Inside the Market’s roundup of some of today’s key analyst actions
Analysts are liking North American Construction Group Ltd.’s (NOA-T) $395-million acquisition of MacKellar Group, an Australia-based provider of heavy equipment earthwork solutions to the mining and civil sectors.
And so are investors, with shares up 36% at midday in Toronto.
TD Securities raised its price target to C$36 from C$27 as it upgraded its rating to “buy” from “hold”. BMO raised its target price to C$34 from C$30. National Bank Financial raised its price target to C$42 from C$33.
The deal was announced Wednesday night at the same time as North American Construction’s earnings, which largely came in as expected by the Street.
“Solid asset at attractive valuation materially increases footprint in Australia; reminds us of Nuna/Aecon asset combo M&A – transformational and accretive,” reacted National Bank analyst Maxim Sytchev in a note to clients.
MacKellar has a similar business model as North American Construction, and the acquisition will add 40% to 50% incremental revenue, EBITDA and EPS to the Street’s 2024 estimates for the company, he said.
“Board and management team of NOA over time (since 2012) have found a way to generate margin / Return on invested capital improvements irrespective of how challenging the operating environment had been, while also identifying M&A opportunities that have been proven idiosyncratic and highly value generative. Last night’s acquisition of MacKellar Group fits the same blueprint – private (hence, ability to leverage NOA’s operational expertise, IT, best practices, etc.), value accretive, marginal increase in leverage, material EBITDA / EPS growth on pro-forma basis, diversifying, and, critically, with a similar cultural fit in a resource-friendly geography. As a result, we believe the market should come to a similar constructive conclusion. We reiterate Outperform rating on the shares,” Mr. Sytchev said.
The average analyst price target on the stock is C$33.60, up from C$30.17 a month ago, according to Refinitiv Eikon data as of midday Thursday.
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Aecon Group Inc. (ARE-T) shares are being punished by investors today after the company reported quarterly profits late Wednesday that fell well short of analyst expectations.
The company was holding its analyst conference call this morning, and price target and rating moves by analysts may not come until Friday.
But the reviews of the quarterly results haven’t been positive so far.
“HOLD-rated Aecon delivered a disappointing set of Q2/2023 results,” summed up Canaccord analyst Yuri Lynk.
“EBITDA fell 57% y/y to $17 million, materially below our $52 million estimate and the FactSet consensus of $55 million. ... The miss was entirely due to an $81 million cost reforecast taken across the four legacy lump-sum fixed price projects that have been negatively impacting results for two years. We believe the largest contributor to the quarterly cost reforecast was the settlement reached on the Finch LRT. Clearly, the settlement amount fell short of allowing Aecon to recover all the costs it has incurred,” Mr. Lynk said in a note to clients prior to the conference call.
He noted project backlog of $6.851 billion did increase marginally from $6.605 billion in the second quarter of 2022. And despite the poor results, Aecon’s balance sheet remains strong. “The net debt-to-EBITDA ratio at the end of the quarter was 2.5x with the sale of its Ontario roadbuilding business closing May 1. The sale of 49.9% of the Bermuda Airport for $170 million will close in Q3/2023 and further reduce indebtedness.”
“We continue to view the medium-term outlook as too cloudy to recommend the stock at this valuation level,” he said.
National Bank Financial analyst Maxim Sytchev wasn’t sounding very impressed either.
“ARE’s Q2/23 results once again highlighted the (very sticky) tail risks created by problematic large-scale projects. While the associated backlog was down by -35% since Q4/22 to $699 mln, the company had to book a -$81.3 mln operating loss on the portfolio during the quarter. We suspect pressures on OCF/FCF will persist at least through the end of the year, as improved Bermuda traffic contribution (sale of 49.9% interest to CC&L Infrastructure expected to close in Q3/23E) cannot offset the cash drag resulting from the troublesome portfolio,” Mr. Sytchev said.
In early trading, shares were down 15%.
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The market overreacted Wednesday to CGI Inc. (GIB-A-T) reporting a slowdown in its organic growth given that the IT consulting company still has strong bookings, said Desjardins Securities analyst Jerome Dubreuil.
