Inside the Market’s roundup of some of today’s key analyst actions
ATB Capital Markets analyst Chris Murray thinks Canadian Pacific Kansas City’s (CP-T) outlook “implies continued volume growth in H2/24 and a significant step-down in the operating ratio in Q4/24, positioning the company for stronger earnings growth and greater returns to shareholders in 2025.”
Alongside the release of “solid” second-quarter results on Tuesday, CPKC’s management reaffirmed its full-year guidance, including double-digit EPS growth “despite expectations for a Canadian industry-wide rail strike in August 2024 and cost pressures in Q3/24 stemming from a derailment in July.” Mr. Murray said it remains “constructive on macro conditions, the upcoming grain harvest, and expects idiosyncratic opportunities to support better performance in intermodal.”
In a research note released before the bell, he reaffirmed a positive view on CPKC, expecting synergy realization from its acquisition of Kansas City Southern to support growth and margin trends for the remainder of the year and into 2025
“We view CP’s acquisition of KCS as a transformative opportunity for the company as it is set to establish the first Canada/U.S./Mexico rail network, providing both companies with greater scale, capabilities, and route densification, with new intermodal contracts with large-scale transportation companies announced in 2023 that are expected to have a larger impact on performance in 2024,” he said. “We view synergy expectations as conservative and see meaningful potential upside over the longer term given the breadth of the cross-selling opportunity, particularly around intermodal volumes, favourable underlying economics, and environmental benefits of freight rail, which we expect to underpin longer-term value creation.
“Management reaffirmed guidance for double-digit EPS growth in 2024 despite expectations for labour disruption in August 2024, given ongoing negotiations with the Teamsters Canada Rail Conference (TCRC). Management confirmed that the two parties are not close to a settlement and indicated that it believed a Canadian rail industry-wide strike was likely toward the end of August. Guidance assumes low to mid-single-digit volume growth, healthy pricing conditions, and gradual realization of cost/revenue synergies, with the potential avoidance of a strike offering potential upside. Management does not provide formal O/R [operating ratio] guidance but does expect the ratio to improve meaningfully in Q4/24 given its outlook around volumes, synergy realization and labour conditions. Longer-term (i.e., 2024-2028) growth/synergy targets laid out at investor day were reaffirmed, with management expecting to exit 2024 with a revenue synergy run-rate of US$800-million (up from US$350-million at Q4/23).”
While he made a modest reduction to his full-year earnings forecast based on the quarterly release, Mr. Murray raised his 2025 expectations based on the “strong” outlook.
“Management was more upbeat on its volume outlook for H2/24, given optimistic expectations around the Canadian grain harvest and balanced macro outlook, which should support greater operating leverage in Q4/24 (ATB estimated O/R: 56.7 per cent) and into 2025 as synergies continue to be realized,” he said. “Leverage stepped down to 3.2 times at Q3/24, positioning CPKC to resume buybacks in H1/25.”
Maintaining an “outperform” recommendation for CPKC shares, Mr. Murray raised his target to $133 from $130. The average target on the Street is $124.83, according to LSEG data.
Others making target adjustments include:
* Desjardins Securities’ Benoit Poirier to $132 from $131 with a “buy” rating.
“CP delivered strong 2Q results despite a challenging macro environment, supported by better-than-expected revenue synergies from KCS and attractive growth opportunities in Mexico (both intra-country and cross-border),” said Mr. Poirier. “While we expect a positive trading reaction this morning, we believe that a potential TCRC strike and additional costs from the derailment incident in North Dakota in July could cast a shadow and create uncertainty around 3Q results.”
* Bernstein’s David Vernon to $126 from $122 with a “market perform” rating.
* JP Morgan’s Brian Ossenbeck to $136 from $123 with an “overweight” rating.
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National Bank Financial analyst Gabriel Dechaine expects strong equity markets to support a “solid” second-quarter earnings season for Canadian life insurance companies.
