Inside the Market’s roundup of some of today’s key analyst actions
TD Securities analyst Vince Valentini upgraded BCE Inc. (BCE-T) to “buy” from “hold”, citing recent weakness in the stock as well as expectations for lower bond yields. His 12-month price target went up C$1 to C$57.
He expects BCE, which is already sporting a juicy dividend yield, to announce another bump in its payout to shareholders alongside fourth quarter results on Feb. 8.
“Some investors fear that [dividend] growth could decelerate to 3% from 5%, but even at 3%, the prospective yield would be 7.4% at the current share price (7.6% if they bump 5%),” Mr. Valentini said in a note to clients.
While BCE pays out considerable cash to shareholders, he thinks the telecom has the financial resources to do it.
“On our free cash flow definition, the payout ratio will be over 100% in 2024 with either a 3% or 5% dividend increase, but the amount of borrowing required to fund the delta is trivial, in our view. We estimate $242-million in debt to fund 5% dividend growth and $171-million to fund 3%, which are both rounding errors on total debt/preferred shares of about $38 billion,” he said.
TD is optimistic about investment in the Canadian telecom sector in general, partly because dividend payouts are relatively attractive to bond yields.
Mr. Valentini cited several other reasons to feel upbeat about the industry as well:
“1. Wireless subscriber growth remains very strong, so that revenue growth should be solid in FY2024, even with recent price competition causing slightly negative ARPU [Average Revenue Per User] growth.
2. Partially owing to this price competition, we see very little risk of incremental regulatory disruption from either the government or the CRTC in 2024. In fact, we believe investor sentiment on this front has become significantly more positive recently, especially in the wake of a favourable spectrum auction and a much better CRTC decision on FTTH [Fiber-To-The-Home] wholesale access rates than some analysts had feared.
3. Now that we have a few quarters of knowledge about industry competitive dynamics following the Rogers-Shaw-Quebecor transactions, we sense that investor fears about worst-case scenarios are subsiding. There is no doubt that price competition is fierce in certain segments of the telecom market (notably bundled offers in condos and standalone wireless pricing in the discount/flanker segment – but consolidated results in Q2/23 and Q3/23 (plus expectations for the upcoming Q4/23 prints) showed that the industry has largely been able to absorb this competition without material disruption to key financial results.
“To be clear, we have some concerns (albeit not our base-case scenario) that price wars could escalate in H2/24, but even in this downside scenario, we believe BCE will still rally in the next few months on the yield and regulatory momentum,” the analyst added.
The average analyst price target on BCE is C$57.21, according to Refinitiv data.
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Goldman Sachs downgraded Magna International Inc. (MGA-N, MG-T) to “neutral” from “buy” and lowered its price target to US$58 from US$73.
Goldman says the auto parts company will see slower content per vehicle growth compared with peers. It also warned that the ramp-up of electric vehicles from auto giants such as General Motors and Ford will be sluggish, which will dampen demand for Magna products.
The average analyst target is US$66.80, according to Zacks Investment Research
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RBC analyst Piral Dadhania cut his price target on Nike Inc. (NKE-N) to US$120 from US$127, believing the company is in store for some near-term sales weakness as it conducts a refresh of its athletic wear products. He still rates the stock “outperform.”
He notes that Nike’s implied guidance of the first half of this calendar year points to a less strong product demand environment than RBC initially expected, particularly for China. With product range transition expected in 2024, better revenue growth prospects may have to wait until the mid term.
“We believe Nike current brand/product cycle is transitioning (having lasted 5 years) and confirmed by management’s signalling of product range rotation (last done in 2017-2018),” Mr. Dadhania said in a note to clients.
“We acknowledge competition is heating up, however, we also view Nike as strong in life cycle management and innovation/newness - if it can deliver a similarly successful transition to 2017 (which will take few quarters from here), then we believe the setup is arguably more attractive into fiscal 2025. Gross margin recovery thesis remains in-tact in the meantime,” he said.
The average analyst target is US$125.58.
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D.A. Davidson has initiated coverage on Nvidia Corp (NVDA-Q) with a “neutral” rating and US$410 target price, significantly lower than the current trading price.
The chip maker has been a go-to name for investors seeking exposure to the artificial intelligence theme, with the stock rallying about 240 per cent in 2023. But analysts at D.A. Davidson believe the hype around AI is approaching the “trough of disillusionment.”
“While we continue to believe that generative AI is the most important transformative technology since the Internet, we do not expect the same level of investment we saw in 2023 continuing beyond 2024,” analyst Gil Luria said in a note.
The average analyst target is US$653.
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Despite progress on cutting costs, VerticalScope Holdings Inc. (FORA-T) isn’t on the radar of many investors, with shares drifting down 15 per cent on light volumes since reporting third-quarter results in early November, said TD Cowen analyst Vince Valentini.
He now thinks that more material catalysts will be required to improve valuations for FORA shares.
“These catalysts could be a snap back acceleration in the advertising market and/or developments with privatization discussions, but we do not believe that either is likely to occur in the near term,” he said.
Mr. Valentini reiterated a “hold” rating on VerticalScope shares and cut his price target by C$1 to C$6.50.
“We believe that this market environment is simply not favourable for all small cap stocks, particularly those that are not included in major indices like FORA,” the analyst added. “Those that are included in small cap indices can benefit when bond yields come down ... but single name stocks that are not included in indices have to persuade investors for their attention.”
“We remain hopeful that VerticalScope could be an early beneficiary of improving macro conditions, but we maintain our hold rating until we see tangible evidence of the improvement,” he said.
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In other analyst actions:
Crescent Energy Co (CRGY-N): Mizuho cuts target price to US$14 from US$18 and downgrades rating to “neutral” from “buy”
Ovintiv Inc (OVV-N): Mizuho cuts target price to US$59 from US$67
American Express Co (AXP-N): Stephens raises target price to US$193 from US$148 and upgrades rating to “equal weight” from “underweight”. Evercore ISI raises target price to US$200 from US$155
Sherwin-Williams Co (SHW-N): Baird cuts to neutral rating; raises price target to US$300 from US$270
Blackstone Inc (BX-N): Goldman Sachs cuts to “neutral” from “buy”
Charles Schwab Corp (SCHW-N): Goldman Sachs cuts to “neutral” from “buy”
CME Group Inc (CME-Q): Goldman Sachs cuts to “sell” from “neutral”
Darcy Keith