Inside the Market’s roundup of some of today’s key analyst actions
Cargojet Inc.'s (CJT-T) “premium story is getting the premium valuation it deserves,” according to Canaccord Genuity analyst Doug Taylor.
Though the Mississauga-based cargo airline company’s business has shown “no signs of deterioration,” Mr. Taylor lowered his rating for its stock to “hold” from “buy” ahead of the release of its second-quarter financial results on July 31.
“We remain bullish on Cargojet’s competitive positioning and market opportunity and continue to believe this operation deserves a premium multiple. However, following a 24-per-cent run in the stock since Q1 results and at 13.3 times NTM [next 12-month] EBITDA, we believe Cargojet’s prospects are receiving a full valuation,” he said. “As such, we are moving to a more neutral stance on the name with a HOLD rating as we look for either: 1) a more attractive valuation / entry point; 2) further evidence of an inflection point higher in the growth profile; 3) a higher FCF [free cash flow] conversion of its growing EBITDA to warrant further valuation expansion. We expect the company will demonstrate an extension of its growth trends in Q2 (expected next week), consistent with our existing estimates.”
Mr. Taylor emphasized the downgrade is solely a valuation call, noting: “The company has executed well against its strategy and has solidified an already enviable competitive position in Canada,” he said. “Last week’s announcement of record shipping volumes related to Amazon Prime Day(s) supports the view that Cargojet will continue to deliver strong year-over-year volume growth driven by e-commerce exposure.”
With the downgrade, Mr. Taylor raised his target for Cargojet shares to $100 from $95. The average target on the Street is $100.63, according to Bloomberg data.
“Outside of a more attractive valuation entry point, we look to the following to drive a higher valuation: 1) a growth trajectory inflection event, potentially driven by new ACMI [Aircraft, Crew, Maintenance and Insurance] routes and/or further U.S. penetration; 2) evidence of margin expansion potential after weathering the impacts of the pilot fatigue legislation; 3) better FCF conversion and deleveraging profile following a heavy reinvestment cycle," he said.
Meanwhile, Laurentian Bank Securities analyst Nauman Satti kept a “buy” rating and $78 target leading into the earnings release.
Mr. Satti said: “Cargojet continues to benefit from growth in the e-commerce business as it remains the single largest player in Canada’s overnight courier services, reaching 90 per cent of the Canadian population. According to Stats Canada, retail e-commerce sales increased by 25% YoY during April/May of this year. We expect this trend to continue from a higher e-commerce share in retail sales (Canada is at 7 per cent vs. 9 per cent in the U.S and 20 per cent in the U.K), and pick-up in cross-border trade from changes in the USMCA (NAFTA); duty-free purchase limit increased to $150 from $20 (Canadian retail consumers ordering more from the U.S). Furthermore, initiatives such as “Prime Week” from Amazon are adding new peak periods (apart from the boxing day and holiday season) for overnight courier business. Apart from the Core-overnight domestic business, the introduction of a new scheduled route to the US under the ACMI segment provides an additional avenue of growth. As steady growth shall continue, we recognize some near term cost pressures as CJT expands its capacity and increases its pilot count, amid the introduction of pilot fatigue regulations.”
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In a research note released Thursday previewing second-quarter earnings season for Canadian infrastructure companies, Credit Suisse analyst Andrew Kuske said it’s time to be “realistic about rate reality.”
“With the move in rates, clearly the utilities have outperformed a number of the core energy infrastructure-associated stocks. Accordingly, we are adjusting targets with an upward bias – most pronounced in the utilities sector,” he said. “Even with that upward bias, we retain a cautious view on utilities versus energy infrastructure, but acknowledge that some interesting cross-border valuation dynamics exist – especially with names like Emera (EMA) and Fortis (FTS), both of which are Neutral rated.”
Pointing to its recent stock performance and a “re-assessment of structural complexity,” Mr. Kuske downgraded Brookfield Renewable Partners LP (BEP-UN-T) to “neutral” from “outperform” with a $48 target, which matches the Street.
