Inside the Market's roundup of some of today's key analyst actions
Expressing increased confidence in its long-term growth prospects following its annual investor day, Raymond James analyst Steve Hansen raised his target price for shares of Canadian National Railway Co. (CNR-T, CNI-N).
"While the core building blocks of CN's strategic plan remain largely unchanged, in our view, we came away from [Wednesday's] Investor Day with the view that management has adopted a decisively proactive, technology-rich agenda designed to further advance its competitive position and, ultimately, deliver outsized growth amidst an increasingly complex macro landscape," he said.
Mr. Hansen added that the company's track record "speaks for itself," noting: "By almost all accounts, CN has enjoyed tremendous success over the past six years (Revenue compound annual growth rate: up 6 per cent, EPS: 14 per cent), a performance that management largely attributes to the firm's three foundational pillars, including its: 1) unrivalled Class 1 network/franchise that touches all three coasts; 2) disciplined operating model and best-in-class commensurate operating ratio; and, 3) unwavering commitment to service excellence—all factors that remain broadly unchanged in management's updated strategic plan."
The analyst pointed to a trio of takeaways from the Montreal event. They were:
- "Outsized" long-term growth potential: "Specifically, management outlined a broad range of tangible growth opportunities over the 2018–2022 period that collectively represent between $1.1–$2.2-billion of incremental revenue.
- Its five-year outlook, featuring an operating ratio in the mid-50s and 10-per-cent EPS CAGR. "While we acknowledge the difficulty in providing long-term guidance, we believe these metrics appear broadly conservative (particularly the latter) given the outlook for healthy volume growth, solid SSS pricing (above rail inflation), and a robust basket of efficiency improvement initiatives expected to deliver incremental gains – all to be complemented by a healthy share buy-back program."
- Traffic remains "outstanding": "CN's traffic performance has been nothing short of outstanding in recent weeks/months (QTD revenue ton miles: up 18.5 per cent year over year), enjoying the benefit of several combining factors, including: recent contract wins, west coast port upgrades, recent mine restarts (coal), and weak comparable data given last year's tumultuous spring (Alberta wildfires, empty grain bins). In short, traffic has continued to exceed our optimistic forecasts, compelling us to raise our front quarter estimates."
Based on the company's outlook, Mr. Hansen raised his fiscal 2017 EPS estimate by a nickel to $5.20.
With an unchanged "outperform" rating, his target for CN shares rose to $115 from $112. The analyst consensus price target is $98.04, according to Thomson Reuters data.
"Our revised $115.00 target is based upon a 20.0 times multiple applied to our 2018 estimate, a multiple at the upper-end of the company's three-year trading range (15.0 times to 21.0 times) reflecting CN's best-in-class operating platform and outsized growth prospects," he said.
Elsewhere, CIBC World Markets analyst Kevin Chiang raised his target to $111 from $105 with a "neutral" rating.
Mr. Chiang said: "CN's history of consistent performance has made it a core holding. The biggest question mark facing the company is whether it would be able to maintain its best-in-class operating metrics given incremental growth is harder to come by. The investor day highlighted how CN remains at the forefront offering unique supply chain solutions to drive increased volumes onto its network. The company's asset positioning, cost structure, disciplined investment approach, and culture are difficult to replicate. While other Class 1s will inevitability narrow the operating ratio gap with CN, the ability to transition this to better service does take time. And given CN's head start, we continue to see no risk of it abdicating its position as the most efficient railroad in North America with a robust pipeline of revenue growth opportunities. We believe it is deserving of its premium multiple."
Despite lowering its coal price guidance, Teck Resources Ltd. (TECK.B-T, TECK-N) still possesses a "strong" balance sheet, said RBC Dominion Securities analyst Stephen Walker, who expects "significant" free cash flow at a conservative price scenario.
On Thursday, Vancouver-based Teck announced expects its second-quarter average realized coal price to be between $160 and $165 (U.S.) per ton, versus a $190 quarterly benchmark price.
