Inside the Market’s roundup of some of today’s key analyst actions
Citing its recent relative outperformance, Industrial Alliance Securities analyst Elias Foscolos downgraded his rating for Keyera Corp. (KEY-T) on Monday in a research note previewing first-quarter earnings season in the energy infrastructure and midstream sector.
“Stocks in our coverage universe have bounced off their lows in March but in general they are materially below where they started the year (KEY-T and //www.theglobeandmail.com/investing/markets/stocks/SPB-T/" title="" class="selected-link" data-original-title="" aria-describedby="popover41935" style="">SPB-T, being the exceptions,” said Mr. Foscolos. “Unlike January and February when rising interest rates pushed down equity valuations, benchmark rates have held relatively steady over the last two months providing a modest level of support. In the first quarter, drilling activity as measured by rig counts is down 10 per cent but the length of wells drilled is up 10 per cent. In our view, the reduced drilling count is due to wide crude oil price differentials (due to lack of takeaway capacity), low natural gas price, and improved drilling technology. In our view, the lower rig count in and of itself does not have a material impact. IM companies with significant contributions from crude marketing, NGL marketing, or NGL fractionation spreads should add a boost to their bottom lines this quarter. However, we believe that any financial outperformance in Q1/18 due to those factors will not alter our outlook nor do we believe that they will be capitalized by the market in a meaningful manner.”
Though he expects a “relatively” strong quarter from its marketing segment as it benefits from enhanced frac spreads when it releases results on May 8, Mr. Foscolos moved Keyera to “buy” from “strong buy” due to its “relatively strong stock outperformance on a year-to-date basis.”
He did raise his target to $43 from $42 after updating his financial models to incorporate the recently announced infrastructure development and midstream service agreement with Encana Corp. to support their condensate focused Pipestone Montney development near Grande Prairie, Alta.
The average target price on the Street is currently $41, according to Bloomberg data.
In other actions, Mr. Foscolos raised his target for Pembina Pipeline Corp. (PPL-T) to $56 from $54, keeping a “strong buy” rating. The average is $51.03.
He also bumped his target for Superior Plus Corp. (SPB-T) to $14.50 from $14.25, which exceeds the consensus of $14.07. He kept a “buy” rating.
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Imperial Oil Ltd.’s (IMO-T) “supercharged” new buyback plan indicates a strategic shift to “ rethink and potentially defer growth plans, optimize existing operations, and ratchet up cash payouts,” said Morgan Stanley analyst Benny Wong, who upgraded its stock to “equal-weight” from “underweight.”
On April 7 with the release of its quarterly results, the company announced an amendment to its buyback program, projecting the number of shares that may be repurchased is now up to 5 per cent of the outstanding float. It had previously said 3 per cent.
Mr. Wong moved his target to $42 from $39. It’s ahead of the consensus of $39.56.
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Truckload (TL) market conditions in the United States for TFI International Inc. (TFII-T) have finally “turned the corner,” according to Echelon Wealth Partners analyst Ralph Garcea, leading him to upgrade his rating for the Montreal-based company in the wake of better-than-anticipated first-quarter results.
On April 35, TFI, formerly known as TransForce Inc., reported revenue for the quarter of $1.197-billion, exceeding Mr. Garcea’s $1.193-billion projection and the consensus among analysts of $1.183-billion. Adjusted EBITDA of $129-million also topped projections ($112-million and $121-million, respectively), which the analyst attributed largely to package and courier (P&C) and truckload (TL) divisions. Earnings per share of 53 cents beat Mr. Garcea’s estimate by 22 cents and the Street by 25 cents.
“We are pleased with TL performance in the quarter at $491-million (up 1 per cent year over year),” said the analyst.
“While the Company sees improved US conditions in its largest division (TL) through 2018, it has focused on consolidating operations in P&C, focusing on asset-light business models, and growing its Logistics and Last Mile business. The freight environment in the US TL market has improved, which has led to a marked increase in freight rates, and management continues to focus on improving the network efficiency in the US. We remind investors that TFII’s U.S. TL presence via its US$558-million 2016 acquisition of XPO Logistics TL division makes it a serious player in that market – once those market conditions fully normalize, we expect the Company to outperform expectations.”
Mr. Garcea moved the stock to “buy” from “hold” based on improvements to the U.S. TL market, which he said “have been dampening its largest divisions results.”
He raised his target for the stock to $44 from $35. The average is currently $39.62.