CGI shares fell nearly 5% after the firm reported earnings and revenues that were close to the Street consensus but said its organic growth slowed to 5% in its fiscal third quarter from the previous three-month period. In its second quarter, growth was 9%
“While clients’ assessment of AI and macro uncertainty could lead to softer near-term demand in the IT market, we believe CGI’s focus on Return on Investment-generating solutions and strong exposure to the government vertical—which is currently a source of high growth—will help bridge over the near-term uncertainty,” Mr. Dubreuil said in a note to clients.
“CGI’s 3Q book-to-bill ratio of 121% was the strongest in nine quarters, thanks notably to strong demand from the US federal government. We believe there is potential for continued strength in the segment in 4Q FY23 as the government’s last fiscal quarter (also in September) is typically busy for contract allocations,” he said.
The analyst reiterated a “buy” rating, but did trim his price target by C$1 to C$154.
Canaccord Genuity analyst Robert Young was disappointed CGI didn’t report any large M&A deals in the pipeline, but also saw no reason for investors to sell shares. He reiterated a “buy” rating and C$155 price target.
“Given strong demand, CGI’s backlog was up 10% YoY to $25.6B whereas bookings, largely driven by managed services engagement for government and financial services, were up ~29% YoY providing confidence in demand and near term estimates,” Mr. Young said. “Management remains confident on margin expansion driven by multiple factors. A more aggressive stance on AI investment is a modest headwind on margins, although management foreshadowed formal partnership announcements which may be a catalyst. CGI continues to evaluate M&A opportunities but sees more emphasis on buyback given target valuation expectations. Disappointingly, CGI reported no large M&A opportunities in the pipe which removes a positive catalyst. At a time when many IT services peers have cut guidance and indicated caution, CGI has continued to demonstrate strong execution on profitability and bookings.”
Elsewhere, BMO cut its target price to C$147 from C$156.
CIBC analyst Stephanie Price maintained an “outperformer” rating and $150 price target. She had a slightly different take: “We believe that the stock was down due to concerns around longer sales cycles. We see the longer sales cycles as indicative of a client preference for RIO [Return on Investment] driven work, leading to greater demand for larger managed services contracts versus shorter-duration consulting engagements. We believe that the overall demand environment remains solid, with CGI seeing a strong book-to-bill in FQ3 (1.21x), but expect that the higher proportion of managed services bookings will take slightly longer to convert to revenue. Overall, we see CGI’s focus on ROI-driven work and AI as a differentiator which we expect to benefit the company longer-term.”
The average analyst price target is now C$148.69, down from $150.85 a month ago, according to Refinitiv Eikon data.
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Analysts have been busy nudging up their price targets on Loblaw Companies Ltd (L-T) after the grocer reported quarterly results on Wednesday that pointed to continued earnings per share growth throughout this year.
CIBC raised its target price to C$152 from C$149; National Bank of Canada raised its target to C$142 from C$140; and RBC raised its target price to C$169 from C$168.
Desjardins Securities analyst Chris Li is more conservative on the stock, maintaining a “hold” rating and C$133 price target.
“While L is well-positioned to capitalize on current industry trends, we believe slowing food inflation, tougher comparisons in the second half of the year and potential for sector rotation would limit valuation expansion,” Mr. Li said.
Loblaw reported EPS growth of 15% in its second quarter, in line with expectations, driven by continued strength in food and drug sales due to high food inflation, a shift to discounted sales, market share gains, solid pharmacy sales, good cost control and share buybacks, the analyst noted.
Despite the solid results, Loblaw shares underperformed the S&P/TSX Composite Index on Wednesday, with the stock down 2% vs flat for the TSX.
