Wednesday’s analyst upgrades and downgrades

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

Ahead of third-quarter earnings season for paper, packaging and forest products companies, RBC Dominion Securities analyst Paul Quinn sees strong demand offsetting rising input costs.

“Despite some fairly material corrections, OSB and lumber pricing still remain at historically high levels. In other forest product commodities, the supply and demand balance remains tight, although we are starting to see slowing growth rates,” he said in a research report released before the bell on Wednesday.

“Regardless, paper & packaging producers have been able to leverage strong market conditions into higher pricing over the last 12 months. We expect that earnings will be strong for most companies given elevated capacity utilization and favorable pricing; however, input costs are becoming a larger factor. Costs for recovered paper, chemicals, and transportation will all likely be topical and could potentially cause variances versus consensus estimates.”

Mr. Quinn thinks tissue producers are “best-positioned” heading into earnings season, expecting a “much more upbeat” outlook based on the “favorable turnaround” in pulp prices, which should lead to margin strength.

“Recent commentary from P&G and Costco suggests that consumer tissue demand is starting to pick up and may remain structurally above pre-pandemic levels due to increased focus on health and hygiene,” the analyst said. “With expectations low and stocks that have underperformed, we think that there is room for positive surprises.”

Based on that “more constructive view,” Mr. Quinn upgraded KP Tissue Inc. (KPT-T) to “outperform” from “sector perform” with a $12 target, rising from $10 and exceeding the $11.42 average on the Street.

He also raised Spokane, Wa.-based Clearwater Paper Corp. (CLW-N) to “outperform” from “sector perform” with a US$50 target, up from US$32 and US$1 more than the consensus.

Conversely, Mr. Quinn called pulp his “least-preferred” commodity, seeing the market in a “precarious position with both demand and supply shocks possible in the near term” following a surge in price earlier this year.

“On the demand side, Chinese government mandated paper & board curtailments could materially reduce demand,” he said. “On the supply side, Bracell is currently ramping up production at its new mill in Brazil. While the start-up of Arauco’s new pulp line was delayed by 3–5 months, we expect that it will impact operating rates in 2022. UPM is still on track to start up its new mill in Uruguay in H2/22.”

That prompted him to lower Canfor Pulp Products Inc. (CFX-T) to “sector perform” from “outperform” with a $9 target, falling from $12 and below the $9.30 average on the Street.

Mr. Quinn also made a series of target price adjustments on Wednesday. For Canadian companies, his changes were:

• Doman Buiding Materials Group Ltd. (DBM-T, “outperform”) to $10 from $11. Average: $10.50.
• Conifex Timber Inc. (CFF-T, “outperform”) to $3 from $3.50. Average: $2.83.
• Interfor Corp. (IFP-T, “outperform”) to $44 from $47. Average: $42.83.
• Western Forest Products Inc. (WEF-T, “outperform”) to $3 from $2.75. Average: $2.80.

“We raise our price targets for five companies (KP Tissue, Western Forest Products, James Hardie Industries, Clearwater Paper, and Weyerhaeuser) to reflect increasing commodity prices,” he said. “We lower our price targetsfor seven companies(Canfor Pulp Products, Doman Building Materials, Conifex Timber, Interfor, International Paper, Mercer, and WestRock) to reflect slower-than-expected earnings growth.”

“In Canada, our favorite names are Interfor, Western Forest, Canfor, and Cascades. In the United States, our favorite names are Louisiana-Pacific, West Fraser, James Hardie, and Weyerhaeuser.”

======

Pointing to “near-term labour headwinds, a decelerating recovery and valuation with recent share price appreciation,” Desjardins Securities analyst David Newman lowered his recommendation for Boyd Group Services Inc. (BYD-T) to “hold” from “buy.”

In a research report released Wednesday, he reduced his third-quarter earnings before interest, taxes, depreciation and amortization (EBITDA) estimate for the Winnipeg-based operator of non-franchised collision repair centres to US$59-million from US$64-million, falling below the consensus projection on the Street of US$63-million. That decline came after he cut his same-store sales growth estimate to 12.3 per cent from 14.5 per cent.

