Inside the Market’s roundup of some of today’s key analyst actions
Desjardins Securities analyst Doug Young is maintaining his “constructive” outlook for Canadian bank stocks following third-quarter earnings season, seeing key trends as “positive for the sector on average.”
“Good thing we sharpened our pencils,” he said. “We learned a lot. (1) This was a good quarter for the group on average, with cash EPS and adjusted pre-tax, pre-provision (PTPP) earnings above expectations. (2) However, there were overachievers (NA, CM and RY) and strugglers (BMO). (3) The Canadian banking trends are encouraging. (4) Yes, there can be divergences in credit losses as we saw from BMO and CWB, a result of a few commercial loan impairments. (5) The Canadian consumer remains resilient, but for how long? (6) Lower interest rates should help, but when? (7) The NIM outlook is constructive. (8) Regulatory capital ratios are at comfortable levels. (9) And several banks seem inclined to buy back more stock. But is this enough to move banks to the top of the class for investors?”
In a research report released before the bell titled 3Q FY24 postview—back to cool?, Mr. Young said National Bank of Canada (NA-T) “got the gold star this quarter, driven by a solid adjusted PTPP earnings beat across all operating divisions, without unusually strong corporate earnings, as well as stable PCLs [provisions for credit losses].”
“Cash EPS increased by 9 per cent year-over-year on average and was 4 per cent above our estimates,” he said. “RY and CM led the way with substantial beats of 12 per cent and 11 per cent, respectively. However, we are more impressed with NA’s 6-per-cent beat as it achieved this without relying heavily on lower PCLs or a standout quarter from treasury. Meanwhile, BMO missed our estimate by 7 per cent, driven by larger-than-anticipated impaired PCLs which were also well above guidance; and its impaired PCLs are expected to remain elevated (above 3Q FY24 levels) for a few more quarters.”
“RY’s cash EPS got a boost from much lower-than-expected PCLs; and CM’s cash EPS and adjusted PTPP earnings were bolstered by higher-than-normal corporate earnings (driven by treasury activities). BMO’s commercial portfolio is navigating turbulent waters for now. It disappointed the market once again with impaired PCLs which were higher than expectations as well as guidance. Furthermore, management was clear that impaired PCLs will be above the 3Q FY24 level for the next 1–3 quarters.”
In order of preference, Mr. Young’s recommendations and target prices are currently:
- Royal Bank of Canada (RY-T) with a “buy” rating and $172 target. The average on the Street is $162.64, according to LSEG data.
- Canadian Imperial Bank of Commerce (CM-T) with a “buy” rating and $83 target. Average: $79.09.
- Canadian Western Bank (CWB-T) with a “buy” rating and $57 target. Average: $47.66.
- Toronto-Dominion Bank (TD-T) with a “buy” rating and $90 target. Average: $86.22.
- Bank of Montreal (BMO-T) with a “hold” rating and $120 target. Average: $120.26.
- National Bank of Canada (NA-T) with a “hold” rating and $127 target. Average: $125.46.
- Bank of Nova Scotia (BNS-T) with a “hold” rating and $68 target. Average: $68.87.
- Laurentian Bank of Canada (LB-T) with a “sell” rating and $26 target. Average: $26.18.
“Our ranking for the quarter: NA, CM, RY, BNS, TD and BMO,” he concluded.
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While acknowledging investor focus remains squarely on its proposed acquisition of Japanese retail giant Seven & i, RBC Dominion Securities’ Irene Nattel emphasized Alimentation Couche-Tard Inc.’s (ATD-T) status as “a compelling investment lies in performance of existing footprint and ATD’s ability to drive strong earnings/cash flow despite challenging backdrop.”
After the bell on Wednesday, the Montreal-based company reported first-quarter 2025 results that the analyst called “solid but inspiring,” falling in line with her expectations as “soft” consumer spending remained evident.
“KPI’s across regions reflective of challenging macro backdrop, notably for low income consumers that typically make up 50 per cent of c-store business,” she said. “Adjusted EBITDA and EPS close to forecast, $1.54-billion/$0.83. F25/26 combination of initiatives to drive revenues/optimize costs in the legacy network, integration of prior period M&A and in CY2025, GetGo, and stabilization of consumer spending should see improving trends.”
“Consistent with narratives from other retailers that over-index to lower income consumers, SS metrics modestly negative across geographies. Aggregate GP $$ 1 per cent below expectations, with Europe contribution a bit better than modest expectations, offset by modest shortfall in N.A. segments. U.S. SSS [same-store sales] and SSG [same-store sales growth] outperforming 7-Eleven, ATD’s most relevant peer.”
Given the results and macroeconomic backdrop, Ms. Natel cut her target for Couche-Tard shares to $94 from $96 with an “outperform” rating. The average target on the Street is $93.06.
“Despite macro uncertainty, ATD is a name that performs well across the cycle with stock-specific optionality,” she said.
“We remain constructive on this Global Top 30 name based on earnings outlook, long track record of disciplined, accretive M&A.”
