Inside the Market’s roundup of some of today’s key analyst actions
While he sees third-quarter volume levels for North American railway companies “recovering nicely following a tough 2023,” RBC Dominion Securities analyst Walter Spracklin lowered his earnings expectations for both Canadian National Railway Co. (CNR-T) and Canadian Pacific Kansas City Ltd. (CP-T), pointing to the linger impact of the recent dispute with much of their unionized work forces.
“We update our Q3 estimates for carload trends, management commentary at conferences as well as our own channel checks,” he said. “We caught up with management teams at CN, CP, CSX, and NSC last week, .... In terms of our updated volume numbers, NSC and UNP came in ahead of our initial estimates coming into the quarter (although UNP versus muted expectations), with CP and CSX closer to in line, and CN below. Looking into next year we now model for Coal to be off 5 per cent at the U.S. rails (in line with forecasts from the EIA) and are watching closely the macro backdrop given cautious commentary from FedEx and CN that the industrial outlook is worse versus prior expectations. Finally, we rolled forward our valuation year to 2026 and adjusted target multiples accordingly.”
Mr. Spracklin’s EPS estimate for CPKC slipped by 2 cents to $1.03, a penny above the consensus, to reflect the impact of the strike in late August.
“Key is that resilience following the strike appears to be quite strong and Forestry is not as meaningful an impact versus CN,” he said. “Our 2024 estimate moves lower to $4.28 (from $4.30), in line with consensus $4.27, and represents year-over-year EPS growth of 12-per-cent versus guidance for “double- digit” on low-single-digit volume growth (RBC estimate: 3.7 per cent).”
After updating his valuation multiple, Mr. Spracklin raised his target for CPKC shares to $137 from $133 with an “outperform” recommendation and reaffirmed it as his “top pick in rail.” The average target on the Street is $124.96, according to LSEG data.
“We have a highly positive view on the CP-KCS combination and believe the merits of the deal are extensive,” he said. “We believe the network advantage is by far the most compelling merit providing the combined entity with an unparalleled network reach that covers Canada, the US and Mexico; and we point to significant opportunities in Grain, Fertilizer, Intermodal, Auto and Crude. Moreover, the improved network reach provides an increased diversification that comes on both a business line and a geographic basis. We expect the company to outgrow peers longer-term due to improved network reach thereby supporting a higher target multiple in our view. In addition, we consider CP management to be one of the top teams in North America and have strong confidence in the ability of this team to execute on the integration of this deal and achieve (or exceed) the targets announced.”
He added: “CPKC continues to trade at a premium to the group, reflecting company specific opportunities on the back of the KCS acquisition, which we expect to drive meaningful EPS growth outperformance in the medium-term. We saw first-hand an example of one such opportunity during our recent site tour of CP’s Wylie facility, which demonstrated to us the compelling ways CPKC is executing to drive growth. CN trades closer to in line with the group average valuation and toward the bottom of its historical range relative to the group resulting from recent guidance reductions due to the recent labour stoppage, weakness in Forestry and Metals, in addition to a delayed recovery in Intermodal.”
For CN, he lowered his earnings per share projection for the third quarter to $1.71 from $1.77, below the $1.83 consensus on the Street, “reflecting lower expected Intermodal yields as well as costs associated with the strike and fires.”
“Our 2024 estimate decreases to $7.37 (from $7.50), below consensus $7.56, representing EPS growth of 1 per cent versus guidance for up low-single-digit,” he said. “Our out-year estimates are unchanged and represent a 9-per-cent EPS [earnings per share] CAGR 2024-26 in line with management’s 3-year target for EPS growth of high-single-digit.”
Maintaining a “sector perform” rating for its shares, he raised his target to $169 from $160. The average is $176.86.
“Our Sector Perform rating is based on favourable network dynamics as well as GDP plus growth opportunities and potential for meaningful margin improvement, offset by full valuation in our view,” said Mr. Spracklin.
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Citi analyst Tyler Radke sees more upside ahead for Shopify Inc. (SHOP-N, SHOP-T) in the second half of 2024, sensing an “upbeat tone” from its management and leading him to reaffirm its place on the firm’s “U.S. Focus List” along with a new Street-high target for its shares.
In a note released Monday, he raised his earnings forecast for both the third and fourth quarters, touting potential gains to the Street’s expectations, after recent conversations with the Ottawa-based e-commerce giant’s Investor Relations team that led to “incremental confidence in Payments adoption and cross-sell of select Merchant Solutions products (Capital, Installments, Cross-Boarder).”
