Inside the Market’s roundup of some of today’s key analyst actions
Two more equity analysts on the Street downgraded Bank of Montreal (BMO-T) in response to the release of its third-quarter financial results, which sent its shares tumbling 6.5 per cent on Tuesday.
Scotia’s Meny Grauman sees “a constructive path forward” for BMO following three consecutive earnings misses, but he cautioned “timing is uncertain.” That him to lower his recommendation to “sector perform” from “sector outperform” previously.
“A downgrade now, especially with the stock down [6.5 per cent] on earnings day, may seem backward looking, but while we can still see a bullish path forward here, what has changed is our confidence in its ability to emerge over the coming few quarters,” he said in a research note.
“Whether or not BMO ends up being a negative outlier this credit cycle, Street EPS estimates for both this year and next year need to come down (once again) to reflect elevated impaired PCL guidance that even Management is finding difficult to forecast. On top of that is continued pressure on the multiple. BMO shares came into earnings day trading at a 7-per-cent discount to peers based on consensus F2025 EPS, but that is on EPS estimates that probably need to come down by about 5 per cent from here. The silver lining is the bank’s strong PTPP performance could get an extra boost next year as rates cuts stimulate demand for credit in the US, but none of that is likely to move the stock materially higher until we see evidence of a credit inflection. The problem is that could take us well into next year, leaving better near-term upside at peers.”
Expecting the Scotia shares to remain “under pressure until the market can begin to see a tangible turn in its credit performance which Management only expects to come later next year,” Mr. Grauman lowered his target to $112 target from $123. The average target on the Street is currently $122.06, according to LSEG data.
“Our 2024 core cash EPS [estimate] falls by 2 per cent to $10.33 while our 2025 core cash EPS decreases by 5 per cent to $11.13 mainly to reflect a worsening credit outlook going forward,” he explained. “We now value the shares at 9.2 times 2025 estimated EPS (implies an 8-per-cent discount to the group), and as a result our price target falls.”
Elsewhere, TD Cowen’s Mario Mendonca moved his recommendation to “hold” from a “buy” with a $114 target, down from $130.
“Results remain overshadowed by the abrupt absolute and relative increase in PCLs (relative to peers) and guidance,” he said. “Reflecting lack of visibility on credit and our revised view that corporate/commercial credit conditions will drive credit losses (less so unsecured Canadian consumer), we lowered our target P/E for BMO reflecting a 15-per-cent discount to the group multiple and downgrading the stock to HOLD.”
Their move follows similar revisions from analysts at Jefferies and CFRA Research during the trading day on Tuesday.
Others making target revisions include:
* National Bank’s Gabriel Dechaine to $127 from $131 with an “outperform” rating.
“For the second quarter in a row, BMO’s PCLs were higher than expected,” he said. “This quarter, 9 basis points of BMO’s 54 bps total loss rate was tied to two specific accounts. Management highlighted that 15 loans have generated 50 per cent of year-to-date wholesale impaired provisions. Looking ahead, it sounds like BMO is in ‘clean-up’ mode in dealing with troubled loans on its watch list. Having a firmer grasp on future resolutions, the bank has guided to higher (i.e., relative to Q3/24′s 54 bps loss rate) provisions over the next 1-3 quarters, trending to a normalized level of 35 bps in the back half of 2025. Improvement is expected from the transmission effect of rate cuts along with BMO having “cleaned up” its more troubled lending exposures. We are forecasting 57 bps of losses over the next two quarters, dropping to an average of 48 bps through Q2/25 to Q4/25.
“Otherwise, it was a good operating quarter.”
* Desjardins Securities’ Doug Young to $120 from $125 with a “hold” rating.
“While adjusted pre-tax, pre-provision (PTPP) earnings were in line with our estimate, higher PCLs resulted in a cash EPS miss vs our estimate and consensus for the second quarter in a row,” he said. “The uncertainty around credit will remain a near-term overhang. We reduced our estimates.”
* RBC’s Darko Mihelic to $106 from $118 with a “sector perform” rating.