“While the economic recovery is driving growth, the small haircut in SSSG reflects industry activity levels, capacity constraints (technicians), hurricanes in the southern U.S. and the lingering impact of COVID-19,” said Mr. Newman. “We believe wage inflation, which BYD should recover in time, may weigh on near-term margins (forecasting 12.2-per-cent EBITDA for 3Q).”

“BYD is able to dynamically pass through parts and materials inflation to P&C insurers (BYD procures parts at a discount and is allowed a mark-up on pricing). However, the technician shortage flagged last quarter remains a headwind, leading to forgone revenue opportunities, higher work in process and wage inflation. Since wage increases are typically recovered over a period of time, we believe BYD could face some near-term margin pressure, especially with the labour fallout on the back of COVID-19. Independent shops and even debt-laden MSOs (eg Service King) likely have suffered more, potentially enriching BYD’s M&A pipeline. Global chip shortages facing automakers have also led to record high prices for cars, incentivizing people to buy and maintain used vehicles (BYD’s sweet spot is 4–10-year-old cars).”

With its pace of acquisitions picking up again and seeing its pipeline to growth remaining “very robust,” Mr. Newman did increase his target for Boyd shares to $280 from $270. The average on the Street is $261.46.

=====

After it posted “decent” third-quarter financial results, Desjardins Securities analyst Benoit Poirier thinks Canadian National Railway Co. (CNR-T) is “off to a good start” with progress on its strategic plan, seeing “strong” yield management.

On Tuesday after the bell, CN reported adjusted fully diluted earnings per share of $1.43, exceeding Mr. Poirier’s forecast by 4 cents matching the Street’s expectation. Its adjusted operating ratio, a key measure of profitability in the industry, was 59.0 per cent, also beat forecasts (59.1 per cent and 60.9 per cent).

“Notably, CN has already reached 75 per cent of the workforce targeted and management intends to complete the entire program by the end of 2021 to ensure that the entire $250-million of savings are realized in 2022,” the analyst said.

“Meanwhile, CN has secured $100-million of cost-saving initiatives related to a reduction in purchased services and materials (total savings of $250-million targeted). Recall that management is also targeting $50-million of savings from the reduction in casualty and other costs, thanks to past investments in technology to improve safety. On the pricing front ($150-million of benefits anticipated), the company delivered same-store pricing of 5.1 per cent in 3Q. Interestingly, while management reiterated its confidence that it can deliver on its 2022 targets (adjusted EPS growth of 20 per cent, ROIC of 15 per cent and FCF of $4-billion), management highlighted that the 57-per-cent adjusted OR target for 2022 is not the end goal as it sees further opportunities beyond that as the business grows. With respect to the ongoing strategic review of non-rail businesses, management noted that a sales process is ongoing for the GLT ships, with multiple prospective buyers already identified. For TransX, CN is still evaluating its options as it reiterated that the business is accretive to adjusted EPS. Management appears to be evaluating a partial divestiture of the assets to protect rail volume attached to the business.”

Based on the results and management comments, Mr. Poirier raised his adjusted fully diluted EPS estimate for 2021 to $5.61 from $5.55. However, citing a “weaker volume environment,” he trimmed his 2022 projection to $6.73 from $6.89.

Reiterating a “hold” recommendation, he raised his target for CN shares to $165 from $163. The average on the Street is $155.67.

“While we are encouraged by management’s early progress with the strategic plan, we prefer to remain on the sidelines while waiting for the outcome of the proxy fight and/or further signs of progress on OR improvement initiatives,” said Mr. Poirier.

Elsewhere, calling CEO J.J. Ruest’s departure “unexpected,” BMO Nesbitt Burns analyst raised his target to $160 from $155 with a “market perform” rating.

“It is unusual to see a leader launch a strategic plan and financial targets only to announce retirement five weeks later with no visibility into succession,” he said. “Whether this is a signal that the board of CNR might be more open for the type of change that TCI is proposing is yet to be seen. Our analysis suggests possible material upside to profitability beyond what is currently contemplated in the company’s strategic plan, but visibility into unlocking this opportunity remains limited.”

