Wednesday’s analyst upgrades and downgrades

Inside the Market’s roundup of some of today’s key analyst actions

While its 2024 guidance came in “a touch below” expectations, RBC Dominion Securities analyst Walter Spracklin sees “a degree of conservatism embedded” in Canadian Pacific Kansas City Ltd.’s (CP-T) forecast, pointing to uncertainty around the second half of the year.

“Net-net, we continue to expect CP to outperform peers on a volume basis (despite lower guidance) and the company to benefit from both a cyclical upturn (if it occurs) and an idiosyncratic one (based on the integration of KCS),” he said.

After the bell on Tuesday, CPKC reported fourth-quarter 2023 adjusted earnings per share of $1.18, exceeding both Mr. Spracklin’s $1.13 estimate and the consensus projection of $1.12. However, pointing to a 5-cent gain from a lower tax rate, he saw the results as largely in line with expectations.

However, his main concern was the company’s full-year guidance, which narrowly misses his forecast.

“CP pointed to ‘doubledigit’ EPS growth in 2024 on the back of low-single-digit volumes,” said Mr. Spracklin. “The EPS guide is consistent with the language used when management articulated a ‘double-digit’ multi-year (2024–28) guide at CP’s investor day in July last year. At that investor day, management refined that guidance, suggesting a mid-teens level in year 1, with subsequent years higher when the buyback kicks in. On the call, the company indicated that since the investor day Cdn grain production has been impacted by drought and the macro environment is more uncertain. We interpret this to imply low-teens 2024 EPS growth guidance, which indicates 2024 EPS of $4.26–4.33, a touch below prior consensus of $4.40.”

“Contrasting CP’s low-single-digit volume guide with that of its closest peer, which guided at mid-singledigit, seems out of sorts. Given the idiosyncratic growth opportunity at CP, it would be surprising to see CP come in at a lower growth rate than peers in 2024. It is possible that it is conservatism, and commentary from the call reaffirmed that management believes CP will lead the industry in growth, thereby suggesting that variation in volumes embedded in guidance is large a result of relative conservatism.”

Citing that lower volume assumption and seeing pricing as a potential headwind to an improvement of its operating ratio, the analyst cut his 2024 EPS estimate by 6 cents to $4.33 with his 2025 expectation sliding 4 cents to $5.28.

Maintaining an “outperform” recommendation for CPKC shares, Mr. Spracklin lowered his Street-high target by $1 to $127. The average is $115.43, according to Refinitiv.

“While our target multiple of 21.5 times is unchanged, our price target decreases on our lower 2026 EPS estimate of $6.35 (previously $6.41). Our target multiple represents a premium to peers, reflecting the power of CPKC’s operating model and compelling opportunity related to the KCS integration,” he said.

Elsewhere, other analysts making adjustments include:

* Stifel’s Benjamin Nolan to US$80 from US$78 with a “hold” rating.

“Canadian Pacific Kansas City (it is going to take time to get used to saying all of that) posted a decent 4Q,” said Mr. Nolan. “Although similar to other rails, the company is only looking for low single-digit growth in revenue ton-miles. However, merger synergies are continuing to flow through well which should enable the company to have double-digit EPS growth as margins improve. Going forward, we continue to expect above average volume growth and further synergy (improving OR) next year. With shares trading at 21x our 2025 estimates, which represent a significant premium to the peer group, we just struggle to see how that premium expands in the near term and are thus maintaining our Hold rating.”

* ATB Capital Markets’ Chris Murray to $120 from $117 with an “outperform” rating.

“CPKC issued guidance for ‘double-digit’ EPS growth in 2024 based on expectations for improving volume trends, a strong pricing environment, and synergy realization, which management expects to offset volume challenges from Canadian grain, particularly in H1/24, and intermodal. Guidance does not assume any expected buyback accretion in 2024, with management confirming that a resumption is more likely to occur in 2025. Strong Q4/23 results, guidance for double-digit EPS growth in 2024, and an improving O/R reaffirm our view that CPKC remains a best-in-class growth story, deserving of its premium multiple,” said Mr. Murray.

