Inside the Market’s roundup of some of today’s key analyst actions
Four analysts downgraded their ratings on Bank of Nova Scotia (BNS-T) following the bank’s disappointing earnings report on Tuesday. The majority of analysts who follow the bank cut their price targets as well.
The bank was the first of the Big 5 to report quarterly results this earnings season. Its adjusted EPS of $2.10 came about a penny below the Street consensus, but capital markets and the International Banking segment showed particular weakness.
“In our view, with more modest Net Interest Margin expectations, rising Provision for Credit Losses, and more uncertainty regarding the Pacific Alliance economies (and even the North American economies), we see downside risks to our estimates,” said RBC analyst Darko Mihelic. He downgraded his rating to “sector perform” from “outperform.”
His price target was dropped to C$83 from C$94.
Scotiabank’s Canadian business posted $1.217-billion in earnings, which was better than Mr. Darko’s $1.122-billion forecast. But its Global Banking and Markets (GBM), International Banking, and Corporate business were all weaker than anticipated.
The International Banking results were particularly of concern to Mr. Mihelic, so much so that he called it “thesis altering.”
“We may be entering a period of rising Provision for Credit Losses (possibly some recessions in the Pacific Alliance countries and even in North America) and therefore we think pre-tax pre-provision earnings for the International segment needs to have momentum. We suspect the investment banking revenues in the International segment will rebound but net interest income growth may be more limited. By changing our net interest margin (NIM) expectations to a very modest expansion, we now suspect the International Banking segment may not have strong earnings momentum in the foreseeable future as either the bank builds stage 2 allowances or actual impairments rise (or a combination of the two),” the analyst said.
Scotiabank’s overall total Provision for Credit Losses rose 88% from the previous quarter to $412 million.
Mr. Mihelic thinks these may continue to be on an upward trajectory from here, as economies face further downside risk, including a possible shallow recession in North America.
Impaired Provision for Credit Losses in the latest quarter decreased sequentially to $389 million. While that’s positive, Mr. Mihelic thinks it’s unsustainably low.
In other rating changes, KBW downgraded its recommendation to “market perform” from “outperform” and reduced its price target to C$84 from C$86. BMO downgraded its rating to “market perform” from “outperform” but kept a C$95 price target. And Veritas Investment Research’s Nigel D’Souza downgraded his rating to a “reduce” as his price target was reduced to C$80.
“While the quarter itself was not the trigger, the complexities in forecasting some key income statement drivers (e.g., NIM; liability-sensitive nature of the balance sheet) leads us to conclude that investor risk appetite is unlikely to be supportive of relative re-rating of the forward P/ E valuation (key ingredient of our Outperform thesis) in the foreseeable future,” BMO analyst Sohrab Movahedi said in explaining his downgrade.
“Absent re-rating, the only way up for the stock is via higher-than-peer earnings growth; we see this as challenging specially with announced acquisitions (albeit of various sizes) at the peer competitors. To be clear, we are neither questioning the banks’ business mix nor strategy but simply making the observation that investor risk aversion, along with lower EPS growth trajectory, relative to peers and limited return on Equity expansion (given a very respectable and likely resilient +/-15%) leaves moderate stock upside (with BNS shares already trading ~1.5x book value); the attractive dividend yield of 5%+ will provide downside protection, in our view,” the BMO analyst added.
Canaccord Genuity cut its target price to C$86.50 from C$89, CIBC reduced its target price to C$84 from C$87, Desjardins Securities lowered its target to C$88 from C$92, Credit Suisse trimmed its target by $1 to C$84, Barclays cut its target to C$86 from C$85, and Cormark Securities cut its target price to C$91 from C$95.
Despite the poorly received results, Desjardins analyst Doug Young still recommends the stock as a “buy”, believing its attractively valued.
“While management remains constructive on the outlook for international banking, investors may have to be patient until fiscal year 2023 to see some benefits flow through,” he said.
Credit Suisse analyst Joo Ho Kim reiterated a “neutral” rating post third quarter results.
“While we wouldn’t classify the Q3 results as weak, certain elements were below our expectation and in focus. The near-term guidance on International Banking (and all-bank) margins is for stability, but what remains to be seen is whether the volatility in Net Interest Margins (and the pressure on funding cost) is specific to the segment or a sector-wide theme to watch. Beyond International Business, while expectations for market-sensitive businesses were lower for the quarter, we saw a steeper-than-expected decline in the bank’s trading business; and here, we are hesitant to suggest that the level of decline could be pervasive for the sector this quarter,” the Credit Suisse analyst said in a note to clients. “Lastly, strength in underlying fundamentals of Canadian Banking (and cautious optimism around macroeconomic outlook) is a positive read-through for this earnings season.”
