Inside the Market’s roundup of some of today’s key analyst actions
With the Bank of Canada “finally” beginning its long-awaited rate-cutting cycle, Desjardins Securities analyst Doug Young thinks investor sentiment could be shifting toward domestics banks as third-quarter earnings season in the sector approaches.
“For the quarter, we expect steady results in Canadian P&C banking, a strong showing in capital markets and continued pressure on U.S. P&C banking trends,” he said. “The last being the wild card! And the focus will be on credit and whether trends have moved from ‘normalizing’ to ‘deteriorating’ and when impaired PCLs might peak. We continue to favour the banks over insurers.”
In a research report released Tuesday before the bell, Mr. Young said he’s forecasting a 5-per-cent year-over-year increase in cash earnings per share for the Big 6 on average, with an 11-per-cent increase in adjusted pre-tax, pre-provision (PTPP) earnings.
“The delta between the two relates to higher PCLs and taxes,” he said. “At the top of house, we expect on average modestly higher all-bank NIMs ex trading, steady loan growth (mostly in Canadian banking) and improved adjusted efficiency ratios (positive operating leverage). By segment, we expect strong performance from Canadian P&C banking, capital markets and wealth management, partially offset by pressures in US P&C banking.
“Credit will be the topic du jour. We expect a PCL rate of 42 basis points on average for the Big 6. CRE and Canadian consumer trends will be the key focus. We are in the camp anticipating a further normalization of PCLs, not a massive deterioration, and we expect PCL rates on average to plateau in FY25 vs FY24. We will be looking for any clues to support or refute our views.”
Reaffirming Royal Bank of Canada (RY-T) as his top pick in the sector, Mr. Young upgraded his rating Canadian Imperial Bank of Commerce (CM-T) to “buy” from “hold” and moved it to No. 2 on his pecking order.
“We like its ‘Steady Eddie’ performance of late, which we expect to continue, the U.S. office credit bump is mostly in the rearview mirror and we view valuation (and upside to our target price) as attractive,” he said.
His target for CIBC shares rose to $77 from $71. The average on the Street is $72.68, according to LSEG data.
In order of preference, Mr. Young’s current ratings and targets are:
- Royal Bank of Canada (RY-T) with a “buy” rating and $163 target, up from $156. The average is $152.45.
- Canadian Imperial Bank of Commerce (CM-T) with a “buy” rating and $77 target, up from $71. Average: $72.68.
- Canadian Western Bank (CWB-T) with a “buy” rating and $53 target, up from $52. Average: $46.07.
- Toronto-Dominion Bank (TD-T) with a “buy” rating and $91 target (unchanged). Average: $85.47.
- Bank of Montreal (BMO-T) with a “hold” rating and $125 target, down from $129. Average: $128.46.
- National Bank of Canada (NA-T) with a “hold” rating and $118 target, up from $116. Average: $119.77.
- Bank of Nova Scotia (BNS-T) with a “hold” rating and $68 target (unchanged). Average: $67.67.
- Laurentian Bank of Canada (LB-T) with a “sell” rating and $26 target, up from $25. Average: $26.73.
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Seeing competitive pressures “stifling [its] near to medium-term prospects,” Canaccord Genuity’s Aravinda Galappatthige downgraded Telus Corp. (T-T) to “hold” from “buy” on Tuesday.
The change came in response to Friday’s quarterly earnings release, which the analyst deemed a “net negative,” citing “notably soft wireless metrics (ARPU down 3.4 per cent, wireless service growth only 0.9 per cent) and a lowered FCF guide ($2.3B to $2.1B), although profitability was in line assisted by strong margins.”
“With respect to 2024 guidance, the FCF reduction was owing to downward revisions to TELUS International’s guidance,” he added. “TELUS also indicated that for TTECH revenue (2-4-per-cent outlook) and EBITDA growth (5.5-7.5-per-cent outlook), the lower end of the range now looks more likely, due to competitive conditions in the market. However, we note that our estimates already reflected that (we have 5.7-per-cent TTECH EBITDA growth)”
Seeing wireless trends as a concern and price pressures increasingly evident in its wireline business, Mr. Galappatthige cut his target to $21.50 from $23. The average on the Street is $24.65.
