Inside the Market’s roundup of some of today’s key analyst actions
Heading into 2023, CIBC World Markets analyst Kevin Chiang is maintaining a “defensive posture” toward TSX-listed transportation and industrial stocks in his coverage universe.
“Going back at the Global Financial Crisis, the S&P Transportation Index hit its cycle bottom 5 months before U.S. Industrial Production found its floor,” he said. “Similarly, looking at the lull in Industrial Production during the 2015/16 Freight Recession, this bottomed out in March 2016 while transport equities troughed 2-3 months prior. CIBC Economics is forecasting GDP to hit a trough in H1/23, suggesting that transportation equities may be finding a floor now given historical trends. That said, our defensive posture reflects the recognition that there is downside risk to our economic forecasts as Central Banks look to tame inflation. We would also note that even in 2024, our GDP forecast still points to underwhelming growth when compared to the three years prior to the pandemic. The economic environment faces heightened uncertainty. While we do believe a number of freight KPIs are approaching their floor, we are not expecting a ‘hockey stick’ recovery.”
Given that view, Mr. Chiang said he prefers companies that possess “more predictable earnings driven by inflation-plus pricing, less cyclical volume exposure, healthy margins, and strong FCF potential.”
“Our top picks consist of four names – CP, WCN, GFL and CJT. We see these companies benefiting from good earnings visibility during a period of heightened volatility and our Portfolio Strategy team calling for mid-single digit market returns next year,” he said.
Mr. Chiang downgraded a pair of stocks in his coverage universe on Wednesday.
Citing a limited potential return to his target, he lowered Canadian National Railway Co. (CNR-T) to “neutral” from “outperformer” with a $182 target, up from $170. The average on the Street is $161.43.
“[We] continue to have a positive fundamental outlook on CN but downgrading to Neutral to reflect return to target,” he said.
Based on “ongoing supply chain issue concerns,” Mr. Chiang moved NFI Group Inc. (NFI-T) to “underperformer” from “neutral” with an $8.50 target, down from $10. The average is $13.
“[We are] downgrading to Underperformer reflecting ongoing supply chain bottlenecks and lack of visibility as to when these issues resolve themselves,” he said. “We also adjusted our near-term estimates to reflect these challenges. We continue to expect NFI to benefit from a healthy demand environment but earnings recovery path remains uncertain.”
He also made these target adjustments:
- Air Canada (AC-T, “outperformer”) to $31 from $30. Average: $27.07.
- Bombardier Inc. (BBD.B-T, “neutral”) to $57 from $47. Average: $59.82.
- Cargojet Inc. (CJT-T, “outperformer”) to $207 from $203. Average: $198.36.
- Canadian Pacific Railway Ltd. (CP-T, “outperformer”) to $130 from $120. Average: $113.26.
- Chorus Aviation Inc. (CHR-T, “outperformer”) to $4.75 from $4. Average: $4.58.
- GFL Environmental Inc. (GFL-T, “outperformer”) target to $50 from $46. Average: $44.14.
- Lion Electric Co. (LEV-N/LEV-T, “neutral”) to US$5 from US$7. Average: US$5.74.
- Mullen Group Ltd. (MTL-T, “neutral”) to $15.50 from $15. Average: $16.75.
- TFI International Inc. (TFII-N/TFII-T, “outperformer”) target to US$123 from US$115. Average: US$118.
- Transat AT Inc. (TRZ-T, “underperformer”) target to $2.20 from $2. Average: $2.49.
- Waste Connections Inc. (WCN-N/WCN-T, “outperformer”) to US$165 from US$156. Average: US$153.56.
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In conjunction with changes to RBC’s commodity price forecast, equity analyst Greg Pardy made a series of target price adjustments to energy stocks in his coverage universe on Wednesday.
The firm raised its 2023 and 2024 outlook for Brent to US$95.56 and US$101.46 per barrel, respectively, from US$94.75 and US$88.10. Its WTI forecast increased to US$92.06 and US$98.46 from US$91.25 and US$84.10.
“Our investment recommendations remain unchanged across the board, and we continue to favor companies that possess focused leadership teams, improving balance sheets, capable execution and resilient business models,” he said. “From where we sit, the sector themes of capital discipline, balance sheet deleveraging via debt reduction and shareholder returns (with an emphasis on share buybacks) will continue into 2023.
