Inside the Market’s roundup of some of today’s key analyst actions
Maple Leaf Foods Inc. (MFI-T) is reaching an inflection point in the wake of difficult 2018 market conditions, which featured trade disruptions and increased U.S. slaughter capacity, said TD Securities analyst Michael Van Aelst.
“Now seeing the signs we were looking for to pound the table,” including higher hog futures and a drop in feed costs, Mr. Van Aelst upgraded Maple Leaf shares to “action list buy” from “buy,” predicting a strong 2019 with the first quarter being the “last difficult quarter before pork fundamentals turn by mid-year.”
Projecting earnings growth to turn positive in the second quarter, he maintained a $39 target for its shares. The average target on the Street is now $33.83, according to Bloomberg data.
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Seeing “the potential for accelerated value surfacing” after a U.S. investment partnership revealed a 10-per-cent stake in the utility and demanded representation on its board, Credit Suisse analyst Andrew Kuske raised his rating for TransAlta Corp. (TA-T) to “neutral” from “underperform.”
"After-market close on Friday, securities filings in Canada and the U.S. highlighted an activist approach for TransAlta Corporation (TA)," he said. "Those with longer-term memories will remember activist action surrounded TA in the past (unsuccessful for activists). Mangrove Partners and Bluescape Energy Partners collectively control more than 28.5m TA shares or roughly 10.02 per cent of the outstanding stock. As per our body of work, there have been improvements with Alberta's electricity market fundamentals, seemingly less risk associated with political outcomes and TA's own improved disclosure. In our view, a number of actions could be used to surface value from TA's asset base, but will largely be focused on the hydro portfolio and large interest in TransAlta Renewables. With the approach, we upgrade our rating."
"In the Early Warning report, we note the ‘Common Shares were undervalued and that the Issuer can create significantly more value for shareholders through improved execution and focus. numerous opportunities to increase shareholder value, including through operational and cost excellence, asset optimization, capital allocation and broader strategic initiatives.’”
Mr. Kuske raised his target for its shares to $10 from $7. The average is $8.73.
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Though he said its fourth-quarter financial results fell largely in line with his expectations, Raymond James analyst Ben Cherniavsky lowered his target price for shares of Cervus Equipment Corp. (CERV-T) after expressing concern about market trends.
On Monday, the Calgary-based company reported adjusted earnings per share for the quarter of 33 cents, missing the analyst’s 48-cent projection but up 39 per cent year-over-year. He attributed the miss to lower-than-expected gross margins (17.3 per cent versus a 18.6-per-cent estimate).
“The only variable that materially strayed from our forecasts was the gross margin which compressed as competitive pressures in Ag intensified and the timing of OEM incentive payments shifted quarters,” said the analyst. “Recall that gross margin pressure was also called out in the 4Q18 report for Rocky Mountain Dealerships, Cervus’ peer and direct competitor. As a result, we are growing increasingly concerned that Canada’s largest ag dealers are beginning to sacrifice price discipline in the pursuit of market share gains for their respective OEMs.”
“Similar to how we articulated our investment thesis on Rocky last week, this behaviour invariably moderates our conviction on Cervus’ stock in the near-term. That said, also akin to Rocky’s situation, Cervus’ highly depressed valuation suggests that some of these risk may already be partly priced-in. Indeed, with the stock trading below its tangible book value, we think this is the wrong time for investors to throw in the towel. We also note that the progress Cervus continues to make in its Transportation segment—as well as, to a lesser degree, its Industrial segment—serves as a helpful buffer to the headwinds the company is experiencing in Ag.”
Mr. Cherniavsky lowered his 2019 revenue and earnings per share projections to $1.378-billion and $1.62, respectively, from $1.416-billion and $1.95.
Keeping an “outperform” rating for Cervus shares, he dropped his target to $16.25 from $19.50. The average is now $16.75.
Elsewhere, Acumen Capital's Brian Pow raised his target to $16.25 from $16 with a "buy" rating (unchanged).
Mr. Pow said: “We continue to see uncertainty around demand for new equipment in the agriculture segment, the result of a weak Canadian dollar. This is likely the biggest risk and potential downside to our estimates. This may be partially offset by higher used equipment demand as well as continued improvement in the Company’s Transportation segment.”
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The grounding of Boeing Co.'s (BA-N) 737 Max fleet will have a short-term negative impact on both Air Canada (AC-T) and WestJet Airlines Ltd. (WJA-T), said Cormark Securities analyst David Ocampo upon resuming coverage of the companies.