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Seeing its “relentless focus” on product development driving “superior” growth, Ventum Capital Markets analyst Amr Ezzat resumed coverage of Blackline Safety Corp. (BLN-T) with a “buy” recommendation.
“BLN has consistently reinvested around 26 per cent of its sales into product development since fiscal 2014, resulting in a differentiated product line and a three- to five-year technological lead over competitors,” he said. “This focus on innovation is central to the Company’s growth strategy. We project a top-line CAGR [compound annual growth rate] of 25.5 per cent over our forecast period through best in class net dollar rentention (130 per cent last quarter), significantly outpacing industry growth rates. Blackline has emerged as one of Canada’s highest-growth tech companies over the past several years.”
In a research report titled Best-in-Class Growth Fueling the March to the Black, Mr. Ezzat said the Calgary-based software-as-a-service (SaaS) technology company, which develops, manufactures and sells safety wearables and cloud-connected services, is reaching an inflection point, pointing to its operating leverage and expanding gross margins driving “exceptional” growth. He also touted its management team having “proven leadership with a track record of value creation.”
“Our investment thesis centres on the scalability of Blackline’s model, integrating high-margin services with each hardware sale (approximately $2,200 in high-margin services revenue per $600 hardware sale),” he said. “We expect operating expenses as a percentage of revenue to decrease from 79.3 per cent in F2023 to 61.8 per cent in F2026, leveraging fixed costs. Consequently, we forecast Adjusted EBITDA margins to improve from negative 16.3 per cent in F2023 to 6.2 per cent in F2026.:
“The management team and BOD have a history of innovation and success, expanding BLN’s revenues by 5.6 times over the past five years. Many were integral to the success of BW Technologies, which grew revenues 10 times from 1997 until its takeout in 2004 for $260M ($2.00 per share go-public and $36.00 per share takeout).”
Calling it “a misunderstood innovator” and seeing a “flagrant” valuation discount,” Mr. Ezzat set a 12-month target price of $6.50, equating to a 41.3-per-cent return from current levels. The average target on the Street is $6.06.
“Despite a significant three- to five-year lead over competitors, the market underestimates BLN, primarily viewing it as a hardware provider to the oil and gas industry,” he said. “In reality, 75 per cent of its business now comes from outside Canada (up from 35 per cent in F2015), with exposure to oil and gas reduced to 40 per cent (from 55 per cent in F2015). The Company’s products are highly configurable for multiple industries and applications, thus driving diversified, recurring revenue streams.
“We expect the Company to grow its sales nearly twofold by F2026 and become EBITDA breakeven by Q4/F24; as such, we believe using multiples on short-term estimates significantly (and incorrectly) undervalues BLN shares as they give no recognition to the Company’s growth profile. We derive our $6.50/shr target price using a DCF analysis with a 10.0-per-cent discount rate and a 3.0-per-cent perpetual growth rate. Our DCF analysis is further corroborated by a comparables benchmarking analysis. With 53 per cent of sales coming from service revenues that are recurring, we feel it is more appropriate to contrast BLN’s multiples to other Canadian high-visibility tech companies. BLN’s 2.5 times/5.7 times NTM [next 12-month] sales/LTM [last 12-month] GP multiples compare to the peer median of 4.6 times/7.3 times (46 per cent/22 per cent discount), an unwarranted discount in our opinion. For reference, our DCF-derived target price implies a 3.1 times/2.6 times/2.2 times F2025/F2026/F2027 revenue multiple.”
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National Bank Financial analyst Maxim Sytchev warns industrial stocks haven’t performed well historically when the U.S. Fed beings easing off peak interest rates, calling it “not an ideal place to be” for investors.
“All things being equal, lower rates equals higher NPV [net present value], propelling recent laggards such as staples and real estate-exposed names,” he said in a report. “The operative word ‘being equal’ as starting valuations, anticipation of rate cuts and, more importantly, their need — now to stabilize the weakening labour market in the U.S. and prop up overall economy in Canada, respectively, (amid rolled over inflation) — all play an evolving part within the capital allocation equation.”
“When using historical data, Industrials have not performed well during prior bouts of rate cuts because coincidental nature of rate compressions = slowing economy, not a great setup for earnings revisions Staples, on the other hand, appear (not exactly surprisingly) as the most defensive. What could be different this time? A soft landing would of course go a long way, but as the saying goes, economists have predicted nine of the last five recessions. Fiscal stimulus on the infrastructure side (US$1.2-trillion IIJA pool of capital continues to be allocated — 40 per cent (US$480-billion) to be exact has been announced for over 60,000 projects) and continued industrial decoupling from Asia should lead to greater installed manufacturing capacity over the years; we are, however, clashing somewhat against high by historical norms valuations, coupled with again weakening manufacturing PMIs.”
Mr. Sytchev recommends investors “stick with names that will exhibit a counter-cyclical dynamic to an economic slowdown,” pointing to Rb Global Inc. (RBA-T), or “have something unique within the structural setup to emerge stronger post any dislocation.”
