Inside the Market’s roundup of some of today’s key analyst actions
There has been mixed - but mostly pretty negative - analyst reaction to TC Energy Corp.’s (TRP-T) plans to split into two separate companies, spinning off its liquids pipelines business from its natural gas and low-carbon energy operations.
BMO cut its target price to C$55 from C$60 as it downgraded its rating to “market perform” from “outperform”; National Bank of Canada upgraded its rating to “outperform” from “sector perform” as it raised its target price to C$54 from C$53; and TD Securities downgraded its rating to “hold” from “buy” as it cut its price target to C$50 from C$62.
BMO analyst Ben Pham, in a note to clients, explained why he’s taking a negative view of TC Energy’s plans: “Our TRP thesis changes somewhat following the liquids separation announcement. Previously, we believed valuation would rise on asset sales/debt reduction and as CGL [Coastal GasLink project] concerns ease. Now we believe share performance will be driven by perceived value of the two separate entities, and while Nat Gas/Power could trade at a healthy valuation, we are doubtful Liquids will. As such, we are not yet convinced the separation will add value. Instead, we believe it will detract for now.”
TD Securities also said it was skeptical the spinoff would create value. “We see execution risk introducing uncertainty and potentially distracting (TC) from its existing strategic priorities,” TD analyst Linda Ezergailis said in a note.
The market, so far, seems to be siding with Mr. Pham and Ms. Ezergailis. Shares were trading down more than 5% Friday.
CIBC analyst Robert Catellier said the planned tax-free spinoff of the liquids pipelines business, as well as second quarter results, are neutral to his outlook. “Benefits of the spinoff may include a potentially higher multiple for the remaining TC Energy business focused on natural gas and low-emissions power. Risks include the ultimate value of the Liquids business in light of its smaller size, lower growth, and currency risk,” he said. Mr. Catellier is keeping a “neutral” rating on the stock and a C$60 price target.
He noted second quarter results were close to expectations.
The company held an analyst call this morning to discuss the transaction and its latest financials, so more rating and price target moves could be forthcoming. But the average target on the Street so far has fallen by about $3 since TC Energy’s announcement, to C$57.74, according to Refinitiv Eikon data.
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ATB Capital Markets analyst Chris Murray says any pullback in shares of Canadian Pacific Kansas City (CP-T) in the wake of weaker-than-expected quarterly results released after the bell on Thursday would be a buying opportunity.
Mr. Murray maintained an “outperform” rating and 12-month price target of C$120.
He said in a note to clients: “CP released Q2/23 results reporting revenue, Adjusted EBITDA and Adjusted FD EPS of $3.2bn, $1,591mm and $0.83, which were mixed versus ATB estimates of $3.1bn, $1,466mm and $0.86. CPKC delivered mixed results, which was not unexpected given it is in the early stage of integrating the two networks in the middle of a freight recession. Management acknowledged that headcount remains elevated but views the investment as necessary to support its unique growth outlook. Management reiterated full-year guidance and was upbeat on its volume outlook, with bulk expected to return to growth in H2/23 and intermodal positioned to benefit from its expanded network reach and added capacity in eastern Canada. ... The quarter reaffirmed our view that CPKC remains a best-in-class growth story and would view any weakness as a buying opportunity.”
BMO analyst Fadi Chamoun, who has an “outperform” rating on the stock and a C$128 price target, also took a positive view.
“CPKC’s recent Investor Day provided a compelling framework supporting brisk growth for the company over the next 5-10 years, which combined with best-in-class execution, offers the best option for growth in the rail industry in our opinion,” the BMO analyst said. “Near-term cyclical challenges may mute the pace of growth for everyone including CPKC, but with merger-related idiosyncratic opportunities, CPKC remains best positioned to grow both in the near term and the long term.”
There were some price target adjustments on the Street this morning in the wake of the earnings. RBC trimmed its price target by C$1 to C$124. JP Morgan’s target rose to C$125 from C$118 and TD Securities’ target rose to C$125 from C$120.
RBC analyst Walter Spracklin explained why his target went up in a note to clients: “While Q2 results were particularly weak, mgmt’s move to maintain its guidance implies quite a significant inflection in H2 - a move we consider to be very bullish. Our key objective therefore on the call was to ascertain if this bullishness was predicated on concrete or instead on aspirational trends. Key is that we received unequivocal confirmation that it was indeed the former; and therefore we recommend strongly a buy-on-weakness strategy [Friday] should there be any knee-jerk reaction to the weaker Q2 results. Reiterate CP as a favourite name in railroads.”
The average analyst price target is up about $1 since the earnings were released, to C$119.53.
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Canaccord Genuity analyst Yuri Lynk has decided, in his words, to “capitulate” when it comes to his support for AirBoss of America Corp. (BOS-T) after the company delivered disappointing preliminary quarterly results.
He downgraded his rating to a “hold” from a “buy” while aggressively slashing his one-year price target to C$6.50 from C$15.