* CIBC’s Kevin Chiang to $124 from $126 with an “outperformer” rating.

“CPKC reported better-than-expected Q4 results and its 2024 earnings guidance highlights its idiosyncratic earnings growth algorithm reinforcing why it is one of our preferred freight transportation names. We maintain our Outperformer rating and our price target moves from $126 to $124 as we tweak our estimates after adjusting for lower base volume growth reflecting CPKC’s outlook and stronger C$/US$,” he said.

* JP Morgan’s Brian Ossenbeck to $121 from $116 with an “overweight” rating.

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RBC Dominion Securities analyst Maxim Matushansky sees Celestica Inc. (CLS-N, CLS-T) set up well for growth in the second half of 2024 “across all of its end markets from existing customers and new program wins, with a valuation below EMS and ODM peers.”

Shares of the Toronto-based tech manufacturer rose by 1.6 per cent on Tuesday following the release of better-than-expected fourth-quarter 2023 results and guidance for the first quarter of fiscal 2024 that exceeded expectations on the Street.

Quarterly revenue rose 5 per cent year-over-year and 4.8 per cent sequentially to US$2.14-billion, ahead of Mr. Matushansky’s US$2.09-billion estimate and the Street’s expectation of US$2.08-billion. The beat was driven by “continued strength” in its Enterprise segment (up 46 per cent year-over-year versus the analyst’s 28-per-cent projection). Higher revenue and better mix shift benefiting margins led to adjusted earnings per share of 76 US cents, topping the 68-US-cent estimate of both the analyst and Street.

While expressing concern over the performance of its Advanced Technology Solutions (ATS) segment, which fell short of projections, Mr. Matushansky expects improvement in the second half of the year and sees room for increases to the company’s 2024 guidance.

“The midpoint of Q1 revenue guidance for $2.025–2.175-billion (up 10 per cent to up 18 per cent year-over-year) came in above consensus of $1.98-billion and brackets our estimate of $2.06-billion,” he said. “Celestica maintained its FY24 outlook while increasing its FCF guidance, and we believe there is further upside to FY24 guidance if Celestica’s ongoing conversations with its customers are positive on H2/FY24 demand, given new program ramps in ATS and improvements to the hyperscaler outlook. .... Increased capacity should allow Celestica to fulfill greater hyperscaler demand in FY24. Celestica provided additional detail on its Malaysia and Thailand facility expansions, which are anticipated to begin coming online in Q1/FY24 and provide Celestica enough capacity to meet its hyperscaler demand.

“The ATS segment was down 2 per cent year-over-year and down 7 per cent quarter-over-quarter, compared to previous guidance for a low single-digits year-over-year increase. The weakness is most pronounced in EV charging, but is prevalent in the broader industrial end markets given the impact of higher interest rates as well as burndowns of strategic inventory buffers. Celestica expects new program ramps as well as a normalization of inventory buffers to contribute to ATS growth in H2/FY24.”

Increasing his earnings expectations through fiscal 2025, Mr. Matushansky raised his target for Celestica shares to US$38 from US$33, reiterating an “outperform” recommendation. The average on the Street is US$38.33.

“Our price target multiple is justified at near the EMS peer average given Celestica’s greater exposure to the risk of hyperscaler demand slowing offsetting similar margins, similar cash conversion cycles, and higher NTM [next 12-month] EPS growth than peers,” he said. “We believe that as the market gains more comfort as to the sustainability of hyperscaler revenue, Celestica has the potential to trade near the high end of the EMS peer group or closer to the ODM peer group.”

