Inside the Market's roundup of some of today's key analyst actions
Teck Resources Ltd.'s (TCK.B-T, TCK-N) strong fundamental position and exposure to coking coal and zinc is likely to drive "continued" outperformance over the next 12 months, said RBC Dominion Securities analyst Fraser Phillips.
After increasing his coking coal and zinc price forecasts due to reduced supply, Mr. Phillips upgraded his rating for Teck to "outperform" from "sector perform."
"The fundamentals of the seaborne coal market have tightened significantly in recent months due to the combination of supply restrictions and more robust (stimulus driven) Chinese demand," the analyst said. "On the supply side, since May 2016 Chinese coal miners have been ordered to cut their output from a 330-workday basis to a 276-workday basis. In Australia, there have been production problems at Anglo American's Moranbah North and German Creek mines, South32's Illawarra mine, Vale's Carborough Downs mine and BHP Billiton's Goonyella mine. In addition, a train derailment closed the Newlands rail line and restricted shipments from Jellinbah, Middelmount and Newslands in September.
"We still anticipate a correction in spot coal prices in coming months on the back of improvements in domestic and seaborne coal availability, as well as potential for capacity restarts elsewhere. With that said, as long as China maintains a certain degree of supply-side restriction and accommodative fiscal and monetary policy, we would expect coking coal to remain well above its previous trough levels. This does pose a significant risk to the outlook as the market imbalance is being driven by a policy whose implications are still evolving. Any reversal or moderation of current policies could cause a sharp correction in prices. This is likely to cause discounting of coking coal cash flows within the equities at spot but also temper the pace of the supply response."
He raised his hard coking coal forecast for 2016 by 21 per cent to $109 (U.S.) per ton. His forecasts for 2017 and 2018 jumped 65 per cent and 68 per cent, respectively, to $165 and $150.
Teck's high leverage to coking coal yields should lead to significant upside potential, he said, adding: "We estimate approximately 50 per cent of Teck's 2016 revenue comes from coal. Our sensitivity analysis indicates that for each $20 increase in the coking coal price, Teck's 2017 EPS would increase by $0.67. Our analysis suggests that at the current spot price Teck is discounting a coking coal price of $139/tonne.
"While increased coking coal prices are putting downward pressure on steel producer profitability, our examination of steel raw material spreads suggests there is currently room for contract prices above $200/tonnes FOB."
Mr. Phillips said his preferred commodity for the next 1-2 years remains zinc with the belief it has moved into deficit and will remain there for the coming years. He added inventories will drop below "critical" levels and lead prices upward.
"We expect Teck to benefit from higher zinc prices given its 20-per-cent revenue exposure to zinc," he said.
Mr. Phillips increased his 2016 and 2017 earnings per share projections to $1.14 (Canadian) and $3.79, respectively, from 41 cents and $1.19. His 2018 estimate jumped to $3.55 from $1.18. His net asset value projection moved to $26.42 from $20.53.
He raised his price target for Teck stock to $30 from $23. The analyst consensus price target is $21.78, according to Thomson Reuters.
Elsewhere, Credit Suisse analyst Ralph Profiti also upgraded the stock to "outperform" from "neutral" and raised his target to $30 from $23.
"Our coking coal forecasts remain unchanged beyond a 4Q16 mark-to-market at $200/tonne; however, we see compelling valuation upside for Teck in a tighter coking coal market in 2017 at prices above our average $119/t forecast, reflation of the steel-making cost curve, equity scarcity among global coking coal plays, and stronger base metals prices," he said.
Mr. Profiti also raised his target price for First Quantum Minerals Ltd. (FM-T) to $13.50 from $13 with an "outperform" rating (unchanged). Consensus is $12.83.
Traffic is still down from Canadian railroad companies, but the "bulk pendulum" is firmly in motion, said Raymond James analyst Steve Hansen.
In a third-quarter preview, Mr. Hansen downgraded Canadian National Railway Co. (CNR-T, CNI-N) to "market perform" from "outperform" and Canadian Pacific Railway Ltd. (CP-T, CP-N) to "outperform" from "strong buy."
