Inside the Market’s roundup of some of today’s key analyst actions
Citi analyst Paul Lejuez came away from meetings with the management team of Gildan Activewear Inc. (GIL-T) believing they were on track to hit both third-quarter and full-year 2024 guidance “with potential near-term upside more likely coming from better margins rather than better sales (though long-term upside coming from higher revenues).”
“Importantly, management was bullish on their positioning within the competitive landscape, as several competitors are shutting down operations or in a historically weak position (e.g. Delta chapter 7, Next Level in a tougher financial position, Fruit of the Loom losing space at WMT),” he said. “This increases our confidence in the sustainability of their long-term competitive advantage as the low-cost provider, which will allow them to further take market share.”
After hosting chief executive Glenn Chamandy, chief financial officer Rhodri Harries and senior vice-president of investor relations Jessy Hayem for a meetings with investors in New York, Mr. Lejuez said they pointed to several potential drivers for margin expansion, including cheaper production in Bangladesh, a return to full capacity in Central America and expense leverage. He also emphasized a $300-400-million revenue opportunity from the liquidation of peer Delta Apparel.
While noting core business, excluding discontinued SKUs, has been growing by a 5-per-cent compound annual growth rate over the past several years, he did note macroeconomic conditions are “one thing that worries management, as management cited a generally weak apparel environment for the past 18 months.”
After raising his earnings per share projections through 2026, Mr. Lejuez increased his target for Gildan shares to $54 from $44, keeping a “buy” rating, to “better reflect GIL’s favorable long-term positioning within an improving competitive landscape.” The average target on the Street is $46.46, according to LSEG data.
“GIL is a leader in the ‘imprintable’ activewear market and has developed a solid innerwear (underwear and hosiery) business,” he said. “GIL is a clear leader as the low-cost producer, which enables the company to pivot and win private label business as mass merchants move away from branded products. The company has made several strategic decisions that position them well over the next several years (even beyond F22) to further take market share in the markets they play in. We believe this potential is not yet fully reflected in consensus numbers.”
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Citing “strong multi-year share price appreciation (resulting in higher valuation) and our expectation of a slower growth profile,” Scotia Capital analyst Jason Bouvier downgraded Imperial Oil Ltd. (IMO-T) to “sector perform” from “sector outperform” previously.
“IMO has outperformed many of its peer group and has been one of our favorite names,” he said.
“Outperformance was warranted, but will be more difficult going forward. We believe the share price outperformance was partly due to their clean balance sheet allowing them to buy back a significant amount of shares (while many of their peers were allocating FCF to continued debt repayment). Now, many others in industry have also hit their debt targets with several allocating 100 per centof FCF to shareholders. In addition, IMO has done a great job ramping up Kearl (after a rough initial couple of years). Kearl will hit 280 mbbl/d in 2024, a year earlier than the company’s initial expectations. As a result we expect future growth levels to be lower than the past few years.”
Mr. Bouvier said his “favorable view of the story continues,” however he thinks Imperial Oil’s valuation is “not as attractive going forward.
“IMO has improved the operational performance at both Kearl and Cold Lake and its downstream business continues to boast some of the strongest margins in North America,” he said. “In addition, IMO offers the most exposure to heavy oil prices in the Cdn Large Cap space. Debt is low and continued SBB are likely.
“Looking forward to 2025 and 2026, an elevated share price and lower production growth profile has caused the DAFCF [debt-adjusted free cash flow] yield to be more in line with peers. IMO’s 2026 DAFCF yield is 8 per cent compared to CVE, SU, and CNQ at 12 per cent, 8 per cent, and 6 per cent, respectively.”
His target for Imperial Oil shares remains $110, exceeding the average on the Street of $98.38.
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In a separate report released Wednesday, Mr. Bouvier upgraded MEG Energy Corp. (MEG-T) to “sector outperform” from “sector perform” with the expectation of “strong” free cash flow per share growth.
“Given the solidified balance sheet, enhanced shareholder return profile and plans for robust and capital efficient growth we continue to like the story,” he said. “The recent underperformance in share price gives us the opportunity to upgrade the stock.”