“While our longer term concerns around the electronics manufacturing industry and Celestica’s potential long-term growth rate and margins remain, we believe the secular growth in hyperscaler spending and potential for further guidance raises provide a catalyst for the valuation to further increase as compared to peers. Celestica has transformed itself away from traditionally low-margin end markets to non-traditional markets like industrial, aerospace & defense, healthcare, and capital equipment, and has increased its exposure to hyperscaler customers that should experience multi-year growth in data center expansion. In the nearer-term, we believe that while the risk remains of a macroeconomic slowdown impacting all of Celestica’s businesses or of a potential slowdown in hyperscaler spending, Celestica’s strong FCF and mix-shift to higher quality end markets should cause the business to be more defensive than it had been in prior slowdowns.”

Others making changes include:

* Canaccord Genuity’s Robert Young to US$38 from US$32.50 with a “buy” rating.

“We have increased our estimates to reflect strong hyperscaler demand, although we highlight growing customer concentration. Given a valuation that we continue to view as in line with EMS peers and a discount to AI hardware and ODM peers, we remain confident on the potential for continued share growth,” said Mr. Young.

* CIBC’s Todd Coupland to US$41 from US$33 with an “outperformer” rating.

“Its revenue and EPS growth is accelerating due to a broadening set of drivers, including from the top five hyperscalers which are customers that are upgrading compute capacity for GEN-AI requirements. This provides increased confidence in our forecast of 2024 adjusted EPS of $2.95 (FactSet $2.73) on revenue growth of 11 per cent (vs. FactSet 8 per cent).

“We rate Celestica Outperformer and recommend investors buy its shares.”

* TD Securities’ Daniel Chan to US$40 from US$33 with a “buy” rating.

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Scotia Capital’s Kevin Krishnaratne said he sees several enticing investment options in the Canadian technology sector with many equities trading at “attractive valuations.”

In a research report released Wednesday titled Lots of Good Opportunities in 2024, but Timing Is Everything, the analyst said he’s “cautiously optimistic” about software spending trends for the year ahead and also sees “positive views” on fintech and payments companies given consumer resiliency.

“We enter the year cautiously optimistic on software, with a view that the initial outlook for software as a service (SaaS) firms will likely be conservative,” he said. “Fieldwork conducted by Scotiabank GBM’s U.S. Software Equity Research team (link) suggests that 2023′s major IT budget cost optimizations are behind us and signs of stabilization are more apparent. Early reads from earnings season last week also support our views. SAP’s 2024 outlook anticipates accelerating cloud revenue growth but a still-subdued macro environment. ServiceNow characterized the demand environment as “tough” and saw no change vs. trends in Q3.

“Last week’s prints from the card networks (Visa, Amex) suggest consumer-spending resiliency through Q4, with online strength. Black Friday Cyber Monday (BFCM) was a record with better-than-expected growth, and December U.S. retail sales figures per the Commerce Department beat. While Visa observed some transitory softness in January in-person U.S. spending trends and several categories continue to be challenged (home & garden, sporting goods), we still think the outlook is unchanged (and positive) for the U.S. consumer in 2024.”

Mr. Krishnaratne named two “top picks” for 2024:

* Open Text Corp. (OTEX-Q, OTEX-T) with a “sector outperform” rating and US$50 target (unchanged). The average on the Street is US$50.42.

“Open Text is our top pick in a hard-landing scenario given its solid operating profile (approximately 80-per-cent recurring revenue, 35-per-cent adjusted EBITDA margins, and strong FCF) and leverage to multiple mission-critical enterprise software verticals including content management, supply chain, cybersecurity, and IT operations management,” he said. “Management has already provided guidance for its F24 (June), which calls for organic growth ex-FX of 1 per cent to 2 per cent (we are at 2 per cent), while we estimate cloud organic growth ex-FX at 4.3 per cent vs. 3.9 per cent in F23. We expect Q4 to be in line, but the company could issue positive updates to F24 guidance given its exposure to cybersecurity and optionality on AI.”

