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Inside the Market’s roundup of some of today’s key analyst actions

Though he expects growth to slow for Canadian diversified industrial companies from “the strong pace of early 2018,” Industrial Alliance Securities analyst Nav Malik thinks economic activity will likely “remain supportive” for the sector through 2019.

In a research report released Tuesday, Mr. Malik revealed his top picks for the year in his coverage universe with the expectation of “above trend” U.S. GDP growth of 2.6 per cent in 2019 and Canadian growth of 1.9 per cent.

"Heading into 2019, concerns over slower economic growth and uncertainty regarding global trading relationships have weighed on investor sentiment," he said.

“Recent market volatility has created opportunities to buy solid, well managed companies. Our top picks include companies that are led by established management teams with a demonstrated track record of creating value through various economic cycles.”

Mr. Malik highlighed three stocks. They are:

TFI International Inc. (TFII-T) with a “strong buy” rating and $60 target. The average on the Street is $49.96.

Mr. Malik: “TFII is one of the largest and most broadly diversified trucking companies in North America. Margin improvement was the key driver of growth in 2018, and we expect that to continue through 2019 as TFII focuses on improving operational efficiency, rationalizing unprofitable business, and pursuing an asset-light approach where possible. In addition, TFII has been the most active consolidator in the Canadian trucking industry, and we believe acquisitions will remain a key component of growth going forward. We are forecasting operating income growth of 21 per cent in 2019.”

Titanium Transportation Group Inc. (TTR-X) with a “buy” rating and $2.50 target. Average: $2.92.

Mr. Malik: “TTR has grown into a major asset-based trucking and non-asset-based logistics provider serving eastern Canada and the northeastern U.S.. In 2019, we believe trucking industry fundamentals will remain supportive as demand for freight transportation remains strong while capacity remains tight due to driver shortages and more stringent hours of service (HOS) regulations. TTR’s focus on technology and driver recruitment/retention has allowed it to capture additional market share. In 2019 we are forecasting 15-per-cent year-over-year revenue growth, and 20-per-cent operating income growth.”

Exchange Income Corp. (EIF-T) with a “strong buy” rating and $43 target. Average: $42.77.

Mr. Malik said: “EIF is a dividend-paying, acquisition-focused company with a portfolio of diverse operating subsidiaries in the aerospace, aviation, and manufacturing industries. The Company’s acquisition model has led to strong historical growth, while also adding to diversification. Many of its operating subsidiaries are counter-cyclical, providing overall revenue and cash flow stability. In 2019, we are forecasting solid EBITDA and Adjusted EPS growth (13 per cent and 19 per cent, respectively) as well as continued dividend growth (5 per cent).”

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Raymond James analyst Daryl Swetlishoff said the “carnage” suffered by lumber wholesalers will be “a defining factor for markets going forward as extreme caution and reduced capital availability derailed normal pre-building season buying.”

In a research report reviewing the firm’s ninth annual Homebuilding & Wood Products Forum, held in Toronto last week, Mr. Swetlishoff lowered his fourth-quarter earnings expectations, which now sit 5-10 per cent below the consensus on the Street. He also reduced his 2019 estimates to reflect a reduced forecast for building materials pricing and shipments.

“Two key takeaways emerged, 1) optimism surrounding homebuilding activity levels during the spring building season, and 2) a lack of pre-building season buying due to supply chain intermediaries exhibiting extreme caution,” he said. “We expect these factors to support tighter commodity markets in coming quarters.”

He added: “Frank Turnbull (Mercer), Trent Gustafson (Trapa/Hampton) and Brian McParland (Tall Tree) provided insightful commentary suggesting that inventory levels at the producer and on-the-ground are normal to low with very wet Texas weather hampering product take-aways. There was consensus that 2019 pricing would average higher than current spot with potential for the year to be back end loaded. While showing some recent improvement, off-shore demand was weaker than year ago levels with some buyers frustrated by the sharp pricing correction. Mercer sells 25 per cent of Euro lumber to SE USA, with pulp, bioenergy and low transportation costs facilitating trade.”

Mr. Swetlishoff downgraded a pair of stocks to to "outperform" from "strong buy" ratings:

Norbord Inc. (OSB-T) with a target of $51, down from $60. Average is $41.53.

Western Forest Products Inc. (WEF-T) with a target of $2.60, falling from $3. Average is $2.60.

“On balance ... our experience suggests share price reactions will likely be biased to improving commodity pricing and would add to positions at current levels,” he said.

He also lowered his target for the following stocks:

Canfor Corp. (CFP-T, “strong buy”) to $26 from $35. Average: $24.42.

Interfor Corp. (IFP-T, “strong buy”) to $24 from $28. Average: $21.50.

West Fraser Timber Co. Ltd. (WFT-T, “strong buy”) to $94 from $100. Average: $82.17.

Conifex Timber Inc. (CFF-T, “outperform”) to $4 from $6. Average: $3.25.