“We see some near-term pressure for the stock due to TELUS’ sector high exposure to wireless and competitive conditions in wireline in the West,” he added. “In terms of FCF yield (CG definition of FCF), it trades at 6 per cent 2025 estimates, which in comparison to peers is not overly compelling.”
Elsewhere, others making changes include:
* RBC’s Drew McReynolds to $25 from $26 with an “outperform” rating.
“Q2/24 results for TTech were in line with our expectations with management indicating that TTech operating revenue and adjusted EBITDA growth is trending to the lower end of the 2024 guidance ranges. Factoring in a lower adjusted EBITDA trajectory for TELUS Digital, our price target decrease,” said Mr. McReynolds.
* Scotia’s Maher Yaghi to $24 from $24.25 with a “sector perform” rating.
“In the quarter right before Rogers acquired Shaw, TELUS was outgrowing the industry by a wide margin in both wireless and wireline service revenues,” said Mr. Yaghi. “Fast-forward a year and the company is now trailing peers in wireless, and wireline growth is decelerating rather quickly. We can spend time and dissect and adjust peers’ wireless ARPUs all we want; service revenue growth remains for us the best descriptor of market leadership in a competitive market. TELUS Health and Ag are starting to show improving trends; however, for us to become more constructive on the name we need to see a change in the direction of service revenue growth, especially in wireline. We have been pointing to the deceleration in wireline service revenue growth since late last year and so far we have not seen tangible evidence that the pricing dynamic affecting this segment is quickly resolving. We have slightly lowered our target as a result of a reduction in forecasted FCFs.”
* CIBC’s Stephanie Price to $24 from $25 with an “outperformer” rating.
“TELUS had a solid Q2, with strong net adds and adj. EBITDA margins up 170 basis points year-over-year as it continues to focus on cost efficiencies,” she said. “However, growth in the base business was overshadowed by a 25-per-cent adj. EBITDA guidance reduction at TELUS Digital (TIXT) amid pricing pressures, leading TELUS to reduce its consolidated 2024 adj. EBITDA guide to low-single-digit growth. Management was clear that it does not expect to privatize TIXT amid industry headwinds, but we would not be surprised to see TELUS assessing options for the business. TELUS’s base business remains strong as the company focuses on AMPU and bundling in a competitive market.”
* TD Cowen’s Vince Valentini to $25 from $26 with a “buy” rating.
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In a separate note, Mr. Galappatthige became the latest analyst to downgrade Telus International Inc. (TIXT-T) following last week’s announcement of a reduction to its earnings forecast and a leadership shakeup.
“TELUS International’s (renamed TELUS Digital) Q2/24 report was reminiscent of last summer when guidance was cut sharply,” he said. “This time it comes with the departure of the CEO. Following a light Q2 and the anticipated rebound in H2 seemingly unlikely, the company sharply reduced guidance with revenue growth revised down to a range of negative 1.6 per cent to negative 3.6 per cent and EBITDA lowered by a steeper 25 per cent. The EPS guide drops from $0.93–$0.98 to $0.39–$0.44. The incoming ‘acting’ CEO is Jason Macdonnell, a tenured executive at TELUS Corp. (previously SVP, Customer Solutions Excellence).”
His target slid to US$7.50 from US$13.50. The average is US$6.76.
Elsewhere, TD Cowen’s Daniel Chan cut Telus International to “hold” from “buy” from US$3.75, down from US$10.
Target changes on Tuesday include: CIBC’s Stephanie Price to US$5 from US$18.50 with a “neutral” rating and Scotia’s Maher Yaghi to US$5 from US$10 with a “sector perform” rating.
Following a group of downgrades late last week, two other analysts lowered their recommendations on Monday:
* RBC’s Daniel Perlin to “sector perform” from “outperform” with a US$5 from US$10.
“We are downgrading TIXT to Sector Perform from Outperform on the heels of a weak 2Q24 print and guidance reduction, both of which suggests a lack of visibility into the company’s customer base, persistent weak demand backdrop, and further pricing pressures, which are not likely to abate anytime soon,” said Mr. Perlin. Concurrently we are cutting estimates and reducing our price target.”