“Lifecos are out/underperforming the market by 3 per cent since the end of Q1/24 reporting season,” he said. “In general, we are forecasting a fairly noisy quarter, with a wider spread (approximately 20 per cent) anticipated between Reported and Core EPS, reflecting the positive impact from equity markets partially offsetting losses in real estate investments. Core EPS should benefit from strong equity markets during the quarter, considering 30 per cent or more of average lifeco earnings are linked to Wealth businesses.
“Beyond the quarter we are still positive on the group overall, reflecting: 1) improving momentum in business lines that had been lagging, such as Asia for MFC & SLF; 2) strong capital positions across the group, with a relatively ‘lighter touch’ regulatory backdrop compared to the Big-6 banks; 3) high teens ROEs; and 4) potential catalysts such as MFC’s ongoing Legacy Disposition strategy. Our top picks in the space are IAG and MFC.”
In a research note released Wednesday, Mr. Dechaine raised his target for shares of Manulife Financial Corp. (MFC-T) to $43 from $38 to reflect an increase to his target valuation multiple. The average on the Street is $38.25.
“We believe this increase is warranted given greater confidence in the company’s earnings outlook, with high teens ROE potential,” he said, reiterating an “outperform” recommendation.
The analyst’s other ratings and targets are:
- Great-West Lifeco Inc. (GWO-T) with a “sector perform” rating and $43 target. Average: $44.
- IA Financial Corp. Inc. (IAG-T) with an “outperform” rating and $102 target. Average: $102.25.
- Sun Life Financial Inc. (SLF-T) with a “sector perform” rating and $72 target. Average: $75.54.
- Sagicor Financial Co. Ltd. (SFC-T) with an “outperform” rating and $9 target. Average: $9.17.
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National Bank Financial analyst Cameron Doerksen sees Chorus Aviation Inc.’s (CHR-T) $814-million sale of its underperforming Britain-based aircraft leasing division as a “positive” that unlocks value and is accretive.
“The RAL [regional aircraft leasing] segment had been the main growth vector for Chorus, but management indicates that the macro-economic environment has made it more challenging to grow the asset light leasing business. The agreement allows for Chorus to consider unsolicited superior proposals (including the sale of Chorus in its entirety) with a break fee to HPS of US$25-million; however, the RAL sale process was a competitive process so we would not expect another proposal to materialize.”
“The net cash to Chorus from the sale equates to $4.21/share versus the $2.81/share closing price for the stock [Monday] night, so after proceeds are deployed towards debt/preferred share repayments, the transaction is accretive to valuation. Indeed, Chorus estimates that on a pro-forma basis, 2023 EPS would have been 17 per cent higher. The implied P/B multiple for the RAL sale is 0.84 times, which is consistent with where publicly traded aircraft lessors trade, so we view the value Chorus is receiving for RAL as fair.”
Mr. Doerksen also thinks the deal with U.S.-based HPS Investment Partners LLC, which is expected to be completed by the end of the year, simplifies both the Halifax company’s capital structure and business while a cleaner balance sheet positions it for growth or to increase returns to shareholders.
“In addition to an overly complex capital structure, one common criticism of Chorus was the complexity of its business, operating in several distinct (albeit related) segments: the fixed fee capacity purchase business with Air Canada, the Voyageur aviation services business, and aircraft leasing, which itself was complicated given its transition from a more traditional leasing business to an asset light model,” he said. “With the sale of RAL, the business will be easier for investors to understand.
“Management indicates that it will re-focus its growth on the remaining businesses with organic and M&A opportunities in aviation services (specialty charter, in-service support services, aircraft modifications, parts provisioning, flight training). Given the steady cash flow stream under the Air Canada CPA (although the fixed fee steps down in 2026) and the relatively stable nature of aviation services, free cash flow should be predictable, which could also support additional shareholder returns, be it NCIB or even a potential return of a dividend, which was a key component of the investment story for Chorus prior to the pandemic. Management estimates that on a pro-forma basis, FCF in 2023 after debt repayment would have been $74 million versus the $58 million reported. Chorus will also have $250 million in available liquidity to support growth.”
