Inside the Market’s roundup of some of today’s key analyst actions
Canadian National Railway Co.’s (CNR-T) decision to lower its 2024 and three-year earnings per share growth targets was “not overly surprising,” according to RBC Dominion Securities analyst Walter Spracklin.
“CN estimates an impact of $0.20/share related to labor uncertainty and the work stoppage, as well as the wildfires in Alberta,” he said. “Management also flagged weaker than expected demand in forest products and metals, as well as the delayed recovery in intermodal due to port labor uncertainty, all of which we expect to weigh on results in Q3. Our Q3 estimate therefore decreases to $1.77, from $1.98 (and compares to prior consensus of $1.97).
“Management reduced their EPS growth guidance to low-single-digit (from mid- to high-single digit growth) due to weaker demand (as discussed above), with RTM growth now expected to come in at the low-end of the prior 3-5-per-cent range. Overall, we see the updated 2024 guide as neutral (to negative) to sentiment given the prior guide did not include any impact from the strike/wildfires, although we note our recent survey results show only 25 per cent of investors expected CN’s EPS growth to come in below consensus expectations of 6 per cent.”
Mr. Spracklin emphasized estimates had “largely not refreshed since the work stoppage/wildfires occurred” and, while the new guidance is below the Street’s expectations, he thinks the stock reaction will “be more limited as a result.”
“We are reducing our estimates to align with CN’s updated guidance” he said. “However, while management flagged lower expected industrial production CAGR [compound annual growth rate] of 1 per cent (versus prior 2 per cent), we are keeping our volume growth estimates consistent across the group. This results in a 3-year EPS CAGR of 9 per cent at the upper end of management’s range.”
Maintaining a “sector perform” rating for CN shares, Mr. Spracklin reduced his target to $160 from $169 based on his lower estimates. The average target on the Street is $177.07, according to LSEG data.
“Our Sector Perform rating is based on favourable network dynamics as well as GDP plus growth opportunities and potential for meaningful margin improvement, offset by full valuation in our view,” he said.
Elsewhere, other analysts making target adjustments include:
* Scotia’s Konark Gupta to $180 from $187 with a “sector outperform” rating.
“We believe this second 2024 guidance cut may not overly surprise investors, considering wildfires and TCRC work stoppage quite evidently impacted in July and August, respectively,” he said. “However, the market could be disappointed by the revised 2026 outlook, which we think most investors were assuming to match at least the low-end of CNR’s original target. While current guidance seems fair, we note B.C. port labour is the last remaining major uncertainty this year, which could potentially add some more pressure on guidance (likely minor, in our view). We have reduced our estimates to reflect the updated outlook, which pushes our target down ... Nevertheless, we maintain our SO rating as valuation remains attractive at 19.0 times, a relatively smaller premium of 0.8 times to U.S. peers vs. historical average of 2.0 times. Further, CNR’s updated long-term outlook continues to imply a return to double-digit EPS growth in 2025-2026, aided by easy comps, macro recovery, and CNR-specific growth opportunities.”
* Raymond James’ Steve Hansen to $180 from $187 with an “outperform” rating.
“As a reminder, this is second guidance cut in the past two months,” he said. “We have lowered our estimates accordingly. Despite these changes, we’ve elected to maintain our reiterate our OP2-rating based upon: 1) our constructive view of the 2H24 traffic outlook; 2) CN’s appealing long-term growth prospects; and 3) the stock’s discounted valuation relative to its closest peers (& history).”
* Desjardins Securities’ Benoit Poirier to $181 from $192 with a “buy” rating.
“While management was clear that its 2024 guidance assumed no stoppages/wildfires, we suspect that a reduction in 2026 targets was not priced in,” he said. “As a result, we are lowering our numbers and expect the stock to react negatively to the announcement.”
* BMO’s Fadi Chamoun to $178 from $182 with an “outperform” rating.
“We characterize this outcome as largely anticipated,” said Mr. Chamoun. “With the shares trading at 9-per-cent discount to the 5-year historical average; 13-per-cent discount versus the 5-year average versus the market; and an even larger discount versus peers, the downside appears limited from current levels, but the de-rating of valuation following Q2/24 execution setbacks may take time to recover.”
* BoA’s Ken Hoexter to US$129 from US$132 with a “buy” rating.