“We believe there will be a negative impact in Q1 and Q2 from the cost associated with rebooking delays and the lost capacity,” said Mr. Ocampo, who believes industry conditions appear favourable for both and expects the market remain balanced into 2020.
Believing it provides investors with the “best value” as all its drivers are in place for a strong 2019, he kept a “buy” rating and $47 target for Air Canada. The average on the Street is $41.
With a “market perform” rating and $21 target (versus the $20.88 consensus), Mr. Ocampo thinks WestJet will need to provide below-market fares to compete, placing further pressure on already depressed results.
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Argus analyst John Eade thinks shares of Boeing Co. (BA-N) will continue to face “downward pressure” as investigations into the crashes involving its 737 Max aircraft continue.
That led him to downgrade its stock to “buy” from “hold.”
"Boeing management has not been particularly pro-active in its response, and we think the shares are subject to downward pressure as the investigation plays out in the news,” the analyst said. “We think the investigation is likely to cap multiples, and that earnings forecasts are likely to decline.”
“In the near term, the company is struggling, along with aviation investigators, to quickly determine the cause of two fatal crashes involving the company’s popular 737 Max jet. Until we get some clarity from investigators on the cause of the crashes, and from Boeing on its responses, we think a near-term HOLD rating is appropriate."
Mr. Eade did say he sees Boeing’s long-term outlook as bright and maintained a five-year buy rating.
“If the cause of the crashes turns out to be a mechanical or engineering issue, Boeing can correct the problem and the industry, which is heavily dependent on the plane, the 737 Max jet, can move on," the analyst said.
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Pointing to a slower-than-anticipated start to spring, particularly in the U.S. Midwest, Citi analyst P.J. Juvekar cut his first-quarter earnings expectations for a trio of North American fertilizer companies.
“The slow start has combined with a difficult fall 2018 season which limited applications and resulted in higher than usual inventories for phosphates, potash, and ammonia,” he said. “We anticipate U.S. demand will pick up in the coming weeks and think it is too early to ‘throw in the towel’ for the spring fertilizer season. Remember last year started slowly as well with 75 per cent of 2Q18 nitrogen tons moving in the months of May/June. Fertilizer prices are still anticipated to be higher quarter-over-quarter in 2Q as seasonal demand emerges and the U.S. shifts 3mm acres to corn.”
“U.S. Dec-Feb weather has been extremely wet ... Rainfall in much of the cornbelt and southern U.S. has been among the top 5 wettest seasons in 100+ years, which delayed early season fertilizer application in parts of the south. More recently, higher year-over-year snow cover in parts of Nebraska, Iowa and Wisconsin is keeping farmers from getting into their fields. High rainfall and melting snowpack can cause challenges/delays for river barge traffic, a major logistics conduit for getting phosphate and nitrogen into the central cornbelt. [Nutrien] and [CF Industries] have the best logistics assets spread across the Midwest and should benefit from any shortages through higher pricing.”
Mr. Juvekar maintaining his ratings and target prices for shares of the three companies.
They are, in order of preference:
Nutrien Ltd. (NTR-N/NTR-T) with a “buy” rating and US$56 target. Average: US$61.44.
CF Industries Holdings Inc. (CF-N) with a “buy” and US$50. Average: US$52.05
Mosaic Co. (MOS-N) with a “buy” and US$38. Average: US$38.35.
“On a relative basis we think CF’s 1Q EPS has the most to fall, and we cut our estimate to 28 cents from 35 cents vs. 49-cent consensus,” said Mr. Juvekar. “We also think NTR will be impacted by lower nitrogen profits and delayed crop input retail sales. While 1Q estimates come down, if fertilizer prices start to recover as seasonal demand picks up, we think the stocks could outperform even if 1Q results are sloppy. Investors should remember that the Ag cycle is fundamentally different than the economic cycle and could benefit massively if U.S.-China trade was is settled. That would spur China buying more U.S soybeans and could improve farmer health.”
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In other analyst actions:
Independent Research GmbH analyst Markus Friebel downgraded Apple Inc. (AAPL-Q) to “hold” from “buy” with a target of US$200, up from US$198. The average on the Street is US$179.47.
PI Financial Corp. analyst David Kwan upgraded Espial Group Inc. (ESP-T) to “buy” from “neutral” with a target of $1.35. The average is $2.34.
With files from Reuters and Bloomberg
David Leeder