"After five (long) quarters of negative traffic data, including a wildfire-induced, double-digit downdraft earlier this spring (2Q16), traffic at Canada's two Class 1 railroads (CN and CP) is finally re-approaching the prospect of growth, in our view; a transition underpinned by the demonstrable upturn in several bulk-related categories in recent weeks/months, including grain, potash, and coal — a trend broadly consistent with the 'bulk pendulum' thesis we laid out earlier this year," said Mr. Hansen. "In this context, while 3Q16 carloads remained firmly in negative territory for both carriers (CN: 3.2 per cent and CP: 6.1 per cent), we view this performance as largely rear-view looking, with the directional trend over the past 4-6 weeks painting a very different (more optimistic) picture, in our view — a trend that investors have seemingly taken notice of given the strong upside moves in both stocks."
Mr. Hansen said he still expects Canadian grain crops for the year to be "a whopper," up 5.6 per cent year over year, however wet weather has pushed back the timeline into the fourth quarter. He also expressed concern over the quality of the crop for export purposes.
"That said, we view this recent delay as largely transitory and take comfort in rail traffic at both carriers surging over the past four weeks into positive territory," said Mr. Hansen, noting U.S. grain traffic has "accelerated well ahead of the domestic harvest."
Mr. Hansen also expressed optimism about traffic for potash exports, the effects of strong coal pricing and commodity-related merchandise.
"Notwithstanding the bright spots highlighted, we continue to observe lingering challenges in crude-by-rail and international intermodal volumes that continue to weigh on our prior expectations," the analyst said.
Mr. Hansen raised his price target for CN stock to $94 from $92. Consensus is $82.19.
His target for CP stock jumped to $230 from $220. Consensus is $210.49.
Desjardins Securities analysts adjusted their commodity outlook and estimates ahead of the start of third-quarter earnings season in the oil and gas sector, which kicks off with Suncor Energy Inc. (SU-T, SU-N) on Oct. 26.
"While the quarter certainly provided a far more robust gas price environment than anticipated (and relative to 2Q16), operational updates were fairly limited following a slow return from spring break-up and with the market placing greater scrutiny on budgeted activity in 2017," the analysts said in a research note. "To that end, we still see 2016 representing a cyclical trough for both commodities, and while it painfully reduced producer cash flows (and equity values), it has also served to mute reinvestment, which should ultimately expedite the rebalancing of physical markets. While we could see some 2016 budget expansions with 3Q16 results as producers look to build operational momentum entering 2017, we generally expect the industry to remain cautious with respect to spending levels until the recent recovery in commodity prices shows greater signs of solidifying."
"Maintaining a preference for well-capitalized producers that provide cash flow torque and downside protection through strong cost structures. While we ultimately expect commodity prices to trend higher in 2017, we are also cognizant of the potential for significant near-term volatility and changes in market sentiment which could rapidly evolve over the coming weeks ahead of the November 30 OPEC meeting and with the beginning of the traditional winter heating season — two critical events that will likely go a long way in determining the 2017 commodity price environment. Although we remain defensively positioned in our stock selection, maintaining a preference for well-capitalized producers that have re-established sustainable business models in the current environment, we also recommend tactically increasing risk weightings through positions in select producers exhibiting strong cash flow torque in the event of a more entrenched price recovery."
Analyst Kristopher Zack upgraded his rating for Enerplus Corp. (ERF-T) to "buy" from "hold" and raised his target to $12.50 from $9.25. The consensus is $11.08.
"We highlight a significant increase in our target …. we have likely been too conservative in our cash flow estimates and note the significant improvement in the company's debt position going into year-end, which had been a sticking point for us in adopting a more constructive view on the stock," he said. "We also note market speculation surrounding the potential sale of the company's non-operated Marcellus assets. While this has not been confirmed by management, we believe it could represent a positive catalyst for the stock to the extent that it provides further balance sheet support, and by extension additional flexibility to opportunistically pursue operated assets through an acquisition. To better highlight the valuation disconnect, we note that the stock is still trading at 5.7x 2017 debt-adjusted cash flow based on our revised estimates — a notable discount to the divco peer group average of 8.4x. We are consequently moving to a buy rating in view of the 32-per-cent expected return to our revised target."
The group made numerous target price changes to stocks across the sector.
They reduced targets for the following stocks:
Crescent Point Energy Corp. (CPG-T, buy) to $22.50 from $24. Consensus: $25.35.
Baytex Energy Corp. (BTE-T, hold) to $7.50 from $8. Consensus: $7.27.
