Inside the Market’s roundup of some of today’s key analyst actions
Desjardins Securities analyst Benoit Poirier thinks short-term weakness should not scare investors away from Canadian railway companies, expecting both Canadian National Railway Co. (CNR-T) and Canadian Pacific Kansas City Ltd. (CP-T) to offer “significant value-creation opportunities with limited downside.”
“We expect both railroads to hit their respective investor day targets despite our weaker estimates for 2023 and 2024. However, we see limited immediate upside for shorter-term investors ahead of the quarter,” said Mr. Poirier.
In a research report titled All the switches will have to be aligned to meet 2023 guidance, Mr. Poirier trimmed his third-quarter estimates for both companies with volumes continuing to contract and seeing a “significant intermodal rebound unlikely in 2024 as [a] melting pot of headwinds continues to exercise pressure.”
“We have adjusted our numbers to reflect the RTM [revenue ton mile] contraction in 3Q of 4.7 per cent for CN and 3.3 per cent for CPKC,” he said. “The notable drivers of the volume reduction in the quarter were: (1) weakness in intermodal (carloads down 22.6 per cent at CN and 9.0 per cent at CPKC); (2) pressure in forest products; (3) wildfires on CN’s network; (4) shuttering of CPKC customer Canpotex’s fertilizer export terminal; and (5) the Canadian West Coast port strike (both rails are now mostly caught up on the backlogged boxes but did lose out on some volume as several ships were diverted to U.S. ports; CPKC management expects this to create an $80-million revenue headwind for 3Q). Intermodal softness is not specific to the Canadian rails, but is an issue across the continent as U.S. intermodal carloads were also down 5.4 per cent in 3Q. Weakness in Canadian port TEU volumes experienced by the rails is not surprising as port volumes were trending down in the double digits year-over-year even before the strike. The inventory-to-sales ratio signals whether inventories are growing faster than sales and remains elevated at 1.39 (latest reading from June.”
Mr. Poirier thinks reaching fourth-quarter objectives is also “not a layup,” warning “a lot will need to go right” and believing both rails are unlikely to achieve their 2023 targets and the Street appears poised to also cut their 2024 expectations.
“Considering the continued weakness in intermodal and forest products volumes, the fuel lag headwind as well as the fact that the elevated headcounts at both rails will result in significant operating deleveraging, we now forecast both companies falling short of their respective 2023 targets,” he said.
“We believe 2024 consensus is too optimistic given the current U.S. IP growth forecast of negative 0.05 per cent. Additionally, we do not believe the Street has fully priced in the impact of the weaker western Canadian crop. Projections will have to be adjusted as the reference base is expected to soften considerably in 2H23. We now forecast adjusted EPS growth of 9.3 per cent in 2024 for CN and 14.3 per cent for CPKC.”
Mr. Poirier reduced his adjusted fully diluted earnings per share projections for CN to $7.05 in 2023, $7.71 in 2024 and $8.59 in 2025 from $7.28, $7.71 and $8.59, respectively. His core adjusted fully diluted EPS estimates for CP slid to $3.81, $4.36 and $5.13 from $3.83, $4.85 and $5.59.
Keeping “buy” recommendations for both companies, Mr. Poirier cut his target for CN shares to $172 from $181 and CP to $109 from $117. The averages on the Street are $160.62 and $117.70, respectively, according to Refinitiv data.
“For CN, despite our weaker 2023 and 2024 estimates, we still calculate that the company can deliver a three-year adjusted EPS CAGR [compound annual growth rate] of 10.8 per cent between 2023 and 2026 (starting from a lower base of $7.05 in 2023), achieving the target set out at its investor day of 10–15 per cent,” he said. “This demonstrates the resilience of the Canadian rails and their value-creation opportunities no matter the economic backdrop. For CPKC, we still assume that EPS will double between 2023 and 2028 (to $7.63 from $3.81), driven by a 7.4-per-cent revenue growth CAGR (management targets high single digits) over that period and a 57.7-per-cent OR [operating ratio] in 2028. We continue to like the long-term potential for value creation from the KCS transaction. The integration plan and customer feedback presented by CPKC are exciting, which leads us to believe that the revenue synergies targeted by management are achievable despite the more challenging market environment.”