The analyst thinks the Calgary-based company’s balance sheet is “fixe” and thinks shareholder returns are set to “ramp up.”
“MEG will hit its long-term debt target of US$600-million in Q3/24,” he said. “After years of having above average financial leverage the company’s balance sheet is now much more manageable improving the overall sustainability of the company.”
“With the debt target being reached in Q3/24, MEG is set to allocate 100 per cent of its FCF to shareholder returns. The company has instituted a quarterly base dividend of $0.10/sh with a current yield of 1.6 per cent. All of the FCF, beyond the dividend, is expected to be used for share buy backs.”
In justifying his rating revision, Mr. Bouvier also predicted “growth also on the table” for MEG.
“The company plans to continue growing its production and FCF. MEG has two projects it is considering for approval later this year: 1) A 3rd processing train that could add 15 mbbl/d of capacity for $300-milllion of capex ($20,000/bbl/d); and 2) Adding steam generation that could add 10 mbbl/d of capacity for $250-million ($25,000/bbl/d),” he said. “Both of these projects should pave the way for about a 4-per-cent production CAGR over the next several years. More importantly, we expect the growth to be capital efficient at about $20-$25,000/bbl/d.”
“The tax man is coming, but we still foresee above average FCFPS growth. Although MEG will eventually need to pay cash taxes (we estimate in late 2027 or early 2028 at $70 WTI), which will hurt available FCF, the company’s above average production growth profile and focus on SBB are likely to result in MEG showing strong FCFPS growth over the next few years (ie: 9 per cent at $70 WTI).”
Suggesting MEG may be a takeout candidate, Mr. Bouvier reiterated his $35 target for its shares. The average is $33.96.
“Although we don’t view a transaction as imminent, MEG continues to be a ‘clean’ story with one producing high quality asset. In addition, MEG offers synergies to potential acquirors such as: 1) Tax pools; 2) Higher cost debt (which can be refinanced lower); 3) Operational synergies as well as several production growth opportunities (both at Christina Lake and Surmont),” he said.
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National Bank Financial analyst Cameron Doerksen is expecting to see “some earnings noise” from Air Canada’s (AC-T) third- and fourth-quarter results, calling the pilots’ vote on a tentative four-year labour agreement a “key short-term catalyst” as ratification will be remove a “significant overhang” for its stock.
“There will be some strike threat-related noise in the Q3 and Q4 results for Air Canada,” he said. “For one, given the uncertainty for passengers, Air Canada undoubtedly saw some book-away in the weeks ahead of the potential work stoppage as well as some costs related to re-booking. Immediately following the tentative agreement we observed some more aggressive fare discounting from Air Canada that may also impact yields late in Q3 and into Q4 (noting that domestic fares in our survey this week have strengthened). We have therefore lowered our yield assumptions for Q3 and Q4 and have also trimmed our load factor assumption for Q3 and Q4 by a point. We have also increased some of our cost assumptions to reflect the operational impact of flight changes/cancellations. See our estimate revisions below for more details.
“In addition to the direct operating impacts from the strike threat, Air Canada will see some other accounting impacts. Firstly, based on the negotiated terms of the contract, Air Canada will be required to retroactively make adjustments to its pilot cost accrual assumptions going back to Q4/23. We therefore expect a large catch-up cost accrual that likely will be run through the operating expenses in either Q3 or Q4. In addition, once a new deal is ratified, in Q4, we assume the pilots will receive a one-time retroactive cash payment for the difference between the new contract terms and the old contract under which their pay has been set since Q4/23. Given the uncertainty around what Air Canada’s accrual assumptions have been, we have not adjusted our model for these changes, but we would expect the company to call-out these items when reporting Q3 and Q4 results.”
In a research report released Wednesday, Mr. Doerksen also emphasized industry capacity growth is decelerating, which could help drive “some yield improvement” for Air Canada in the fourth quarter and into 2025.
“Indeed, the 1.4-per-cent year-over-year increase in Q4 U.S. transborder capacity is much lower than the 10 per cent plus year-over-year increases seen from Q1 to Q3,” he said. “International capacity growth has also progressively slowed from being up 18.1 per cent year-over-year in Q1 to the 0.6-per-cent year-over-year increase in Q4. Domestic capacity has been much more constrained this year and although the Q4 year-over-year increase is slightly higher than the prior quarters of the year, it is still well below 2019 levels.”