After markets closed Thursday, AirBoss, a manufacturer of rubber-based products for the resource, military, automotive and industrial markets, announced a preview of second quarter results while also disclosing some leadership changes. Chris Bitsakakis, current president and chief operating officer, will assume the role of president and co-CEO alongside current CEO Gren Schoch. The company also announced it implemented cost-saving measures across AirBoss Defense Group’s (ADG) operations, including a reduction in its workforce, which is expected to generate $5 million in annual cost reductions. Management aims to streamline the segment’s operations following a series of acquisitions and a slowdown in business activity.
In terms of the second quarter preliminary results, revenues were forecast at between $112.5 million to $115.0 million, largely in line with consensus at the mid-point, the analyst noted. But EBITDA was forecast at between $5.0 and $5.3 million, down from Q2/2022′s $10.5 million and 54% behind consensus at the mid-point. And the company forecast a loss per share of between 8 cents and 12 cents, a considerable miss from the consensus forecast of a profit of 10 cents per share.
“The underlying earnings power of ADG continues to disappoint and, worse still, is highly unpredictable,” said Mr. Lynk in a note to clients. “The Q2/2023 guidance of about $5.2 million of EBITDA is half of what we had previously contended was steady state quarterly EBITDA for the company.”
As for the leadership changes, “we find it curious,” he said. “Co-CEO situations are extremely rare for a reason: it’s generally best to have one person in charge.”
“We are aggressively reducing our forward estimates to reflect heightened uncertainty in the outlook,” he added. He reduced his 2023 EBITDA estimate from $50 million to $36 million, and cut his 2024 EBITDA estimate from $56 million to $41 million.
In other analyst actions, National Bank of Canada cut its price target to C$11 from C$12. And CIBC downgraded its rating to “neutral” and slashed its price target to C$7 from C$15.
The average analyst price target is C$9.67.
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Desjardins Securities analyst Lorne Kalmar downgraded Allied Properties Real Estate Investment Trust (AP-UN-T) to “hold” from “buy”, and lowered his price target to C$24 from C$31.
The main reason? Workers are just not returning to offices nearly as quickly as he originally thought. And that’s not good for the office REIT.
“Over the course of 2023, it has become increasingly clear that a broader return-to-office trend and an increase in leasing activity are likely longer-term catalysts than we had initially anticipated,” Mr Kalmar said in a note to clients. “We are finding it increasingly difficult to envision near-term catalysts that would move the stock meaningfully higher.”
“We continue to have confidence in the longer-term prospects for the REIT’s office portfolio, predicated on its solid performance leading up to the pandemic, as well as the embedded value within its urban land bank. However, given the current state of the office market, we believe AP’s unit price will likely remain range-bound until fundamentals and, perhaps more importantly, investor sentiment toward the sector improve in a meaningful way,” he said.
He suggested investors look elsewhere in the REIT sector for opportunities.
“While we acknowledge the current valuation is appealing vs historical levels, and the 8% distribution yield is attractive and remains well-covered, we believe there are other opportunities within the REIT space that offer more attractive total returns and greater visibility over the near to medium term,” the Desjardins analyst said.
The average analyst price target is C$26.18.
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Several analysts cut their price targets on Storagevault Canada Inc (SVI-T) in the wake of the company’s second quarter results and commentary that demand for storage in Canada has normalized back to seasonal patterns.
National Bank of Canada cut its price target to C$5.5 from C$6.25, RBC cut its target price to C$6.5 from C$7.5, and Raymond James cut its target to C$5.75 from $6.75.
“StorageVault suggested that Canadian storage leasing demand fundamentals and tenant turnover trends (historical tenant length of stay: about 13 months) have normalized back to historical seasonal patterns, while slower Canadian housing transaction activity could have contributed to lower leasing demand within some of StorageVault’s secondary and tertiary market locations,” said Raymond James analyst Brad Sturges.
Last year, average occupancy rates were in the low 90% range. They’ve now come down to the high 80% range.
StorageVault’s second quarter Same Property Net Operating Income (SP-NOI) growth was up 2.2% from a year earlier, but sequentially down from growth of 6.3% year-over-year in the first quarter, mostly due to lower average occupancy rates.
“We forecast StorageVault to generate 2023 SP-NOI growth in the +4%-6% YoY range (vs. +12.5% YoY in 2022), and in-line with its US storage peers’ guidance,” Mr. Sturges wrote in a note to clients. “While we expect StorageVault may face further average occupancy rate headwinds in the next 2-3 quarters that constrain its near-term SP-NOI growth YoY, we believe future rate growth YoY, combined with NOI margin expansion potential may provide a medium-term, high-single-digit SP-NOI growth profile for StorageVault.
He is maintaining a “market perform” rating on the stock.
The average price target is C$6.54.