“We connected with IR pre-quiet period who seemed upbeat on payments and cross-sell of Merchant Solutions products (Capital, Installments, Cross-Border, Offline, etc.) and Shopify’s push upmarket,” said Mr. Radke. “Although Shopify is seeing strong momentum upmarket, we highlight that this is still a relatively small part of the business, with higher volume, but lower margins (enterprise customers receive volume discounts). Management pointed out that larger merchants are increasingly coming to Shopify for Payments via Shopify Commerce Components, and there’s no plan to disclose enterprise or Commerce Components economics in the near-term (Enterprise = $125-million-plus in GMV). Enterprises often come for Shop Pay first, either from headless perspective, singular/couple components or full stack. And latest anecdotes from Shopify competitors and partners suggest Shopify is continuing to steal share among enterprise merchants (as we initially discussed in our deep dive – Shopify Inc (SHOP.N): Adding to Cart: Positive Checks + Confidence on MS Biz). International expansion is still geared towards getting products in market and is currently a headwind given limited product availability but will improve as adoption grows.”
The analyst also thinks Shopify’s marketing spending is generating a high return on investment, leading him to predict “EBIT upside” into the fourth quarter as well as fiscal 2025.
“Management remains upbeat on marketing investments, is continuing to see high ROI within select investments/marketing channels and will continue making investments that fall within the 18-mo. payback guardrails,” he said. “2Q24 marketing expenses were lower as Shopify deferred some enterprise campaigns and spend on channels with lower expected returns. Management still expects increased marketing investments to drive merchant growth in 2024, but it will take time for merchants to ramp (earliest returns expected in 2025). While we expect year-over-year improvements in operating income growth to stall out in 3Q24, we believe operating income growth can inflect in ‘25. We model operating income growth of 60 per cent year-over-year in 2025, 20 points faster than consensus, with 20-per-cent OPM.”
Viewing Shopify as a “beneficiary of a lower rate environment, which will benefit consumers, merchants and drive GMV (Citi projects $645-billion in GMV by FY28),” Mr. Radke raised his target for its shares to US$103 from US$90 following updates to both his forecast and valuation framework, reiterating a “buy” recommendation. The average on the Street is US$78.84.
“Our confidence is underpinned by a more resilient e-commerce backdrop and accelerated share gains up market,” he said. “Our Deep-Dive analysis into SHOP’s Merchant Solutions business gives us confidence in SHOP’s long-term growth as take-rate expansion accelerates in 2025+ fueled by new product/feature adoption going mainstream. With shares off 20-per-cent-plus from year-to-date highs and trading at a discount on growth adjusted valuation (vs. large cap peers), we see an attractive entry point.”
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Several companies were named to TD Cowen’s “Canada Best Ideas” list in separate research reports released on Monday.
They include:
* Bombardier Inc. (BBD.B-T) with a “buy” rating and $129 target. The average on the Street is $112.36.
Analyst Tim James: “We believe Bombardier is transitioning from a turnaround story to a re-rating story. We believe a re-rating is warranted given significant operational and financial progress made by the new management team from 2020 through Q2/24, our 2-3 year forecast growth, and expectations for further deleveraging, revenue diversification, and returning capital to shareholders beyond 2025.”
* Brookfield Renewable Partners LP (BEP-N, BEP.UN-T) with a “buy” rating and US$34. The average is $29.37.
Analyst Sean Steuart: “BEP is our pick for Canada Best Ideas. Global renewable power and energy transition growth opportunities are expanding at an accelerating rate, augmented by surging demand from corporate buyers. We believe that BEP offers compelling exposure to this theme given its leading funding position, expanding organic development pipeline, and relatively transparent FFO and distribution growth potential.”
“Several characteristics separate BEP from its peers: scale; a broad/deep growth opportunity set; an ability to act on large/complex transactions; operating/procurement expertise; management depth; a strong funding platform; and high exposure to positive corporate PPA momentum. We believe BEP’s relative valuation premium is poised for further expansion.”
* HudBay Minerals Inc. (HBM-T) with a “buy” rating and $16 target. The average is $15.82.
Analyst Craig Hutchison: “Hudbay is a mid-cap copper producer with production of 150ktpa supplemented by a substantial gold credit of 300kozpa (30 per cent of revenues). With three operating assets and an attractive growth project in Copper World progressing towards FID the company is well positioned for investors looking for copper growth exposure in top-tier jurisdictions and is our Top Pick in the base metals space.”
“In contrast to many of its peers, Hudbay’s copper production growth is expected to come from stable jurisdictions (the U.S. & Canada). Additionally, we view the company’s current flagship operation, the Constancia mine in Peru, as an attractive low-cost, long-life cash flow generating asset with significant exploration potential. Another differentiator relative to peers, nearly one-third of the company’s revenues come from gold, which offers investors exposure to more defensive-oriented cash flows with gold prices at record highs.”