“Our favorite Canadian Major remains Canadian Natural Resources (Global Top 30 and Energy Best Ideas lists), with Enerplus Corporation (Energy Best Ideas list) our favorite amongst the Intermediate producers. Cenovus Energy, Imperial Oil, MEG Energy and Suncor Energy round out our Outperform roster.”
His changes were:
- Canadian Natural Resources Ltd. (CNQ-T, “outperform”) to $89 from $88. Average: $92.95.
- Cenovus Energy Inc. (CVE-T, “outperform”) to $33 from $32. Average: $33.50.
- Enerplus Corp. (ERF-N/ERF-T, “outperform”) to US$21 from US$20. Average: US$21.
- Imperial Oil Ltd. (IMO-T, “outperform”) to $82 from $81. Average: $79.56.
- Ovintiv Inc. (OVV-N/OVV-T) to US$60 from US$58. Average: US$68.64.
- Suncor Energy Inc. (SU-T, “outperform”) to $55 from $54. Average: $54.10.
- Vermilion Energy Inc. (VET-T, “sector perform”) to $32 from $31. Average: $39.43.
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Accelerating M&A activity in the first quarter of its fiscal 2023 is positioning Mainstreet Equity Corp. (MEQ-T) for “another year of outsized acquisition growth as management leverages its countercyclical M&A strategy,” according to ATB Capital Market analyst Chris Murray.
“We view valuations as increasingly attractive, particularly given the acceleration in M&A at the beginning of FY2023 and improving trends around vacancy in core Western Canadian markets,” he said.
That led Mr. Murray to raise his recommendation for the Calgary-based residential real estate company, which focuses on acquiring and managing mid-market rental apartment buildings, to “outperform” from “sector perform” previously.
On Tuesday, Mainstreet reported fourth-quarter results that largely fell in line with expectations. The analyst called the report “strong, highlighted by its fourth consecutive quarter of double-digit NOI [net operating income] growth, with vacancy rates and the number of stabilized units improving sequentially.”
During the quarter, the company acquired 70 units for $7-million, bringing its full-year total to 815. Thus far in the current year, it has added 548 units, including 287 in Winnipeg for $24.1-million, which Mr. Murray said “represents a potential growth market for the Company given the size of the market and MEQ’s limited existing penetration.”
“With $360.0-million in liquidity in place, MEQ remains positioned to acquire assets below replacement cost at scale should market conditions experience further weakness in 2023,” he said.
“While inflationary pressure and higher rates present operating challenges in 2023, management expects a constructive commodity price environment to continue to support positive in-migration trends in Alberta, helping to offset macro pressures, with average vacancy falling to 5.6 per cent in the quarter (down 320 basis points quarter-over-quarter). Furthermore, the Federal government’s increased immigration targets and elevated housing costs represent structural tailwinds that should support occupancy rates in Western Canada and NOI growth on a go-forward basis, noting Alberta and Saskatchewan are not subject to rent controls.”
Raising his net operating income and funds from operations projections to account for the accelerated M&A activity, Mr. Murray hiked his target for Mainstreet shares to $135 from $128. The average is currently $143.33.
“Despite experiencing a recent pullback with the broader markets, shares of MEQ are up significantly over the past year, with the Company trading at a premium on both a price-to-book and price-to-FFO basis. While capitalization rates have remained quite low for multi-family residential and could modestly improve alongside the Alberta economy, we believe that interest rates are likely to continue to rise and could offset any gains as spreads remain steady or widen,” he concluded.
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Scotia Capital analyst Michael Doumet expects margin improvement for Badger Infrastructure Solutions Ltd. (BDGI-T) to take longer than previously anticipated.
Given his view that share price performance is contingent on those gains, he lowered his recommendation for the Calgary-based excavation company to “sector perform” from “sector outperform” on Wednesday.
“Earlier this year, we upgraded BDGI to SO with the view that margins would recover as COVID headwinds dissipated and planned efficiencies went into effect,” said Mr. Doumet. “Margins improved, but not to the extent we envisioned, partly due to the upfront costs (and margin dilution) of its expanded sales effort initiated in 2022. With truck utilization rates substantially improved, we believe Badger’s best lever to improve margins is more trucks – but the timing of the desired expansion coincides with 25 per cent of its fleet becoming +10 years old, which could limit net truck growth, margin expansion, and FCF through our forecast horizon.
“Our view isn’t so much that we see downside to BDGI – the shares are inexpensive, and we believe the margin expansion opportunity is achievable, over time. Rather, similar to 2022, investors may remain on the sidelines as the company enters a 2-3 year capex cycle. We believe the prospects of a higher share price are contingent on margin outperformance (Street already forecasting more than 35-per-cent EBITDA growth in 2023) and improved FCF visibility.”