After adjusting his forecast for the airline to include a lower fuel price assumption, a cut to his yield and load factor assumptions to reflect the labour disruption’s impact on pricing and bookings an higher go-forward labor cost assumptions, Mr. Doerksen reduced his target for Air Canada shares to $22 from $24, keeping an “outperform” recommendation. The average on the Street is $21.94.
“We continue to view Air Canada’s valuation as attractive. On our updated 2025 forecast, which assumes only a modest recovery in passenger unit revenues and a jet fuel price assumption that is 20 per cent or more above the current spot price, Air Canada shares are trading at just 2.9 times EV/EBITDA,” he said. “This is below the historical average forward multiples (excluding the pandemic years) of 4.3 times EV/EBITDA and is also well below the U.S. legacy airline peer group, which trades at 4.6 times 2025 EV/EBITDA on average.”
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Seeing it “now offering the best value of the developers,” BMO Nesbitt Burns analyst Alexander Pearce upgraded Denison Mines Corp. (DML-T) to “outperform” from “market perform” previously.
“Denison’s stock price has come under pressure in recent months, like the rest of the group, but DML now offers one of the most attractive P/NPV’s at 0.9 times with clear near-term catalysts, in our view,” he said. “Significantly with 2.2Mlb of uranium held in inventory, it also has one of the strongest balance sheets for funding its relatively modest capital requirements for its Phoenix ISR project.”
In a note released Wednesday, Mr. Pearce noted uranium equities have re-rated lower, but fundamentals are “strong.” He now sees a “good opportunity” in Denison after “steady re-risking.”
“Denison’s share price has come under pressure in recent months, not unlike the rest of the uranium equities under coverage,” he said. “However, most recent developments have been positive for uranium, including announcements of another wave of new nuclear reactors in China and an agreement to restart Three Mile Island in the U.S. We expect the market to remain in a modest deficit near term, with greenfield assets like Denison’s Wheeler River project required to meet demand later this decade.”
“Denison has made steady progress in de-risking Wheeler River, which incorporates the use of the In Situ Recovery (ISR) process at its Phoenix deposit. While ISR is a well utilised method for uranium production, it will be the first of its kind in the Athabasca. Denison is in the process of permitting the project, having submitted its draft EIS in October 2023, and is approaching the final stages of review and comments by the CNSC. The next catalysts include final approval of the EIS (Federal and Provincial), which could be within the next six months, completion of the detailed engineering study in mid-2025, with potential FID for the project thereafter.”
His $3 target (unchanged) is below the $3.97 average.
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Pet Valu Holdings Ltd.’s (PET-T) new distribution center in Brampton, Ont., leaves it “better equipped to pursue further growth in Eastern Canada,” according to Stifel analyst Martin Landry.
“The new distribution facility is a significant improvement vs the previous facility due to (1) its size, the facility is 2.9 times larger than previously and (2) automation,” he said. “Storage and retrieval for 45 per cent of the SKUs is automated. Management has not quantified the costs savings that could come from the consolidation of the warehouses and automation benefits but mentioned expectations to ‘at least’ double the units per labor hours. However, in the near-term these benefits should be outweighed by the increased depreciation and lease costs expenses which are creating a headwind of $0.20 to 2024 EPS. These headwinds seem to be better understood by investors than at the beginning of the year.”
Mr. Landry said he came away impressed from a Tuesday tour of the facility for sell-side analysts as well as presentations by the senior management team
“It is the largest of three distribution centers used by the company and can supply more than 520 stores or 65 per cent of the company’s store base,” he said. “The facility is not fully utilized and there is room to handle 10-20 per cent more volume (our estimation), by simply adding more racking. Management also mentioned that there is room to increase the facility size by 50 per cent on adjacent land if needed in the future. The layout is functional, with high ceilings that are twice as high as the company’s previous distribution center. The facility has a large lunch area, extensive employee locker space, and a prayer room, all amenities which have been considerably improved vs the company’s previous facility.”