Acadian Timber Corp. (ADN-T, “outperform”) to $26 from $28. Average: $19.

Fortress Global Enteprises Inc. (FGE-T, “outperform”) to $3 from $4. Average: $4.

Mr. Swetlishoff added: “In terms of share price performance, West Fraser outperformed the lumber peer group in 2018, while in recent months West Fraser has continued to perform well, with a 16-per-cent return from Nov. 2018 lows in-line with a 16-per-cent sector average return and an 11-per-cent return by the TSX index. We attribute this to a form of flight to quality as markets digested the precipitous 3Q18 drop in commodity pricing along with severely negative U.S. housing sentiment. We expect sector leading margins, trading liquidity, regional diversification, regular share buybacks, along with a strong balance sheet explain this outperformance, however, note that comparables Canfor, Conifex and Interfor have lower trading multiples with higher implied upside.”

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Though the market had a “muted” reaction to Shawcor Ltd.'s (SCL-T) $312-million offer to acquire ZCL Composites Inc. (ZCL-T), Industrial Alliance Securities analyst Elias Foscolos said he remains “upbeat on SCL’s base prospects and value to be eventually added through ZCL.”

On Monday, Shawcor, a Toronto-based oilfield services company, fell 1.75 per cent after announcing the acquisition at a cost of $10 per ZCL share before market open.

"Although it seems that initially SCL has paid full value for ZCL, we believe that the strategic opportunities for driving cross selling and improved margins, in addition to less volatile financial performance, will result in increased shareholder value for Shawcor," said Mr. Foscolos.

"ZCL has a lot in common with Shawcor in terms of its fundamental value drivers and core competencies. Value should be initially created by reducing G&A and streamlining operating costs. Additionally, we expect SCL to attempt to move its composite products into ZCL’s Fuel distribution network, and ZCL’s Oil & Gas storage products into the U.S. through SCL’s distribution network."

Mr. Foscolos maintained a "strong buy" rating for Shawcor shares and raised his target to $27.50 from $26.50. The average is now $28.90.

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Raymond James analyst Steve Hansen said he’s still “constructive” on Canadian railway companies despite a “slowing” economic backdrop, seeing valuations “more attractive” following a recent sell-off.

In a research note previewing fourth-quarter results for both Canadian National Railway Co. (CNR-T) and Canadian Pacific Railway Ltd. (CP-T), Mr. Hansen said Canadian rail traffic continues to “perform well on both an absolute and relative basis, albeit with some obvious qualifiers” regardless of lingering macro concerns.

“For context, CN and CP 4Q18 traffic (revenue-ton-miles, or RTM’s) increased 11.9 per cent and 8.7 per cent year-over-year, representing one of the strongest periods of growth for both carriers over the past 4 years,” he said. "To be fair, traffic was up against an easy comp following last year’s gnarly winter—one that triggered acute congestion/service issues at CN and detrimental ‘spill-over’ effects at CP. Traffic also benefited from a sustained uptrend in crude-by-rail, coal, and potash shipments, segments benefiting from a unique series of drivers that: a) help reduced their sensitivity to macroeconomic cross-currents; and, b) are broadly expected to continue through 2019 (at a slower rate of growth).

“This is not to suggest that Canadian rail traffic is immune to the global economic slowdown that is gradually unfurling; rather, we merely point out that we continue to expect CN and CP to benefit from a handful of structural tailwinds that add an element of resilience, and ultimately serve up traffic growth that paces comfortably ahead of the traditional ‘GDP-plus’ relationship.”

Mr. Hansen said the fourth-quarter slide of both both companies in the fourth quarter provides a glimpse into the sensitivity of both to a more difficult macro environment.

“While difficult to compare/extrapolate, we believe the market’s 4Q18 ‘spasm’ (acute downdraft) offers an instructive glimpse into CN and CP’s perceived resilience/sensitivity to an economic slowdown,” he said. “From a historical perspective, CN clearly stands as the unrivaled champion, with the stock vastly outperforming both CP and the broader market through the 2009 financial crisis, an outcome equally supported by the carrier’s superior operating metrics during the crisis (i.e., more nimble). To be fair, however, CP was a vastly a different enterprise back then, still under the reign of the former management team, and saddled with an oppressive, lumbering cost structure. This time around, the results look vastly different, with CN and CP performing equally (down 17.5 per cent) through the 4Q market spasm between Oct-1-18 to Dec-24-18, and both notably outperforming the S&P 500 (down 19.6 per cent) over the same period.”

Mr. Hansen maintained a "strong buy" rating and $340 target for shares of CP. The average on the Street is currently $291.66.

He kept an "outperform" rating and $125 target for CN, which exceeds the average of $117.78.

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Though he lowered his target price for shares of Tiffany & Co. (TIF-N) to reflect “weaker” fourth-quarter financial results, Citi analyst Paul Lejuez thinks the stock remains a “long-term winner.”