“We attribute this partly to gross margin decline (-30bps vs our +10bps), mainly due to supplier cost increases (double digits) that were not fully passed through and higher shrink. The majority of the margin decline was at Shoppers (theft by organized crime and, to a lesser extent, lapping strong comps from COVID-19-related services last year). Excluding shrink, Shoppers’ gross margin was up. Food margins were largely stable, with higher supplier costs largely offset by other initiatives. Some margin headwinds are expected to linger in 3Q but should normalize in 4Q as initiatives are in place to reduce shrink, and Shoppers will lap the COVID-19-related services and benefit from growing contribution from expanded scope of practice for pharmacists,” Mr. Li said.
The average analyst price target is C$141.22, up from $140.72 a month ago.
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A handful of analysts have modestly hiked their price targets on Rogers Communications Inc. (RCI-B-T) in the wake of the company’s earnings on Wednesday and increased guidance. But they are also urging investors to use some caution given the turmoil in the telecom sector and the risks that come with its integration with Shaw Communications.
National Bank of Canada raised its price target to C$80 from C$79, RBC raised its target to C$72 from C$71, and Desjardin Securities raised its target to C$71 from $68.
Desjardins Securities analyst Jerome Dubreuil is maintaining a “hold” rating for now, commenting that “the near-term risk-reward ratio in RCI shares is currently not attractive.”
“RCI’s guidance increase, which was mostly material for free cash flow, was an encouraging sign of the progress on the Shaw integration, which we believe is the biggest driver of RCI’s share price performance. This news, coupled with beats in subscriber loading, were encouraging,” Mr. Dubreuil said in a note to clients.
However, he believes it’s “too early to declare victory” over integration risks, and a lot of things are going on in the sector that present risks.
“Price competition, the Mobile Virtual Network Operator rate decision, looming fixed wholesale review, Shaw integration, Fibre to the Home deployment, spectrum auction—the turbulent times in Canadian telecom make it more difficult for us to recommend being overweight the most levered story in the sector, even if we see a path to deleveraging,” the analyst said. “We would rather wait and see what happens competition-wise during the back-to-school period and following QBR’s 5G launch before changing our recommendation on RCI.”
The average analyst target is C$72.63.
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Tilray Brands Inc. (TLRY-Q, TLRY-T) is getting some mixed reaction after reporting earnings Wednesday. Even though its stock surged about 15%, some analysts have lowered their price targets: CIBC cut its target to US$2.25 from US$2.75, Piper Sandler cut its target to US$2 from US$3, and TD Cowen cut its target to US$3 from US$5.
ATB Capital Markets, on the other hand, raised its target price to US$3 from US$2.5.
ATB analyst Frederico Gomes praised the quarterly results, but noted he is maintaining a “sector perform” rating because the pot company’s stock price is looking rather pricey based on valuation metrics.
“Tilray’s Q4/FY23 results were positive, with sales growth across all segments, improving margins, and working capital management driving break-even adj. FCF for the fiscal year. Management issued FY2024 guidance for adj. EBITDA between $68mm to $78mm (implying 19% y/y growth at the midpoint) and positive adj. FCF (excluding growth capex, HEXO integration costs, and cash income taxes from Aphria Diamond),” Mr. Gomes said in a note to clients.
“We think the guidance is achievable via an improved cost structure and sales growth in Alcohol and Cannabis (our estimates have sales increasing 26% in FY2024, which includes the HEXO consolidation). In our view, Tilray’s improving cash burn shows resiliency in turbulent conditions and positions it well to remain the leader in Canadian adult-use and continue to grow in Alcohol. We are increasing our estimates and PT on the positive results and constructive guidance; however, at a NTMe EV/EBITDA multiple of 20.8x (vs. Canadian peers at 10.7x and MSOs at 7.5x), we think the valuation prices in much of our growth expectations,” he said.
The average analyst target on Tilray is US$2.71, down from US$3.11 a month ago.
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RBC raised its price target on Athabasca Oil Corp (ATH-T) to C$4 from C$3.5 on the back of strong operating performance in its latest quarter.
“Athabasca posted an in-line quarter with Leismer ramping ahead of expectations,” noted RBC analyst Luke Davis. “In our view, the thermal business has performed well this year with Leismer continuing to improve as new well-pairs come online. We expect this sets up well for 2024 with management likely to begin allocating incremental capital into the light oil business, driving moderate growth.”
