Inside the Market’s roundup of some of today’s key analyst actions
Desjardins Securities analyst Doug Young thinks the second quarter was “good” for Canadian banks with both cash earnings per share and pre-tax, pre-provision earnings exceeding his expectations.
“Overall, bank results for 2Q FY24 were better than expected, but Bank of Canada (BoC) rate decisions and credit remain the elephants in the room,” he said. “RY and TD delivered strong results, but the sentiment on these two could not be more different. RY hit it out of the park and the integration of HSBC Canada seems to be on track, while TD remains entangled in US AML investigations. NA surprised positively again in capital markets and at ABA. CM seems to be the ‘steady Eddie’ these days. BNS’s international banking division beat, but it was an outlier with a capital markets and Canadian banking miss. BMO also fell short of expectations, driven by higher-than-expected impaired credit losses which are expected to linger in 2H FY24. Question being, is BMO the exception or the rule?”
“Our ranking for the quarter: RY, TD, NA, CM, BNS and BMO.”
In a research report released Wednesday, Mr. Young said he now has a “favourable view” on Canadian banks.
“Market expectations are muted. They have done a good job navigating various headwinds, including tempered loan growth, higher taxes, increased capital requirements and higher credit provisions,” he said. “The trend of downward cash EPS revisions seems to be done, and future BoC rate cuts would be a positive for the sector on several fronts.”
The analyst upgraded his pecking order for bank stocks, which is now:
- Royal Bank of Canada (RY-T) with a “buy” rating and $156 target. The average on the Street is $153.07.
- Canadian Western Bank (CWB-T) with a “buy” rating and $32 target. Average: $31.45.
- Toronto-Dominion Bank (TD-T) with a “buy” rating and $91 target. Average: $85.90.
- Canadian Imperial Bank of Commerce (CM-T) with a “hold” rating and $71 target. Average: $71.80.
- Bank of Montreal (BMO-T) with a “hold” rating and $129 target. Average: $129.64.
- National Bank of Canada (NA-T) with a “hold” rating and $119 target. Average: $119.92.
- Bank of Nova Scotia (BNS-T) with a “hold” rating and $68 target. Average: $68.62.
- Laurentian Bank of Canada (LB-T) with a “sell” rating and $25 target. Average: $26.82.
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Following its earnings season, Scotia Capital analyst Meny Grauman sees an interest rate cut as the next notable catalyst for Canada’s banking sector, however he is not sure of the long-term impact.
“Canadian bank earnings season included some big surprises and also some big moves in the shares,” he said. “In fact, if we compare the best-performing Big Six bank stock this earnings season (RY) against the worst-performing stock this earnings season (BMO), we get a delta of roughly 970 bps. Results generally came in better than expected, although clear signs of credit stress emerged as a result of the “higher for longer” rate environment. The rate outlook continues to be the most important single variable for this sector, and we believe that a BoC rate cut in June is likely to spark a rally in the shares even as we question how sustainable it will be. ETF flows suggest that investors are getting more positive on the space despite the growing concerns about rising loan losses. Although Canadian economic performance continues to lag the U.S., we continue to see better P&C results domestically and believe that rate cuts in Canada will only sharpen that divide, at least in the short term.”
For the quarter, core earnings per share for the industry came in at $2.17, flat quarter-over-quarter but up 3 per cent year-over-year. On average, results for the Big Six banks topped Mr. Grauman’s projections by 4 per cent and the Street by 3 per cent.
“On the face of it, Q2 was the quarter in which the implications of ‘higher for longer’ became more tangible in results,” he said. “That said, relative to expectations, results skewed positively among the Big Six banks with BNS, CM, NA, RY, and TD all beating, and only BMO missing (again). Among the smaller banks, EQB beat, as did LB (underlying results here were weaker), while CWB missed. In our view, RY put up the best results of the earnings season, followed by CM which continued to deliver on its guidance. We would rank NA a close third. Meanwhile, BMO delivered the weakest result of the quarter of the group for the second quarter in a row, missing the Street by 6 per cent as loan loss provisions came in well ahead of consensus. Among the smaller banks, EQB clearly put up the best result of the quarter, led by 10 bps in sequential margin expansion that we believe is sustainable.”
In a report released Wednesday, the analyst made one change, raising his target for Royal Bank of Canada (RY-T) to $157 from $153 with a “sector outperform” rating. The average is $153.07.
His other targets and ratings are:
- Bank of Montreal (BMO-T) with a “sector outperform” rating and $129 target. Average: $129.64.
- Canadian Imperial Bank of Commerce (CM-T) with a “sector outperform” rating and $77 target. Average: $71.80.
- Canadian Western Bank (CWB-T) with a “sector outperform” rating and $30 target. Average: $31.45.