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CIBC analyst Todd Coupland upgraded Celestica Inc. (CLS-N, CLS-T) to “outperformer” and nearly doubled his price target to US$25 from US$14 after the company’s latest earnings.
“This upgrade is supported by Celestica’s Q2 beat and the raise of its 2023 guidance. Q2 revenue was 5% higher than FactSet, while EPS was 15% higher. Its revised 2023 outlook calls for higher Y/Y growth in revenue (8%) and EPS (19%). Demand trends are strong across its business. The company is also experiencing accelerated AI-related demand in the Enterprise business (26% of total revenue) from hyperscaler customers such as Google, Microsoft and Amazon. These facts provide us increased confidence in our forecast and the expectation of a peer valuation,” Mr. Coupland said in a note.
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CIBC downgraded Great-West Lifeco Inc. (GWO-T) to “neutral” from “outperformer”, citing limited upside potential after its rally this year. The price target remains at C$41.
“GWO is up 28% YTD vs. an average of 11% for peers and the stock is approaching our $41 price target. The stock is trading at 10.0x P/E (2024E) vs. a five-year average of 9.8x. No change to our earnings outlook, but we think earnings upside is now priced in,” said CIBC analyst Paul Holden.
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Price target reductions are coming in this morning for Aecon Group Inc (ARE-T) after disappointing quarterly results this week that sent its stock skidding 16% on Thursday.
ATB Capital Markets cut its target price to C$16.25 from C$18, RBC cut its target price to C$12 from C$14, Desjardins Securities cut its target to C$16 from C$19, iA Capital Markets cut its target to C$16 from C$18, BMO cuts its target price to C$14 from C$15, and TD Securities cut its target price to C$11.50 from C$14.50.
Nevertheless, ATB Capital Markets analyst Chris Murray also argues that “core fundamentals” for the engineering firm remain strong, and he is maintaining an “outperform” rating.
Aecon Group reported net revenue, EBITDA and EPS of $1.2 billion, $16.7 million, and $0.38, respectively, well below ATB’s forecasts of $1.1 billion, $51.6 million, $2.24. Results were also well below consensus forecasts. The big profit miss reflected challenges at two legacy projects resulting in $81.3 million in anticipated higher costs.
“While the cost reforecast was a negative surprise and highlights the challenges around earnings visibility, the margin achieved on the underlying business ( about 9%+) was better-than-expected and reflects an improving project mix and execution. We continue to see significant value in the company’s shares for holders willing to shoulder the uncertainty, with shares closing at 4.2x estimated 2024 EBITDA after Thursday’s 16% sell off,” Mr. Murray said.
Desjardins Securities analyst Benoit Poirier also continues to recommend the stock, keeping a “buy” rating.
“The base business continues to perform well and the backlog is at record levels. We thus see Thursday’s weakness as an attractive entry point for longer-term investors as these issues are temporary,” he said.
iA Capital Markets analyst Naji Baydoun is keeping his “buy” rating as well.
Mr. Baydoun commented: “ARE continued working off its four large legacy fixed-price contracts so far this year; these projects have put a substantial dent in near-term profits, but most are expected to be completed over the next 12 months with about $700 million of work related to these contracts left in backlog. We expect material profitability improvement once those legacy projects are cleared from the backlog and see a path for margins to gradually return to a normalized level.”
More analyst reaction to Aecon’s earnings can be found here in Thursday’s upgrades and downgrades.
The average analyst price target is about C$14, down $2 since the results were released.
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In other analyst actions:
Alamos Gold Inc (AGI-T): TD Securities raises to “buy” from “hold”
Canadian Utilities Ltd (CU-T): BMO cuts target price to C$38 from C$39; RBC cuts target price to C$40 from C$43; TD Securities cuts target price to C$37 from C$39
Cenovus Energy Inc (CVE-T): National Bank of Canada cuts target price to C$31 from C$33
New Gold Inc (NGD-T): National Bank of Canada cuts target price to C$1.75 from C$2
North American Construction Group Ltd (NOA-T): ATB Capital Markets raises price target to C$43 from C$32
Precision Drilling Corp (PD-T): RBC raises target price to C$118 from C$100; BMO raises target price to C$110 from C$100; TD Securities raises target price to C$125 from C$105;
Tamarack Valley Energy Ltd (TVE-T): ATB Capital Markets cuts target to C$6.5 from C$7; Stifel raises target price to C$5.5 from C$5; Cormark Securities cuts target to C$5.25 from C$5.5
Teck Resources Ltd (TECK-B-T): National Bank of Canada raises to “outperform” from “sector perform” and raises target price to C$70 from C$67
Intel Corp (INTC-Q): At least seven analysts raised their price targets, including JP Morgan to US$35 from $30, TD Cowen raises target price to $38 from $31, and Wells Fargo to $40 from $32
McDonald’s (MCD-N): At least 10 analysts raised their price targets, including BofA Global Research to US$343 from $319 and TD Cowen to $340 from $326