* Lightspeed Commerce Inc. (LSPD-N, LSPD-T) with a “sector outperform” rating and a US$22 target, up from US$21 and above the US$19.51 average.

“Lightspeed Commerce is our top pick in a soft-landing scenario given its valuation (3.5 times calendar 2025 estimated gross profit versus peers at 9.0 times and TOST at 6.0 times) and the opportunity for gross profit upside over the next several years on its Unified Payments push,” he said. “We recently published our updated thoughts on LSPD’s GMV monetization opportunity where we show how our F25 GP estimate could more than double if LSPD’s net attach rate at 0.42 per cent catches up to that of leaders such as SHOP (1.60 per cent) via a combination of full payments penetration and better software traction. We also applaud management’s focus on profitability, which it achieved a quarter ahead of forecast in its Q2 (September) results, on path to delivering a solid Rule of 40 profile, skewed toward growth. Under a soft-landing scenario where consumer spending reverts toward discretionary categories, LSPD is well positioned for upside given the focus of many of its retail and hospitality merchant customers. Shares have underperformed to start 2024, down 9 per cent, but this follows a nearly 75-per-cent rally in the stock from the end of October prior to strong Q2 results.”

Ahead of earnings season, Mr. Krishnaratne downgraded Enthusiast Gaming Holdings Inc. (EGLX-T) to “sector perform” from “sector outperform” with a 50-cent target, down from $1.50 and below the $1.16 average.

“We’re downgrading Enthusiast Gaming to Sector Perform from Sector Outperform, as despite the significant underperformance of the stock (down 17 per cent year-to-date, down 60 per cent in 2023), we believe shares are likely to remain range bound until there is greater clarity and confidence in the company’s profit profile,” he said. “While we model slight adj. EBITDA profits being achieved in Q4 given seasonality, we still see FCF losses that are expected to continue through 1H/24. Meanwhile, the surprise departure of Nick Brien as CEO on January 8 who had just come on board in March, adds more uncertainty to the story. While we appreciate the wealth of knowledge interim CEO Adrian Montgomery (served as CEO since 2019 until Mr. Brien’s hiring in March) and other members of the Enthusiast Gaming team have of the company’s unique assets and brand/advertiser relationships, we look forward to a permanent replacement and updated strategic vision before getting more constructive on shares.”

The analyst also made these target changes:

• Altus Group Ltd. (AIF-T, “sector perform”) to $50 from $48. Average: $51.83.
• Coveo Solutions Inc. (CVO-T, “sector outperform”) to $14 from $13. Average: $13.05.
• Kinaxis Inc. (KXS-T, “sector outperform”) to $220 from $200. Average: $217.78.
• Nuvei Corp. (NVEI-Q/NVEI-T, “sector outperform”) to US$35 from US$30. Average: US$35.54.
• The Descartes Systems Group Inc. (DSGX-Q/DSG-T, “sector outperform”) to US$95 from US$86. Average: US$90.80.

“Prudence in positioning ahead of Q4 earnings, 2024 guide: We are most constructive on (1) Descartes, as despite the robust valuation (10. times C25E EV/sales) we like the leverage to supply chain & logistics and its organic growth in the high-single digits alongside strong adj. EBITDA margins (mid-40 per cent ), with upside from M&A; (2) Open Text as a ‘defensive pick’ given the undemanding valuation (7.1 times C25E EV/EBITDA) and its exposure to key verticals such as cybersecurity and supply chains, with upside from AI (not in current guidance); and (3) Nuvei, which we think is set up for a Q4 beat given our view that guidance is conservative while online trends to close out the year were better than expected, at an attractive valuation (6.8 times C25E EV/EBITDA). We remain Sector Perform on Shopify but believe it can produce a Q4 beat given its BFCM outperformance and increasing focus on AI, cost optimizations and operating leverage,” he said.