* RioCan REIT (REI.UN-T) with a “buy” rating and $23 target. The average is $20.85.
Analyst Sam Damiani: “RioCan’s valuation remains unfairly discounted, reflecting higher interest cost growth and concerns about the condo pipeline. With interest cost headwinds now rapidly fading, we see RioCan’s solid SPNOI growth flowing through to strong AFFO growth starting in 2025. This, together with the falling Debt/EBITDA we forecast, should improve the relative valuation vs both Canadian and U.S. peers.”
“We view RioCan as an attractive way to gain exposure to Canada’s strong retail leasing markets, while taking advantage of a historically low relative value vs. both Canadian Retailfocused REITs and U.S. peers.”
* Veren Inc. (VRN-T) with a “buy” rating and $15 target. The average is $14.29.
Analyst Aaron Bilkoski: “Veren’s recent underperformance has resulted in an improved entry point. Veren offers high impact assets, organic volume growth, improving FCF generation, robust (and potentially increasing) RoC via the dividend/NCIB, and is approaching its near-term debt target. Despite these attributes, the company trades at an attractive 2025 estimated FCF yield of 14 per cent based on strip pricing.”
“We believe the recent underperformance could be driven by the perception Veren’s recently acquired assets are not performing as originally expected (a view we believe is unjustified) and weaker than originally anticipated Q3 volumes (in part due to third-party outages) - both factors should ebb with time.”
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Following a conversation with Ballard Power Systems Inc.’s (BLDP-Q, BLDP-T) chief financial officer Kate Igbalode on its restructuring and “path forward,” Citi analyst Vikram Bagri thinks it currently possesses “enough but fleeting” liquidity as it embarks on a significant global corporate restructuring
On Sept. 12, the Vancouver-based company announced a strategy to “reduce corporate spending and in order to maintain balance sheet strength amid a slowdown in hydrogen infrastructure development and delayed fuel cell adoption.” That includes a goal of reducing annual operating expenses by more than 30 per cent.
“Investors questioned the timing as the decision comes before final 45V guidance and U.S. elections,” said Mr. Bagri. BLDP indicated that hydrogen adoption appears to be getting pushed out by 3-5 years, so the decision was independent of these looming uncertainties. The slower pace of hydrogen adoption necessitated Opex reduction to preserve B/S strength. Importantly, the restructuring does not impede focus on new products and does not lower the TAM [total addressable market] meaningfully. Despite the changes, we estimate $100-million of cash burn in 2025. As a result, we expect the stock to continue to trade below cash value per share of $2.30.”
The analyst now sees “sufficient” liquidity, noting Ballard ended the second quarter with US$680-million in cash and investments and was also awarded US$94-million U.S. Department of Energy (DOE) grants and additional tax credits.
“Cash burn remains high,” he warned. “The 30-per-cent reduction in Opex through reorganization will largely be realized in 2025. Despite the reduction, we estimate cash burn will be more than $100-million in 2025 and remain elevated in the foreseeable future.”
Maintaining a “neutral” recommendation for its shares, Mr. Bagri lowered his target to US$2 from US$3.50. The average is currently US$2.84.
“We are lowering our Opex and revenue estimates to reflect the reorganization and weaker outlook,” he said. “BLDP currently has $2.30 per share of cash on the balance sheet. Yet, the stock trades 19 per cent below that value. Given the cash burn for the foreseeable future and unclear path to profitability, we believe the stock will continue to trade at a discount to cash on the B/S.”
“We like BLDP’s strategy of targeting the truck and bus market in Europe, California, and China. However, we think growth and profitability are likely back-end loaded. Furthermore, the company is reliant on the build-out of hydrogen delivery infrastructure.”
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Raymond James analyst Stephen Boland sees the lost of its DoorDash (DASH-Q) services agreement as “materially negative” for Payfare Inc. (PAY-T), noting the DashDirect card program is currently its largest program and represents a “material amount” of the its total revenue.
After making significant reductions to his 2024 and 2025 forecast, he downgraded its shares to “market perform” from “outperform” based on a “lack of visibility in material growth options.”
“We believe that DoorDash went through an RFP process to choose a new vendor,” he said. “This may be public within the next several weeks. PAY as a public company, had to release this information ahead of any DoorDash announcement.
“With estimates of DashDirect’s contribution to total revenues between 70-80 per cent, we are materially reducing our revenue forecast through 2025. This includes a meaningful contraction both in drivers added and negative growth in Gross Dollar Values (GDV). We do expect some stability in 2H25 with possible other clients programs, Lyft (under contract for 5 years) and UBER Canada programs.”