At the same time, he raised his rating for Hydro One Ltd. (H-T) to “neutral” from “underperform" after “after re-assessing the current rate environment, along with a reduction of political risks over the last year.” His target rose to $24 from $20. The average is $22.87.
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Industrial Alliance Securities analyst Elias Foscolos raised his target for shares of Gibson Energy Inc. (GEI-T) in response to Wednesday’s announcement of the successful assignment of a second “investment grade” credit rating.
After the bell, Calgary-based Gibson said S&P Global Ratings has raised its long-term issuer credit rating and senior unsecured debt ratings on the company to “BBB–” with a “Stable” outlook. The company was previously assigned a “BBB (low)” rating by DBRS Ltd.
“It will make a material impact on its annual cost of capital, giving the company more flexibility in its growth strategy and ability to finance its capital projects,” said Mr. Foscolos. “The news came earlier than we had anticipated, and we had made adjustments to our model prior to the quarterly results.”
“Heading into the quarter we have adjusted our estimates and now project a current Street-low Adj. EBITDA of $83-million (Infrastructure $74-million, Logistics $19-million). Heading into the back half of 2019, we expect that the contributions from the Moose Jaw splitter, Phase II Top of the Hill Hardisty Expansion, and the US Pyote gathering system will contribute an estimated annualized $50-million of run-rate EBITDA.”
With an unchanged “buy” rating, Mr. Foscolos raised his target for Gibson shares to $27 from $26. The current average on the Street is $25.32.
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In a separate research note, Mr. Foscolos said he is expecting the market to react positively to Mullen Group Ltd.'s (MTL-T) better-than-anticipated second-quarter financial results.
On Wednesday after market close, Mullen reported revenue of $319-million for the quarter, exceeding the $311-million expectation from the Street. Operating income before depreciation and amortization (OIBDA) of $51-million also topped projections ($47-million).
“YTD, the Company has generated $95-million of OIBDA, and with unchanged guidance for 2019, this implies $116-million through the back half of the year, which is consistent with our previous estimates,” said Mr. Foscolos. “MTL achieved 16-per-cent OIBDA growth on a YoY [year-over-year] basis, with 7-per-cent attributable to IFRS 16. Three tuck-in acquisitions were completed in T&L [Trucking & Logistics], two post quarter-end, for combined cash consideration of $21.5-million. We believe the market will react positively to the forecast-beating results.”
Mr. Foscolos maintained a “strong buy” rating and $15.50 target for the stock. The consensus is $12.56.
Elsewhere, Raymond James analyst Andrew Bradford said the “quarter ‘beat’ sweetens an already attractive investment thesis.”
“By way of review, our investment thesis can be summarized as follows: (1) ‘return-on’ metrics are structurally improving as OFS EBITDA has been higher year-over-year for four sequential quarters and Trucking/Logistics EBITDA has been higher y/y for 7 consecutive quarters. (2) Mullen tends to grow through acquisitions; its acquisition metrics have averaged between 4 times and 5 times EBITDA, and; its recent $125-million convertible debenture offering is highly indicative of a company on the ‘acquisition warpath’,” said Mr. Bradford, who maintained a “strong buy” rating and $12.50 target.
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Loblaw Companies Ltd. (L-T) stayed “on script” with its second-quarter financial results, said Desjardins Securities analyst Keith Howlett.
“Loblaw delivered 2Q adjusted EPS in line with Street expectations on lower-than-expected same-store sales growth in grocery (up 0.6 per cent) and a stronger-than-expected performance at Shoppers Drug Mart,” he said. “Adjusted EPS grew by 7.1 per cent (comparable basis) as the last major drug reforms were cycled mid-quarter. While Shoppers continues to face gross margin pressure from a ‘normalized’ level of drug reform, its EBITDA is once again growing. We are positive on management staying on script and delivering EPS growth.”
