Inside the Market’s roundup of some of today’s key analyst actions
RBC Dominion Securities’ Darko Mihelic downgraded Toronto-Dominion Bank (TD-T) in response to Thursday’s announcement it has pleaded guilty to conspiracy to commit money laundering, leading to significant penalties from U.S. regulators and law enforcement which the equity analyst called “the worst-case scenario.”
Andrew Willis: TD Bank’s ‘LOL’ culture reverses two generations of southward expansion
“It will be difficult for TD to outperform its peers over the medium term, as it has limited strategic flexibility, lower earnings/dividend growth, and significant cultural change coming,” he said.
Mr. Mihelic moved his recommendation to “sector perform” from “outperform” and dropped his target for its shares to $82 from $88. The average target on the Street is $84.78, according to LSEG data.
Other analysts making target adjustments include:
* Canaccord Genuity’s Matthew Lee to $91.50 from $93.50 with a “buy” rating.
“The net impact of the firm’s actions should be modestly negative to adjusted earnings for F25 but allow for U.S. earnings stabilization (and perhaps a return to growth) in F26,” said Mr. Lee. “On the back of the news, we have made several changes to our model, reducing F25 EPS by 4 cents and F26 EPS by 18 cents. We expect TD to provide more clarity into its near and medium-term outlook when it reports Q4 earnings in December.
* CIBC’s Paul Holden to $96 from $100 with an “outperformer” rating.
“TD’s U.S. AML settlement provides clarity to the situation, but with an asset cap it is worse than our expectation,” said Mr. Holden. “Our F2026 EPS estimate is little changed, giving credit for TD’s plan to increase NII, even with a smaller balance sheet. We reduce our valuation multiple from 10.6 times to 10.3 times in recognition of the asset cap. Our price target decreases from $100 to $96. TD is trading at 9.9 times P/E (NTM [next 12-month] consensus), a 12-per-cent discount to the group average. We view the 12-per-cent discount as too punitive for what we estimate is 2-per-cent slower EPS growth.”
* Barclays’ Brian Morton to $80 from $90 with an “equal-weight” rating.
=====
Following Thursday’s release of better-than-expected second-quarter fiscal 2025 financial results, Stifel analyst Martin Landry sees further upside for shares of Aritzia Inc. (ATZ-T), pointing to “a strong balance sheet, traction in the U.S. and strong growth ahead.”
“We had doubts that Aritzia could attain its FY27 goals given the hiccup the company has had in FY24,” he said. “However, we get some comfort from management’s comments saying that they still expect to achieve the original targets. As a result, we have increased our valuation multiple and our forecasts to reflect this increased visibility.”
The Vancouver-based fashion retailer reported revenue for the quarter of $616-million, up 15 per cent year-over-year and topping both Mr. Landry’s $581-million estimate and consensus forecast of $584-million. Comparable sales increased by 6.5 per cent from the same period a year ago, topping expectations (3.2 per cent and 4 per cent, respectively) as gross margin improved 520 basis points to 40.2 per cent, also blowing past management’s guidance and the analyst’s projection of 450 basis points. That led to adjusted earnings per share of 21 cents, beating Mr. Landry’s 14-cent prediction and the Street’s 15-cent calculation.
“Aritzia introduces a financial guidance for Q3FY25 which calls for revenue growth of 3-7 per cent, lower than the 12-per-cent growth rate seen year-to-date,” he said. “This is explained by the company’s annual warehouse sale which occurred in Q2 vs Q3 last year and the FY24 archive sales online to clear excess inventory which did not reoccur this year. Excluding these two events which boosted sales by $25-million, Q3FY25 revenues are expected to be up 7-11 per cent year-over-year. That pace is still lower than what the company has realized to date due to a slowdown in traffic in Canada.