However, he warned the Markham, Ont.-based retailer’s gross margin is “under pressure” in near-term, noting higher lease costs and related amortization expenses are expected to weigh for the reminder of the year and keep the company’s gross margin below 35 per cent.
“Longer-term, management aims to increase gross margins into the 35-36-per-cent range,” he said. “We do not expect the company gets there in 2025 given the GTA DC is not fully utilized and given pressures from the new Vancouver DC. We expect 2025 gross margin to decline 30bps from 2024 levels of 33.9 per cent.”
Mr. Landry reiterated a “hold” rating and $27.50 target for Pet Valu shares. The current average on the Street is
“While Pet Valu’s shares are down 13 per cent year-to-date, the decline is related to negative earnings revision and hence not translating into to cheaper valuation metrics,” he said. “In fact, we see limited multiple expansion potential from current levels as we believe Pet Valu’s shares are fairly valued, trading at 15-16 times 2025 earnings estimates. This represents a PEG ratio of 1.5 times assuming a normalized earnings growth rate of 8-12 per cent. Hence, we see the risk/reward profile currently balanced on Pet Valu’s shares.”
Elsewhere, National Bank Financial’s Vishal Shreedhar sees Pet Value’s supply chain transformation “on track” and kept “outperform” rating and $30 target.
“We hold a positive view on PET, reflecting its strong business positioning, attractive industry characteristics (notwithstanding near-term softness) and high returns on capital,” he said. “Revenue, EBITDA and FCF are expected to grow in 2024+ (NBF 2025 FCF is $100-million; PET expects more than $100-million), with EPS growth accelerating in H2/25+.”
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In other analyst actions:
* After Morgan Stanley lowered its rating for the U.S. auto industry to “in-line” from “attractive”, analyst Adam Jonas downgraded Magna International Inc. (MGA-N, MG-T) to “equal-weight” from “overweight” and lowered his target to US$43 from US$55. The average on the Street is US$49.75.
* Barclays’ Brandon Oglenski cut his Canadian National Railway Co. (CNR-T) to $162 from $165 with a “hold” rating and raised his Canadian Pacific Kansas City Ltd. (CP-T) target to US$97 from US$95 with a “buy” rating. The averages are $176.86 and $127.95 (Canadian).
* In response to its $38.9-million fine for deceptive marketing practices imposed by the Competition Tribunal, Canaccord Genuity’s Aravinda Galappatthige cut his Cineplex Inc. (CGX-T) target to $11.50 from $12. The average on the Street is $12.92.
“While we will not get into the details of the arguments in question here, we do note that the financial penalty came across as unexpectedly high and wonder whether it could be materially reduced upon appeal (or entirely overruled),” he said. “In fact, the higher end of penalties we have seen in the recent past (from the Competition Tribunal) for deceptive marketing have been in the $3-5-million range (baring one outlier of $15-million). With that said, given Cineplex intends to maintain the booking fee, albeit adjusted to provide greater exposure to the incremental fee as per the CB submissions, the impact on ongoing financials would be minimal.”
* Stifel’s Justin Keywood move his Cipher Pharmaceuticals Inc. (CPH-T) to $17 from $16 with a “buy” rating. The average is $17.63.
“We raise our target price ... to reflect increased confidence on integration efforts of Natroba but also as in the midst of a more prevalent lice season,” he said. “Cipher is a specialty pharma company, focused on dermatology with a high 60-per-cent EBITDA margin base business and strong FCF conversion. • The company announced the US$89.5-million acquisition of Natroba in July, which more than doubles the business’ EBITDA with free cash flow inflection, including from the use of $200-million in tax loss credits. • Natroba also has the commercial infrastructure to support a revenue level in excess of US$100-million, in our view, suggestive of additional operating leverage. • Our new $17.00 target reflects a slightly higher multiple and expected seasonal strength in Q3/Q4. • We estimate Cipher is still pursuing a pipeline of 25 assets to leverage the U.S. commercial infrastructure in-place.”
* Scotia’s Mario Saric raised his Primaris REIT (PMZ.UN-T) target to $17.25, above the $16.96 average, from $16.75 with a “sector perform” rating.