“ATS/FTT have already been negatively impacted; in the engineering consulting space, we now see Atkins (ATRL) as providing the best risk/reward skew as the nuclear refurb cycle/margin expansion potential seems compelling, especially at relative valuation which imputes a 40-per-cent discount vs. peers,” he said. “In the small cap space, we like RUS (steel market is depressed) and AFN (ag cycle is scraping the bottom).”
Mr. Sytchev’s ratings and targets for his recommended stocks are:
- Ag Growth International Inc. (AFN-T) with an “outperform” rating and $77 target. Average: $78.13.
- AtkinsRéalis Group Inc. (ATRL-T) with an “outperform” rating and $68 target. Average: $68.09.
- ATS Corp. (ATS-T) with an “outperform” rating and $52 target. Average: $57.83.
- Finning International Inc. (FTT-T) with an “outperform” rating and $47 target. Average: $49.33.
- RB Global Inc. (RBA-T) with an “outperform” rating and US$90 target. Average: US$96.63.
- Russel Metals Inc. (RUS-T) with an “outperform” rating and $46 target. Average: $46.33.
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Already possessing “well-established brands offering a comprehensive range of services for buying and selling equipment,” RB Global Inc.’s (RBA-N, RBA-T) US$6-billion acquisition of IAA Inc. last year “significant” increases its footprint in the vehicle auction market and more than doubles its gross transaction value, said BMO Nesbitt Burns analyst John Gibson.
“The addition of IAA has introduced a new vertical to RB’s business, expanding its presence in the auto salvage auction market,” he said. “Operating in a duopoly with its main competitor, Copart (CPRT-US; Not Covered), we expect IAA to grow based on positive trends in vehicle total loss frequency. We also believe IAA is now much better positioned to take back market share given its strong technology offering and improved yard capacity. This in turn, allows for better long-term relationships with customers (i.e., insurance companies, dealers, rental businesses, etc.) during and post periods of high turnover.”
“RB’s legacy business (i.e., Ritchie Bros) has evolved substantially, particularly in the last decade. Through a series of acquisitions, the company has shifted from being a traditional auctioneer to a technology-driven asset disposition company. This transformation was accelerated by pandemic-induced supply chain disruptions, which led to significant growth in the legacy business. While we do expect this growth to normalize in the coming years, Ritchie Bros provides the company with a very stable base with high barriers to entry in a counter-cyclical industry.”
In a research report released Thursday titled One’s Loss is RB’s Gain, Mr. Gibson initiated coverage of RB Global, previously known as Ritchie Brothers Auctioneers, with an “outperform” recommendation, touting its “much improved” balance sheet following the IAA deal which he thinks provides “optionality to grow its business, including additional land purchases and technology investments, which are in-line with the Copart strategy.”
The analyst set a target of US$105 per share, exceeding the current average on the Street of US$96.63.
“Given strong tailwinds in vehicle total frequency loss, we believe RB’s auto salvage business (IAA) is poised to grow, while it is now much better positioned to win some market share from its largest competitor. The company’s legacy business (Ritchie Bros) also provides RB with a stable base in a counter-cyclical industry, with high barriers to entry,” he concluded.
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In other analyst actions:
* Canaccord Genuity’s Robert Young raised his Descartes Systems Group Inc. (DSGX-Q, DSG-T) target to US$110 from US$108 with a “buy” rating, while BMO’s Thanos Moschopoulos increased his target to US$104 from US$100 with a “market perform” recommendation. The average on the Street is US$103.77.
“We remain Market Perform on DSGX and have raised our target price following Q2/25 results that were a beat on revenue (helped by hardware sales) and in line on EBITDA (despite a one-time charge),” said Mr. Moschopoulos. “We modestly raise our FY2025/26 EBITDA estimates. We think DSGX can continue to execute successfully on its strategy of delivering consistent EBITDA growth (its recent organic services growth provides us with comfort in that regard), but on a relative basis, prefer other consolidators in our coverage universe.”
* CIBC’s Scott Fletcher raised his Dye and Durham Ltd. (DND-T) target by $1 to $22, keeping an “outperformer” rating. The average target is $21.25.
“With DND having pre-released revenue, organic growth and leveraged FCF, our focus for the Q4 print was on net new profitability and ARR results, as well as the underlying drivers of organic growth and FCF,” he said. “Adj. EBITDA of $69.0-million (57.5-per-cent margin) was in line with consensus of $69.2-million, and ARR of $136.7-million was up 9 per cent sequentially due to subscription growth momentum. Revenue from real estate transactions remains pressured due to lower volumes, but generating 8-per-cent organic growth in a challenging environment highlights the potential upside once volumes return. With the BoC cutting rates by 0.25 per cent [Wednesday] morning and poised to continue to cut, we are optimistic on DND’s forward outlook. We acknowledge that the ongoing litigation and the pending Special Meeting will likely limit upside until resolved, but the business itself looks to be in good shape.”