On Friday, the New York-based luxury retailer cut its yearly profit forecast in the wake of lower-than-anticipated holiday sales, which it attributed in part to Chinese tourists spending less due to a strong greenback.

“Management is doing all the right things to turn around the brand (more inclusive brand messaging, investing heavily behind marketing, targeting millennials) and given all the macro pressures they are facing this early in their brand positioning, 4Q results were not that bad,” he said. “As we look to fiscal 2019 when TIF will have another year to get their brand message out there, we see opportunity for a major comp inflection in 2H19 as TIF begins lapping macro headwinds (assuming the macro does not worsen).”

In reaction to fourth-quarter struggles, which included a deceleration of U.S. demand, and the "expectation that global macro headwinds continue through 1H19," Mr. Lejuez lowered his 2019 and 2019 earnings per share estimates to US$4.66 and US$4.92, respectively, from US$4.80 and US$5.18.

With a "buy" rating (unchanged), his target for Tiffany shares fell to US$115 from US$125. The average on the Street is $108.29.

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Ahead of the release of its fourth-quarter results on Feb. 7, Citi analyst Ben Herbert raised his rating for Intercontinental Exchange Inc. (ICE-N) to “buy” from “neutral.”

"The name previously screened at the top of our preference ranks among our Neutrals for some time, and with the recent pullback in multiple, we see a favorable entry point," he said. "Our view of ICE’s full service ecosystem/broad Transactions platform, resiliency of Non-Transactions business and seasoning Fixed Income business align well with our defensive/offensive theme for 2019."

"Our ICE upgrade is driven by: 1) favorable ’19 volume outlook given strong transactions platform/ecosystem; 2) 2H18 Data momentum leading to upward bias to Consensus Data revenue estimates in ’19 and ’20; and, 3) a more attractive valuation after recent pullback."

Mr. Herbert raised his target to US$86 from US$80, exceeding the current consensus target by 6 US cents.

The analyst also placed CME Group Inc. (CME-Q) on a “30 day upside catalyst watch.”

"We believe a favorable NEX Group update after a bit of a regulatory driven vacuum of information pre-deal close – with potential upside margin and eventual revenue opportunity impacts – may ignite a near-term rally off 4Q18 results," said Mr. Herbert.

He rates CME a "buy" with a US$210 target, dipping from US$220. The average is US$201.07.

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CIBC World Markets analyst Stephanie Price expects a “noisy quarter” from Maxar Technologies Ltd. (MAXR-N, MAXR-T), suggesting its dividend may be cut in the wake of the failure of its key WorldView 4 satellite.

“We expect Maxar to issue 2019 guidance with Q4 results and our estimates are well below consensus,” she said. "We are expecting $1.588-billion in 2019 revenue (consensus $1.914-billion) and adj. EPS of $2.59 (consensus $3.46). We note a wide range of consensus estimates (2019 revenue range $1.494-billion to $2.204-billion). Our 2019 numbers incorporate the move to U.S. GAAP accounting, the exiting of the GEO business and the impact of the WorldView-4 failure.

“With the impacts noted above and the WorldView Legion capex program, we are anticipating slightly negative 2019 free cash flow of ($11-million). To date, Maxar has retained its $65-million/year dividend. Given the current stock price and the lack of free cash flow expected in 2019, we would not be surprised to see the board decide to eliminate the dividend with the quarter.”

Ms. Price maintained a "neutral" rating and dropped her target to US$6 from US$15.

“Maxar remains in flux, with a new CEO, the GEO strategic review ongoing and the WorldView Legion capex program in full swing,” she said. “While we see a strong competitive moat around the Imagery business, we see a number of near-term headwinds.”

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In other analyst actions:

Cormark Securities analyst Richard Gray moved Goldcorp Inc. (G-T, GG-N) to “tender” from “buy” with a $14 target, down from $18.50. The average on the Street is $19.92.

TD Securities analyst Graham Ryding raised Sprott Inc. (SII-T) to “hold” from “reduce.”

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 3:57pm EDT.

SymbolName% changeLast
CNR-T
Canadian National Railway Co.
-0.15%178.37
EIF-T
Exchange Income Corp
-0.46%49.51
ICE-N
Intercontinental Exchange
+0.33%137.43
CP-T
Canadian Pacific Kansas City Ltd
-0.54%119.43
CME-Q
CME Group Inc
-0.14%215.29
TFII-T
Tfi International Inc
+0.05%216
SII-T
Sprott Inc
+1.26%49.98
WEF-T
Western Forest Products Inc
-1.56%0.63
CFP-T
Canfor Corp
-2.12%17.11
IFP-T
Interfor Corp
-1.44%21.16
CFF-T
Conifex Timber Inc
+1.64%0.62
ADN-T
Acadian Timber Corp
-0.63%17.38
G-T
Augusta Gold Corp
+6.93%1.08

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