Also suggesting the transaction could lead to sell the remaining pieces of the business, Mr. Doerksen raised his target for Chorus shares to $3.65 from $3.25, keeping an “outperform” rating. The average target on the Street is $3.12.
“We maintain our Outperform rating on Chorus shares as we view the sale of the company’s RAL segment as positive from a valuation perspective with the transaction simplifying the business and positioning Chorus to re-focus its growth on the remaining businesses either organically or through M&A while also supporting additional shareholder returns,” he concluded. “We have updated our forecast to reflect management’s pro-forma financial projections, but expect to refine our estimates in future updates.”
Elsewhere, CIBC’s Kevin Chiang bumped his target to $3.50 from $3.25 with an “outperformer” rating.
“We view CHR’s sale of its Regional Aviation Leasing (RAL) operations to HPS as a positive. The market was clearly applying a significant Holdco discount to CHR. By selling RAL at 0.84times BV, CHR is able to immediately realize the value of these assets. Moving forward, the company is focused on growing its Regional Aviation Services (RAS) segment with Voyageur benefitting from a deep pipeline of opportunities. CHR has shifted to becoming an easier story for investors to understand and still generates strong cash flow with a low leverage ratio,” said Mr. Chiang.
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Citi analyst Stephen Trent thinks Air Canada’s (AC-T) long-term setup “looks attractive, considering the carrier’s dominant domestic shares, its strong exposure to premium product and its global capillarity.”
However, he warns “balancing variations in demand against higher seat mile costs is no easy feat” in the short term,” and believes “it would seem that the shares have at least partially reacted to this short-term downside.”
In a research note released before the bell, he reduced his 2024, 2025 and 2026 earnings per share projections for the airline to $2.67, $3.01 and $3.41, respectively, from $3.41, $4.12 and $4.60.
“Adjustments to forecasts for Air Canada include the incorporation into our model of lower 2024E passenger yields, with some of that growth rebounding in 2025, along with slightly higher expected cost per available seat mile (or CASM ex-fuel). (Yield is the airline industry’s price point, measures the amount of ticket revenue per passenger mile flown). In addition to the lower expected EPS, we also rolls our ca. 7 times target multiple from 2024 to 2025,” he said.
Those changes led him to cut his target for its shares to $21 from $25, reiterating a “buy” recommendation. The average is $22.97.
“Moving forward, Air Canada could see upside from further development of its co-branded card and its loyalty program,” he said. “A growth of these verticals could go a long way, in terms of the carrier de-risking its earnings stream, vs. its pre-pandemic profile.”
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Following “stellar” second-quarter results from Intact Financial Corp. (IFC-T), Raymond James analyst Stephen Boland reaffirmed his view of the property and casualty (P&C) insurance industry being “in a sweet spot with firm markets and high interest rates driving investment income.”
“The bonus this quarter resides in the low cat losses reported across each geography,” he added. “It is difficult to locate any weakness in these results. Despite the strong recent performance in the stock we would continue to be buyers.”
After the bell on Tuesday, Intact reported net operating income per share of $4.86 for the quarter, topping both the analyst’s $3.80 estimate and the consensus projection of $3.80. Overall combined ratio of 87.1 per cent was also better than anticipated.
“Firm market conditions are expected across all divisions for the remainder of 2024,” said Mr. Boland, who raised his forecast for both the current and next fiscal years.
Reiterating his “outperform” rating for Intact shares, he hiked his target to $269 from $261. The current average is $254.63.
Others making adjustments include:
* TD Cowen’s Mario Mendonca to $282 from $270 with a “buy” rating.
* Cormark Securities’ Lemar Persaud to $260 from $250 with a “buy” rating.