Elsewhere, JP Morgan’s Brian Ossenbeck cut his CN target to $159 from $167 with a “neutral” rating and his CP target to $122 from $125 with an “overweight” recommendation.
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While he lowered his third-quarter expectations for GFL Environmental Inc. (GFL-T) to reflect seasonality and one-time items stemming from asset divestitures, National Bank Financial analyst Rupert Merer sees it “well positioned to outperform” as it continues to deleverage and sees the benefits from cash flow growth.
“GFL could benefit from strong pricing (up more than 8 per cent year-over-year) as it plays catch-up with inflation, but see lower volume growth following shedding of unprofitable operations,” he said. “For fiscal 2023, GFL is guiding to $7.4-billion in revenue, $2-billion of adj. EBITDA and $705-million of adj. FCF.”
“GFL remains committed to lower leverage and targets less than 4 times net debt/EBITDA for 2023E, from 4.2 times in Q2 (peers 2.7 times). We believe it could achieve this goal by Q4E, but leverage in Q3E could be up quarter-over-quarter with the timing of cash flows and expenses related to the asset divestitures in Q2. Following FY’23E, GFL should be able to maintain leverage while investing more into the business, with potential to grow FCF to over $1-billion by 2025.”
While he thinks its full-year results continue to be “supported by strong pricing,” Mr. Merer trimmed his revenue expectation for the third quarter to $1.876-billion from $1.908-billion previously. His EBITDA and free cash flow estimates slid to $525-million and $291-million, respectively, from $536-million and $349-million.
“In line with its deleveraging targets, GFL’s M&A is focused on tuck-ins, and it should not see any large acquisitions,” he said. “Investment into RNG continues, though progress is moving slower than expected. Construction at its 2.5 million MMBtu Arbor Hills RNG is finished, with two more sites (approximately 2 million MMBtu total) to come online in H2E and H2′24E. GFL is also investing into recycling infrastructure to support Canadian Extended Producer Responsibility (EPR) rules, which should see $200-million to $300-million of investment at high returns (5 times EBITDA or less).”
Pointing to “a strong return to target and a forecast for continued growth and margin improvement,” Mr. Merer reiterated his “outperform” recommendation for GFL shares, However, he trimmed his target by $1 to $54 target, citing “valuation headwinds across the market from higher bond interest rates.” The average target on the Street is $50.17.
“We believe that GFL’s multiple should improve along with its cashflow conversion as it reduces leverage, increases margins and benefits from its RNG growth,” the analyst said.
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Citi analyst Itay Michaeli sees a “relatively worse” risk-reward setup for Magna International Inc. (MGA-N, MG-T) heading into third-quarter earnings season.
“Tactically, we like pair positioning into the quarter and are opening an Overweight Lear/Underweight Magna pair,” he said in a note released Tuesday. “Key points: (a) We see greater vulnerability in Magna’s 2023 consensus than for Lear’s; (b) Magna sports greater D3/NA [Detroit Three/North American] exposure; (c) Greater potential for near-term buybacks at Lear; (d) We believe Lear sports a cleaner 2024+ incremental margin story. Execution on commercial recoveries (Lear E-Systems) is a notable risk for this pair trade.”
Overall, Mr. Michaeli said he’s maintaining “a cautious stance” on U.S. supplier stocks despite a recent share price pullback across the sector.
“Q3 results should be fine but not without volatility from GM’s T1 [[General Motors’ T1 platform] downtime, the UAW strike and disruptions in Europe/Japan,” he said. “While 2023 guides should remain intact, there are some notable risks: (1) Timing/success of commercial recoveries, including in the event D3 strikes intensify pressure across the supply base; (2) Mexico border delays; (3) Potential for cautious 2024 commentary; (4) Potential for tight supply chains limiting LVP growth next year (ex. strike recovery); (5) Potential multiple de-rating if margins struggle to return to pre-COVID levels. Whereas automaker stocks have well-identified debates (pricing, EVs, labor), supplier stocks seem to have a greater list of potential, albeit modest, surprise factors. Given this, our preferred positioning into Q3 seeks: (a) Less of—Heavy dependence on commercial recoveries, D3 exposure, financial leverage, 2024+ incrementals that are highly reliant on operational execution; (b) More of—New business catalysts, ‘cleaner’ 2024+ incremental margin stories, Europe/China exposure, strong balance sheets and buyback potential.”