"After steel mills filled their prompt requirements immediately following the Queensland cyclone, there were very few prime hard coking coal spot sales during the four week period from mid-April. Steelmaking coal sales volumes for the second quarter of 2017 are expected to be between 6.8 and 7 million tons," the company said in a statement. "Final quarterly sales will depend on timing of shipments."
Based on that announcement, Mr. Walker lowered his quarterly realized coal price forecast to $162.5 from $190 and dropped his sales estimate to 6.9 million tons from 7 million. He now expects Teck to generate operating free cash flow of $600-million (before debt repayment), versus a previous estimate of $800-million.
His quarterly earnings per share estimate fell to $1.17 from $1.41, while his full-year projection is now $4.75 (from $5.02).
Maintaining an "outperform" rating for Teck stock, his target dropped by a loonie to $38. The analyst average target price is $35.90, according to Bloomberg data.
"Teck's total liquidity as of April 24, 2017 was $4.7-billion including $625-million in cash, $3.0-billion (U.S.) in undrawn credit and excludes the $1.2-billion Waneta Dam proceeds," he said. "We have run a lower commodity price scenario analysis over the second half of 2017 to 2019 period using $155 (U.S.) per ton for realized coal price, $2.25 (U.S.) per ton copper, and $1.00 (U.S.) per pound zinc. Results indicate that Teck's net free cash flow (after capital, debt repayments, and dividends) over the next three years would total $3.1-billion. Net debt would decrease from $6.9-billion at yearend 2016 to $2.1 billion at year-end 2019, at which time capex begins to increase significantly with development of QB2."
Brookfield Infrastructure Partners LP (BIP-N, BIP.UN-T) is an underappreciated "solid fundamental organic growth story" that is poised to deliver value to investors, according to Credit Suisse analyst Andrew Kuske.
He moved the stock to "outperform" from "neutral," calling it a "largely tactical" upgrade based on its potential inclusion in the S&P/TSX composite index as well as its near-term performance potential.
"Simply, the near-term issues revolve around two factors: (a) potential index inclusion; and, (b) NTS economics," Mr. Kuske said. "We do not believe the full extent of these issues is appreciated by the market (albeit index potential may be creeping in). Longer-term, we continue to believe the fundamental organic growth story is not appreciated versus BIP's historical M&A bias."
As the S&P/TSX reviews its index criteria requirements, Mr. Kuske believes Brookfield's potential inclusion is likely to have "a meaningful impact on unit demand around the Q3 index revision."
"From our standpoint, one of the more perplexing issues associated with BIP has been the lack of an index presence – especially versus a couple of the other Brookfield entities," he said. "We obviously defer to the expertise of our Index team, but on a very simple basis BIP's index inclusion in the S&P/TSX Composite could result in meaningful incremental demand."
He added: "A Composite inclusion could be a very positive bias for BIP's near-term trading dynamics as it could represent more than 10 days of total volume traded on both exchanges. Rather interestingly, as per the consultation report, the S&P/TSX 60 already includes the U.S. trading volumes in the liquidity measurement. Therefore, there is a broader potential for BIP to eventually be included in the TSX 60 should the first hurdle of the Composite inclusion occur. We don't want to put the cart before the horse in this process – especially with the prolonged index frustration for BIP. Yet, a possible inclusion into the 60 (somewhat dependent on a deletion, the representation criteria, among other factors) would put BIP in a rather enviable position for potential demand."
Mr. Kuske also touted the company's "plentiful pipeline," calling its recent acquisition of the Nova Transportadora do Sudeste S.A. (NTS) natural gas distribution network from Petroleo Brasileiro SA "one of the more interesting deals completed in recent memory."
"Beyond the near-term issues associated with the NTS economics, we continue to believe there is a fundamental change with BIP's business model that is not entirely understood and appreciated," he said. "Simply, we believe BIP has largely transitioned from being M&A skewed from a need basis for growth versus more selective M&A that is truly supplemental (and high returning). This divide is possible given the existing assets that provide a significant amount of organic growth."
Mr. Kuske raised his target for the stock to $44 (U.S.) from $40. The analyst average target price is $43.56, according to Bloomberg data.