Before the bell on Wednesday, the retailer reported adjusted earnings per share of $1.01, up 3 cents from the same period a year ago and matching Mr. Howlett’s projections. According to the analyst, the result would have been $1.05 if the impact of an accounting change related to depreciation of leasehold improvements had been excluded, which would have represented a rise of 7.1 per cent year-over-year.
“We expect management to modulate the promotional mix and improve traffic trends over the next 2–3 quarters," he said. "We are positive on the company maintaining its focus on delivering high-single-digit EPS growth over the long term.”
Mr. Young raised his target for Loblaw shares to $73 from $70, maintaining a “buy” rating. The average target is currently $72.18.
Elsewhere, CIBC World Markets analyst Mark Petrie moved his target to $77 from $76, keeping an “outperformer” rating.
Mr. Petrie said: “Loblaw’s push to a more data-driven organization has generally been fruitful, with healthy margin improvements as the primary evidence. In Q2, a disappointing same-store sales (SSS) result presented the counter-argument. We remain optimistic on the payoff from the work, but there is uncertainty on the costs to stabilize share, particularly in an unforgiving market. Strength at Shoppers largely offsets and our estimates are only tweaked (EPS drops on adjustments below EBITDA).”
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RBC Dominion Securities analyst Sam Crittenden said he’s “cautiously optimistic” on the outlook for copper in 2020, feeling Freeport-McMoRan Inc. (FCX-N) could “rally along with it.”
Accordingly, he raised his rating for Arizona-based miner to “sector perform” from “underperform.”
“We believe softer demand is reflected in prices while the market remains relatively tight,” said Mr. Crittenden. “Freeport has historically been a go to name in rising copper markets and we don’t see any reason for that to change in the near term. Freeport has strong leverage to copper and our NAVPS (8%) at $3.50/lb long term copper would be $21.09 but would fall to $7.14 at $2.50 per pound.”
Though he said the company remains in a transition phase, the analyst pointed to “solid" progress at Grasberg operations in Indonesia.
“Freeport remains confident in the transition at Grasberg and is ahead of plan on several key metrics,” he said. “We continue to see elevated execution risks and it could be well into 2020 before we know if the cave ramp up is progressing well. On the other hand, that could also mean that any significant issues may not arise until then which lowers the near term headline risk. Ultimately we expect the cave to work based on Freeport’s experience with block caving and the orebody; although 2020 could be an eventful year during the ramp up.”
Mr. Crittenden raised his target for Freeport-McMoRan shares to US$14 from US$12, which exceeds the consensus of US$13.45.
Meanwhile, Raymond James analyst Brian MacArthur kept a “market perform” rating and $13 target.
Mr. MacArthur said: “FCX offers investors exposure to a portfolio of large, low-cost, long life copper assets with significant gold production. We believe FCX has excellent assets, but also has higher jurisdictional risk given Grasberg, one of its major assets, is located in Indonesia. However, we believe the recent Indonesia transaction provided greater certainty about the future cash flows from Grasberg.”
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Desjardins Securities’ Doug Young raised his target price for shares of Intact Financial Corp. (IFC-T) ahead of the release of its second-quarter results on July 30.
The analyst is projecting operating earnings per share of $1.80 for the Toronto-based provider of property and casualty insurance, which sits in-line with expectations on the Street.
“There are a number of themes we will be watching,” he said. “First, we expect year-over-year improvement in personal auto results from actions management has taken over the past few years. However, physical damage cost inflation as well as adverse PYRD relating to Ontario accident benefit claims filed pre-2016 reforms remain the key risks for this division, in our view. Second, CAT and non-CAT weather losses may be elevated due to rain storms and flooding in eastern Canada. As of the date IFC released 1Q19 results, management estimated CAT losses at $65-million for 2Q19. It is worth noting that IFC did not pre-release CAT losses for the quarter. Third, commercial insurance results should benefit from rate firming (price increases) and growth in the sharing economy. Fourth, how is the integration of OB progressing? Fifth, is there anything new on its M&A outlook?”
Mr. Young kept a “hold” rating for the stock while moving his target to $120 from $112. The average is currently $127.21.