“Management reiterating its confidence in attaining the FY27 targets provided at the investor day held in October 2022. These included revenues of $3.5- $3.8 billion, which would represent a 2-year CAGR [compound annual growth rate] of 19.2 per cent suggesting that revenue growth will accelerate meaningfully. In addition, management aims to bring FY27 EBITDA margins to 19 per cent, up from a guidance of 13.6% this year, using the mid point of the guidance. Management expects a straight line path to get there as opposed to FY27 being back.”
Mr. Landry emphasized the company’s “strong” momentum south of the border continues with revenues in the U.S. increased by 24 per cent year-over-year, driving its 50-per-cent quarterly revenue growth.
“With the momentum accelerating in August, ATZ is expecting continued strength in the U.S. and the Q3FY guidance’s underlying assumptions point to an increase in same-store sales growth for the region,” he said “The momentum is also driven by ATZ’s real estate expansion strategy including the opening and reposition of three flagship locations in H2FY25. We believe top-line growth in the United States has a multiyear runway that comes along with margin accretion opportunities due to the currency lift and should be an important driver to reach the FY27 financial targets.”
Maintaining his “buy” rating for Aritzia shares, Mr. Landry raised his target to $58 from $50. The average is $57.63.
“This is the second consecutive quarter of sizable margin recovery,” he said. “Management guides for a softer Q3FY25 due to demand weakness in Canada and difficult comparable period. This may weigh on the shares tomorrow for investors with a shorter time horizon. Management reiterated its FY27 financial ambitions, demonstrating confidence as these financial goals imply sizable growth from FY25 levels. We are increasing our FY25 forecasts slightly and raise our valuation multiple on improved visibility.”
Elsewhere, others making adjustments include:
* Raymond James’ Michael Glen to $52.50 from $48 with an “outperform” rating.
“We believe investors were expecting a beat and raise (flow through raise) type scenario with Aritzia’s F2Q,” said Mr. Glen. " In that regard, while Aritzia delivered on the F2Q beat, the updated guidance, specifically that surrounding F3Q, unfortunately prompts negative near-term revisions. Stepping back from the near-term implications of the F3Q guide, we view the F2Q as another strong step forward in the business, with management speaking constructively about hitting their F2027 targets.. As such, while we do expect Aritzia stock to see some pressure on the back of the F3Q guidance, the longer-term growth opportunity in the name remains extremely attractive, and we would encourage investors to use pullbacks as an opportunity to build a position.”
* BMO’s Stephen MacLeod to $57 from $52 with an “outperform” rating.
“Q2/25 results were above forecast, reflecting accelerating U.S. sales growth and margin improvement,” said Mr. MacLeod. “The quarter was highlighted by positive comps across all channels and geographies, with notably strong growth in the U.S. (up 23.9 per cent). U.S. momentum has continued into Q3, while Canada has softened. Tightened 2025 guidance reflects accelerated investment in high-opportunity digital investments; Q3/25E below forecast. We continue to believe Aritzia is well-positioned to execute on its significant U.S. growth opportunity. We see attractive risk-reward, with the stock trading at a discount to growth peers, and reiterate our Outperform rating.”
* TD Cowen’s Brian Morrison to $58 from $70 with a “buy” rating.
“Aritzia reported Q2/F25 EPS that exceeded our forecast/consensus but modestly lowered its annual guidance,” he said. “This is mainly due to a pull forward of digital infrastructure spend to drive future growth. We maintain our positive recommendation as its key revenue and cost initiatives are achieving results, positioning it for attractive EPS growth and FCF generation over our forecast horizon.”
* CIBC’s Mark Petrie to $60 from $47 with an “outperformer” rating.
“Q2 results came in well ahead of expectations but are offset by deferred store openings and slower Canada sales momentum that supresses Q3 guidance. Though disappointing, these do not shake our bullish view on Aritzia’s U.S. opportunity, and we are encouraged by the acceleration in sales growth seen over the last year. Our F25 EPS forecast falls, though our F26 estimate rises on higher revenues,” said Mr. Petrie.