"This upgrade is very tactical in nature given the potential for BIP's index inclusion. Yet, there are several fundamental underpinnings to the upgrade that revolve around BIP's continued transition towards a greater amount of predictable organic growth," he said. "The revised valuation is based on a number of factors, including: a probable index inclusion broadening and deepening BIP's investor audience; the ongoing validation of organic platform growth resulting in a premium valuation that is more in line with organic growth peers; and, not explicitly part of the valuation, but the positive impacts associated with BIP's capital recycling efforts and the opportunity for high-graded M&A."
DHX Media Ltd. (DHX.B-T) has a "solid" growth profile, but free cash flow conversion concerns linger, said BMO Nesbitt Burns analyst Tim Casey.
He initiated coverage with a "market perform" rating.
"DHX's revenue and adjusted EBITDA growth has been impressive," the analyst said. "With six-year revenue and adjusted EBITDA CAGRs of 40 per cent and 70 per cent, respectively, DHX's growth rates show well among Canadian consumer and media names. That said, content production by its nature requires upfront capital to generate recurring revenue streams that recoup the initial investment and generate sustainable free cash flow. Commercially successful productions—hits—are critical, as they create excess profits in and of themselves and, importantly, drive overall library revenues. To date, cash flow conversion from the growth in revenue, EBITDA, investments in film, and acquisitions, has lagged considerably."
Calling it a "Canadian media growth story built on M&A," Mr. Casey said: "A meaningful portion of DHX's value creation in recent years has been driven by opportunistic acquisitions, most of which were priced in the 5-6 times EBITDA range. We estimate DHX's most recent proposed acquisition of Peanuts and Strawberry Shortcake (which at $345-million U.S. is also its largest acquisition) is valued at roughly 12 times EBITDA."
He set a price target for shares of the Toronto-based company of $7. The average target is $7.95.
"We forecast mid-single-digit organic EBITDA growth over our forecast period," the analyst said. "Reported growth will be significantly higher based on contributions from acquisitions, as will balance sheet leverage. With the Peanuts acquisition, we expect DHX's pro forma leverage (including production financing) will increase from slightly less than 3 times EBITDA (last 12 months) to over 5 times at closing, which is a concern in our view."
Credit Suisse analyst Allison Landry believes Kansas City Southern's (KSU-N) current valuation relative to its peers provides an "attractive" entry point.
She upgraded the railway company's stock to "outperform" from "neutral," seeing "a number of positives on the near and mid-term horizon that are likely to drive material upward revisions to the consensus."
"Following investor meetings with management that we hosted this week, we have increased confidence that the secular growth story at KSU has re-emerged, with a significantly larger growth opportunity than we initially thought in the cross border refined products business; what we now think are conservative estimates for growth in plastics; and a potential re-acceleration in crossborder intermodal," the analyst said. "Based on our analysis, we think refined products could generate incremental EPS of $0.24 through 2019 relative to our initial forecasts (or, approximately 4 per cent)."
Ms. Landry raised her target to $116 (U.S.) from $90. The average is $98.88.
In other analyst actions:
Peel Hunt analyst Michael Stoner downgraded Endeavour Mining Corp. (EDV-T) to "add" from "buy" and lowered his target price to $23.70 from $27.10. The average is $29.99.
Cantor Fitzgerald analyst Louise Chen initiated coverage of Valeant Pharmaceuticals International Inc. (VRX-T, VRX-N) with an "overweight" rating and no specified target. The average target is $20.90.
BMO Nesbitt Burns analyst Andrew Mikitchook initiated coverage of INV Metals Inc. (INV-T) with an "outperform" rating and $2 target. The average is $1.91.
Buckingham Research Group analyst Mark Weintraub initiated coverage of Norbord Inc. (OSB-T) with a "neutral" rating. He did not specify a target. Consensus is $45.67.
J.P. Morgan analyst Matthew Boss downgraded Nike Inc. (NKE-N) to "neutral" from "overweight" and dropped his target to $58 (U.S.) from $61. The consensus average is currently $61.29.
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