“BMO’s Q3/24 losses appear elevated relative to peers (higher performing and impaired PCLs, elevated PCL guidance for the next 2 quarters, higher U.S. GIL ratio versus peers, etc),” said Mr. Mihelic. “We increase our credit loss assumptions across BMO’s businesses and model PCLs to peak in the next 2 quarters, higher than we assumed previously. Either BMO is way ahead of peers in this credit cycle or BMO’s loan book will endure higher losses — time will tell — and we believe investors can comfortably wait for signs of either before taking a serious position in the stock.”
* Canaccord Genuity’s Matthew Lee to $130 from $135 with a “buy” rating.
“PTPP was better than expected but this was entirely overshadowed by credit weakness, which appears to be degrading at a faster rate than management initially forecasted,” said Mr. Lee. “On the call, the firm noted that fifteen customers accounted for 50 per cent of impaired wholesale PCLs throughout the year, but we highlight the firm’s growing watchlist as an indication that US commercial challenges may continue. Longer term, BMO was optimistic that credit would return to its historical 36 basis points levels by the end of F25, which indicates that perhaps the discreet nature of commercial banking credit softness could be containable as macroeconomic factors (primarily rates) improve. We have raised our impaired PCL estimates in Q4 and F25, which results in a meaningful reduction for our earnings forecast. In addition, we have removed the 4-per-cent premium valuation previously ascribed to BMO as we expect investors will be hesitant to pay an above-industry multiple until there is more clarity on the shape of a PCL recovery. The net result is a reduction in our target price.”
* CIBC’s Paul Holden to $116 from $120 with a “neutral” rating.
“Elevated credit losses from commercial and corporate banking surprised to the negative again this quarter. Management also had to reset expectations higher for the next two quarters. Results outside of credit losses were generally in line to better than expected. However, in our view, it is credit that will drive the stock near-term. Our EPS estimates decline based on higher assumed PCLs and our price target drops ... We maintain our Neutral rating as most of the peer group is performing better on credit,” he said.
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RBC Dominion Securities analyst Darko Mihelic saw few surprises in the quarterly release from Bank of Nova Scotia (BNS-T), declaring “that’s good.”
“Q3/24 results were in line with our expectations and consensus,” he said. “Credit quality remained stable quarter-over-quarter, we like the larger than expected build of performing PCLs while impaired PCLs were below our estimate, and there were no notable signs of Canadian credit deterioration. We sense that BNS is working away at its longer-term plan and things still seem to be going smoothly.”
Scotia reported adjusted earnings per share of $1.63, a penny below Mr. Mihelic’s estimate but 1 cent above the consensus expectation. He attributed the difference to a $465-million loss in its Corporate segment (versus his estimate of a loss of $426-million).
“Total provisions for credit losses (PCLs) were $1,052-million (up 4 per cent quarter-over-quarter), in line with our forecast of $1,054-million. PCLs on stage 3 (impaired) loans were $970-million, below our forecast of $1,023-million, which we view positively. Stage 1 and 2 (performing) PCLs were $82-million, higher than our $32-million estimate. We expect the total PCL ratio to land at 54 basis points for 2024, near the high end of the guided 45–55 bps range. We model a total PCL ratio of 55 bps for 2025.”
With both its Canadian and International P&C results topping expectations and seeing its capital position as “strong,” Mr. Mihelic raised his full-year 2024 EPS projection by 2 cents to $6.61 with his 2025 and 2026 estimates increasing to $7.55 and $8.57, respectively, from $7.46 and $8.47.
That led him to bump his target for Scotia shares to $65 from $62, keeping a “sector perform” recommendation. The average target is currently $68.
“On a forward P/E basis based on our next-12-months core EPS estimate, BNS is trading at 9.3 times, below its long-term historical average of 10.7 times and the lowest in the group,” said Mr. Mihelic. “BNS is trading at a P/B multiple of 1.14 times, below its long-term historical average of 1.68 times, second-lowest in the group.”
Other analysts making target revisions include:
* BMO’s Sohrab Movahedi to $72 from $74 with a “market perform” rating.