Others making target changes include:

* Scotia Capital’s Konark Gupta to $166 from $160 with a “sector outperform” rating.

“Q3 was full of positive surprises, including a material EPS beat, OR improvement, unchanged EPS guidance, and a record-high pricing gain, which should maintain upward momentum in the stock. CNR also surprised with a planned retirement of CEO, Jean-Jacques Ruest, who has been at the helm since 2018 and at CNR for over 25 years. We believe improving execution and CEO transition could bridge some of the gap between the company and its activist shareholder, TCI Fund, which could potentially avoid a costly proxy battle,” said Mr. Gupta.

* Stifel’s Benjamin Nolan to US$120 from US$116 with a “hold” rating.

* National Bank’s Cameron Doerksen to $153 from $151 with a “sector perform” rating.

=====

Desjardins Securities analyst Doug Young is maintaining a “constructive” outlook on the Canadian insurance sector heading into third-quarter earnings season.

However, he warns investors “the ride could be bumpy in light of various political and macro risks in the short term.”

“With all four lifecos reporting results within a 24-hour period, and given we expect there could be lots to dig through, this will be an interesting reporting season,” he said. “For instance, we suspect weather events likely impacted MFC’s and GWO’s P&C retrocession businesses, a steepening yield curve may adversely impact MFC’s results, 3Q is when SLF and MFC do deeper dives on actuarial assumptions and IAG typically provides guidance on its 4Q actuarial review. But excluding all of this, we expect decent core results.”

Mr. Young is projecting a 6-per-cent year-over-year increase in core earnings per share on average, but he thinks headline numbers will likely be “negatively impacted by equity market movements, URR assumption changes and recent catastrophe (CAT) weather impacts on reinsurance businesses (for MFC and GWO).”

After adjusting his forecast and releasing his 2023 estimates, Mr. Young raised his target for Sun Life Financial Inc. (SLF-T) to $76 from $72 with a “buy” rating. The average is $73.29.

Elsewhere, TD Securities analyst Mario Mendonca raised his Sun Life target to $77 from $73 with a “buy” recommendation.

Mr. Mendonca also increased his targets for Manulife Financial Corp. (MFC-T, “action list buy”) to $37 from $36, Great-West Lifeco Inc. (GWO-T, “buy”) to $43 from $42 and IA Financial Corp. Inc. (IAG-T, “buy”) to $89 from $88. The averages on the Street are $30.03, $40.20 and $83.17, respectively.

=====

National Bank Financial analyst Matt Kornack made a series of target price changes to real estate investment trusts in his coverage universe on Wednesday.

His changes include:

• Allied Properties Real Estate Investment Trust (AP.UN-T, “outperform”) to $50 from $49.25. The average on the Street is $50.29.
• Boardwalk Real Estate Investment Trust (BEI.UN-T, “outperform”) to $60 from $56. Average: $54.39.
• Canadian Apartment Properties Real Estate Investment Trust (CAR.UN-T, “outperform”) to $70.50 from $68.50. Average: $67.73.
• Dream Office Real Estate Investment Trust (D.UN-T, “outperform”) to $26 from $24. Average: $25.33.
• European Residential REIT (ERE.UN-T, “outperform”) to $5.40 from $5.50. Average: $5.28.
• Granite Real Estate Investment Trust (GRT.UN-T, “outperform”) to $110 from $105. Average: $98.20.
• InterRent Real Estate Investment Trust (IIP.UN-T, “outperform:) to $20.25 from $20. Average: $19.24.
• Killam Apartment Real Estate Investment Trust (KMP.UN-T, “outperform”) to $26 from $24. Average: $23.44.

=====

Blackline Safety Corp.’s (BLN-T) $40-million equity raise supports a “significant growth rate,” according to Canaccord Genuity analyst Doug Taylor, who now sees “a more comfortable” balance sheet.

