Inside the Market’s roundup of some of today’s key analyst actions
In response to its third consecutive earnings miss, Jefferies analyst John Aiken downgraded Bank of Montreal (BMO-T) to “hold” from “buy” previously, citing a deteriorating credit outlook.
“We freely admit that we may be closing the barn door after the animals have escaped, the pace of deterioration in credit and BMO’s relative over-exposure to commercial infer ongoing pressure to the bank’s earnings. While we remain positive on the longer-term outlook for its U.S. operations, near-term outperformance over our forecast period has become increasingly difficulty,” he said.
In a research note, Mr. Aiken predicted the bank’s “elevated” credit losses are likely to persist.
“For the second consecutive quarter, BMO missed earnings on the back of elevated credit losses (and third miss for 2024 with Q1 under delivering on operating leverage, which is no longer an issue),” he said. “While disappointing, management guided to provisions that are above historical norms for the next several quarters (1-3). Underlying results remain solid as evidenced by pre-provision, pre-tax earnings supported by a return to positive operating leverage. However, these improvements were insufficient to negate the increased provisions` impact on profitabilty.”
“We believed that the second quarter was likely a relative high watermark for credit, but it appears that the higher for longer interest rates are taking a toll on BMO`s commercial lending book. Further, with BMO’s relative over exposure to commercial on both sides of the border and the lagging nature of credit, the current expected easing cycle by the central banks is not expected to have any immediate relief. Consequently, while we do expect that underlying growth will accelerate in BMO`s U.S. platforms, we not longer believe that it will be sufficient to offset the credit headwinds and provide earnings outperformance against its peers.”
Mr. Aiken’s target fell to $118 from $124. The average target on the Street is $125.60, according to LSEG data.
“Given the variability inherent in formations and provisions for credit losses, we would not expect a single quarter’s beat to generate much lift in BMO`s earnings outlook,” he concluded “Consequently, we believe that the market will view its near-to-medium term run-rate earnings to be reduced. While we are maintaining our target multiple (10.5 times) as we are confident in the growth of BMO`s U.S. platform, our lower estimate (2025 EPS forecast of $11.26, down from our previous $11.83) results in an $8 reduction in our target price.”
Elsewhere, CFRA Research analyst Alexander Yokum cut BMO to “hold” from “buy” previously.
“Our downgraded view reflects rising credit concerns as gross impaired loans hit 0.89 per cent (up 10 basis points quarter-over-quarter) in the July-Q vs. the five-year average of 0.59 per cent,” he said. “Credit weakness was identified in consumer, commercial real estate, manufacturing, and transportation. Still, we are encouraged by the bank’s healthy capital position (CET1 ratio of 13.0 per cent). Also, expected rate cuts in the U.S. and Canada should reduce the strain on BMO customers. Canadian Personal & Commercial Banking rose 7 per cent year-over-year as results benefited from 11-per-cent deposit growth and 6-per-cent loan growth. BMO Capital Markets (up 14 per cent year-over-year) continued its momentum given higher interest rates and equities trading.”
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Scotia Capital analyst Maher Yaghi thinks shares of Thomson Reuters Corp. (TRI-N, TRI-T) are not yet properly pricing in the potential acceleration in revenue growth possible from investment in generative artificial intelligence, leading him to raise his recommendation to “sector outperform” from “sector perform” on Tuesday.
“Applying the Rule of X valuation methodology and comparing TRI’s valuations vs North American cloud/software/data services peers we notice that the stock’s relative valuation has remained essentially unchanged since 2022,” he said. “While Q3 results will likely be pressured by GenAI investments that are picking up at a time of weak seasonality, we expect margins to improve as we exit the year. The forward outlook for 2025/2026 remains bullish in our view and the ability of the company to deliver on margins and FCF remains solid.”
In a research report released before the bell, Mr. Yaghi suggested the combination of data and underlying software should “warrant an added premium over time.”
“We believe that TRI’s continuous investments in GenAI should better position the firm to grow its TAM [total addressable market] over time,” he said. “In addition, we think that the content leadership that the company has amassed in the litigation and tax space should protect and amplify the work the company is doing to future proof its position in those segments. Hence, while the stock’s valuation has not materially changed vs other N.A. software/cloud companies, a multiple expansion could likely occur over time.”