- EQB Inc. (EQB-T) with a “sector outperform” rating and $113 target. Average: $105.30.
- Laurentian Bank of Canada (LB-T) with a “sector perform” rating and $26 target. Average: $26.82.
- National Bank of Canada (NA-T) with a “sector perform” rating and $123 target. Average: $119.92.
- Toronto-Dominion Bank (TD-T) with a “sector outperform” rating and $87 target. Average: $85.90.
“As we leave bank earnings season, we continue to favour RY and CM as our top Sector Outperform names among the large banks, and EQB among the smaller banks,” he said. “All three banks delivered very impressive results this earnings season despite headwinds from the rate environment. RY is a consensus name, but proved why, while CIBC showed that it deserves a re-rate. We’ve raised our target multiple for RY to reflect its recent outperformance and peer-leading Q2 results; our target price goes to $157 from $153 as a result. Misses this quarter were severely punished by the market, while beats were richly, if inconsistently, rewarded as well, with TD being a good example of a bank that beat (by 10 per cent no less) yet found its stock down on earnings day due to worries about the outlook for growth in the U.S. in the shadow of its ongoing AML issues. Despite another very disappointing quarter for BMO, we did not downgrade this name and continue to rate it as a Sector Outperform even as we acknowledge that the stock will be constrained in the near term as management rebuilds its credibility with the Street. Although we agree that the bank’s U.S. revenue story will take longer than expected to deliver, we push back on the notion that this bank will emerge as a negative outlier this credit cycle.”
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Citi analyst Jason Gursky said business jet demand has exceeded expectations thus far in 2024 with an expectation for higher-than-anticipated growth for the remainder of the year after hosting a panel discussion with a group of industry brokers, reaffirming his “buy” recommendation for shares of Montreal-based Bombardier Inc. (BBD.B-T).
“We hosted the same set of brokers for a call back in January 2024, and there was a unanimous view then that the pipeline of deals coming into the year was much stronger than at a similar time in 2023,” he said. “That said, there was some level of caution about the back half of the year given the U.S. election. However, it appears things have gone better than expected year-to-date – with volumes up year-over-year and no slow-down in sight for the second half. Demand appears broad-based across product types, with North America, the Middle East and India getting regional mentions. Importantly, the introduction of Gulfstream’s G700 appears to be driving a supply of used G650s into the market – which is spurring industry volumes as used buyers are in some cases trading up into what is still viewed to be a very attractive product. Finally, several participants noted that sales cycles have elongated somewhat – to three months – as more supply has come to market and buyers have more choices. It seems they want to kick a few more tires before pulling the trigger.”
While participants did not think the election will hurt demand, they feel a Republican victory could “invigorate demand given more the permissive proposed tax policies of the party.”
“We note this sentiment appears to have evolved over time, with this same group previously cautioning that industry demand would likely pause in the second half of this year pending the election cycle,” Mr. Gursky said.
He added: “Used pricing appears rational and in-line with historic depreciation levels, while OEM pricing remains resilient. Importantly, attendees continue to believe that the increase in adoption of private travel experienced during the pandemic is here to stay. Large cabin buyers don’t seem to be interest rate sensitive, but small and mid-cabin are – so that’ll be a key watch item should rates remain higher for longer.”
The analyst said participants agreed Bombardier and peer Gulfstream “should continue to control the ultra-long-range bizjet segment.”
“However, one participant stated that he saw increased list price discounting on Bombardier’s global family aircraft, which seemed in part, to be an attempt to grow the global family’s customer base,” said Mr. Gursky. “Bombardier’s broader outreach also seemed to contrast with Gulfstream marketing/selling its G650-family aircraft more strictly to its installed customer base. Another participant stated that Canadian jet manufacturer Bombardier’s apparent Global family price discounting was worth watching, in light of the potential impact on pricing across this segment. Another panelist believes that Bombardier could launch a new jet product, in order to refresh its product suite and considering that the company’s financial leverage has declined materially in recent years.”
He kept a “buy” recommendation and $83 target for Bombardier shares. The average is $92.39.
“Relative to its past, Bombardier now looks to be a much stronger, more stable company, even as ongoing global supply chain issues could put some constraints on the sector’s valuation,” Mr. Gursky said.
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National Bank Financial analyst Patrick Kenny resumed coverage of Tidewater Midstream and Infrastructure Ltd. (TWM-T) with a “sector perform” recommendation after coming off research restriction following its $100-million issuance of five-year, 8.0-per-cent coupon convertible debentures, aiming to see “confirmation of consistent run-rate cash flows from its recently commissioned renewable diesel facility.”