=====
Emphasizing the second half of the year is “typically ‘make or break’ for telecoms,” Desjardins Securities analyst Jerome Dubreuil thinks the “slight” improvement in competitive dynamics seen during the last earnings season in July will “likely not be sufficient to offset the impact of low prices, which are gradually being reflected across a larger proportion of the telecoms’ subscriber base.”
Heading into this reporting period, he does not recommend an overweight position in the sector, pointing to “the risk that the Big 3 may fall short of their 2024 guidance” and “recent headlines about foreign student admissions, which could begin to negatively impact wireless loadings.”
“There is a risk that RCI and T could miss the lower end of their EBITDA growth guidance. Exhibit 1 shows our EBITDA growth estimates for 3Q, along with the implied 4Q EBITDA growth required for each of the Big 3 to meet the low end of their respective EBITDA guidance,” said Mr. Dubreuil. “As we can see, RCI and T will need a significant acceleration in EBITDA growth in 4Q to meet the low end of guidance; barring unannounced M&A or a sudden easing in competitive intensity, this will likely raise questions about the companies’ guided ranges. Revisions to guidance are also a possibility; however, we note that consensus EBITDA is already slightly below the low end of guidance for RCI and T. We expect BCE and T to miss their revenue growth guidance for the year, but telecom investors typically do not focus as much on the top line.”
“RCI remains our top pick for long-term-oriented investors, followed by QBR and T, and we would recommend CCA ahead of 3Q.”
The analyst made target adjustments to three of the five stocks in his coverage universe:
* BCE Inc. (BCE-T, “hold”) to $51 from $53. The average is $49.69.
Analyst: “We believe the Maple Leaf Sports & Entertainment (MLSE) transaction, wherein BCE sold its stake in the entertainment company to RCI, was a positive for the name; however, we believe BCE’s growth prospects remain too low for it to trade at a premium to RCI. Recent comments by BCE lead us to believe that there will be limited change to the top-line trajectory as a result of its transition ‘from telco to techco’. On the bright side, recent interest rate cuts, coupled with our expectation that the dividend will not be cut in the foreseeable future, should protect the downside.”
* Cogeco Communications Inc. (CCA-T, “hold”) to $80 from $69. Average: $72.75.
Analyst: “During a recent industry conference, CEO Frédéric Perron indicated that CCA does not need its spectrum assets to operate its wireless business in Canada and added that its current portfolio could be worth $2-billion, up from the $600-million the company initially paid. We had previously attributed no value to the spectrum assets in our NAV, as we assumed that the company would need spectrum to operate wireless or would leverage the assets as a way to obtain a sweeter MVNO deal from its wholesale partner. Now that it is clear that spectrum is not included in the wireless wholesale agreement, we feel comfortable adding spectrum value to our NAV. We highlight that there could be government pushback on a spectrum transaction. The moratorium on spectrum licence transfer is still in effect. However, we understand that the company could start monetizing its spectrum before the licence transfer ban is lifted by subordinating (leasing) its spectrum to another company. We believe leasing spectrum to a wireless operator would also help CCA meet its spectrum deployment requirements. We have added $440-million to our NAV, assuming a sale at a conservative $600-million (sold at cost) in four years, which is the main reason behind our $11/share target price increase.”
* Rogers Communications Inc. (RCI.B-T, “buy”) to $68 from $70. Average: $67.89.
Analyst: “While we like RCI long-term, we believe the curtailment of immigration by the federal government could have an outsized impact on the company given the success it has had in the new-to-Canada category. Moreover, we believe the lower end of EBITDA guidance looks ambitious at this time.”
He maintained his targets for these stocks:
* Quebecor Inc. (QBR.B-T, “buy”) at $42 (Street high). Average: $38.25.
Analyst: “QBR’s stock has performed well recently, gaining 27 per cent since it bottomed in early July. We expect strong wireless but weak cable results, with the key question being whether the market will continue to focus on wireless and accelerated shareholder distributions instead of cable performance. Indeed, we believe QBR will face a deterioration in its cable business as a result of ongoing competitive pressure from BCE and the lack of price increases this quarter (increases coming in early December) — hence, our lower cable margin assumption. Our adjusted EBITDA forecast for 3Q24 is now $609-milllion, below the Street’s $620-million.”