“We lower our estimates and PO due to the impacts of the strike and storms, on lower near-term volumes, and its reduced long-term outlook. We reiterate Buy as it moves past many one-time costs from work blocks and as we look for it to post accelerating earnings,” said Mr. Hoexter.
* CIBC’s Kevin Chiang to $160 from $170 with a “neutral” rating.
“This does not come as a total surprise as CN had noted its 2024 guidance, which it had adjusted when it reported Q2 results, did not contemplate a shutdown of its network. Add to this the network issues that hit CN’s Western corridor in Q2, which caused the company to take down its original 2024 EPS guidance in July, and it was clear it was becoming more difficult for CN to achieve its three-year EPS CAGR target of 10-15 per cent from 2024-2026,” said Mr. Chiang.
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The preliminary economic assessment for Kinross Gold Corp.’s (K-T) Great Bear project in the Red Lake district of northern Ontario exceeded Eight Capital analyst Ralph Profiti’s expectations “with stronger technical de-risking outlining a high-margin project with modest capex requirements.”
In a research note titled Strong Great Bear PEA is Just the Beginning, he said he continues to see “significant upside for resource growth.”
“Ongoing drilling to depth has already shown multiple wide, high-grade intercepts beyond the current PEA2024 resource,” said Mr. Profiti. “Deep drilling from surface demonstrates the continuation of mineralization at depth and the upside potential for further resource and mine life additions for exploration progress at depth. Expansion of the LP Zone continues to confirm the thesis of high-grade mineralization continuing at depth, including the deepest drill hole to date in Q2/24, which returned 3.8m at 9.52 g/t at a vertical depth of 1,575m, demonstrating robust mineralization at depth, well outside the current resource.
“Kinross expects strong grades to continue as drilling extends deeper. The 2023 and 2024 exploration programs resulted in the addition of significant ounces at improved grades compared with the initial project mineral resource declared at YE22, with the bulk of additions in high-grade underground areas between 0.5-1.0km. As of April 2, 2024, approx. 0.568Moz of inferred resources have been added from the LP zone to the total resource compared to YE23, bringing total Inferred Resources to 3.88Moz (from 3.32Moz) and total resources to 6.62Moz (from 6.18Moz) at an increased gold grade of 3.69g/t (from 3.43g/t). In 2024, Kinross will continue to focus drilling to link zones at depth at LP and further directional work at Hinge and Limb. Exploration will also focus resources on brownfield exploration work on the newly expanded 120km2 land package to look for additional open pit and underground opportunities.”
Reiterating his “buy” recommendation for Kinross shares, he bumped his target to $16 from $15. The average is $15.25.
“The Great Bear PEA2024 provides a solid foundation to build on Kinross’ production outlook of 2Moz/year out to 2026 and strong free cash flow driving deleveraging catalysts,” he said. “Kinross remains a top pick among our peer group of senior gold producers at 0.89 times P/NAV [price to net asset value] vs. Agnico (AEM-T, BUY, TP C$115) at 1.38 times, Newmont (NEM, NEUTRAL, TP US$55) at 1.20 times, and Barrick (ABX-T, BUY, TP C$38) at 0.82 times.”
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Raymond James analyst Steve Hansen sympathizes with investor frustration over Methanex Corp.’s (MEOH-Q, MX-T) “surprise” US$2.05-billion acquisition of OCI Global’s international methanol business.
“Many investors we spoke with [Monday] expressed frustration at the abrupt shift in strategy implied by the proposed OCI acquisition,” he said. “To be clear, we ‘get it’ & we sympathize. After five long years of G3 development/construction (FID: Jul-19), we were finally on the doorstep to welcoming in the robust shareholder return/buyback story that we’d all been waiting for. But now we need to wait a little longer (18 mos.)!? An unexpected gut punch, to be sure; however, we’re still inclined to believe that the medium-term benefits associated with this deal are compelling, and thus worth waiting for.”
However, Mr. Hansen said he’s “comfortable” reiterating his “outperform” recommendation for Methanex, citing a “constructive outlook on global methanol fundamentals, and several attractive merits of the proposed deal.”