“The equity raise provides greater financial flexibility as Blackline continues a multi-year investment that will see its product line and addressable market dramatically expand,” he said. “This flexibility offsets the associated dilution from the equity raise, in our view. With BLN shares down 24 per cent from their June high and facing lower risk of further dilution, we view the current share price as presenting a more compelling risk/reward profile for investors in advance of an accelerating growth trajectory with improving recurring services revenue metrics.”

Accordingly, Mr. Taylor raised his rating for the Calgary-based technology company to “buy” from a “hold” recommendation.

For the fourth quarter, he expects to see an “accelerated growth profile,” projecting a 47-per-cent jump in revenue year-over-year to $17-million, supported by several “substantial” customer wins.

“Blackline allocated $2.8-million in FQ3 toward inventory stock on hand to mitigate the effects of ongoing global supply chain issues on its operations,” he said. “Recall in our FQ3 results note, the entry-level G6′s launch timeline is facing a several-quarter delay with future updates subject to sourcing components. We also look to other new products, including Blackline’s first-generation body camera and G8 cloud-connected monitor, to begin contributing exiting F2022. In addition to funding the company’s investments in R&D, sales and marketing efforts, we expect financing proceeds to be partially earmarked toward additional proactive inventory build-up to manage against any sporadicity or higher per-unit costs on its current and new hardware products. We note this dynamic could sharpen further if hardware sales re-accelerate ahead of near-term expectations in the current tight supply environment.”

He maintained a $8.25 target for its shares. The current average is $11.03.

Elsewhere, TD Securities’ David Kwan resumed coverage with a “speculative buy” rating and $12 target, down from $12.50, while National Bank’s John Shao resumed coverage with an “outperform” rating and $10 target.

=====

A group of equity analysts raised their targets for shares of Onex Corp. (ONEX-T) following its Investor Day event.

Those making adjustments include:

* RBC’s Geoffrey Kwan to $125 from $118, keeping an “outperform” rating. The average is $111.60.

“Onex’s Investor Day reinforced why it is our 2nd best idea,” said Mr. Kwan. “We came away more positive on the story and have greater conviction in our call. Our key takeaways: (1) fund performance is better than the share price reflects; (2) the introduction of Fee Related Earnings (FRE) for the asset management business suggests potentially substantial valuation upside over the next several years, something we did not expect; (3) continued strong performance could drive very significant future carried interest; and (4) Onex is creating a more diversified business that should see significant new product launches and potentially new platforms for growth, ultimately driving cross-selling opportunities. We view the shares as undervalued.”

* Scotia’s Phil Hardie to $113 from $107. with a “sector outperform” rating.

“We came away from Onex’s Virtual 2021 Investor Day feeling increasingly bullish on the outlook for the stock given that management’s focus over the next five years is likely to be on growth and surfacing value for its asset management operations,” said Mr. Hardie. “We believe that value creation levers applied to investment capital, combined with surfacing the value of an expanded asset manager, could support a stock price of almost $200 per share by 2026.

“Key Investor Day takeaways included plans to: 1) double fee-generating AUM by 2026; 2) adopt fee-related earnings (FRE) as a key performance metric and focus on the expansion of that earnings stream to better surface the value of its asset & wealth management operations; and 3) continue to expand its private equity and private credit platforms with reduced capital intensity.”

======

With strength in commodity prices, equity analysts at BMO Nesbitt Burns expect to see “strong” third-quarter results from Canadian oil and gas companies.

“Oil demand surged higher in the quarter as pent-up demand began to be unleashed and supply failed to keep pace, in part due to hurricane outages on the U.S. Gulf Coast,” the firm said. “Global natural gas prices also surged as demand gains outpaced supply and European and Asian natural gas storage levels hit 5-year lows. If colder weather arrives early we expect commodity prices to make further gains. The third quarter should showcase impressive levels of free cash flow, which are poised to grow further into Q4/21 and 2022. Balance sheets are improving quickly, which is leading to the prospect of higher cash returns to shareholders over the coming quarters. Against the backdrop of improving returns on capital, shrinking debt and higher yields, we believe that the sector remains significantly undervalued.”

For large-cap stocks, the analysts made the following target price changes:

• Crescent Point Energy Corp. (CPG-T, “outperform”) to $9 from $8. Average: $8.08.
• Vermilion Energy Inc. (VET-T, “market perform”) to $15 from $13.50. Average: $13.91.