He added: “The speed of client deterioration speaks to lack of visibility. Although management has been calling out the decline in revenues from its third largest client (social media client) for several quarters, the decline in revenues outside of its top three clients was down DD y/y [double digits year-over-year] in 2Q24 & 1Q24 vs. being up LDD [low double digits] in FY23. We are more troubled by this broader-based decline vs. the risk of further deterioration of its 3rd largest client, which looks to be moderating on the top line, but now seeing additional price degradation, further pressuring margins.”
* BoA’s David Barden to “underperform” from “buy” with a US$4, down from US$11.
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While its second-quarter production results fell short of expectations, Haywood Securities analyst Pierre Vaillancourt upgraded Lundin Mining Corp. (LUN-T) to a “buy” recommendation from “hold” to reflect a stronger outlook for the second half of 2024.
“We are also encouraged with the BHP partnership and the potential for long term growth that could result from the development and synergies of Josemaria and Filo del Sol,” he added. “We recognize relative short-term weakness in the copper price may continue to weigh on the stock (down 7 per cent in the last month), and as a result, we are maintaining our $17.00 target price, however, the prospects for long term growth in a major district make LUN compelling for long term investors.”
On July 30, Lundin reported largely in-line quarterly results with adjusted earnings per share of 16 cents falling just a penny below the Street’s expectations and revenue and EBITDA rising 16 per cent and 27 per cent from the first quarter. However, production declined sequentially due in part to lower output from Candelaria and Caserones related to specific operational issues and seasonality.
The quarterly release came shortly after the announcement of an agreement with BHP to acquire Canadian developer Filo Corp for $4.5-billion. The companies will form a 50/50 joint venture to hold the Filo del Sol project and Lundin Mining’s Josemaria project.
“It’s a deal that Mr. Vaillancourt sees providing a “marginally positive” cash impact, but he thinks there’s “lots more to consider.”
“This transaction could trigger more changes within the company,” he said. “While LUN remains in good financial position to continue operating all assets, the divestiture of non-core European assets including Zinkgruvan (Sweden) and Neves-Corvo (Portugal) is a possibility as the centre of gravity for mining is established in South America. Cross border issues are also a focus as LUN and BHP work through the logistics of operating two mines in Argentina while shipping concentrate from an established port in Chile. LUN believes there is an opportunity to create a bi-national agreement, but it could take time. Water and power issues will also take prominence as the economic study takes shape.
“Vicuña is now the focus for the future of LUN. These strategic transactions will be key in assuring the development of Filo del Sol (FDS) and Josemaria and strengthen a strong foundation for LUN in South America. The proximity of the FDS and the Josemaria projects allows for the potential of infrastructure to be shared between the projects, with economies of scale and increased optionality for staged expansions, as well as the incorporation of future exploration as the district expands. One important consideration is to access the high grade from FDS in a timely manner.”
Mr. Vaillancourt’s $17 target falls below the average on the Street of $17.76.
“Lundin Mining offers diversity of metals exposure, including gold, and production from six operations in established jurisdictions,” he said. “The recent addition of a majority interest in the Caserones mine, along with growth at Chapada will be key factors in the company’s production profile, providing diversification from the Candelaria mine..
“Josemaria and Filo del Sol are key to the future. The Josemaria project provides long term upside which could increase copper production by 130kt and gold production by 225 koz, on a 100-per-cent basis. The Filo del Sol project is expected to produce annual copper and gold production of 66kt and 168koz (100 per cent), respectively. The updated economic study in 1H25 will likely look much different, but the projects will be a major contributor to LUN copper and gold production profile.”
Elsewhere, CIBC’s Bryce Adams raised his target to $17 from $16 with a “neutral” recommendation.
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When Metro Inc. (MRU-T) reports its third-quarter financial results on Aug. 14, National Bank Financial analyst Vishal Shreedhar predicts its supply chain transition will be “on track.”