“We expect in-line quarters and 2024 outlooks for (1) Docebo on macro softness impacting IT budgets, though we see multiple levers poised to drive upside as the year progresses (government initiatives, AI-product releases, new large enterprise logo wins), and a clear path to exit 2024 with a Rule of 40 profile; and (2) Lightspeed, which reports its seasonally strong Q3 (December) and for which management has communicated macro/gross transaction volume (GTV) spending caution given exposure to several highly discretionary, in-person retail/restaurant categories.”

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Scotia Capital analyst Phil Hardie thinks “increased conviction of a soft landing” has broadened the investment opportunities in his Canadian diversified financial coverage universe.

However, pointing to lingering macroeconomic uncertainties, he recommends investors take “a barbell approach that balances defensive quality plays with attractive value opportunities.”

“The improved macroeconomic outlook and investor risk appetite have likely improved the risk-reward and opened opportunities to include more economic and market-sensitive names,” said Mr. Hardie in a report released Wednesday. “That said, despite a solid market rally, risks and uncertainties remain. Effective stock selection is likely to remain key for generating outperformance given a complicated investing environment. As we kick off 2024, our favoured segments remain P&C insurance and alternative asset managers.

“We believe the P&C insurers look well-positioned for the year ahead. These stocks have relatively low sensitivity to macro factors and can generate solid investor returns in an environment where multiple expansion is limited. Over the past year, elevated cat losses and rising rates created headwinds to book value growth for several insurers. Looking into 2024, we expect these pressures to diminish with book value growth accelerating. Fairfax and Trisura remain our top overall picks for the year. Alternative asset managers such as Onex and Brookfield Business Partners likely trade at significant discounts and are well-positioned to rally as operating conditions improve. Healthier and more stable financial market conditions could open the window for accelerating monetization activity, which would likely serve as a catalyst for these stocks. Regarding the downside, we think these stocks are discounted and therefore already priced in a high degree of risk.”

Ahead of earnings season, Mr. Hardie lowered Toronto-based Propel Holdings Inc. (PRL-T) to “sector perform” from “sector outperform” with a $17 target, jumping from $11.50. The average on the Street is $16.40.

“Propel has generated strong outperformance with the stock delivering a total return of close to 135 per cent over the past twelve months and doubling over the last few months,” he said. “Following the strong run, we expect the stock to take a breather and with a one-year expected return in the low single digits despite a significant increase to our target price, we are downgrading the stock.”

The analyst named Fairfax Financial Holdings Ltd. (FFH-T) and Trisura Group Ltd. (TSU-T) his top picks for the year ahead.

Mr. Hardie has a “sector outperform” recommendation for Fairfax shares with a $1,900 target, rising from $1,650 and above the $1,690.54 average on the Street. He also raised his Trisura target to $54, above the $51.43 average, from $50 with a “sector outperform” rating.

“Fairfax has demonstrated resilience through the business cycle and turbulent financial markets, but we view it as a less defensive play than more traditional publicly listed insurers,” he said. “At this stage of the market cycle, this likely provides an attractive balance: downside protection thanks to the relative resilience of insurance operations through a potential recession, and upside potential when markets recover. There have been significant changes at Fairfax that we believe investors have yet to fully recognize. Trisura is our top small-cap idea and we believe the stock offers investors an attractive risk-reward profile. The stock has a strong track record of delivering outsized shareholder returns but came under pressure through 2023 and has likely gone through a transitional re-rate as investors rebalance risks related to managing a high-growth company with upside potential. A string of ‘meet or beat quarters’ with no adverse surprises is likely to support multiple expansions and eventual return to prior valuation levels.”

