1′2024 CRE Industry Conditions and Sentiment Survey, firms with over $5-billion in assets plan to be net buyers in both the U.S. (up 13 per cent) and Canada (up 10 per cent) over the next six months which runs in contrast to last quarter when that cohort was expected to be net sellers (down 18 per cent in U.S. and down 19 per cent in Canada). We believe this has the potential to drive a re-acceleration in cross-/up-selling opportunities.”
“While we expect bookings growth in the short-term care of easier comps, the CRE backdrop remains challenging, and when paired with the potential integration/leverage risk from the acquisition of REVS, we think the risk-to-reward here is balanced.”
* Lightspeed Commerce Inc. (LSPD-N, LSPD-T) to US$15 from US$20 with a “sector perform” rating. The average is US$18.77.
“We’re expecting in-line FQ4 (CQ1) results from Lightspeed given the recent reaffirmation (on April 3, 2024) of the guidance as part of its recent cost reductions announcement,” he said.
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TD Cowen analyst Aaron MacNeil views North American Construction Group Ltd.’s (NOA-T) underperformance following a fourth-quarter earnings miss “as an opportunity to buy a quality name at an attractive valuation.”
Accordingly, he raised his recommendation for its shares to “buy” from “hold” previously after comparing Alberta-based company to four Australian mining services peers given its recent $395-million acquisition of MacKellar Group.
“50 per cent of NACG’s revenues are derived from high carbon energy end markets, well above its Australian peers that are increasingly focused on ‘future-focused metals’ exposure,” said Mr. MacNeil. “In our view, the end market focus of this comparative group likely reduced local interest in the MacKellar Group prior to NACG’s acquisition and allowed NACG to acquire MacKellar at attractive valuation metrics. For investors in NACG who were already comfortable with its high oil sands exposure, this accretive transaction provided shareholders with a continuation of NACG’s industry-leading per share growth as well as increased size and scale.”
“We also compare NACG against our energy services coverage universe that does not feature NACG’s long-term contract structures and geographic/endmarket diversification and Aecon (ARE-T) that is engaged primarily in civil construction opportunities that features no commodity exposure, but needs to constantly secure new work as other projects roll off. Notably, NACG now trades at a modest discount to the Energy Services peer group and Aecon on a 2024estimated free-cash-flow yield basis.”
The analyst maintained his $34 target for its shares. The average is currently $44.
“For investors that hold a more conservative timeline for energy transition, NACG addresses what appears to be a decreasingly competitive wedge of the energy mix (high carbon energy sources including oil sands and coal) as competitors pivot to other end markets. In this context, we believe that NACG’s 2024E FCF Yield of 18 per cent (in line with expanded peer group average) is more than justified and that investors can expect enhanced project economics and a continuation of its strong historical growth profile despite the mature nature of its end markets,” said Mr. MacNeil.
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The valuation for Air Canada (AC-T) “continues to look attractive” ahead of the release of its first-quarter 2024 results on May 1, according to National Bank Financial’s Cameron Doerksen.
In a note released Thursday, the analyst said he sees demand and fares remaining “generally healthy” and its domestic capacity sitting “fairly rational” in the current quarter, despite trimming his estimates to reflect higher fuel prices and “less favourable” foreign exchange. He’s now projecting quarterly adjusted earnings per share of a loss of 16 cents, down 2 cents from his previous estimate. His full-year 2024 and 2025 forecasts slid to $2.71 and $2.97, respectively, from $2.95 and $3.35.
“Although the market seemingly remains concerned about the sustainability of air travel demand in Canada, the data continues to point to a still positive end market,” said Mr. Doerksen. “In addition, the company’s financial position is still improving with a recent re-financing resulting in the reduction of US$1.1-billion in debt. With leverage very comfortable (we project 1.2 times at the end of 2024) and significant available cash and liquidity, the company can readily fund its fleet additions over the next several years. Finally, the current valuation for Air Canada continues to reflect what we believe is an overly pessimistic outlook.