* Telus Corp. (T-T, “buy”) at $25. Average: $24.46.
Analyst: “T’s declining capex profile remains attractive for longer-term investors; however, questions on 2024 guidance and DLCX not being out of the woods warrant near-term caution in our view.”
=====
National Bank Financial analyst Vishal Shreedhar is “looking for confirmation of turnaround momentum” when Lassonde Industries Inc. (LAS.A-T) reports its third-quarter results in early November.
He’s currently projecting quarterly sales from the Rougemont, Que.-based food and beverage company of $675-million, jumping from $583-milllion a year ago and ahead of the Street’s expectation of $666-million. Earnings per share are estimated to jump to $4.13, a gain of 46 cents from fiscal 2023 but below the consensus of $4.35.
Mr. Shreedhar attributes that 12.8-per-cent EPS growth to “the impact of acquisitions (Summer Garden, partly offset by Diamond Estates), higher volumes, year-over-year higher pricing, better efficiency (in-sourcing of certain capacity, among others), partly offset by higher input costs, higher warehousing costs and higher investments (reinforcing the innovation pipeline, distribution expansion and strategic trade spend)”
“We model 8.0-per-cent sales growth year-over-year (excluding acquisitions and F/X), reflecting higher year-over-year pricing and volumes, despite pressured industry volumes (industry volume decline of 6-7 per cent in Canada and 3 per cent in the U.S.),” the analyst said. “We expect higher volume for LAS reflecting, among others: (i) sequentially accelerating momentum in the U.S. (private label contracts, in addition to growth in single-serve format), and (ii) a shift in consumer preference to private label, growth in foodservice business (for LAS) and new product introductions in Canada.
“Notwithstanding a higher blended input cost index (coarsely inversely correlated to the gross margin), we model 90 bps higher year-over-year gross margin (excl. acquisitions and D&A) largely reflecting in-sourcing of capacity (better efficiency), and pricing (year-over-year; to offset input cost increases), partly offset by adjustments related to purchase price allocation of the Summer Garden acquisition (resulting in a temporarily lower gross margin in Q3/24).”
After raising his 2025 forecast, Mr. Shreedhar bumped his target for Lassonde shares to $189 from $187, reiterating an “outperform” recommendation. The current average is $189.67.
“We consider LAS to have meaningful turnaround potential; if the U.S. business returns to historical EBIT margins (7-8 per cent), we estimate upside to our 2026 EPS estimates (10 per cent),” he concluded. “Though there remains near-term uncertainty surrounding consumer health, cost inflation and operational performance, we hold a positive view given favourable valuation and expectations of improving performance.”
=====
While its third-quarter results fell short of the Street’s expectations, National Bank Financial analyst Zachary Evershed sees Richelieu Hardware Ltd. (RCH-T) “back in the groove” with four acquisitions and now thinks a “market (and margin) recovery [is] a question of when, not if.”
Shares of the Montreal-based company slid 2.1 per cent on Thursday after it announced revenue of $467.7-million, up 1.9 per cent year-over-year and driven by a 1.3-per-cent decline (offset by a lift from acquisition) and below the Street’s $474.8-million estimate. After EBITDA margins contracted 2 per cent from the same period a year ago (to 11.3 per cent), earnings per share fell 22.6 per cent year-over-year from 53 cents to 41 cents, missing both Mr. Evershed’s 44-cent projection and the Street’s expectation of 47 cents.
“RCH entered into four agreements in principle to acquire two businesses in Canada and two in the U.S. (approximately end Q4 close), generating total run-rate sales of $40-million, complementing the $60-million in revenues acquired year-to-date,” he said. “This brings RCH right in line with their latest goal of acquiring $100-million on average in incremental revenue from M&A annually, a hurdle that was last achieved (and exceeded) in 2022 when four businesses were acquired generating $125-million in run-rate sales.”