He also made these target changes:

• CI Financial Corp. (CIX-T, “sector perform”) to $19 from $17. The average is $18.25.
• Definity Financial Corp. (DFY-T, “sector outperform”) to $46 from $44. Average: $43.75.
• Element Fleet Management Corp. (EFN-T, “sector perform”) to $25 from $22. Average: $26.06.
• Fiera Capital Corp. (FSZ-T, “sector perform”) to $7 from $6. Average: $6.46.
• First National Financial Corp. (FN-T, “sector perform”) to $45 from $44. Average: $42.
• Goeasy Ltd. (GSY-T, “sector perform”) to $170 from $145. Average: $182.56.
• Guardian Capital Group Ltd. (GCG.A-T, “sector outperform”) to $60 from $58. Average: $58.
• IGM Financial Inc. (IGM-T, “sector perform”) to $44 from $40. Average: $41.17.
• Intact Financial Corp. (IFC-T, “sector outperform”) to $252 from $232. Average: $226.07.
• Onex Corp. (ONEX-T, “sector outperform”) to $125 from $115. Average: $116.67.
• Power Corp. of Canada (POW-T, “sector perform”) to $45 from $44. Average: $40.86.
• TMX Group Ltd. (X-T, “sector perform”) to $36 from $35. Average: $34.

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In a research report previewing earnings season for Canadian life insurance companies, CIBC World Markets analyst Paul Holden noted the valuation discount relative to the banks has widened following recent strong performance.

“Our expectation is that interest rates will stay higher for longer than implied by the market, which is a relative positive for lifecos over banks,” he said. “Regulatory capital also remains a relative positive for the lifecos and we expect relatively solid Q4 results. For these reasons we think it is a good time to trim bank exposure and add to lifecos. Our preferred name at this juncture is SLF.”

Mr. Holden made a pair of rating changes on Wednesday, upgrading Sun Life Financial Inc. (SLF-T) to “outperformer” from “neutral” with a $75 target, up from $73. The average is $74.17.

“We think now is a good time to be adding to SLF weights given the relative underperformance over the last year and equity market levels as a catalyst for positive earnings revisions,” he said.

Conversely, he lowered Manulife Financial Corp. (MFC-T) to “neutral” from “underperformer” with a $30 target, up from $28. The average is $30.67.

“While we have not changed our cautious view on MFC’s Hong Kong/China exposure, we do have to acknowledge that the long-term care reinsurance transaction has shifted sentiment and has reduced the risk premium being applied to the stock by more than we expected. The potential for further reinsurance transactions pushes us to a Neutral rating,” said Mr. Holden.

He also made these target changes:

* Great-West Lifeco Inc. (GWO-T, “neutral”) to $44 from $42. Average: $43.50.

* IA Financial Corp. (IAG-T, “neutral”) to $97 from $95. Average: $101.25.

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While Echelon Partners analyst Rob Goff acknowledged the optics and financial impact of Converge Technology Solutions Corp.’s (CTS-T) “huge” free cash flow outperformance in the fourth quarter of 2023 are “significant,” he cautioned “the lasting value rests on its causation.”

On Tuesday, shares of the Gatineau-based IT & Cloud Solutions provider soared over 13 per cent after it announced it expects cash flow from operations of $109-116-million for the fourth quarter and $224-231-million for full year 2023, exceeding the Street’s expectations of $23.9-million and $123.1-million, respectively.

“Management attributed a significant portion of its outperformance to reduced inventory levels that are more appropriate with supply chain bottlenecks largely addressed,” said Mr. Goff. “CTS had previously communicated that it had bulked up on inventory including the purchase of goods directly from OEMs to ensure customer deliveries. The logic behind an inventory recalibration supports its sustainability. Where equipment deliverability is not the same issue, CTS is also able to purchase from wholesalers where it can secure 75+ days of payables versus closer to 30 from OEMs. We look to see modest gains going into Q124 although they are likely to be much more modest. We do look for free cash flow in 2024 to benefit from the introduction of new policies.”

While the analyst increased his 2024 FCF from Operations estimate to $225-million from $171-million, which led him to reduce his exiting net debt calculation by $143-million (or 70 cents per share), he made only a modest 40-cent increase to his target for Converge shares to $5.80, keeping a “speculative buy” recommendation. The average on the Street is $5.85.