They increased targets for these stocks:
Encana Corp. (ECA-T, hold) to $11.50 from $8.50. Consensus: $16.45.
ARC Resources Ltd. (ARX-T, buy) to $26 from $25. Consensus: $25.64.
Bonavista Energy Corp. (BNP-T, buy) to $5.50 from $5.25. Consensus: $4.76.
Vermilion Energy Inc. (VET-T, buy) to $56.50 from $52. Consensus: $53.78.
Crew Energy Inc. (CR-T, buy) to $7.75 from $7.25. Consensus: $7.79.
Gear Energy Ltd. (GXE-T, hold) to 80 cents from 75 cents. Consensus: 97 cents.
Kelt Exploration Ltd. (KEL-T, buy) to $7.50 from $6.50. Consensus: $6.80.
Leucrotta Exploration Inc. (LXE-X, buy) to $2.50 from $2.25. Consensus: $2.55.
Pengrowth Energy Corp. (PGF-T, hold) to $2.25 from $2. Consensus: $1.90.
Paramount Resources Ltd. (POU-T, hold) to $18 from $13.50. Consensus: $16.87.
Painted Pony Petroleum Ltd. (PPY-T, buy) to $9.50 from $9. Consensus: $10.98.
Penn West Petroleum Ltd. (PWT-T, hold) to $2.50 from $2. Consensus: $2.28.
Storm Resources Ltd. (SRX-X, buy) to $5.75 from $5.50. Consensus: $5.84.
Tourmaline Oil Corp. (TOU-T, buy) to $40 from $37.50. Consensus: $41.77.
Seven Generations Energy Ltd. (VII-T, buy) to $35 from $34. Consensus: $36.40.
RBC Dominion Securities analyst Fraser Phillips downgraded Uranium Participation Corp. (U-T) in reaction to "significant" reductions to his uranium supply/demand and pricing outlook.
"With the stock trading at [net asset value], and with only limited upside potential for uranium prices over the next 12 months based on our updated supply/demand analysis, we see only limited upside potential for the share price," said Mr. Phillips, moving his rating to "sector perform" from "outperform."
Mr. Phillips said his analysis on the market now suggests it may not be balanced until 2024, with signs of a "larger" surplus before that point.
"The current spot price is as low as it has been since 2005 and is putting tremendous pressure on producers," he said. "We expect that additional mine production cuts will eventually lead to a modest rebound in prices. However, we expect prices to remain lower for longer in a significantly oversupplied market."
He added: "We have slashed our uranium price forecasts again to reflect the collapse in spot uranium prices and the deterioration in our supply demand analysis. We expect that a combination of declining production and some further progress from the slow reactor restart process in Japan will lead to a rebound in the uranium price over the next 12 to 24 months. However, we expect the upside to be limited until the market begins to tighten. We have reduced our 2016 forecast to $27.15 (U.S.) per pound from $31.00/lb and our 2017 forecast to $27.50/lb from $35.00/lb. In 2018, we expect prices to rebound towards the 85th percentile of the cash cost curve and remain at or below $40.00/lb until 2021, when we believe prices could begin to rise in anticipation of the market moving back into deficit in 2024. Our long-term price forecast remains $65.00/lb in 2016 starting in 2026."
Mr. Phillips lowered his target price for the stock to $4.50 from $5.50. Consensus is $5.57.
The third-quarter results for Canadian lifecos will be "noisy," predicts Desjardins Securities analyst Doug Young.
"There are a few important themes for the Canadian lifecos over the next 12–18 months," said Mr. Young. "We remain constructive on the Canadian lifecos for a few reasons. We anticipate good core EPS growth over the next year (core excludes accounting mark-to-market impacts) driven by acquisitions, turnaround of certain businesses, partnerships, growth in wealth management and expense efficiency initiatives, to name a few of the key drivers. In a few cases, the lifecos have strong international businesses. We believe the sector remains comfortably capitalized and anticipate further steady dividend increases. The focal point over the next 12–24 months will be execution on past transitions. Recall that MFC officially began its DBS bancassurance relationship on January 1, 2016, SLF's acquisition of Assurant's US group employee benefit business closed in 1Q16 and GWO is integrating three US pension businesses. We foresee a relatively stable regulatory environment for the lifecos.