For Magna, he lowered his target to US$58 from US$61, reiterating a “neutral” recommendation. The average is US$66.
“D3 and GM T1 exposures add risk to the quarter, as do potential delays in commercial recoveries,” said Mr. Michaeli. “Magna’s stronger execution in Q2 provides some comfort into Q3, but we still see some vulnerability to Q3/Q4 consensus estimates. With Magna having become an execution story—including across its growing megatrend revenue product lines—any margin shortfall could dampen the degree of confidence in the 2024+ margin bridge. The stock looks inexpensive on P/E but limited ‘23E FCF and higher-than-normal leverage offsets this. Overall, the relative risk/reward doesn’t seem attractive into Q3. We’re updating our estimates for latest industry datapoints and company updates, with our 2023-25 estimates trimmed slightly. Based on these changes plus modestly lower target multiples.”
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In response to a recent pullback in valuation, Stifel analyst Ingrid Rico upgraded Eldorado Gold Corp. (ELD-T) to “buy” from “hold” following a site tour of its operations in Greece and Turkey last week.
“The tour showcased the Skouries project, the main growth driver over the next 5-years,” she said. “With the project 50-per-cent built, ELD reiterated commercial production expectations (late 2025), but the remaining key items to completion, in our view, are not without risks. 2024 will be an important year for Skouries success. We were pleased to see both Kisladag and Efemcukuru performing well, which in our view shows that ELD does have the operating template to be replicated. At Olympias, we recognize that the mine has made some progress, but we left the site with the view that more work (+time) will be needed for this asset to show consistent results.”
Ms. Rico thinks Eldorado is “nearing inflection points across its portfolio.”
“The large mineral potential at Lamaque is just starting to become clear to the market with the recent 2022 PEA highlighting the potential for an extended LOM [life-of-mine] from the Lower Triangle and Ormaque resource base,” he said. “Kişladağ restarted operations in 2019 after a brief period of suspension, with gold production beginning to hit steady state, with the successful commissioning of the high-pressure grinding roll circuit (HPGR), and recovery rates performing to plan. At Olympias, optimization efforts are targeting an operational turnaround for that long-life operation. With the de-risking milestones of project financing and board approval now in hand, Skouries serves as a material growth driver to ELD, with average LOM annual production of 140koz Au and 67Mlbs copper (or approximately 280-300koz AuEq) over a 20-year mine life. Expect ELD to continue de-risking Skouries through project construction execution.”
After updating her projections to include initial third-quarter production results as well as a “tempered” five-year outlook for Olympias and an increased operating expense assumption, Ms. Rico trimmed her target for Eldorado shares by $1 to $15.50. The average is $12.42.
“ELD’s valuation has pulled back and in our view screens as a NAV-rich name, but it is all about execution,” she concluded.
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While TD Securities analyst Daniel Chan thinks the enterprise market can bring many opportunities to Shopify Inc. (SHOP-N, SHOP-T) and “could result in more stable, stickier revenues,” he warned it “also possesses different challenges” than the small and medium-sized business market.
“Consequently, we believe it could take time for Shopify to meaningfully grow its enterprise presence, and the opportunity may not be as material as some investors are hoping for,” he added.
In a research note released Wednesday, Mr. Chan said the Ottawa-based e-commerce giant’s strength with SMBs does not directly translate to enterprise.
“We believe Shopify’s success with SMB merchants has largely been due to its comprehensive, fully integrated platform, making it easy for merchants to start and grow their businesses,” he said. “This value proposition may not resonate as strongly with enterprises which have complex IT systems and vast resources to piece together best-of-breed components for their unique needs. We also believe that the enterprise competitive landscape is more challenging, with incumbents having touchpoints with its customers across multiple IT systems, giving them potential pricing advantages and making them far more entrenched. Our channel checks suggest Shopify is chipping away at the enterprise market, but not gaining significant market share yet.”
Mr. Chan trimmed his target to US$60 from US$70, maintaining a “hold” rating. The average on the Street is US$66.83.