“Arguably, the greater financial flexibility associated with our revisions would support a more aggressive PT move,” he said. “However, we await the disclosure of full financials and further information on the 2024 outlook with the release of Q423 results on March 6th, 2024.”

“While still in the show me category, we consider CTS shares to be significantly undervalued at 7.1 times/6.6 times 2024/25 EV/EBITDA while offering an FCF yield of 17 per cent/18 per cent. We note the median 2024/25 EV/EBITDA valuations for its U.S. and European peers at 10.8 times/9.4 times and 11.1 times/9.6 times, respectively.”

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Flow Beverage Corp.’s (FLOW-T) “stretched balance sheet leaves little margin of error,” according to Stifel analyst Martin Landry.

On Tuesday, the Toronto-based beverage company announced revenues fell 29 per cent year-over-year, driven by the sale of its Verona bottling facility and a drop in Flow-branded revenues.

“Flow reported Q4FY23 results, which at first glance appear disappointing,” he said. “However, management pointed to non-recurring items impacting revenues and SG&A which, if excluded, paint a different picture. Q4FY23 EBITDA came-in at negative $10.5 million, worse than our expectation for a loss of $4.5-million but include several one-time costs amounting to $6-million.

“Despite being non-recurring, these costs deteriorated FLOW’s balance sheet which appears stretched to the maximum. In our view, FLOW will need further cash infusion to stay afloat in the coming year and our visibility on new financing sources is limited. FLOW had recent co-packing contract wins which shifted management’s strategy to postpone the sale of its Aurora facility. This asset sale was a non-dilutive source of capital, which now, may not materialize. However, management sees these contracts as providing a path to profitability and expect to bridge its cash balance until positive cash flow from operations occur.”

While Flow has announced several large co-packing contracts recently, Mr. Landry emphasized the company’s balance sheet remains “challenged.”

“Flow’s balance sheet deteriorated in 2023 and the company is exiting the year in a challenging financial position,” he said. “Flow Beverage has $6 million of cash and stretched accounts payables which leaves limited room for error. This at a time when the company needs to invest in CAPEX to support future growth. Post its Q4FY23 results, the company announced a private placement of $2 million, which could be upsized to $3.5 million.”

Maintaining a “speculative buy” recommendation for its shares, Mr. Landry dropped his target to 60 cents from $1.25. The average is $1.55.

“We are reducing our multiples to reflect the deteriorating balance sheet, delays in profitability improvements and a slowdown in revenue growth of Flow branded products. While the new co-packing contract wins provide hope, we have limited visibility on new financing sources which will be needed to keep the company afloat and our valuation does not reflect any future equity financing,” he concluded.

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In other analyst actions:

* In an earnings preview for Canadian airlines and aerospace companies, Canaccord Genuity’s Matthew Lee bumped his Air Canada (AC-T) target to $32 from $31 with a “buy” rating and lowered his Exchange Income Corp. (EIF-T) target to $63 from $65 also with a “buy” recommendation. The averages are $29.95 and $63.25, respectively.

“When considering the outlook for airlines, investors appear to possess anticipation and concern in equal doses. In December, the JETS, which is a U.S.-weighted airline index, rebounded nearly 12 per cent as broader market sentiment, easing fuel constraints, and resilient consumer spending drove increasing interest in torquey aviation equities,” said Mr. Lee. “In January, pedestrian F24 guidance from DAL toppled the group amidst fears around costs, only for concerns to be assuaged weeks later by constructive outlooks from AAL and UAL. From a Canadian perspective, all eyes are on AC, which could act as a bellwether for travel appetite for the group. CJT, which has seen a meaningful rally since November, should also be in the spotlight given its transition to cash flow, while CAE, EIF, and CHR will be expected to execute on their near-term plans. ... While our estimates have been updated, our general views remain intact. We continue to prefer Air Canada given the substantial valuation discount against US peers, EIF and Cargojet for cash flow, and CAE for the long-term view on civil aviation.”