“We expect Metro to resume gaining food store sales market share in Q3/ F24, following a slight underperformance versus industry sales last quarter,” he said. “Our expectation is based on, among other factors, a strong discount format, slight benefit from a public boycott of Loblaws stores as well as higher e-commerce sales.
“We note the following trends in PJC front-end: (i) Government data indicate higher influenza cases & symptoms year-over-year, (ii) We expect higher beauty sales reflecting solid consumer demand. We expect growth in Rx, driven by professional services and specialty medication. ... Our review of peer commentary points to the following trends, among others: (i) a continuation of customers looking for value, (ii) expectation of more tradespend by CPG companies, and (iii) moderating inflation year-over-year. ...We expect a sequential moderation in supply chain transition costs in Q3/F24.”
Mr. Shreedhar is currently projection earnings per share of $1.35 for the quarter, matching the consensus on the Street as well as the result from the same period a year ago. He said that flat year-over-year performance reflects “slight gross margin expansion, share repurchases, resilient discount format performance and strength at PJC (aided by solid health & beauty, prescription and OTC), offset by SG&A deleveraging (duplicate transition costs, higher e-commerce fees, amongst other factors), higher D&A and higher interest expense.”
“We expect Metro to resume gaining food store sales market share in Q3/F24, following a slight underperformance versus industry sales last quarter,” he said in a research note. “Our expectation is based on, among other factors, a strong discount format (approximately 40 per cent of Metro’s supermarket count, versus Empire at 10 per cent and Loblaw at 50 per cent), slight benefit from a public boycott of Loblaws stores as well as higher e-commerce sales (largely driven by third-party partnerships). We forecast grocery sssg of 1.0 per cent versus 9.4 per cent last year. We expect higher traffic and lower basket (with a steeper decline in conventional).”
Maintaining his “sector perform” recommendation for Metro shares, Mr. Shreedhar raised his target to $85 from $82 after updating his valuation. The average on the Street is $79.63.
“We believe that Metro is a solid company which has delivered superior long-term performance supported by strong execution and strong capital allocation; however, these favourable attributes are reflected in the valuation, in our view,” he said.
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Following “impressive” second-quarter results, National Bank Financial analyst Jaeme Gloyn saw the commentary from Definity Financial Corp.’s (DFY-T) as “encouraging as management expressed confidence in the outlook as the combination of continued firm markets and expense improvements drive the ROE expansion story.”
On Aug. 1, the Toronto-based property and casualty insurer reported operating earnings per share of 94 cents, blowing past the Street’s expectation by 49 per cent (63 cents) as well as Mr. Gloyn’s 65-cent estimate. The result was driven by a “huge” underwriting beat as well as better-than-anticipated distribution and net investment income results.
“Lower CAT losses in the quarter played a large part in the combined ratio beat in Q2; we don’t expect a repeat of this in Q3,” he said. “Management informed us that July was an active month that puts year-to-date catastrophes on pace for their expected level through 2024. Momentum is set to continue in personal auto as the market remains firm (double-digit increases in written rates) and DFY returns to unit growth. Claims inflation has stabilized at the mid-single-digits level as well. Management reiterated the combined ratio target of mid to high-90s but expressed confidence in achieving the low end.
“Profitability improvements appear sustainable as DFY is making progress toward bringing Sonnet to breakeven, expense ratio improvements (another 100 basis points) and claims transformation. Additionally, management highlighted that continued growth of the broker platform could drive further expense ratio improvements beyond the 50 bps year-over-year structural benefit delivered in Q2.”
After increasing his full-year operating EPS projections for 2024 to $2.69 and 2025 to $3.13 (from $2.67 and $3, respectively) to reflect “strong momentum across all business lines,” Mr. Gloyn increased his target for Definity shares to $62 from $60, reiterating an “outperform” recommendation. The average on the Street is $53.18.
Elsewhere, CIBC’s Paul Holden downgraded Definity to “neutral” from “outperformer” after a “great run” while raising his target to $51 from $47.