He trimmed his target for Badger shares to $32 from $35, below the $34.32 average on the Street.
“With BDGI near 52-week lows, our timing for a downgrade isn’t great,” he concluded. “But much like 2022, we believe the shares may continue to trade sideways. On valuation, BDGI shares trade at 6.3 times EV/EBITDA on our 2023 estimates compared to rental peers at 5.8 times. While lower than its historical average of 8.0 times, the large retirements projected beyond 2023 (i.e. in 2024 and 2025) may cost the company $100 million – and that amount translates into a 0.7 times multiple turn of value (i.e. discount). A slowing macro could also soften margins and pose risk to consensus estimates.”
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Following “encouraging” third-quarter results, Echelon Partners analyst Andrew Semple raised his recommendation for Fire & Flower Holdings Corp. (FAF-T) to “speculative buy” from “hold” based on its current valuation.
“We issued a Hold rating on Fire & Flower for just under two months,” he said. “Over that timeframe, Fire & Flower’s share price declined by 38 per cent. Following this price reset, we now believe the share price offers better opportunity for upside appreciation, with our target price implying upside of 108 per cent. The Company has also appointed John Chu as a new Interim CFO during this period, bridging an important vacancy, and has demonstrated improving financial results with its FQ322 earnings (though further improvements needed). We believe FAF shares have an improved risk/reward tradeoff at current levels, and therefore upgrade our rating.”
Before the bell on Tuesday, the Toronto-based cannabis retailer reported revenue of $43.8-million, up 7.6 per cent quarter-over-quarter and exceeding both Mr. Semple’s $41.9-million estimate and the consensus forecast of $43.5-million. Its core retail segment grew 8.7 per cent, which the analyst called “especially strong” given the new reduction of two stores during the quarter.
“Same-store-sale growth reached 15 per cent quarter-over-quarter, demonstrating that the Company’s relatively new Spark Perks member pricing strategy is beginning to convert additional traffic at its stores,” he said. “We estimate SSS are now 23 per cent above trough levels and are continuing to improve. Gross margins expanded 317 basis points quarter-over-quarter and adj. EBITDA loss narrowed to $2.8-million. FQ322 represents the first full quarter under new CEO Stéphane Trudel, and his emphasis on returning Fire & Flower to profitability is evident through these results and his tone on the earnings call.
Mr. Semple emphasized the “outperformance” of the company’s digital segment, which grew 55.2 per cent sequentially to $3-million, exceeding his expectations.
“The digital segment saw impressive growth in FQ322 as several customers resumed data subscription agreements, a very valuable recurring revenue stream for the Company. Project-based data and analytics work also increased during the quarter. The digital segment contributed positive adj. EBITDA of $1.4-million in the quarter and was the only segment with positive contribution,” he noted.
The analyst did reduce his target for Fire & Flower shares to $2.50 from $3, citing “more conservative assumptions on the presumed exercise price of warrants held by [Alimentation Couche-Tard], and a reduced net cash position.” The average on the Street is currently $3.69.
“We also introduce our 2023 quarterly forecasts. We have modestly reduced our 2023 sales forecasts as the Company’s wholesale segment delivered slightly slower than expected growth in FQ322,” said Mr. Semple. “Our retail and digital sales estimates are roughly consistent with our prior estimates. However, we have raised our EBITDA forecast as Fire & Flower is progressing quicker than expected with cost-saving measures, and delivered better than expected retail gross margin performance. We now see Fire & Flower achieving positive EBITDA in H223, with room for further expansion into 2024.”
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Desjardins Securities analyst Jerome Dubreuil expects competition to “heat up” among Canadian telecom companies in 2023.
“Given the protracted RCI/SJR merger proceedings, we expect RCI and QBR to hit the ground running with new offers shortly after the deal closes, which we expect to occur either in the last few days of 2022 or in 1Q23,” he said. “We expect this could lead to pricing pressure, especially in wireless, but wireline may not be spared either. That said, we expect wireless subscriber growth to remain strong across the sector in 2023. We have reduced our risk-free rate assumption to match government yields but have slightly reduced our estimates to reflect the additional competition we expect in 2023.”
In a research report released Wednesday, the analyst said the wide range in telecom multiples “creates compelling outperformance potential for stock pickers vs indexers in 2023.”