“On our updated 2024 forecast, which assumes a 2.3-per-cent decline in passenger unit revenues and non-fuel unit costs towards the high end of Air Canada’s guidance range, Air Canada shares are trading at just 3.2 times EV/EBITDA and 7.0 times P/E. This is below the historical average forward multiples (excluding the pandemic years) of 4.3 times EV/EBITDA and 9.0 times P/E. Indeed, if we assumed that AC’s shares should trade at its historical average forward EV/EBITDA multiple, the current share price implies that 2024 EBITDA would come in at $2.6-billion, a 35-per-cent decline from the $4.0-billion Air Canada generated in 2023.”
Maintaining his “outperform” recommendation and $31 target for Air Canada shares, which exceeds the $27.99 average, Mr. Doerksen emphasized it continues to underperform its peers.
“Most airline stocks saw a significant amount of volatility in 2023 as share prices increased early in the year in anticipation of a record summer for air travel before declining considerably through the latter part of the summer and into the fall as concerns over sustained demand and pricing as well as the rising cost of jet fuel took over investor sentiment,” he said. “The group rallied during the last couple months of the year but, despite delivering record financial results, Air Canada shares still ended 2023 down almost 4 per cent (versus TSX up 8.1 per cent) while the U.S. legacy carriers were all up at least 8 per cent. So far this year, AC’s stock is down slightly (down 1.7 per cent), modestly below United (up 0.6 per cent) but has outperformed American Airlines as well as the NYSE Arca Airline Index (XAL), noting that Delta has significantly outperformed the group, up 15.7 per cent year-to-date. However, since the beginning of 2023, AC’s stock still lags the U.S. peers, down 5.2 per cent versus Delta up over 40 per cent, United up 10 per cent and American up 2.5 per cent.
“From a valuation perspective, Air Canada is also trading below the U.S. legacy carriers, currently trading at 3.2 times 2024 consensus EV/EBITDA versus the U.S. peer average of 5.1 times (noting that for comparison purposes, we use EV/EBITDAR and adjust for operating lease liabilities for the U.S. carriers) and its historical forward average (in which we exclude outlier years of 2020, 2021 and 2022) of 4.3 times. On P/E, AC is currently at 5.0 times 2024 consensus estimates (historical forward average of 9.0 times) compared to the U.S. peer average of 6.6 times.”
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Stifel analyst Cole Pereira reiterated his bullish view on the Canadian oilfield services industry heading into earnings season, seeing valuation upside.
“1Q24 was a strong quarter for OFS equities, with the average equity return of 13 per cent outpacing both the TSX Composite (up 6 per cent) and the S&P 500 (up 10 per cent),” he said. “Despite commodity price volatility, oilfield services activity was largely stable, reinforcing our thesis that OFS valuations need to move higher to better reflect the improved earnings resiliency of the sector. While EV/EBITDAS valuations have improved by 7 per cent on average year-to-date, they remain inexpensive at 3.5 times 2025 estimated EV/EBITDAS and 6.4 times 2025E P/E on average. We are also placing an increased focus on EPS moving forward given the improved earnings stability and high capital intensity, along with our emphasis on ROIC.
“For a trade specifically into 1Q24 results we like CEU and SES. Our CEU EBITDAS forecast is 5 per cent above the Street, and we believe there could be positive data points on margins, market share and SLB-CHX. Our SES EBITDAS forecast is 2 per cent above the Street, and we expect the company could provide a more detailed update on capital allocation. Our top ideas in the sector are CEU, TCW, PD, EFX and SES, while TOT is our top small-cap pick.”
Mr. Pereira said oilfield activity represented “another stable quarter” with Canadian drilling averaging 208 rigs, up 16 per cent sequentially but down 6 per cent year-over-year.
“The rig count in the deep plays was down 4 per cent year-over-year, though declines in the Montney (down 6 rigs) and Deep Basin (down 2 rigs) were partially offset by an increase in the Duvernay (up 4 rigs),” he explained. “In the U.S. the land rig count averaged 602 rigs in 1Q24, effectively flat quarter-over-quarter from 601 in 4Q23 but down 19 per cent on a year-over-year basis from 744 in 1Q23. The Permian saw the most net additions, up seven rigs, while the Haynesville saw the largest net reduction, down eight rigs.”