“The surge in GenAI awareness in the past 2 years have led to increased scrutiny and attention towards software companies as they have become central to the development and deployment of AI technologies. As AI advances and GenAI specifically is integrated into various industries, software companies which can harness AI’s capabilities will attract more attention from investors for their role in shaping the evolution. TRI has been a company at the forefront of technological innovation for a while and is developing GenAI capabilities and solutions to meet the growing needs of their customers. In this report, we aim to determine how TRI is valued within its direct comparable group and to other North American software/cloud companies. We do this by using the Rule of X as introduced by our colleague, Patrick Colville’s (US Software Analyst) recent industry report. Our results in this analysis show that the market has not paid an additional premium for information service providers capitalizing on GenAI thus far.”
He argued data will “continue to be the lifeblood of GenAI,” which will benefit Toronto-based Thomson Reuters.
“Current investors who do not own the stock risk that if access to data becomes more prominent in selling software within TRI’s industry as AI deployment continues, the market can start to put a greater premium on stocks that can harness that data, leading to further upside for TRI,” said Mr. Yaghi. “GenAI will likely bring new competitors into the market; however, the trusted relationships that TRI has with its clients, combined with its own AI development platform and strong balance sheet should maintain TRI’s relevance and potentially expand its TAM.”
With his model also concluding “investors value topline growth over profitability,” Mr. Yaghi raised his target for Thomson Reuters shares to US$182 from US$164. The average on the Street is US$164.61, according to LSEG data.
“We believe TRI’s management has gained significant credibility given the complete overhaul of the business that they have undertook in the last few years,” he concluded. “With the company’s major segments now delivering mid to high single digit revenue growth we expect the shares to continue to gain momentum. In addition, the expected monetization of the company’s LSEG holdings should add upside to our target price in due course.”
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While he expects Alimentation Couche-Tard Inc. (ATD-T) to see the benefits of higher fuel margins when it reports first-quarter fiscal 2025 financial results on Sept. 4, National Bank Financial analyst Vishal Shreedhar predicts those gains will be offset by a “tepid” consumer trends.
He’s currently forecasting earnings per share for the quarter of 86 cents, exceeding the consensus estimate on the Street by 2 cents but unchanged from the same period in fiscal 2024.
“Our projection of flat year-over-year EPS reflects higher year-over-year fuel margin in all segments, positive merchandise same-store sales growth in the U.S., acquisition contribution and share repurchases, offset by negative merchandise sssg in Canada and Europe and other, higher D&A and higher interest,” he said.
While he’s predicting sales gains south of the border, Mr. Shreedhar sees negative results in both Canada and Europe, pointing to “continued near-term consumer pressure, partly offset by growth in beverage and food.”
“Our review of peer management commentary points to a continuation of themes from prior quarters, including pressured merchandise trends (soft discretionary spending and trade-down, etc.),” he added.
“We expect the return of market volatility to benefit ATD’s fuel margin (due to ATD’s partnership with Musket and its fuel trading divisions, etc.). OPIS data suggests U.S. fuel margin averaged 43.6 c/g [cents per gallon] during Q1/F25 (NBF projects 50.6 c/g for ATD, higher by 1 per cent year-over-year). We model a U.S. fuel margin delta of +7.0 c/g vs. OPIS based on our proprietary calculations. Kalibrate data suggests fuel margin averaged Canadian 9.9 cpl [cents per lite] during Q1/F25 (NBF projects Canadian 13.4 cpl for ATD). We model a Canada fuel margin delta of Canadian +3.5 cpl based on our proprietary calculations.”
Hoping for further details on its blockbuster deal for the parent of rival 7-Eleven, Mr. Shreedhar raised his target for Couche-Tard shares to $86 from $84, maintaining a “sector perform” recommendation. The average target on the Street is $92.92, according to LSEG data.
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“If ATD achieves its F2028 targets, significant upside remains,” he concluded. “That said, our estimates fall short of ATD’s goals. Recent lacklustre merchandising trends call into question ATD’s aggressive plans under its ‘10 For The Win’ strategy. While ATD has executed well against prior growth ambitions, the current plan calls for growth largely outside traditional vectors (such as fuel margin and M&A). Perhaps recent tepid merchandising performance has motivated ATD to accelerate acquisitions. We await more clarity on ATD’s organic growth trajectory, and acquisition rationale.
“Given valuation which is not inexpensive (vs. history) and ongoing macroeconomic uncertainty, our preference is to monitor execution from a neutral vantage point.”
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Following Monday’s announcement of its intention to increase its planned capital program by approximately $20-million through 2025, Hammond Power Solutions Inc. (HPS.A-T) continues to possess “the financial headroom to continue growing as it sees fit,” according to National Bank Financial analyst Rupert Merer.