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Seeing the market already expecting “solid” second-quarter results Gildan Activewear Inc. (GIL-T), Desjardins Securities analyst Chris Li is predicting management will maintain its full-year guidance and is looking for ”improving visibility on macro and longer-term financial targets under returning CEO Glenn Chamandy and the new board to drive further share price upside over the longer term.”
Glenn Chamandy is back on Gildan board after estimated $65-million proxy battle
“We expect GIL to maintain its 2024 EPS guidance of US$2.92–3.07,” he added. “We and consensus are at the low end, reflecting near-term macro headwinds. We expect returning CEO Glenn Chamandy to reiterate the company’s attractive long-term drivers (market share gains, SG&A leverage, increasing capital return, etc) but refrain from providing specific targets until later this year/early next year.”
Ahead of Thursday’s quarterly release, Mr. Li is projecting earnings per share of 71 US cents, up 8 US cents from the same period a year ago and matching the Street’s expectations. He forecasts total sales to largely be in line with a year ago (U$841-million, up from US$840-milllion), falling narrowly below the consensus projection of US$852-million.
“We expect activewear to grow 2 per cent, driven by volume growth (positive POS trends despite tough macro, aided by continued market share gains, partly offset by lower selling prices and unfavourable mix),” he said. “We expect hosiery and underwear to decline 10 per cent due to the termination of the Under Armour business, weak industry demand and unfavourable mix.”
Reiterating his “buy” recommendation for Gildan shares, Mr. Li hiked his target to $63 from $55. The average is currently $55.28.
“While macro headwinds will limit earnings visibility in the near term, we are increasing our target P/E to 13.5 times (vs GIL’s 15 times average) 2025 EPS from 12.5 times to reflect higher confidence in operational execution and value creation with the reinstatement of Mr Chamandy and the new board,” he said.
“Despite the strong share price performance since early May, GIL remains inexpensive at 12.8 times NTM [next 12-month] EPS vs its 15 times average, supported by low-teens EPS growth, strong FCF/ balance sheet and increasing capital return.”
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In other analyst actions:
* CIBC’s Allison Carson increased her Artemis Gold Inc. (ARTG-X) target to $14.25 from $13.50 with an “outperformer” rating. The average is $15.33.
* JP Morgan’s Kenneth Worthington raised his targets for Brookfield Corp. (BN-N, BN-T) to US$52 from US$49 with an “overweight” rating and Brookfield Asset Management Ltd. (BAM-N, BAM-T) to US$42 from US$41 with a “neutral” recommendation. The averages are US$53.52 and US$42.33.
* Prior to its Aug. 7 release of its first-quarter 2025 results, Ventum Capital Markets’ Amr Ezzat raised his Computer Modelling Group Ltd. (CMG-T) target to $15 from $13, exceeding the $14.08 average, with a “buy” rating, citing increased confidence in the company’s growth profile.
“We expect to see a degree of volatility stemming from the timing impacts of contract renewals (for both CMG and BHV), which typically favour the latter half of the fiscal year,” said Mr. Ezzat.
* CIBC’s Mark Petrie moved his George Weston Ltd. (WN-T) target to $254 from $235, above the $227.83 average, with an “outperformer” rating. Other changes include: BMO’s Tamy Chen to $220 from $196 with a “market perform” rating and Desjardins Securities’ Chris Li to $232 from $212 with a “buy” rating.
“Given WN’s simple structure with two high-quality assets (L and CHP.UN) and strong financial position, we believe a holdco discount of 8–10 per cent is appropriate (vs 14 per cent currently),” said Mr. Li. “An improvement in sentiment on the REITs could be a catalyst for the discount to narrow (similar to what happened around late 4Q22 and 1Q23). Management does not expect the cash settlement related to bread price fixing to impact WN’s capital return plans.”
* ATB Capital Markets’ Amir Arif increased his International Petroleum Corp. (IPCO-T) target to $21 from $19 with a “sector perform” rating. The average is $22.10.