Barclays analyst John Aiken reiterated an “equal weight” rating and suggested the areas of weakness for Scotiabank may prove temporary. “While the market may be modestly disappointed in the results from International, Scotia’s third quarter should potentially be viewed as a temporary plateau, instead of a step-back, and any growth in the fourth quarter could be a catalyst,” he said in a note to clients.
The average price target on Scotiabank shares is now C$86, down from C$90.68 a month ago, according to Refinitiv Eikon data. There are four buy ratings and 10 holds. Only Veritas has a sell rating.
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Canaccord Genuity analyst Doug Taylor lowered his price target on MDA Ltd (MDA-T) following updated management guidance and second-quarter results. He notes that while MDA continues to deliver on growth from its core business lines, timetables for key programs have been delayed.
“Most acutely, we await confirmation of Telesat Lightspeed’s status as Telesat works toward solidifying financing amid an evolving global satellite services landscape,” he said. MDA announced last year that it was selected to provide one of the critical technology subsystems on Telesat Lightspeed, the Low Earth Orbit satellite broadband network recently unveiled by Telesat, one of the world’s largest satellite operators.
He maintained a “buy” rating given MDA’s still strong growth profile and relatively inexpensive valuation, but trimmed his target price to C$12 from C$15.
The average Street target price is C$10.75.
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BMO analyst Thanos Moschopoulos raised his price target on Absolute Software Corp (ABST-T) following fiscal fourth quarter results and fiscal year 2023 guidance that both came in ahead of consensus expectations.
Adjusted revenue was $54.0 million vs. consensus of $53.7 million, while adjusted EBITDA was $15.4 million vs. consensus of $12.1 million
Mr. Moschopoulos raised his target price to C$15 from C$12 but reiterated a “market perform” rating - the equivalent of a hold.
“We remain on the sidelines, as we would like better comfort on ABST’s longer-term competitive prospects in ZTNA,” he explained in a note. ZTNA, short for zero trust network access, is software that provides businesses with secured remote access to computer systems.
“However, we see more upside than downside to the stock given its valuation, ABST’s execution under its current leadership, and a potentially accelerating growth trajectory (with these positives being slightly offset by its balance sheet),” he said.
The average price target is C$16.46.
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At least seven analysts cut their price targets on retailer Nordstrom Inc. (JWN-N) after the company provided disappointing guidance for the rest of this year, despite beating Street expectations for its second quarter results.
The cut in guidance for sales and earnings was more aggressive than many analysts were expecting, leading to a more than 15% plunge in the stock price Wednesday morning.
“Despite the cut, we believe it would have been prudent to cut even further and reset the bar. We fear the challenging macro and potential for further near-term discounting will likely further weigh on the current year outlook but believe shares reflect this,” said BMO analyst Simeon Siegel, who reduced his price target to US$24 from US$25 and reiterated a “market perform” rating.
Most analyst price target reductions were in the $1 to $2 range. The average target is now US$21.63, down from $23.81 a month ago.
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Raymond James analyst Jayson Bedford said he’s growing impatient with Medtronic PLC (MDT-N), the largest pure-play medical devices company, and downgraded his rating to “market perform” from “outperform.”
He no longer has a price target on the stock. Previously, it was US$109, which is about the average target on the Street.
“Supply chain dynamics have disrupted MDT’s growth more so than peers, and our concern is that it will take longer for MDT to regain momentum. We are also increasingly concerned that a higher level of investment is needed to drive a mid single-digit revenue growth profile,” he said in a note.
“Valuation limits the downside, and we believe management is making the right investments for the long-term, but for us, we believe there are other large cap value names in our coverage with a more attractive risk/return profile,” Mr. Bedford said.
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In other analyst actions:
Transalta Corp (TA-T): Credit Suisse cuts target price to C$17.5 from C$18.5
Transalta Renewables Inc (RNW-T): Credit Suisse raises target price to C$19.5 from C$19
Wesana Health Holdings Inc (WESA-CN): Stifel GMP cuts target price to C$0.25 from C$4
Boralex Inc (BLX-T): Credit Suisse raises target price to C$55 from C$46
Capital Power Corp (CPX-T): Credit Suisse raises target price to C$57.5 from C$54
Cloudmd Software & Services Inc (DOX-X): Canaccord Genuity cuts PT to C$0.40 from C$0.45
Dollarama Inc (DOL-T): National Bank of Canada raises target price to C$82 from C$77
Innergex Renewable Energy Inc (INE-T): Credit Suisse raises PT to C$27.5 from C$24
Beyond Meat Inc (BYND-Q): Piper Sandler cuts target price to US$9 from US$12
Twitter Inc (TWTR-N): Rosenblatt Securities cuts target price to $37 from $52 and downgrades rating to “neutral” from “buy”
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