"That said, 3Q16 results will be noisy, and there are a few headwinds to consider over the near term. First, 3Q16 and 4Q16 are when certain lifecos review and update actuarial assumptions, which can result in a few bumps. We expect the Actuarial Standards Board (ASB) to drop the industry's URR assumptions before its five-year scheduled update (for 2019), which would lead to reserve increases (and earnings charges). We expect MFC to move ahead of the pack and take a charge in 3Q16, and expect the other lifecos to adjust in 2017. Second, a lot of uncertainty remains around the macro environment. To be clear, we do not expect interest rates to remain at the current abnormally low levels over the next few years, and if they do, we will have to adjustment our expectations."
Mr. Young is forecasting an earnings per share contraction of 1 per cent through the four lifecos. He projects a 5-per-cent gain for Sun Life Financial Inc. (SLF-T) and 1-per-cent increase for Industrial Alliance Insurance and Financial Services Inc. (IAG-T), while he expects a 5-per-cent decline for Manulife Financial Corp. (MFC-T) and 7-per-cent drop for Great-West Lifeco Inc. (GWO-T)
"Changes in equity markets had a positive impact, and interest rate and spread movements had a slightly negative impact on headline earnings in 3Q16, based on our estimates," he said. "First, equity markets increased 6.5 per cent on average across all the regions we track, and the most important index for lifecos (S&P/TSX) was up 4.7 per cent. Second, with respect to interest rates and spreads, yields on U.S. Treasuries increased in the quarter by 3–12 basis points while Government of Canada bond yields decreased 5–7 bps. U.S. corporate spreads declined 7–9 bps while swap spreads narrowed by 6bps (a positive) sequentially."
He made the following target price changes:
- Sun Life Financial, buy rating, to $50 from $48. Consensus: $46.36.
- Manulife Financial, buy, to $22 from $21. Consensus: $20.82.
- Industrial Alliance, buy, to $52 from $48. Consensus: $48.40.
- Great-West Lifeco, hold, remained $33. Consensus: $34.
Kinaxis Inc. (KXS-T) is still "in the early days of capturing a large market opportunity," said BMO Nesbitt Burns analyst Thanos Moschopoulos.
He said the Kanata, Ont.-based tech company's annual user conference reinforced his view that it has a "robust" sales pipeline with "growing momentum," which he said is "driven by its strong competitive position and growing industry credibility, in an area that's becoming of increasing strategic importance to its potential customers."
"Kinaxis has just over a hundred customers currently (most of whom aren't fully penetrated) out of a current [total addressable market] of perhaps 1,400+ potential customers in its current targeted verticals — and a longer-term TAM that could potentially be much larger than this, as it continues to extend the capabilities of its platform and leverage its partnerships to enter new industries and functional areas," said Mr. Moschopoulos. "We'll also note that Kinaxis can often sign deals that are large in relation to its revenue base, providing the potential for upside to Street estimates (as has been the case in recent quarters). We don't necessarily see much more room for multiple expansion, but believe that the stock's underlying growth rate should drive ongoing upside to the share price over time."
With an "outperform" rating, he raised his target price to $74 from $70. Consensus is $73.09.
"We can't make the case that the stock is cheap, per se; from a valuation perspective, Kinaxis is one of the highest-multiple stocks in the SaaS universe, which in our view could make the stock vulnerable to a pullback in the event of a broader market correction (as we saw with the selloff in the SaaS group back in February), or should its financial results or guidance fall short of expectations," he said.
In other analyst actions:
DH Corp. (DH-T) was rate a new "buy" by Dundee Securities analyst Eyal Ofir with a target of $36. The analyst average is $41, according to Bloomberg.
Endeavour Silver Corp. (EDR-T) was raised to "buy" from "hold" by GMP analyst Ian Parkinson. He raised his target to $8.15 from $7.90. The average is $7.15.
Barclays analyst Matthew Korn upgraded Newmont Mining Corp. (NEW-N) and OceanaGold Corp. (OGC-T) to "overweight" from "equalweight," citing "attractive" near-term strategic and operational catalysts. His target for Newmont remained $45 (U.S.), versus the average of $45.71. His OceanaGold target stayed $6 (Canadian), compared to the $5.81. average.
JPMorgan Chase & Co. (JPM-N) was cut to "neutral" from "buy" by Buckingham analyst James Mitchell. He increased his target to $74 (U.S.) from $71. The average is $73.20.