He named Quebecor Inc. (QBR.B-T) his top pick in the sector for the year, maintaining a “buy” recommendation and $35 target. The average target is $33.35.
“We see QBR as an underappreciated way to play the expected closing of the RCI/SJR merger,” he said. “With the terms of the Freedom deal significantly derisking QBR’s national ambitions, we believe the market could warm up to the idea of a new, long runway of growth as more guidance is provided about integration costs, which we expect to be manageable. RCI is #2. In addition to the upside we see on the SJR deal closing, we believe RCI’s medium-term downside is limited given its large discount to the Big 3 peers. T is #3. T should continue to grow in 2023 (especially apparent with our newly introduced 2024 estimates), but investors may still be digesting the ROIC prospects of its tech investments.”
Mr. Dubreuil cut his target for Cogeco Communications Inc. (CCA-T), ranking No. 4 out of his six stock pecking order, to $101 from $103. The average on the Street is $91.52.
He maintained his targets for
- Rogers Communications Inc. (RCI-B-T, “buy” and No. 2) at $73. Average: $70.27.
- Telus Corp. (T-T, “buy” and No. 3) at $33. Average: $33.
- Shaw Communications Inc. (SJR.B-T, “buy” and No. 5) at $40.50. Average: $40.20.
- BCE Inc. (BCE-T, “hold” and No. 6) at $66. Average: $66.61.
For IT services companies, Mr. Dubreuil sees a “a good mix of growth and resilience.”
“While 2022 has been a difficult year for tech investors, the IT services sector has been relatively resilient although performance has been mixed, with large caps outperforming and small caps following the broader tech market trend. We maintain our positive stance on the sector given attractive valuations, a still-tight labour market, continued strength in digital transformation services and decent FCF support,” he said.
He named Quisitive Technology Solutions Inc. (QUIS-X) his top pick with a “buy” rating and $1.40 target, below the $1.56 average on the Street.
“QUIS remains our top pick heading into 2023 with its low valuation (trading at 6.4 times EV/FY23 EBITDA vs global IT services peers at 9.3 times), strong organic growth of 16 per cent and PayiQ (previously LedgerPay) optionality,” said Mr. Dubreuil. “We see 2023 as another year of strong organic growth in both the Cloud (as demand for digitization projects continues) and Payments (uniquely benefiting from inflation) segments with the potential for M&A in 2H23 acting as a potential catalyst, assuming steady deleveraging in 1H23. Most noteworthy, with the PayiQ pilot progressing full steam ahead as we close 2022, we see 2023 as PayiQ’s ‘coming-out party’ as management continues making investments in sales and marketing, and steps on the gas pedal toward commercialization.”
he raised his target for CGI Inc. (GIB.A-T), which is No. 3 on his pecking order of four stocks, to $136 from $130 with a “buy” rating. The average is $129.62.
He maintained his targets for these companies:
- Converge Technology Solutions Corp. (CTS-T, “buy” and No. 2) at $8. Average: $8.77.
- Alithya Group Inc. (ALYA-T, “buy” and No. 4) at $3.75. Average: $3.61.
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Scotia Capital’s Maher Yaghi thinks 2023 is likely to be a stronger year at the box office for Cineplex Inc. (CGX-T), leading him to reiterate “a general positive view” on the company in that environment.
However, citing the first two months of North American box office revenues for the fourth quarter, he cut his financial projections, emphasizing the importance of the Dec. 16 release of Avatar: The Way of Water.
“We are implying in our new estimates a strong uptake for Avatar, hence we need to see a good turnout spilling potentially into next year to have a good setup for the stock in the short term,” said Mr. Yaghi.
“So far, December has started off rather slow with box office revenues in North America running close to 55-60 per cent of 2019 levels. However, all eyes are on Avatar which will be released Thursday and its success will be key after a sluggish start for the quarter. As a reminder, the first iteration of Avatar (2009), with its successive re-releases, have made it the highest grossing movie of all time with around US$2.8 billion, topping The Avengers (2019). Expectations are high heading into the weekend for the debut.”
Mr. Yaghi is now estimating attendance on the quarter of approximately 68 per cent of the level seen during the same period in 2019 with box office revenue averaging 79 per cent of that level. His revenue and EBITDA forecasts slid to $378-million and $90-million, respectively, below the consensus projections on the Street of $414-million and $98-million.