“TFII is currently trading at a 2018 EV/Sales, EV/EBITDA, and P/E multiple of 1.0 times, 8.2 times, and 14.4 times, respectively, versus its global freight comparables of 1.2 times, 8.6 times, and 16.8 times, respectively,” said Mr. Garcea.
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Morgan Stanley analyst Simon Flannery upgraded Telus Corp. (T-T) to “overweight” from “equal-weight” after expressing confidence in its ability to sustain wireless growth.
It is the first time Mr. Flannery has recommended a Canadian telecom stock in more than two years.
Mr. Flannery also emphasized Telus’ strengthened competitive position in wireline and sees 2018 as a turning point in free cash flow generation.
He maintained a target of $51, which exceeds the average on the Street of $50.94.
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Believing its recent pullback in price is an “overreaction,” Raymond James’ Daryl Swetlishoff added West Fraser Timber Co. Ltd. (WFT-T) to the firm’s “Canadian Analyst Current Favourites” list.
“The stock traded down following 1Q18 results, we expect on concerns shipping levels will continue to lag production precluding companies like West Fraser from fully capitalizing on current very tight commodity markets,” he said. “With quarter-to-date (QTD) production tracking shipments and QTD lumber pricing up 6 per cent, 2Q18 is showing potential to be a record quarter. Earnings could be further boosted should WFT be successful on reducing the $40-million in lumber inventory built during 1Q18. Based on our conservative estimate of US$465 per thousand board-feet benchmark SPF lumber pricing for 2018, we estimate WFT is trading at less-than 5.0 times 2018 enterprise value-to-EBITDA (given effect to free cash flow generation on EV). We note that SPF lumber pricing has averaged US$520 year-to-date and would have to average US$450 for the balance of the year (US$100 lower than current spot) to hit our forecast. As we are currently high on the Street we expect upward earnings revisions across the board will be necessary. We urge investors add to positions.”
Mr. Swetlishoff has an “outperform” rating and $120 target for West Fraser shares. The average on the Street is $96.29.
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Though he sees “multiple avenues for upward revisions to both earnings and valuation,” RBC Dominion Securities analyst Michael Eisen downgraded Owens Corning Inc. (OC-N) to “outperform” from “top pick” based on what he sees as “greater input cost risk” following the April 25 release of its quarterly results.
“We continue to believe that the upside potential from pricing and margin expansion in Insulation should more than outweigh the potential downside from input cost inflation but acknowledge greater risk and uncertainty for FY18 results,” said Mr. Eisen.
His target fell to US$88 from US$102. The average on the Street is US$90.80.
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Investor concerns about Altria Group Inc. (MO-N), the maker of Marlboro cigarettes, are now more than priced in to its stock, said RBC Dominion Securities analyst Nik Modi, who raised his rating to “outperform” from “sector perform.”
“We have been cautious on MO shares over the past 18-months due to combination of fundamental and macro concerns,” said Mr. Modi. “And while some of these issues still persist, it is hard to justify staying on the sidelines given the current valuation. MO also offers CPG [consumer packaged goods] investors a scarce combination of positive pricing, minimal exposure to rising costs and insulation from the retail evolution that is plaguing the broader CPG space.”
He kept a target price for Altria shares of US$65, which sits below average of US$70.80.
“At its current price, MO shares are trading at 13 times price-to-earnings and at a 5.0-per-cent yield,” said the analyst. “While we understand that making valuation calls in consumer staples has not really worked over the past few years, we believe the current state of the overall CPG space makes MO an attractive place to put new money within our space. The company is essentially hedged from the 3 biggest issues facing the CPG space today: 1) limited pricing power, 2) significant retail evolution (selling tobacco products is banned online) and 3) rising cost of goods/logistics (which make up a very small percentage of COGs). Based on an inverse DCF analysis, the stock at current levels is discounting a 15-cent haircut to current RBC/ consensus FY19 EPS and a 180 basis point deterioration in long-run top-line versus estimates. We do not believe this EPS risk will materialize.”
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In other analyst actions:
Macquarie analyst Michael Siperco downgraded Detour Gold Corp. (DGC-T) to “neutral” from “outperform” and lowered his target to $12.50 from $22, which sits below the average target on the Street of $18.40.
Haywood Securities Inc. analyst Kerry Smith downgraded Detour to “hold” from “buy” with a target of $15.50, falling from $26.
David Leeder