“Our biggest hang-ups continue to be the challenges in Canadian personal auto (although we are beginning to gain more comfort on this file) as well as OB risks and valuation (2.6 times book value ex AOCI)," he said. "That said, we like IFC’s strong management team, low correlation with equity markets and successful acquisition track record.”
Elsewhere, Raymond James analyst Brenna Phelan feels a “hardening auto market supports [Intact’s] valuation," leading her to raise her target to $135 from $121 with an “outperform” rating.
Ms. Phelan said: “After a few challenging quarters where a combination of outsized catastrophe losses and some challenges in Personal Auto constrained book value growth, things have come together for Intact recently. Our thesis has been very bullish, based on the attractiveness of its defensive business, plus a Personal Auto segment at a positive inflection point, a strong U.S. Specialty franchise, solid investment and distribution income growth and increasing value in M&A optionality both north and south of the border. The market has agreed, and Intact now trades close to its highest P/B multiple over the past five years. We think that industry fundamentals, Intact’s position therein and peer trading multiples largely support this higher valuation and expect ongoing momentum to support the stock.”
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Calling it a “stylish" growth stock, Canaccord Genuity analyst Derek Dley assumed coverage of Aritzia Inc. (ATZ-T) with a “buy” rating.
“We believe Aritzia offers investors a robust growth outlook, differentiated omni-channel growth strategy, flexible balance sheet, and well-aligned management team, at an attractive valuation,” he said. “In our view, Aritzia has executed on its growth targets since its 2016 IPO; however, the share price has been challenged by previous secondary stock sale overhangs and a changing retail environment. We believe Aritzia is well positioned to thrive in the new era of fashion retailing and view the company as a best-in-class affordable luxury retailer.”
Mr. Dley increased the firm’s target for shares of the Vancouver-based company by a loonie to $24. The average on the Street is $22.29.
“In our view, Aritzia has done a great job of navigating a changing retail landscape,” he said. “With Aritzia currently trading at 8.8 times our fiscal 2021 EBITDA estimate, we believe the shares are attractively valued.”
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Expecting 14-per-cent year-over-year earnings per share growth, Canaccord Genuity analyst Yuri Lynk hiked his target for shares of WSP Global Inc. (WSP-T) ahead of the firm’s second-quarter results on Aug. 8.
“WSP continues to boast the most consistent growth profile in the E&C space," he said. "We recommend investors looking for exposure to the global infrastructure build-out hold WSP shares noting its end market diversity, attractive organic growth profile, and balance sheet M&A optionality.”
With an unchanged “hold” rating, Mr. Lynk moved his target to $77 from $75, which falls below the $80.88 consensus.
“We continue to set our target using a premium valuation multiple of 18 times forward EPS to account for management’s demonstrated track record of valuation creation and to capture the upside potential afforded by management’s plan to acquire over $1 billion of revenue by 2021,” the analyst said. “We note management are proven acquirers operating in a highly fragmented industry.”
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National Bank Financial analyst Maxim Sytchev raised his rating for Toromont Industries Ltd. (TIH-T), declaring: “With such strong performance amid new equipment headwinds, we are buyers again.”
“With significant rental penetration opportunity, eventual rebound in infra spending in Ontario (which is predominantly horizonal in nature), sustained momentum in Quebec and Maritimes and scarcity factor for high-quality management teams (return on equity 22.3 per cent on last 12-month basis vs. TSX at 14.0 times), we are comfortable going long TIH shares again,” he said.
Moving the stock to “outperform” from “sector perform,” Mr. Sytchev increased his target to $71 from $65. The average on the Street is $69.14.
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In other analyst actions:
Roth Capital Partners analyst Scott Fortune initiated coverage of MedMen Enterprises Inc. (MMEN-CN) with a “buy” rating and $5 target. The average on the Street is $7.40.
Eight Capital analyst Jenny Wang initiated coverage of Valens Groworks Corp. (VGW-X) with a “buy” rating and $8.25 target, exceeding the consensus by 2 cents.
David Leeder