“Our 1Q24 EBITDAS estimates are in line with consensus on average while our EPS forecasts are 2 per cent below, or 8 per cent below adjusting for outliers. Our largest downside outliers from an EBITDAS perspective vs. the Street are PSI (down 9 per cent) and TCW (down 6 per cent), while we highlight CEU as a positive outlier (up 5 per cent). ... We like owning CEU and SES as a trade into their quarterly prints. For CEU we forecast 1Q24 EBITDAS of $85-million vs. the Street at $81-million, and expect investors to be focused on the potential for additional market share and margin gains, as well as any additional commentary surrounding SLB’s recently announced offer to acquire CHX. For SES, we forecast 1Q24 EBITDAS of $125-million vs. the Street at $122-million, and we expect investors to be focused on further details around capital allocation post-WCN sale, including whether it will pursue an SIB and/or more growth spending and M&A.”
After minor adjustments to his forecast, Mr. Pereira made three target changes:
* Precision Drilling Corp. (PD-T, “buy”) to $125 from $115. Average: $124.99.
Analyst: “Our PD EBITDAS forecasts decline 5 per cent in 2024 to $58-million and 4 per cent in 2025 to $651-million as we right-size our U.S. market share assumptions. However, we have also increased our target multiple to 4.2 times 2025E EV/EBITDAS (prior: 4.0 times) to better reflect the improved earnings stability of the sector. The net impact of these changes sees our target price increase.”
* Secure Energy Services Inc. (SES-T, “buy”) to $13.50 from $12.50. Average: $12.81.
Analyst: “Our SES EBITDAS forecasts decrease 1 per cent to $457-million in 2024 but increase 1 per cent in 2025 to $476-million. We have also increased our target multiple to 8.2 times 2025E EV/EBITDAS (prior: 7.6 times) to better reflect its improved earnings stability and significant optionality to add value to shareholders via increased shareholder returns, potential M&A and high-return growth opportunities.”
* Western Energy Services Corp. (WRG-T, “hold”) target to $2.75 from $3. Average: $2.95.
Analyst: “Our WRG EBITDAS forecasts decline 2 per cent in 2024 to $47-million but increase 2 per cent in 2025 to $53-million. However, we have also reduced our target multiple to 3.7 times 2025E EV/EBITDAS (prior: 4.1 times) to reflect a more appropriate discount to peers given its higher leverage and lower return metrics.”
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During first-quarter earnings season for senior gold producers, Scotia Capital analyst Tanya Jakusconek thinks investor focus will be largely on operating performance “as little else is expected given year-end 2023 results (including 2024 guidance) were released in mid-February.”
“For Q1/24, we are expecting production for the group to be 5.5 million ounces at TCC and AISC [total cash costs and all-in sustaining costs] of $1,088/oz and $1,489/oz, respectively,” she said. “We are not expecting margins to increase quarter-over-quarter or year-over-year based on the average quarterly prices. However, the gold price is up $300 per ounce or 15 per cent from Q1/24 average price of $2,071 per ounce, and based on current commodity price of $2,360 per ounce, margins are forecast to expand.
“Heading into reporting, we prefer to be positioned in AEM, KGC and WPM. GOLD pre-released Q1/24 results and several other companies have pre-released including all the mid-tier streamers. With this higher commodity price and expected margin expansion, our preference is now the operators (lowered valuations) to the streamers (higher valuations). From an operating standpoint, our Q1/24 forecasts are generally more conservative versus limited consensus estimates. We are lower on EPS versus consensus estimates on GOLD and FNV and higher on IAG and KGC.”
Ms. Jakusconek expects the quarter to be the weakest of the year with the fourth quarter the strongest, a trend which was also seen in 2023.
She made a trio of target changes on Thursday:
- Franco-Nevada Corp. (FNV-N/FNV-T, “sector perform”) to US$140 from US$139. The average on the Street is US$139.40.
- IAMGOLD Corp. (IAG-N/IMG-T), “sector perform”) to US$3.75 from US$3.25. Average: US$3.69.
- Sandstorm Gold Ltd. (SAND-A/SSL-T, “sector perform”) to US$6.25 from US$6.50. Average: US$7.36.
Heading into Q1/24 reporting, we are most comfortable recommending AEM and KGC,” said Ms. Jakusconek. “GOLD pre-released Q1/24 results and maintained 2024 guidance. The shares have underperformed due to a weak Q1/24 performance, especially on the copper front. Our preference going into the quarter is WPM over FNV; we expect WPM to have a decent quarter. We are also not expecting any new updates on Cobre Panama from FNV given the elections (May 4th) are after their conference call. The rest of the mid-tier streamers have pre-released their production and sales.”