“Despite the upsized refinancing, our 2025 estimated AFFO/sh [adjusted funds from operations per share] of $0.21 and D/EBITDA of 1.8 times remain unchanged as we had conservatively assumed a $75-million refinancing on slightly less favourable terms (interest rate) relative to the actual 8.0-per-cent offering,” he said in a research note titled Refi in rearview…all eyes on road to free cash flow.
“More importantly, our liquidity analysis highlights a much improved financial position with more than $100-million of cash resources now available through 2024 and greater than $200-million through 2025 as the company looks to deliver on its free cash flow generating proposition while progressing its 6,500 bpd sustainable aviation fuel (SAF) project towards a final investment decision by mid-2025.”
Mr. Kenny reiterated his 85-cent target for Tidewater shares. The average on the Street is 98 cents.
“Of note, our $0.85 target price reflects a 5.0 times deconsolidated Midstream valuation versus the current share price implying 3.4 times compared to larger cap Midstream peers currently trading at 10.5 times, suggesting attractive upside from any potential re-rate associated with Tidewater Renewables,” he added.
Elsewhere, CIBC’s Robert Catellier cut his target to 90 cents from 95 cents with a “neutral” rating.
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Desjardins Securities analyst Frederic Tremblay thinks location, reliability and the “critical role” of 5N Plus Inc.’s (VNP-T) specialty materials “likely support favourable pricing” in the renewal of its supply agreement with its largest client, First Solar Inc. (FSLR-Q), which includes a 50-per-cent increase in volume over the next two years.
Announced Tuesday, the deal will see the Montreal-based company supply of cadmium telluride (CdTe) semiconductor materials associated with First Solar’s manufacturing of thin-film photovoltaic solar modules
“Management noted that this longstanding partnership was extended on favourable terms, which we interpret as a slight improvement in pricing, supported by VNP’s solid competitive positioning in the Western world and the critical nature of its specialty materials,” said Mr. TrembLay.
“With the 50-per-cent volume increase being slightly higher than what we had envisioned, and expectations that 2026 volumes will be up year-over-year, the increase to our 2025 forecasts is relatively modest. Our 2025 adjusted EBITDA forecast is US$55.8-million vs guidance of US$50–55-million (consensus US$55.1-million). In addition, we are introducing 2026 estimates.”
The analyst thinks 5N is leveraging past investments, adding: “Past investments made by VNP in Montreal and Germany will support the increased volume. We therefore do not expect a material increase in near-term capex, which has positive implications for cash generation and deleveraging. We forecast net debt to adjusted EBITDA of 1.2 times at the end of 2025 vs 2.0 times in 1Q24.”
Reiterating his “buy” recommendation, Mr. Tremblay bumped his target to $6.75 from $6.25. The current average is $6.69.
“A positive First Solar update was a much-anticipated event and, in our opinion, justifies a bump to our valuation multiple,” he concluded. “We now value VNP with a multiple of 9 times on our 2025 adjusted EBITDA estimate (was 8.5 times). Looking ahead, we see further potential upside to valuation from continued multiple expansion and/or investors eventually shifting their focus to 2026 numbers.”
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In other analyst actions:
* Canaccord Genuity’s Mike Mueller downgraded Pine Cliff Energy Ltd. (PNE-T) to “hold” from “buy” and trimmed his target to $1.10 from $1.20. The average target on the Street is $1.23.
* Mr. Mueller raised his Birchcliff Energy Ltd. (BIR-T) target to $6 from $5.50, keeping a “hold” rating. The average is $6.33.
* TD Cowen’s Vince Valentini reduced his Street-high targets for Cogeco Inc. (CGO-T, “buy”) to $94 from $106 and Cogeco Communications Inc. (CCA-T, “buy”) to $80 from $90. The averages on the Street are $76 and $67.85, respectively.
* RBC’s Paul Treiber lowered his target for Coveo Solutions Inc. (CVO-T) to $13 from $15 with an “outperform” recommendation. The average is $11.30.
“We are updating our financial estimates and price target to reflect Coveo’s Q4 results,” said Mr. Treiber. “After Coveo’s surprise FY24 guidance increase last quarter, FY25 SaaS guidance disappointed and missed consensus. While the company is seeing strong growth of its GenAI pipeline and high win rates, it is taking longer for pipeline to convert into deals. Coveo’s SIB and NCIB are likely to help support the stock pending an expected ramp in bookings and SaaS growth 2H/FY25.”
* Resuming coverage of Pet Valu Holdings Ltd. (PET-T) following its secondary offering of 5.9 million shares to Roark Capital Management LLC, ATB Capital Markets’ Chris Murray reaffirmed an “outperform” recommendation and $41 target. The average is $37.59.
“With valuations looking increasingly attractive following the secondary and softer-than-expected Q1/24 results, we would look to add to positions as expectations for stronger same-store performance and new store openings in H2/24 positions the Company for a recovery heading into 2025,” he said.