“PMZ held a 4-hour Investor Day in Halifax (+ tour of recent acquisition, Halifax Shopping Centre) and has outperformed peers and the Sector by 0.4 per cent and 0.7 per cent [Tuesday],” he said. “We felt the presentation was structured efficiently, with a focus on Halifax macro outlook, PMZ Revenue Drivers, Expense Management, the Consolidation Opportunity, all culminating into 3-year guidance that exceeds select peer guidance and we think would = longer-term unit price outperformance, if achieved.
“PMZ remains #2 in our Retail REIT pecking order (behind CRR; SO) and perhaps has the most positive leverage to a CAD economic ‘soft landing’ given available incremental revenue growth levers vs. peers (occupancy upside, CAM recovery upside, etc.). Valuation still has room to grow (assuming PMZ hits 96-per-cent target occupancy. We’ve been fussed with quantifying downside occupancy risk in a recession, but those odds seem to be dissipating on perceived successful North American Central Bank Monetary policy.”
* Canaccord Genuity’s Robert Young increased his Real Matters Inc. (REAL-T) target to $10 from $8.75 with a “buy” rating. The average is $8.82.
“We hosted Real Matters management for a series of in-person meetings last week given recent strong investor interest. Real Matters stock has been trading up recently on improved quarterly results and in anticipation of a more dovish US Federal Reserve. The company’s US appraisal and title businesses, particularly those elements driven by refinance volumes, are likely to be positively impacted by the Fed decision to make an aggressive 50bp rate cut last week. We review several of the key topics of discussion below. We remain bullish on shares of REAL and reiterate our BUY rating. To reflect higher confidence on continued volume recovery, we are bumping our target to $10.00,” he said.
* Scotia’s Robert Hope trimmed his target for TC Energy Corp. (TRP-T) to $61 from $62 with a “sector outperform” recommendation. The average is $60.16.
“With the spin-out of South Bow Corporation (SOBO) imminent, we unveil our updated TC Energy estimates and valuations,” he said. “We estimate spinning out the liquids business is approximately $0.50 dilutive to EPS, though slightly accretive to go-forward credit metrics. More broadly, we like the strategic rationale of the spin-out as it allows TC Energy to focus on its higher-growth natural gas pipelines (90 per cent of EBITDA) and power assets (10 per cent of EBITDA and largely nuclear). We expect this business mix in addition to a strengthening balance sheet will be attractive to investors. Our target price moves down to $61 as the removal of the liquids business ($6-$7/sh) is largely offset by a higher valuation for the remaining business given our expectation that TC Energy trades at a premium to the group.”
* Touting its “precious royalty on a world class silver project,” Raymond James’ Craig Stanley become the firm analyst to initiate coverage of Vizsla Royalties Corp. (VROY-X), giving it an “outperform” rating and $2.25 target.
“Vizsla Royalties (VROY) owns a 2-per-cent net smelter return (NSR) royalty on Vizsla Silver’s (VZLA) 100-per-cent-owned Panuco Project in Sinaloa, Mexico.,” he sai. “VROY was spun out of VZLA in June and the shares commenced trading on August 26, 2024. Following a recent private placement, VZLA owns 41 per cent of VROY’s shares.”
* In response to its Investor Day event, Raymond James’ Brian MacArthur bumped his Wheaton Precious Metals Corp. (WPM-N, WPM-T) target to US$72 from US$70 with an “outperform” rating. The average is US$67.11.
“WPM’s Investor Day highlighted the company’s portfolio of assets,” he said. “WPM has a diversified asset base (18 operating) with over 70 per cent of WPM’s production coming from assets that fall in the lowest cost quartile and the portfolio has over 28 years of mine life based only on reserves. The portfolio is focussed on precious metals with gold and silver representing over 90 per cent of the portfolio and the portfolio is supported by strong operating partners. In addition, we estimate over 90 per cent of Wheaton’s valuation is attributable to assets in North America, South America and Europe.”
“Given our positive view of WPM’s high-quality and diversified asset base, high-margin and scalable business model, we rate the shares Outperform.”