“In its Q3 results press release, Cineplex indicated that its October box office revenues were $33.9-million or 62 per cent of 2019, pre-pandemic, results,” he said. “These results compare closely to North American box office revenues which were 60 per cent of 2019 in October as well. The industry saw a slight improvement in November with box office revenues as a % of 2019 improving to 65 per cent due to the strong success of Black Panther: Wakanda Forever. Our previous estimates assumed that we would see a return into the low 70-per-cent range seen in Q3 and moving to mid 80s in December.”
Maintaining a “sector outperform” rating, Mr. Yaghi trimmed his target to $14.25 from $14.75, exceeding the $13.88 average.
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After a “rollercoaster ride” in 2022 for companies in their Diversified Industries coverage universe, Desjardins Securities analyst Gary Ho and Frederic Tremblay expect the next year to “have its share of challenges given changing macro variables.”
“We head into 2023 with cautious optimism based on the mix of challenges and opportunities that we see,” they said. “To face difficult economic and operating conditions, we favour companies with resilient operations, cost discipline, balance sheet strength, internal and/or external tailwinds to fuel profitable growth, as well as compelling valuation.”
In a research report released Wednesday, the analysts named three stocks as their top picks for the next year. They are:
Ag Growth International Inc. (AFN-T) with a “buy” rating and $55 target. The average on the Street is $55.27.
“We favour AFN given (1) the robust momentum backstopped by a strong backlog and ag fundamentals; (2) the CEO’s focus on integration/optimization, organic growth and deleveraging; (3) the rapid deleveraging (should attract greater investor interest); and (4) the above should warrant a valuation re-rate,” they said.
Goeasy Ltd. (GSY-T) with a “buy” rating and $185 target. The average is $198.
“GSY is our top pick in the diversified financials space due to (1) the manageable credit performance despite macro headwinds; (2) a potential three-year guidance raise with the healthy loan book growth bolstered by the recent equity raise; (3) its prudent management team with a credible track record; and (4) attractive valuation—the stock presents an excellent risk/reward profile,” they said.
H2O Innovation Inc. (HEO-T) with a “buy” rating and $3.50 target. The average is $3.34.
“HEO is our other preferred name based on (1) the excellent organic growth outlook supported by a record backlog and a tidal wave of opportunities, which HEO can continue to capture via product innovation, synergies across the various business units and expansion of the distribution/sales network; (2) the business resilience stemming from the essential nature of water/wastewater treatment, secular sector tailwinds and HEO’s large base of recurring revenue; (3) the targeted improvements in cash flow generation through working capital management and margin expansion; and (4) a mouth-watering valuation,” they said.
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In other analyst actions:
* Wells Fargo’s Neil Kalton upgraded Fortis Inc. (FTS-T) to “equal weight” from “underweight” with a $59 target, up from $54 and above the $57 average.
* Raymond James analyst Craig Stanley downgraded Marathon Gold Corp. (MOZ-T) to “market perform” from “outperform,” seeing limited upside as management focuses on the construction of its Valentine Gold project and emphasizing an “increase in production profile comes with higher costs.” His target fell to $1.35 from $2, below the $1.97 average.
* TD Securities’ Vince Valentini raised his targets for BCE Inc. (BCE-T, “buy”) to $65 from $64 and Rogers Communications Inc. (RCI.B-T, “action list buy”) to $76 from $75. The averages are $66.67 and $70.33, respectively.
* Mr. Valentini also raised his Thomson Reuters Corp. (TRI-T) target to $170 from $165 with a “buy” rating. The average is $151.60.
* TD Securities’ David Kwan bumped his target for Coveo Solutions Inc. (CVO-T) to $11 from $9, maintaining a “buy” rating. The average is $8.69.
* Oppenheimer’s Mark Breidenbach cut his target for Vancouver-based Essa Pharma Inc. (EPIX-Q) to US$17 from US$23 with an “outperform” rating. The average is US$21.20.
* JP Morgan’s raised his targets for First Quantum Minerals Ltd. (FM-T, “underweight”) to $28 from $26 and Lundin Mining Corp. (LUN-T, “neutral”) to $9.70 from $9.20. The averages on the Street are $30.29 and $9.35, respectively.
* TD Securities’ Greg Barnes raised his Triple Flag Precious Metals Corp. (TFPM-T) to $23 from $19.50 with a “buy” rating. The average is $21.69.
* Scotia’s Konark Gupta reduced his target for Westshore Terminals Investment Corp. (WTE-T) to $24 from $28, below the $27.80 average, with a “sector perform” rating.