“The expansion should be focused in its Monterrey manufacturing capacity, specifically for large custom power transformers,” he said. “These transformers are typically in short supply and are widely used in C&I applications, which should lead to shorter wait times for customers (and better margins for HPS). Given this segment of Hammond’s business was capacity constrained, the added capacity should reduce bottlenecks, and we believe it could add up to $100-million in additional revenue potential (versus its current $900-million pro-forma run rate for 2025E) at a 1-2 timesz build/EBITDA multiple. HPS cites continuing market tailwinds as the main driver of the additional capital investment.
“[The] announcement comes in the midst of the biggest capital plan to date. With Q2 reporting, HPS highlighted that it had invested $28-million to date of a $60-million capex plan from 2023 to 2025E. The additional $20-million just announced follows an $8-million increment with Q1 results and could be a sign of things to come. With highly accretive organic growth opportunities available, we believe that HPS is less likely to acquire production capacity in transformer.”
While Mr. Merer maintained his forecast for the remainder of fiscal 2024, he raised his revenue expectation for 2025 to $852-million from $846-million, leading to adjusted EBITDA of $134.9-million (up from $130.4-million, driven by he calls “strong market demand, evidenced by the additional growth investment.”
“With the additional $20-million of capacity expansion, we are also increasing our revenue estimates for 2026, by which time we believe the company should have a revenue capacity of approximately $1-billion (was $900-million),” he said. “We forecast demand to remain strong into 2026, with a revenue forecast of $959-million (was $892-million), but with more conservative gross margin expectations of 29.5 per cent compared to 31.8 per cent in 2025, driven by an assumption of an industry-wide increase in transformer manufacturing capacity.”
“HPS is in a good position to grow incrementally or in chunks, with $48-million in cash as of Q2, only $13-million in debt, over $50-million per year in FCF (net of growth investments) and a small dividend ($13-million per year). We believe it would be comfortable at $175-200-million in debt (1.5 times EBITDA) which should support organic growth and potential for M&A to expand its power quality product lines.”
Reiterating an “outperform” recommendation for the Guelph, Ont.-based company’s shares, Mr. Merer increased his target to $170 from $164. The current average is $163.
“With more growth coming for HPS, we are raising our target ... which is based on a 15 times EV/EBITDA multiple on 2025E and a long-term DCF with a 9.5-per-cent discount rate,” he said. “HPS currently trades at 9.3 times 2025 estimates vs. more direct transformer peers at 20.8 times and broader electrification peers at 14 times As HPS continues to execute in this high-growth environment and gain exposure, we believe that it should close the valuation gap with peers.”
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Canaccord Genuity analyst Robert Young says Pollard Banknote Ltd.’s (PBL-T) iLottery win in Kansas renews his “confidence” in its opportunity for gains south of the border.
After the bell on Monday, the Winnipeg-based company announced the U.S. state has been chosen its proprietary platform to power its new iLottery offering and expects to generate revenue from it in 2025.
“This positive development, quick on the heels of the disappointing exclusion from the Michigan iLottery RFP [request for proposal], renews our confidence in Pollard’s positioning for North American iLottery opportunities,” he said. “Once deployed, barriers to participate on RFPs that demand a North American reference customer are reduced or removed. We also highlight the decision to forgo an RFP process is strong evidence of the strength of Pollard’s lottery org relationships but also the quality and scope of its Catalyst iLottery platform.”
Citing its “ability to bid competitively for North American iLottery opportunities,” Mr. Young raised his target for Pollard shares to $36 from $32, keeping a “buy” recommendation. The average on the Street is $34.75.
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In other analyst actions:
* Canaccord Genuity’s Yuri Zoreda trimmed her Green Impact Partners Inc. (GIP-X) to $9 from $9.50 with a “speculative buy” rating. The average is $8.94.
“The legacy Water and Solids Treatment and Recycling business performed better than expected [in the second quarter] and although GIP’s first RNG project, GreenGas Colorado, is no longer expected to deliver positive EBITDA in 2024, both of its sites are now operating and forward guidance remains unchanged,” she said. “With an improved balance sheet with $15-million in net debt and $21-million in available liquidity following the close of the sale of Colorado’s Investment Tax Credits (ITCs) in the quarter, we continue to see material upside potential in GIP’s shares as management continues to work toward achieving financial close of its flagship project, Future Energy Park (FEP). GIP trades at 9.2 times EV/EBITDA (2025E) on numbers that do not include contributions from FEP and Iowa RNG vs. peers trading at 8.4 times implying, investors are ascribing little value to the more than $1-billion FEP project and other projects in GIP’s development pipeline.”
* H.C. Wainwright’s Scott Buck, who is currently the lone analyst covering Vancouver’s Versus Systems Inc. (VS-Q), cut his target to US$1.50 from US$2 with a “neutral” recommendation (unchanged).