Their changes for small and mid caps were:

• Bonterra Energy Corp. (BNE-T, “underperform”) to $5.50 from $5. Average: $6.19.
• Baytex Energy Corp. (BTE-T, “market perform”) to $4.50 from $3.75. Average: $3.92.
• Cardinal Energy Ltd. (CJ-T, “outperform”) to $6 from $5. Average: $5.05.
• Crew Energy Inc. (CR-T, “outperform”) to $4 from $3.25. Average: $3.65.
• Enerplus Corp. (ERF-T, “outperform”) to $14 from $11. Average: $13.21.
• Headwater Exploration Inc. (HWX-T, “outperform”) to $7 from $6. Average: $6.74.
• NuVista Energy Ltd. (NVA-T, “market perform”) to $7.50 from $6. Average: $6.98.
• Paramount Resources Ltd. (POU-T, “outperform”) to $25 from $24. Average: $23.83.
• Obsidian Energy Ltd. (OBE-T, “underperform”) to $3.50 from $3. Average: $3.88.
• Spartan Delta Corp. (SDE-T, “market perform”) to $8 from $6.50. Average: $9.46.
• Tamarack Valley Energy Ltd. (TVE-T, “market perform”) to $4 from $3.75. Average: $4.64.

=====

In other analyst actions:

* Seeing it “uniquely positioned within the Canadian financials space in that it is a growth company exhibiting a superior ROE,” TD Securities analyst Marcel Mclean initiated coverage of Goeasy Ltd. (GSY-T) with a “buy” recommendation and $260 target, exceeding the $214.50 average.

“Over the past 19 years, revenue has grown at a 13-per-cent CAGR [compound annual growth rate] and EPS has grown at a 25-per-cent CAGR, with growth accelerating in recent years,” he said. “Management has an internal target of growing EPS at a 30-per-cent CAGR over the long term. Additionally, the ROE has been in excess of 20 per cent for the past three years.

“The opportunity for continued growth remains strong, given market dynamics and potential new verticals. goeasy operates in a highly fragmented, underserved market in which it can leverage its expertise to continue to fuel organic growth as well as take advantage of inorganic opportunities. The company currently holds 3-per-cent market share of its estimated $45bln addressable market. In the future, the company could continue to expand its product offering (i.e. revolving-type products, etc.) and may diversify geographically (i.e. U.K., U.S., or possibly Australia), creating an even larger addressable market and growth opportunities.”

* To reflect its improved valuation, Raymond James analyst Brad Sturges cut Nexus Real Estate Investment Trust (NXR.UN-T) to “outperform” from “strong buy” with a $14.50 target, down from $14. The average is $14.19.

“That said, we still hold a favourable view for Nexus, given its strong execution in 2021 year-to-date on the acquisition front that increased its industrial asset exposure, its P/AFFO multiple discount valuation, and based on possible NAV accretion from identified near-term value creation projects completed in the next 12-24 months,” he said.

* Viewing its acquisition of Hush Blankets “positively,” BMO Nesbitt Burns analyst Stephen MacLeod raised his Sleep Country Canada Holdings Inc. (ZZZ-T) target by $1 to $43 with an “outperform” rating. The average on the Street is $40.14.

“Hush adds another name to Sleep Country’s house of brands and is additive to Sleep Country’s existing $160-million accessories business (a key strategic growth area),” he said. “Similar to the 2018 acquisition of Endy, we view the transaction as mutually-beneficial, with Hush leveraging Sleep Country’s infrastructure and Sleep Country gaining access to new markets and customers. Ultimately, the acquisition is another step towards Sleep Country ‘owning’ the sleep retail ecosystem in Canada and provides incremental levers for future growth.”

* Scotia Capital analyst Michael Doumet raised his target for Finning International Inc. (FTT-T) to $42 from $41.50, maintaining a “sector outperform” recommendation. The average is $41.67.