“DFY posted very strong Q2 results and our 2025 EPS estimate increases almost 3 per cent, mostly on higher premium growth,” said Mr. Holden. “We have increased our price target from $47 to $51, on higher EPS and a higher P/E multiple (16 times versus 15 times prior). The stock is trading at nearly 16 times P/E, around the top end of where it has traded over the last year; we expect weaker Q3 results on significantly higher CAT losses and the implied return to our revised price target is only 2 per cent.”
Analysts making target changes include:
* Raymond James’ Stephen Boland to $55 from $52.50 with an “outperform” rating.
“Our view has not changed from last quarter,” said Mr. Boland. “First, the P&C insurance environment remains very positive for the insurers. There is firm market pricing across most business lines and that is expected to remain for 2024. The second factor relates to the elevated interest rate environment. Net investment income for DFY increased 17 per cent year-over-year, driven by the positive impact within the fixed income portfolio. And lastly, with the change in capital structure, DFY has over $1.3 billion in excess capital and leverage capacity to make acquisitions. While the timing is difficult to predict, we would expect DFY to be active in acquiring further brokerages and possibly other insurers (more difficult to find).”
* Desjardins Securities’ Doug Young to $52 from $47 with a “hold” rating.
“Relative to our estimates and on an underwriting income basis, all divisions beat. Overall, it was a good and generally clean quarter; however, there are no changes to our views,” said Mr. Young.
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Seeing it “ripe for market share gains,” Raymond James analyst Michael Glen initiated coverage of Colabor Group Inc. (GCL-T), a Quebec-based distributor and wholesaler of food and related products, with an “outperform” recommendation on Tuesday.
“The company’s near-term strategy is focused on gaining market share in Quebec, which is currently dominated by two larger international players, Sysco and Gordon Food Service, along with several smaller distributors,” he said.
“Colabor’s management team brings a very strong background with foodservice and distribution. In particular, President and CEO Louis Frenette joined the company in 2019 and brings over 35 years of direct industry experience. We believe there is a high probability this team will be successful in pursuing its near/mid-term goals of increasing market share and penetration in Quebec.”
Pointing to several primary growth drivers, including a focus on the growth of its Distribution segment, private label upside and accelerating free cash, Mr. Glen set a target of $1.80 per share. The average is $2.
“We do expect Colabor’s growth strategy to take time. The company operates in a competitive industry, and we do not want to see the company use price as the primary means to gain market share. Such a strategy can be very risky and lead to suboptimal returns. As well, as recently disclosed, we would note that there is a large contract that comes for renewal before the end of 2024, which represents a piece of business Colabor has had for a number of years. We will monitor progress on this closely and would expect a competitive bid process,” he concluded.
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In other analyst actions:
* RBC’s Wayne Lam downgraded Endeavour Mining PLC (EDV-T) to “sector perform” from “outperform” and cut his target to $40 from $48. The average is $41.99.
“We downgrade EDV shares to Sector Perform (from Outperform) given our cautious view around rising operational and geopolitical risk, which comes amidst significant management changes this year,” he said. “While we remain constructive longer term, we note elevated near-term risk given technical complexity ramping up two new projects, with increasing investor aversion to West Africa given volatility of economic stability agreements. We lower our price target ... on more conservative outlook and modestly lower target multiples reflecting increased risk.”
* RBC’s Maurice Choy bumped his Atco Ltd. (ACO.X-T) target to $47 from $46 with a “sector perform” rating. Others making changes include: National Bank’s Patrick Kenny to $40 from $39 with a “sector perform” rating and CIBC’s Mark Jarvi to $51 from $49 with an “outperformer” rating. The average is $43.08.
“In addition to another solid quarterly result from ATCO that was ahead of our estimate and consensus, we favourably view the series of events and transactions that collectively served to improve ATCO’s earnings profile moving forward,” said Mr. Choy. “As ATCO investors will continue to benefit from having the low-risk regulated businesses of Canadian Utilities underpin ATCO’s cash flow and earnings (now 70 per cent of the total, down from roughly 90 per cent in the past), these investors will also benefit from the relatively strong growth ahead at S&L and the additions of new businesses at ATCO (including NRB and ATCOenergy in Q3/24).”