“Relative to us, better results in Canadian Banking (higher volumes) and Wealth (better operating leverage) were partly offset by slight misses in Corporate/Other (higher funding costs), GBM (lower trading), and International Banking (lower risk-adjusted margins). Total PCLs of $1,052 million/55bps was as expected. CET1 ratio up 10 basis points quarter-over-quarter to 13.3 per cent; DRIP discount discontinued as of Q4,” he said.
* TD Cowen’s Mario Mendonca to $71 from $69 with a “hold” rating.
“Scotia modestly beat estimates on a lower tax rate. There were a number of positives from the quarter including the resumption of balance sheet growth supported by a strong CET1, continued momentum in IB as well as stable PCLs in the segment, and improving conditions in corporate supported by lower rates and lower wholesale funding requirements. We raised estimates following the results,” said Mr. Mendonca.
* Jefferies’ John Aiken to $69 from $65 with a “hold” rating.
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Following the late Tuesday announcement from the U.S. Drug Enforcement Administration that is has postponed its cannabis reclassification hearing until Dec. 2 after the federal election, Eight Capital analyst Ty Collin sees the timing adding “significantly to the political risk involved.”
“Cannabis shares are trading lower off of this news because the date of these hearings pushes out the expected timeline for Rescheduling implementation, and increases the political risk involved by potentially having the process cross into a new presidential term,” he said. “Many industry observers (including ourselves) believed that a final rule might be published by/around the November 5 election, with some believing that hearings would be bypassed altogether, which would have mitigated this risk.”
The Department of Justice, which oversees the DEA, said Attorney General Merrick Garland recommended cannabis be reclassified as a Schedule three drug instead of Schedule one earlier this year. Schedule one is reserved for drugs with a high potential for abuse and no accepted medical use.
While Mr. Collin sees the proposal to change the classification of cannabis federally to a less restrictive as “alive and in progress” and emphasized the hearings are a common part of the rulemaking process, Mr. Collin said the length of the hearing process as well as type and participants remain unclear.
“With hearings beginning on December 2, there now appears to be a much higher likelihood that the Rescheduling process bleeds into the next presidential term (starts January 20, 2025), raising the political risk involved and upping the stakes for the election outcome,” he said.
“We believe a Harris administration would likely continue with the Rescheduling process started under President Biden, noting Harris’s supportive comments as Vice President and the language in the renewed Democrat National Committee (DNC) platform. A Trump administration is more likely to frustrate Rescheduling if still in progress, in our view, though we note that the former President has recently made some remarks that may suggest growing support for deregulation.”
Accordingly, the analyst now sees the sector “increasingly trading based on the U.S. presidential election outlook, with a positive correlation to Harris’s odds of winning.”
“We continue to favour fundamental leadership names, namely Top-Picks GTII and VRNO, which have the ability to continue growing with or without relief from 280E taxes,” said Mr. Collin. “We note that GTII and VRNO are the only large-cap MSOs that continue to pay their 280E taxes, with most others having stopped partly in anticipation of Rescheduling.
“Conversely, we see smaller-cap names with higher leverage having the most torque to 280E relief, which includes more downside risk to the Rescheduling process not going through.”
Mr. Collin reiterated his “buy” ratings for Green Thumb Industries Inc. (GTII-CN) and Verano Holdings Corp. (VRNO-NE) with targets of $25 and $14, respectively. The averages on the Street are $26.54 and $12.27.
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Canaccord Genuity analyst Luke Hannan expects “challenging” industry conditions to weigh on the second-quarter fiscal 2025 financial results on BRP Inc. (DOO-T).
Ahead of the Sept. 6 release, he’s now projecting revenue for the Valcourt, Que-based recreational vehicle manufacturer of $1.861-billion, below the Street’s forecast of $1.886-billion and in line with management’s guidance of a high-single-digit decline in the previous quarter. His adjusted EBITDA projection of $182-million (down 26.4 per cent quarter-over-quarter) and earnings per share estimate of 32 cents are also lower than the consensus ($188-million and 35 cents).