“IPCO announced a slight production beat, a meaningful CFPS beat, continuing buildout of Blackrod, and an ongoing active buyback program,” said Mr. Arif. “On the base business, production is holding in fairly well despite the majority of capital being allocated to Blackrod. Base production will decline next quarter due to a planned two-week turnaround at Onion Lake. At Blackrod, activities continue to progress well with 2024 remaining the most active capex year for the project. Despite the significant Blackrod buildout, the Company remained very active on the buyback front, repurchasing 1.7 per cent of its shares out in the quarter. Approximately 60 per cent of its NCIB is utilized, and IPCO is on track to utilize the remaining 40 per cent by the December 2024 renewal timeframe which will allow for the total repurchase of 6.5 per cent of shares out (or 10 per cent of the public float). The combination of buybacks and Blackrod buildout position IPCO well from a longer-term perspective with steaming expected in early 2026 and first oil by fall 2026. By 2027, we are expecting production to reach 66 mboe/d (base declines + 30 mbbl/d Blackrod) and the stock to approach a C$27-$30/sh range based on strip EBITDA (4.5 times 2028) and NAV (1.0 times risked NAV) multiples.”
* CIBC’s Jamie Kubik raised his Precision Drilling Corp. (PD-T) target to $140 from $130 with an “outperformer” rating, while BMO’s John Gibson moved his target to $140 from $135 with an “outperform” recommendation. The average is $127.50.
“PD reported strong Q2/24 results, above both our and consensus numbers. We believe the company has gained market share in the WCSB, while its strong free cash flow generating characteristics continue, which should push shareholder returns to 50 per cent in 2025 (vs. 25-35 per cent in 2024),” said Mr. Gibson
* Canaccord Genuity’s Mike Mueller moved his Saturn Oil & Gas Inc. (SOIL-T) target to $4.50 from $4, below the $5.33 average, with a “buy” rating.
* ATB Capital Markets’ Nate Heywood increased his target for Secure Energy Services Inc. (SES-T) to $15 from $14.50 with an “outperform” rating. Other changes include: BMO’s John Gibson to $16 from $14 with an “outperform” rating and Raymond James’ Michael Barth to $14.25 from $13.50 with an “outperform” rating. The average is $14.16.
“SES continues to perform well operationally, with key KPIs all showing healthy growth year-over-year (adjusting for the Tervita asset sale). The company continues to execute on contracted organic growth projects and is starting to ramp up on the M&A front as evidenced this quarter, all while continuing to repurchase shares. All told, we still see reasonable value in the stock today (17-per-cent return-to-target),” said Mr. Barth.
* Ahead of its Aug. 6 quarterly release, National Bank Financial’s Adam Shine raised his Stingray Group Inc. (RAY.A-T) target to $9.50 from $9 with an “outperform” rating. The average is $10.08.
* BMO’s Jeremy McCrea moved his Surge Energy Inc. (SGY-T) target to $11 from $10 with an “outperform” rating. The average is $11.75.
“When we look back at the best performing companies, they typically have common attributes: 1) a change in asset performance; 2) an inexpensive valuation; and 3) are ‘off-the-radar’, setting up favorable entry points. For Surge, we see potential for outsized gains as the company approaches its final debt target in 2Q25. Q2 reinforced prior themes: strong Sparky well results, highest cashflow margin since 2014, new 3D seismic/designs in expanded Sparky inventory (Hope Valley) to aid in well performance and reiteration of higher growth to come,” he said.
* BMO’s John Gibson increased his Trican Well Service Ltd (TCW-T) target to $6 from $5.50 with an “outperform” rating. The average is $5.75.
“TCW’s Q2/24 results were above expectations, as several work programs accelerated into the quarter to mitigate potential drought issues. Overall, however, the company continues to perform as expected, as its strong client base provides a strong foundation to fund its top-tier capital return program,” said Mr. Gibson.
* Canaccord Genuity’s Yuri Lynk hiked his WSP Global Inc. (WSP-T) target to $255 from $235 with a “buy” rating. The average is $243.08.