* CIBC’s Krista Friesen lowered her Badger Infrastructure Solutions Ltd. (BDGI-T) target to $50, below the $50.06 average, from $52 with an “outperformer” rating. Other changes include: Stifel’s Ian Gillies target to $55.50 from $56.50 with a “buy” rating and Raymond James’ Frederic Bastien to $50 from $54 with an “outperform” rating.
“Our thesis remains unchanged following the update as we believe infrastructure spending tailwinds remain intact and the company will be able to deliver a revenue CAGR of 13 per cent and EPS CAGR of 35 per cent from 2024-2027,” said Mr. Gillies. “We find the current 2025 valuation very inexpensive at 5.3 times EV/EBITDA and 11.5 times P/E, while our NAV suggests $61.55 per share. With that said, we believe confirmation of earnings momentum needs to realized before the stock will move up meaningfully.”
* TD Cowen’s Cherilyn Radbourne increased her Brookfield Corp. (BN-N, BN-T) target to US$62 from US$61, exceeding the US$54.07 average, with a “buy” rating.
* CIBC’s Mark Jarvi raised his target for Canadian Utilities Ltd. (CU-T) to $35 from $34 with a “neutral” rating, while National Bank’s Patrick Kenny moved his target to $34 from $33 with a “sector perform” rating. The average is $34.70.
* National Bank’s bumped his Emera Inc. (EMA-T) target to $49 from $48 with a “sector perform” rating. The average is $49.22.
* TD Cowen’s Craig Hutchison cut his Ero Copper Corp. (ERO-T) target by $1 to $30 with a “hold” rating. The average is $36.55.
* JP Morgan’s Ryan Brinkman cut his Magna International Inc. (MGA-N, MG-T) target to US$55 from US$63 with an “overweight” rating. Other changes include: Raymond James’ Michael Glen to US$53 from US$57 with a “market perform” rating, Scotia’s Jonathan Goldman to US$50 from US$52 with a “sector perform” rating, CIBC’s Krista Friesen to US$47 from US$50 with a “neutral” rating and TD Cowen’s Brian Morrison to US$53 from US$57 with a “buy” rating. The average is US$52.96.
* Truist Securities’ Terry Tillman cut his Shopify Inc. (SHOP-N, SHOP-T) target to US$55 from US$65 with a “hold” rating. The average is US$75.47.
“Based on Truist Card Data, we see the potential for more subdued GMV [gross merchandise volume] in 2Q24 vs. solid upside flowing through to broad financial upside the past couple of qtrs,” he said. “The analysis implies est. $65.7-billion in 2Q24 GMV, reflecting 1-per-cent beat to our est. of $64.9-billion. & in line/slight miss to $65.8-billion consensus. Merchant solutions rev, non-GAAP op. profit & CF upside could be much more modest than prior qtrs. While risk/reward more interesting at 6 times ‘25E sales/41 times ‘25E FCF, maintain Hold rating on valuation and macro/consumer spending concerns. No change to ests. but PT lower to $55 from $65 post tech volatility/lower sector valuations.”
* Desjardins Securities’ Chris MacCulloch cut his Tourmaline Oil Corp. (TOU-T) target to $72 from $74 with a “buy” rating. The average is $77.56.
“We are trimming our target on Tourmaline ... reflecting modest downward estimate revisions following its release of 2Q24 financial results last week,” he said. “Despite the residual weakness in prompt natural gas prices and broader market turmoil, we believe the recent sell-off has created an attractive opportunity to build exposure to what we continue to view as North America’s leading natural gas producer. We highlight the stock as one of our top picks in the Desjardins E&P coverage universe.”
* Mr. MacCulloch also lowered his Vermilion Energy Inc. (VET-T) target to $20 from $21 with a “buy” rating. The average is $20.98.
“We have trimmed our target on Vermilion .. following its release of disappointing 2Q24 financial results last week, which triggered a sell-off coinciding with the turmoil impacting global equity markets. While we recognize the structural challenges associated with the disparate asset base, we believe the upcoming achievement of several important development milestones should help narrow the valuation discount vs peers when combined with a continued dose of aggressive share buybacks,” he said.