“Recall, BRP’s initial objective entering F2025 was to finish the year with powersports shipments down 10-15 per cent year-over-year by year-end, only to revise its plan during Q1/F25 to a 15-20-per-cent year-over-year decline given softer end customer demand and aggressive levels of promotions in the channel, particularly for non-current inventory (though it’s worth noting 65 per cent of BRP’s Q1/F25 retail volumes were current inventory). With consumer confidence remaining lacklustre, and floorplan interest rates remaining elevated, we expect dealer sentiment has yet to materially improve, suggesting Q2/ F25 will play out similarly to Q1/F25, and could feature another downward revision to guidance. We concede that sentiment around rate cuts has improved, though it’ll take several cuts and more time before a more dramatic improvement in dealer sentiment materializes, in our view.
“Management has previously stated that F2025 would be an investment year, returning to year-over-year growth in Q4/F25, though at this juncture we believe it’s more likely current conditions persist for longer than expected. In light of this, consensus expectations calling for H2/F25 EBITDA margins being up slightly year-over-year and 19-per-cent year-over-year EBITDA growth in F2026 could be too optimistic.”
While he lowered his 2026 revenue and earnings expectations, Mr. Hannan reaffirmed a “hold” rating and $90 target for BRP shares. The current average target is $98.78.
“With all that said, we continue to believe BRP is making the correct long-term decision to protect dealer unit economics and remain of the view the company remains well positioned to continue capturing market share in both powersports (and SSVs in particular) as well as marine products,” the analyst said. “Our HOLD rating is more reflective of an operating backdrop that’s currently overwhelmingly unfavourable when it comes to generating consistent, meaningful earnings growth.”
“In our view, BRP shares are likely to remain range-bound over the near term until (1) we receive more dovish commentary from central banks on the path of interest rates, and (2) investors gain more confidence that F2025 estimates have troughed, which we would expect could happen in the latter half of F2025 at the earliest.”
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In other analyst actions:
* Wells Fargo’s Anthony Bonadio raised his Alimentation Couche-Tard Inc. (ATD-T) target to $88 from $86 with an “overweight” rating. The average is $92.92.
* Seeing further upside following an update to her valuation, CIBC’s Stephanie Price hiked her target for Constellation Software Inc. (CSU-T) to $4,850 from $4,100, keeping an “outperformer” recommendation. The average is $4,600.
‘Constellation reported a solid Q2 and its shares have performed well, up 31 per cent year-to-date,” she said. “At these levels, the question we’re often asked is ‘what is priced in?’ While the stock is trading approximately 300 basis points above its five-year average of 18.9 times EV/EBITDA, this valuation method does not take into account the impact of FCF deployment post 2025. In our view, a DCF-based approach that accounts for 100 per cent of FCF deployed on acquisitions in the near term is a more appropriate way to value the M&A-heavy company and give it credit for future growth beyond 2025 as well as give full value to CSU’s consolidated spin-cos, which take varying approaches to M&A and have differing levels of organic growth.”
* Expecting a reduction to its full-year guidance next week, Wedbush’s Tom Nikic cut his Lululemon Athletica Inc. (LULU-Q) target to US$324 from US$400 with an “outperform” rating. The average is US$337.93.
“After years of exceptionally strong performance, LULU has hit unexpected turbulence in 2024, which was exacerbated by last month’s product-quality issues with their new ‘Breeze Through’ leggings line,” he said. Considering that they had to pull the products from shelves, we believe this will lead downwardly-revised guidance when they report Q2 EPS after the close on Thursday 8/29. That said, with shares down almost 50 per cent year-to-date (vs. SPX up 18 per cent), we believe that a cut is pretty much baked into buyside expectations at the moment. Our hope is that a guidance revision becomes a “clearing event”, and that once numbers are appropriately re-set, investors will once again focus on the company’s compelling growth opportunities (International, Men’s), exceptionally strong cash flow generation (well over $1 billion annually) and fortress balance sheet. We’re lowering our Q2 EPS forecast to $2.79 (from $2.97), our FY24 estimate to $13.66 (from $14.38) and our FY25 estimate to $14.53 (from $16.00).”
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With a file from Reuters