“While management acknowledged the OCI purchase came at a modest premium to its share price, it also stressed that: 1) it’s acquiring OCI’s Texas-based facilities at a similar multiple (7.5 times) to what the market currently ascribes to its higher-quality U.S.-based assets (Geismar 1/2/3), while its international assets command a discount; 2) the addition of these assets will substantively upgrade the quality of Methanex’s production base, not only bolstering its low-cost position, but also improving the durability/visibility of future cash flow streams (something a buyback would not accomplish); and 3) it foresees additional long-term value creation (synergy upside) through improved operating performance,” he said. “Taken together, management expects proforma: 1) production to increase by 20 per cent (to 10.2 million mts); 2) Adj. EBITDA to increase by 30 per cent (to $1,125-million); and 3) FCF to increase by 20-30 per cent to $575-million (vs. $450-million prior). The share count is expected to increase by 14.7 per cent.
“Robust methanol S-D fundamentals are also expected to support this deal, with methanol demand expected to grow at a healthy 3.5-per-cent CAGR over the next 5 years (up 17 million mts, ex-marine fuel), while existing supply challenges are expected to persist. Meanwhile, we see very little new greenfield capacity on the horizon. We also remind investors that we’re quickly approaching methanol’s strongest seasonal period (Oct-Feb) where pricing is often prone to large ‘fly-ups’.”
After reducing his full-year 2024 and 2025 earnings projections, Mr. Hansen lowered his target for Methanex shares to US$54 from US$62. The average is US$56.73.
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TD Cowen analyst Tim James sees “significant multiple expansion potential” for Mullen Group Ltd. (MTL-T).
“We continue to believe the 6.0-per-cent dividend yield, prudent capital allocation, solid Q2/24 results and historically low valuation should attract both income and value seeking investors,” he said.
However, in a research report released Wednesday, he trimmed his financial expectations for the for the Okotoks, Alta.-based logistics provider to reflect updated macroeconomic and industry conditions, foreign exchange conditions, interest rate, and other “minor modelling assumptions.”
“Our Q3/24 adjusted EBITDA forecast is slightly below consensus, and implies a slight year-over-year decline in EBITDA” said Mr. James. “We don’t believe that the risk of below consensus Q3 results is material enough to justify waiting for reporting, but would recommend buying the stock for numerous other reasons that we believe are more important drivers of a 12-month return.
“Mullen generated Q2/24 EBITDA growth of 3 per cent despite a 5-per-cent decline in organic revenue, and a backdrop of challenging retail inventory and capital spending trends. Mullen’s LTL [less-than truckload] segment generated a 20-per-cent Q2/24 EBITDA margin compared to its much higher multiple LTL comps (ex-outlier) which generated average EBITDA margins of 14.3 per cent. We forecast 70 basis points of LTL EBITDA margin expansion in 2024 driven by cost control and M&A-driven lane density improvements (vs. consensus margin expansion of 40 bps for its LTL comps exoutlier).”
With those changes, Mr. James trimmed his target for Mullen shares to $21 from $22, reiterating a “buy” rating. The average is $18.08.
“Management remains cautiously optimistic regarding H2/24, while not assuming meaningful economic growth, and viewing original 2024 EBITDA guidance as achievable (TD: in-line with guidance),” he said. “At 9.9 times forward consensus EPS and 6.3 times EBITDA, Mullen is trading at a historically large discount to its weighted-average comp group at 21.2 times EPS, and 12.1 times EBITDA. We believe that a portion of the discount could be related to its exposure to the Canadian consumer and investors’ concern about the consumer outlook heading into 2025. However, as outlined in our recent note Growing Concern Over Cdn Consumer Supports Risk/Return Scenarios, we believe the share price downside risk is limited primarily due to its overly punitive valuation discount. We believe the valuation fails to reflect management’s track record, the company’s strong b/s, M&A execution/potential, expected return to EPS growth in 2025, and shareholder friendly capital return program.”
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In a separate report, adjusting his forecast to account for second-quarter results, Mr. James said FirstService Corp. (FSV-Q, FSV-T) will continue to grow its organic revenue at mid-single digits over the long-term.
“Despite a challenging Q2/23 comparable, which included significant storm-related revenue, FirstService reported a good quarter with adjusted EBITDA and EPS stronger-than-forecast,” he said. “Based on our data, Q3 is tracking towards a relatively small number of named storm events and related revenue, suggesting to us that the opportunity for upside to Q3 is limited. Our current forecast, which is subject to one more update ahead of results, is for Q3 revenue and adjusted EBITDA in-line with consensus, and implies 23-per-cent year-over-year revenue growth (3-per-cent organic) and 25-per-cent adjusted EBITDA growth.