Mr. Davis is maintaining a “sector perform” rating on Athabasca. The average analyst target is C$4.13.
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At least 22 analysts raised their price target on Meta Platforms Inc (META-Q) in the wake of the company’s quarterly earnings report late Wednesday - and most were quite hefty.
Among them: Barclays raised its target price to US$410 from US$320, JP Morgan went to US$425 from US$305, and RBC’s target went to US$400 from US$330.
The average analyst target is now US$338.25, up from US$283.12 a month ago.
“On top of a slight Q2 revenue beat, META guided Q3 nearly 7% ahead of Street at the mid-point,” noted RBC analyst Brad Erickson.
“To us, structural ad platform improvements are coinciding with easing comps, easing Fx & strength from China, Ecom & gaming to produce the strong results with q/q conversion improvements once again cited as driving better advertiser spend vs. other channels,” he said.
“We liked management speaking to capex and opex next year given elevated ‘24 earnings expectations. While Metaverse spending seemed more of the hot button issue than the capex commentary, management has now both given indications of significant increases as well as provided some comfort in reminding it aims to reduce capex intensity even as new AI products ramp,” the RBC analyst added.
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At least five analysts raised their price targets on Boeing Co. (BA-N) in the wake of the company’s earnings, including JP Morgan to US$245 from US$225, Morgan Stanley to US$235 from US$220, and TD Cowen to US$255 from US$230.
RBC analyst Ken Herbert is maintaining a “sector perform” rating and price target of US$225.
“The highlight of the 2Q23 results was the $2.6B in free cash flow,” Mr. Herbert commented. “Management did not change its full year FCF guide of $3B-$5B, but the strong 2Q23 FCF has increased confidence in the 2023 FCF outlook. BA indicated that over $2B of the FCF was the result of strong advance payments on the strong 2Q23 order activity. The company benefited from the finalization of a 55 MAX remarketing order as it continues to de-risk its China exposure.”
“We continue to believe BA is under-owned, but we continue to see risks to the long-term production and delivery plans, which we believe will limit significant upside on the stock,” he added.
Boeing shares spiked more than 8% on Wednesday.
Morgan Stanley analyst Kristine Liwag said she expects the positive momentum to continue as the company is able to realize production rate increases on its flagship program. However, while Wednesday’s report was a positive step forward, she views Boeing’s stock as a “show-me” story. She maintained an “equal weight” rating, seeing the risk-reward as balanced.
The average analyst target on Boeing is US$244.38, up from US$235.43 a month ago.
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In other analyst actions:
Anaergia Inc (ANRG-T): TD Securities downgrades rating to “hold” from “speculative buy” but raises target price to C$1.75 from C$1.50
Crescent Point Energy Corp (CPG-T): Stifel raises target price to C$16 from C$15.25; TD Securities raises target to C$13.5 from C$13; BMO raises target price to C$13 from C$12.5; Raymond James raises target to C$13 from C$12.50;
Dialogue Health Technologies Inc (CARE-T): CIBC raises target price to C$5.15 from C$4; TD Securities cuts to tender from hold and raises price target to C$5.15 from C$4
EQB Inc. (EQB-T) National Bank Financial hikes price target to C$88 from C$78.
Onex Corp (ONEX-T): Canaccord Genuity raises target price to C$89 from C$81
Parkland Corp (PKI-T): Canaccord Genuity raises target price to C$40 from C$36
Whitecap Resources Inc (WCP-T): RBC raises target price to C$14 from C$13; Stifel raises target price to C$13.75 from C$13
Apple Inc (AAPL-Q): Bernstein raises target price to US$195 from US$175
Microsoft (MSFT-Q): Bernstein raises target price to US$398 from US$380; Rosenblatt Securities raises target price to US$360 from US$310
Union Pacific Corp (UNP-N): At least eight analysts raised their price targets, including Citigroup raising its price target to US$270 from US$235; Credit Suisse to US$262 from US$235, JP Morgan to US$254 from US$208, and RBC to US$282 from US$193