* Bernstein’s Nadine Sarwat raised her Canopy Growth Corp. (CGC-Q, WEED-T) target to US$5 from US$1.10, while she lowered her Cronos Group Inc. (CRON-T) target to $2.82 from $2.84 with a “market perform” rating for both. The averages are US$4.93 and $3.57, respectively.

* Despite a fourth-quarter earnings beat and seeing “another wave of growth” arriving in the second half of 2024, Echelon Partners’ Andrew Semple trimmed his Street-high High Tide Inc. (HITI-X) target to $8.50 from $9 with a “speculative buy” rating. The average is $5.65.

“High Tide, Inc. reported another quarterly beat with FQ423 results above estimates. High Tide has now beat revenue estimates for 9 consecutive quarters while reporting positive adj. EBITDA for 15 consecutive quarters,” he said. “The Company’s discount club retail strategy continues to be extremely effective at winning market share in Canadian retail. High Tide’s ever-expanding retail ecosystem (e.g., the launch of Cabana ELITE, and the Cabanalytics Consumer Insights publication) is further entrenching customer loyalty, along with opportunities to enhance LP relationships. We view the results positively.”

“High Tide remains a standout in the Canadian cannabis industry. It is one of a few cannabis companies in Canada to sustain growing positive EBITDA while maintaining clear growth drivers ahead (near-to-medium term from the ongoing deployment of the discount club model and long-term from the expansion into the German/American/international markets upon possible legalization). High Tide remains our highest conviction investment idea in Canadian cannabis. We note the potential for additional upside to our forecast as High Tide could potentially utilize additional debt to support accelerated growth, make acquisitions that would be highly accretive to its current valuation, and with further progress updates to the success of the discount club model.”

* Scotia’s Jonathan Goldman lowered his target for Linamar Corp. (LNR-T) to $82 from $90 and raised his Martinrea International Inc. (MRE-T) target to $18.50 from $15.50. with a “sector outperform” rating for both. The averages are $80 and $19.33, respectively.

“We are expecting double-digit earnings growth for the suppliers in 2024. December SAAR of 15.9 is still 7 per cent below the pre-COVID average (production is 9 per cent off),” said Mr. Goldman. “Pent-up demand (which we conservatively define as UAW strike losses + lost volumes due to semiconductor shortages) should support volume growth in 2024. Inventory refill would represent upside to our numbers. LTM [last 12-month] supplier margins are still more than 30 per cent below pre-COVID levels. Higher volumes should support margin expansion (decrementals typically run around 25 per cent) while we should see a natural margin uplift as higher cost legacy contracts roll off (supply contracts typically run 5-7 years and include limited pass-throughs on labour, energy, and freight). With valuations implying peak earnings in 2023, a more resilient supplier recovery and increased prospects for a soft landing should act as a catalyst for a re-rate in the sector.

“MRE moves into the top spot in our pecking order. We expect outperformance to be driven by higher exposure to NA (which expect to fare better than Europe/Asia), more fullsome pass-throughs on metals, and higher FCF conversion as it exits a capex cycle (whereas LNR and MGA are investing). LNR moves to the number two slot on a lowered outlook in Ag.”

* Morgan Stanley’s Ioannis Masvoulas cut his Lundin Mining Corp. (LUN-T) target to $12.60 from $12.80 with an “overweight” rating. The average is $11.96.

* RBC’s Irene Nattel cut her Metro Inc. (MRU-T) target to $82 from $83 with a “sector perform” rating. The average is $76.61.

* Piper Sandler’s Brian Mullan raised his Restaurant Brands International Inc. (QSR-N, QSR-T) target to US$85 from US$72 with a “neutral” rating. The average is US$83.41.