“Management has guided for mid-teens 2024 consolidated revenue (TD: 17.3 per cent) and adjusted EBITDA growth (TD: 17.0 per cent). 2024 FSR organic growth is expected to normalize to midsingle digits (TD: 6.0 per cent). Q3/24 FSB organic revenue is expected to be flat year-over-year when including named-storm revenue, in-line with TD, and up mid-single digits excluding, in-line with TD. 2024 adjusted EBITDA margin is expected to be flat to up slightly year-over-year (TD: down 10 basis points year-over-year) based on flat FSR margin and modest H2/24 FSB margin expansion.”
Reiterating his “hold” rating, Mr. James bumped his target to US$179 from US$178. The average is US$189.83.
“We continue to view FirstService as a high-quality, economically resilient business with a strong record of growing organically and through acquisitions. As outlined in our recent note Growing Concern Over Cdn Consumer Supports Risk/Return Scenarios, FirstService has one of the lowest exposures to the Canadian consumer in our coverage group, which we believe makes it a relatively stable and predictable business for investors comfortable with the valuation, but concerned about the consumer outlook heading into 2025.
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National Bank Financial analyst John Shao thinks the high level of engagement at recent investor meetings with Computer Modelling Group Ltd. (CMG-T) chief executive officer Pramod Jain reflect the perception that the Calgary-based software maker is “a high-quality company with significant growth opportunities, both organic and inorganic.”
“While we have certainly noticed the stock’s pullback since last earnings, we believe it’s more driven by the market volatility and the broad movement of the energy prices – if anything, those issues should be eliminated as the Company continues to execute its M&A strategy to bring scale and diversification to its business,” he said in a research note titled In Good Hands.
“CMG’s biggest advantage is the simulation of complex use cases such as EOR, thermal and CCS,” he add. “While CMG is in a defensive position due to its already high market share in that segment, we do see an offensive move when it comes to penetrating the lower end of the market to capture volume, and we believe CMG has already been growing its market share in conventional assets by re-bundling its existing products and lowering its price (as an entry point for future upselling). Compared to incumbents, CMG’s competitive edge comes from its superior customer support (supported by what we heard at past industry event) and its strong word of mouth in that market.”
The analyst came away from the meetings expecting further M&A activity from Computer Modelling, which makes software to evaluate underground oil and gas reservoirs, believing it is on “accelerated path to execute its M&A pipeline because the infrastructure supporting that engine is already built.”
“For a company with ROIC/IRR being the top priority, we believe some patience is warranted,” he said.
“In the near term, we believe the Company will focus on the oil and gas sector but in the longer term, opportunities might surface from adjacent verticals such as mining and underground water where the Company sees its simulation technologies potentially transferable.”
Seeing it “at the cusp of scaling,” he reiterated an “outperform” rating and $14 target for its shares. The current average is $14.71.
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In other analyst actions:
* TD Cowen’s Tim James increased his target for AirBoss of America Corp. (BOS-T) by $1 to $8, exceeding the $5.69 average, with a “buy” rating.
“AirBoss announced a contract from the U.S. government for the supply of protective isolation gowns,” he said. “The contract is valued at up to $84 million, with deliveries expected from Q4/24 through 2026. We expect this contract to provide material incremental earnings, expand the buffer vs covenants and hopefully is a sign that the pipeline of defence opportunities is beginning to come to fruition.”
* Following its Investor Day event on Tuesday in New York, BMO’s Sohrab Movahedi raised his targets for Brookfield Asset Management Ltd. (BAM-N, BAM-T) to US$40 from $37 with a “market perform” rating and Brookfield Corp. (BN-N, BN-T) to US$50 from US$48 with an “outperform” rating. The averages are US$42.76 and US$54.05, respectively.
* Scotia’s Himanshu Gupta increased his Chartwell Retirement Residences (CSH.UN-T) target to $16.50 from $15.50 with a “sector outperform” rating. The average is $16.21.
* CIBC’s Anita Soni increased her Lundin Gold Inc. (LUG-T) target to $34 from $28, maintaining an “outperformer” rating. The average is $28.19.