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Raymond James analyst Rahul Sarugaser said he does not view Opsens Inc.’s (OPS-T) agreement to be acquired by Haemonetics Corp. (HAE-N) for $2.90 per share in cash as “a great outcome” for shareholders, despite the deal represeting a 68-per-cent premium to its 10-day volume-weighted average price.
Moving his recommendation for Quebec City heart technology maker’s shares to “market perform” from “outperform” in response to Tuesday’s announcement of the $345-million transaction, he predicts “a non-zero probability of an over-the-top bid from a better-suited party willing to pay a fairer price for OPS’s cath lab products — OptoWire & SavvyWire — plus its underlying optical technology and IP.”
Mr. Sarugaser said he has been consistent in his view Opsens would “engender greater value in the hands of a larger player,” yet he pointed to three reasons why he thinks the deal is not great for OPS’s shareholders:
* Concerns over the size of Haemonetics.
“Notwithstanding [Vascade’s] impressive revenue trajectory, having a single product type in the cath lab channel gives us pause as to HAE’s ability to supercharge sales of OptoWire & SavvyWire,” he said. “Given other big Med-Tech players’ broad/deep portfolios currently sold into cath labs, we would see these other larger players as potential acquirers with greater ability to extract value from OptoWire & SavvyWire.”
* A fair price would be closer to $3.50-$4 per share.
“To us, the $2.90 per share deal price — representing a price tag of 5.4 times FY24 consensus revenue — feels quite low,” he said. “OPS is still in the very early innings of its SavvyWire product launch, which we expect to inflect revenue. into 2025 (not to mention the potential for greater synergistic OptoWire penetration, plus, OPS’s growing OEM revenue from sales to JNJ.”
* Gross margin disparities
“We have seen OPS drive GM’s into the 60-per-cent range, while HAE’s GM currently sits at 55 per cent, with its commensurate 4.0 times FY24 revenue multiple,” he said. “Given OPS’s premium GM profile, we would reasonably expect a premium revenue multiple, driving, in our view, a fair price closer to $3.50-$4.00.”
To reflect the deal, Mr. Sarugaser cut his target for Opsens shares to $2.90 from $3.50. The current average is $2.48.
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In other analyst actions:
* Ahead of the release of its third-quarter results, Acumen Capital’s Nick Corcoran cut his Adentra Inc. (ADEN-T) target to $47.50 from $50 with a “buy” rating. The average is $44.33.
“ADEN remains well positioned to weather the storm,” he said. “Recall, the Company converts a high level of EBITDA to cash flow before working capital and during periods of reduced activity releases working capital (demonstrated in Q2/23).”
* JP Morgan’s John Royall raised his Alimentation Couche-Tard Inc. (ATD-T) to $78 from $73 with an “overweight” rating. The average on the Street is $82.
* KBW’s Michael Brown lowered his targets for Brookfield Corp. (BN-N, BN-T) to US$36 from US$41 with a “market perform” rating and Brookfield Asset Management Ltd. (BAM-N, BAM-T) to US$31 from US$33 with an “underperform” rating. The averages are US$47.36 and US$37.33, respectively.
* Berenberg’s Richard Hatch cut his targets for Endeavour Mining PLC (EDV-T) to $39 from $44 with a “buy” rating and Wheaton Precious Metals Corp. (WPM-N, WPM-T) to US$58 from US$61 also with a “buy” recommendation. The averages are $41.89 and US$57.37, respectively.
* Following a visit to its McIlvenna Bay project in east-central Saskatchewan, BMO’s Rene Cartier raised his Foran Mining Corp. (FOM-T) target to $5.25, exceeding the $4.79 average, from $4.75 with an “outperform” rating.
“Overall, the tour highlighted the expansion and optionality on the ore bodies and mine, the state of advancement at site, the thinking of a larger mine and plant design that will be delivered sooner than expected, and the relative project simplicity, including lower technical and social risk,” he said.
“Foran has opportunities for positive news flow as it progresses permitting the mine, as new project studies are released, and as the project is developed. Moreover, in our view, continued exploration success at McIlvenna Bay, and throughout the district, will support an increase in resources to meaningfully enhance ore feed at a centralized facility, which is staged for expansion.”
David Leeder