“Management maintains the view that while no clear signs of a broad-based recovery have appeared as of yet, pockets of strength are in their early innings. Incremental improvements in market conditions paired with the fruition of the company’s modernization and expansion projects over the last several quarters should see Q4e EBITDA margins rise sequentially from Q3′s 11.3 per cent. Looking ahead, management notes that expansion ramp up and consolidation costs should roll off in early 2025, which will help with OpEx control, but reiterated that a material uptick in margins will be driven by operating leverage, for which a market recovery is required.”
Despite that optimism, Mr. Evershed trimmed his forecast, admitting: “We had hoped for more traction on gross margin improvement, partially offset by new acquisitions.”
That led him to lower his target for Richelieu shares by $1 to $44.50, keeping a “sector perform” rating. The current average is $44.25.
“We note potential upside on our M&A premium as management is confident they can accelerate the pace of M&A to deliver an average of $100 million in additional revenue annually through acquisitions over the next 5 years, as achieved this year,” he said. “Given near-term uncertainty with a cloudier outlook in R&R end markets vs. new residential, we reiterate our Sector Perform rating.”
=====
Raymond James analyst Michael Barth resumed coverage of a trio of pipeline and midstream companies on Friday:
* Gibson Energy Inc. (GEI-T) with a “buy” rating and $28.50 target. The average is $26.04.
“GEI is trading at the highest distributable cash flow yield in its peer group, despite a strong balance sheet, highly contracted cash flows, and option value for future growth,” he said.
“Our model suggests there is 23-per-cent upside to the current share price (38 per cent if we include unrisked option value). Approached differently, the company is trading at an 11-per-cent and 12-per-cent distributable cash flow (DCF) yield on our 2024 and 2025 estimates, which is the high end of the historical range. Similarly, GEI is trading at the low end of the historical EV/EBITDA range despite the significant shift to contracted infrastructure exposure. We view these DCF yields and EV/EBITDA multiples as attractive given the high quality cash flows (backed by contracted infrastructure assets), a strong balance sheet, and plenty of option value for growth.”
* Keyera Corp. (KEY-T) with an “outperform” rating and $47 target. Average: $42.83.
“While not a pound-the-table idea, valuation appears reasonable for a business with high quality cash flows, exposure to important macro tailwinds, spare capacity in prolific producing regions, and a very strong balance sheet,” he said.
* Pembina Pipeline Corp. (PPL-T) with an “outperform” rating and $63 target. Average: $59.93.
“We expect that PPL will be one of the prime beneficiaries from growing natural gas and NGL volumes in the WCSB that should materialize as new LNG capacity comes online,” said Mr. Barth. “While not a pound-the-table idea, it’s our view that valuation is undemanding for a business with clear macro tailwinds, highly contracted existing assets, and an exceptional balance sheet.”
=====
In other analyst actions:
* Stifel’s Cole McGill resumed coverage of Arizona Sonoran Copper Co. (ASCU-T) with a “buy” rating and $4 target, exceeding the $3.69 average.
“A copper development story well known by the market, we think the recent discovery/integration of the near-surface Mainspring property is a game-changer regarding project scale and scope, which the market may be overlooking,” he said. “The new look Cactus Cu Project, located on private ground, in mining-friendly/U.S. Cu bread basket AZ now sports a 95-per-cent open pit tonnage PEA, materially lowering the technical complexity and improving the project’s capital efficiency. Informed by the global bifurcation/electrification theme, we think scalable, domestic copper cathode assets will have increasing importance into the future (cognizant Rio Tinto via Nuton already a 6.0-per-cent shareholder), with domestic smelter capacity decreasing 2.5 times and Cu import reliance increasing 37 per cent over the last three decades. We think the combination of brownfield, open pit, conventional leach and multi-decade +80ktpa Cu potential within 150 miles of 3.5 per cent of global Cu production will not be overlooked.”