“FTT is one of our top picks heading into 3Q21,” he said. “Despite the recent rally (and technical breakout above the $35/share psychological level), the shares remain undervalued. Not only do we see upside to our above-consensus estimates, but at the current valuation, we would argue the market is (only) pricing-in a 2-year upcycle versus historical cycle durations of 3 to 6 years.

“Based on our analysis, we believe FTT’s gross margins have been ‘reflating’ in 1H21. We think tight inventories and the strong demand backdrop make it a good time to be a dealer and that the current environment should act as a catalyst for further gross margin expansion (in addition to operating leverage) positioning the company well for positive surprises.”

* Scotia Capital’s Benoit Laprade bumped up his target for Cascades Inc. (CAS-T) to $22.75 from $20.50, keeping a “sector outperform” recommendation. The average is $19.61.

“CAS shares have often traded at significant discounts to its peers,” he said. “We believe the valuation gap stemmed from a more diversified business mix, a somewhat more complicated corporate structure, a low(er) dividend yield and high(er) financial leverage. However, in the last few years, CAS has taken many steps to address investors’ concerns. The most recent include the acquisition of Orchids Paper in 2019 and the pending divestiture of its European Boxboard operations expected to close this quarter. The company also recently increased its quarterly dividend by 50 per cent to yield 3 per cent.

“The result is a much simpler story (focused virtually solely on North American Packaging and Tissue) and corporate structure together with enhanced financial flexibility and an improved competitive position.”

* RBC Dominion Securities analyst Christopher Carril lowered his Restaurant Brands International Inc. (QSR-N, QSR-T) target to US$74 from US$80 with an “outperform” rating. The average is US$72.47.

* National Bank Financial analyst Vishal Shreedhar raised his target for Loblaw Companies Ltd. (L-T) to $92 from $91 with an “outperform” rating. The average is currently $91.64.

* National Bank’s Tal Woolley raised his target for Storagevault Canada Inc. (SVI-X) to $6.50 from $6 with an “outperform” rating. The average is $6.34.

* Credit Suisse analyst Dan Levy lowered his Magna International Inc. (MGA-N, MG-T) target to US$110 from US$115 with an “outperform” rating. The average is US$103.31.

* Canaccord Genuity analyst John Bereznicki raised his Pembina Pipeline Corp. (PPL-T) target by $1 to $47 with a “buy” rating. The average is $42.92.

“Pembina will report its Q3/21 results on November 4 after market close. We expect continued sequential conventional pipeline volume growth in the third quarter, which likely supported incremental volumes in excess of TOP thresholds. We expect only a limited contribution from Ruby in Q3/21 but believe more favourable natural gas price differentials created modest volume tailwinds for Alliance in the quarter,” he said.

* Mr. Bereznicki also increased his Tidewater Midstream and Infrastructure Ltd. (TWM-T) target to $1.90 from $1.80, topping the $1.88 average, with a “buy” rating.

“We are looking for a relatively steady Q3/21 operating performance on a sequential basis, with some accounting noise related to company’s recent IPO of its energy transition vehicle Tidewater Renewables (LCFS-T). More specifically, Tidewater now retains a 69-per-cent ownership position in LCFS, which dictates a full consolidation as per IFRS (along with provisions for minority equity interest),” he said.

* Canaccord’s Katie Lachapelle raised her Uranium Royalty Corp. (URC-X) target to $7.50 from $7 with a “speculative buy” rating. The average is $6.33.

* CIBC World Markets analyst Bryce Adams resumed coverage of I-80 Gold Corp. (IAU-T) with an “outperformer” rating and $5.50 target, up from $4 and above the $4.86 average.

“i-80 has completed a series of transactions with Nevada Gold Mines (NGM), Orion and affiliates of Waterton Resources,” he said. “Through the series of transactions, i-80 Gold has secured ore processing capacity (previously relied on toll milling), is one of three entities in Nevada that can process refractory ore, and has significantly increased its mineral resource base. The pre-transaction i-80 had an increased level of uncertainty around South Arturo operating parameters, but is now essentially free of JVs and has acquired infrastructure to deliver on its organic growth pipeline. Overall, we view the series of transactions as a strong positive;”