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Desjardins Securities analyst Frederic Tremblay thinks Goodfood Market Corp. (FOOD-T) is displaying “successful” cost discipline as the macroeconomic environment continues to weigh on its near-term growth prospects.
“2Q results featured a beat on adjusted EBITDA as cost discipline contributed to profitability, cash flow and leverage improvements,” he said. “Looking ahead, we are slightly more cautious on the timing of the return to top-line growth given a tough consumer spending environment. Nonetheless, our adjusted EBITDA forecasts move higher. Management’s willingness to explore small M&A opportunities is intriguing, but we believe the company will need to be very selective.”
The Montreal-based meal kit company reported net sales of $39.8-million for its second quarter, in line Mr. Tremblay’s $40-milllion estimate and down 5.4 per cent year-over-year. Active customers came in at 117,000, below the analyst’s expectation of 124,000 and drop of 5.6 per cent from fiscal 2023.
“Top-line growth remained evasive in 2Q as a decline in active customers offset higher revenue per customer,” he said. “That said, cost discipline led to record gross margin of 43.0 per cent. Adjusted EBITDA of $3.5-million was ahead of expectations and in positive territory for a fifth consecutive quarter.”
“While the active customer base had grown in 1Q, the momentum did not carry into 2Q (down 5.6 per cent quarter-over-quarter). In this context, Goodfood remains disciplined on marketing spend and unit economics. In our view, it could be challenging for the company to show a persistent upward trajectory in active customers until the environment becomes more supportive of higher consumer spending and ready-to-eat meal kit demand. We now model year-over-year growth in the active customer base in FY25 instead of FY24.”
Maintaining his “hold” recommendation, the analyst cut his target for Good Food shares by 10 cents to 65 cents after reducing his revenue expectation for both 2024 and 2025. The average on the Street is 60 cents.
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In other analyst actions:
* CIBC’s Jacob Bout increased his target for shares of Aecon Group Inc. (ARE-T) to $22 from $21 with an “outperformer” rating. The average is $18.17.
“We continue to expect the drag from legacy projects on earnings/cash flow to be much lower in 2024/2025, and strong operating performance across the rest of its core construction business,” said Mr. Bout. “We are raising our 2025 estimates (2024E unchanged) to reflect the recent award of the U.S. Virgin Islands airports redevelopment that will reach financial close in Q1/25. We increase our sum-of-the-parts price target from $21 to $22 (based on a 4.5 times Construction and 9 times Utilities EV/EBITDA target multiple to our 2025 segment EBITDA estimates, plus Concessions) and maintain our Outperformer rating. Note, we are currently holding the U.S. Virgin Islands Concession at book value given the early stages of the project.”
* TD Cowen’s Tim James bumped his Andlauer Healthcare Group Inc. (AND-T) target to $54 from $52, above the $50.64 average, with a “buy” rating.
“We forecast that revenue will be relatively flat year-over-year at $164-million (consensus: $171-million),” he said. “Organic growth is expected to offset the decline in COVID-19-related revenue, fuel price surcharges, and the impact of spot pricing on certain U.S. volume. Spot refrigerated rates declined over the course of the quarter, but we estimate this impacts less than 10 per cent of revenue. We forecast EBITDA of $40.9-million (consensus: $43.8-million), flat year-over-year, based on 20 bps of margin expansion.”
* Bernstein’s Bob Brackett raised his Barrick Gold Corp. (ABX-T) target by $1 to $32, exceeding the $28.75 average, with an “outperform” rating.
* In earnings preview reports, Raymond James’ Farooq Hamed raised his targets for Hudbay Minerals Inc. (HBM-T) to $11.50 from $10.50 with an “outperform” rating and Lundin Mining Corp. (LUN-T) to $13 from $11.50 with a “market perform” rating. The averages are $11.48 and $14.88, respectively.
* Wells Fargo’s Roger Read raised his Suncor Energy Inc. (SU-T) target to $60 from $55 with an “overweight” rating. The average is $53.27.
David Leeder