* In a note titled Road Ahead Looks Increasingly Unclear, ATB Capital Markets’ Chris Murray lowered his AutoCanada Inc. (ACQ-T) target to $18 from $20 with a “sector perform” rating. The average is $18.67.
“We expect ACQ to release its Q3/24 results in early November,” he said. “The Company has taken several steps to improve operations since announcing a strategic review with Q2/24 results in August, including divesting two Alberta-based Stellantis stores, the closure of RightRide locations, and a revised covenant structure. We are lowering our estimates to reflect expectations for lower used vehicle GPUs and elevated operating costs, particularly at the Company’s U.S. operations, with the shift towards cash transactions expected to remain a headwind for F&I volumes. We are constructive on the recent divestitures but view the covenant relief as evidence of lower profit levels over the next several quarters, which keeps us cautious about the name, particularly with trends around new vehicle sales softening in Q3/24.”
* In a quarterly preview for North American rail companies, Stifel’s Benjamin Nolan trimmed his targets for Canadian National Railway Co. (CNI-N, CNR-T) to US$130 from US$133 and Canadian Pacific Kansas City Ltd. (CP-N, CP-T) to US$82 from US$83 with a “hold” rating for both. The averages on the Street are US$130.15 and US$93.46, respectively.
“While international intermodal volumes are up, it sounds like pricing continues to struggle as cheap trucking seems to continue to create a challenging ceiling,” said Mr. Nolan. “Some guidance has already been cut, and we expect it may be hard for the rails to remain at the lower end of the current guidance ranges. With the view by our transportation research team that a recovery in truckload pricing is going to be gradual, we expect pricing improvement will also be slow to materialize.”
* Jefferies’ Lloyd Byrne raised his Canadian Natural Resources Ltd. (CNQ-T) target to $57 from $49 with a “hold” rating. The average is $55.51.
* Canaccord Genuity’s Aravinda Galappatthige increased his Thunderbird Entertainment Inc. (TBRD-X) target to $3.50 from $3 with a “buy” rating. The average is $3.13.
“TBRD Q3/24 results were notably stronger than our estimates, with revenues coming in at $51.8-million, up 37.3 per cent year-over-year, compared to our $46.7-million forecast,” he said. “Adj. EBITDA also topped our estimate, coming in at $6.9-million (vs. our $4.9-million estimate), up from $0.7-million last year. Results were driven by stabilizing market conditions and cost-reduction measures. Gross margins were better than last year (22.2 per cent vs. 20.7 per cent last year) despite a higher mix of licensing revenues.”
“Management is guiding to 20-per-cent revenue growth in F2025 and over 10-per-cent adjusted EBITDA growth. The lower profitability growth expectation is on account of the gross margin profiles of upcoming projects, we suspect, skewing more towards the licensing side than service work. We remind investors that while near-term margins on the licensing side may be lower, there is a longer tail to the revenue cycle as well as the prospect of meaningful upside for very successful titles (e.g., merchandising).”
* ATB Capital Markets’ Frederico Gomes lowered his target for Tilray Brands Inc. (TLRY-Q, TLRY-T) to US$2 from US$2.25 with a “sector perform” rating. The average is US$2.25.
“Tilray is ambitiously growing its beverage platform with the recent $23.1-million acquisition of Molson Coors’ craft beer brands, and investments into new categories, including to enter the U.S. hemp-derived THC beverage market (a move previously vetted to remain compliant with Nasdaq requirements),” said Mr. Gomes. “We like the move into hemp-derived THC as a potential new growth vector, but we remain generally cautious on M&A as a value driver (we think more M&A in beverages may come). Meanwhile, we expect the LP market to remain challenging, notably as industry growth slows (here); as such, we expect growth in cannabis to be driven mostly by international. Since FY2024 end, we estimate Tilray has added approximately 8.6 per cent to its basic shares outstanding as a result of its ATM program ($94.5-million raised out of $250-million), debt repurchases, and other transactions. We maintain our neutral stance on Tilray as our growth expectations are largely priced in.”