Mr. Boland’s target for the Toronto-based company’s shares, which plummeted 75.5 per cent on Friday, to $3 from $12. The current average is $8.43.
“The Company is intentionally working through an orderly transition, with workouts related to multiple phases and corresponding deplatform dates,” he concluded. “As a result, DoorDash’s transition to a new provider may have operational delays within rollouts to new customers or cardholder issues. This may slow the revenue decline throughout 2025 though it would be temporary in nature. This is not our base case, but a situation to monitor.
“Through the transition, the Company targets an EBITDA breakeven or better 2H25. Importantly, management is in talks and working towards other large EWA contracts that could replace the lost GDV though we are not factoring this into our estimates. The balance sheet is strong enough to fund any possible losses for the interim if this does occur. PAY has $100 million in cash, equivalents, and guarantee investment certificates.”
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In other analyst actions:
* Jefferies’ Anthony Linton downgraded Enbridge Inc. (ENB-T) to “hold” from “buy” while raising his target to $58 from $55. The average on the Street is $55.40.
* Mr. Linton also increased his targets for these stocks: AltaGas Ltd. (ALA-T, “buy”) to $39 from $37, Keyera Corp. (KEY-T, “buy”) to $47 from $43, Pembina Pipeline Corp. (PPL-T, “buy”) to $61 from $58 and TC Energy Corp. (TRP-T, “hold”) to $66 from $57. The averages are $38.07, $41.50, $58.61 and $61.98, respectively.
* With its technical report on its Thompson Creek project, Raymond James’ Brian MacArthur cut his Centerra Gold Inc. (CG-T) to $13 from $13.50 with an “outperform” rating.
“Centerra offers investors exposure to gold and copper, while generating solid CF. CG also has a strong balance sheet,” he said. “In addition, the company owns 3 molybdenum assets, which offer optionality on molybdenum prices and may be sold to surface value.”
* TD Cowen’s Brian Morrison reduced his targets for Linamar Corp. (LNR-T, “buy” ) to $89 from $92, Magna International Inc. (MGA-N/MG-T, “buy”) to US$52 from US$53 and Martinrea International Inc. (MRE-T, “buy”) to $18 from $19. The averages are $86.50, US$53.67 and $18.21, respectively.
“Auto suppliers shares remained pressured this quarter as investors remain cautious toward North American consumer demand, dealer inventory levels, and slowing EV adoption rates,” said Mr. Morrison. “We expect volatility for suppliers to continue, but maintain that heightened visibility upon the timing for an easing U.S. rate environment should lead to improved earnings/multiples as we focus on our 2025/2026 outlook.”
* Leede Financial’s Douglas Loe initiated coverage of Medexus Pharmaceuticals Inc. (MDP-T) with a “speculative buy” rating and a Street-high $8.25 target. The average is $3.30.
“It is unusual for us to ascribe a ‘Speculative’ rating to a positive cash flow-generating firm, but we believe our rating is justified in this circumstance with much of achievable market value we are projecting embedded into a single soon-to-be-regulatory-stage oncology asset, the alkylating agent Treosulfan,” he said. “We expect FDA review of a resubmitted new drug application (NDA) filing to conclude by early FQ425. Germany-based specialty pharmaceutical partner medac GmbH (private) submitted the revised NDA in Apr/24, and the filing was formally accepted by the US
FDA in June/24. Revised expectations for FDA review timelines to conclude now extend into Jan/25.”
* Desjardins Securities’ Frederic Tremblay trimmed his target for Patriot Battery Metals Inc. (PMET-T) to $15 from $16.50 with a “buy” rating. The average is $11.52.
“We visited PMET’s Shaakichiuwaanaan lithium project in James Bay, Quebec,” he said. “In addition to being a reminder of the scale and quality of the resource, the visit allowed us to observe significant progress made on infrastructure since our last visit a year earlier (eg on-site camp, all-weather access road). Overall, Shaakichiuwaanaan clearly stands out not only for its size but also for its adaptability (hybrid mine plan), making PMET a compelling opportunity for investors looking for lithium exposure.”
* In a preview of its third-quarter results, Desjardins Securities’ Benoit Poirier lowered his TFI International Inc. (TFII-T) target to $209 from $219 with a “hold” rating. The average is $207.33.
“Overall, the key theme among peers’ operating data, FDX’s 1Q results and several other indicators is that the U.S. industrial economy weakened in 3Q, which is weighing on both industry tonnage and pricing. As a result, we have adjusted our numbers. While we continue to like TFII in the long term, we see a lack of near-term catalysts (no immediate trucking recovery, TL spin-off more than a year away, large M&A unlikely and reduced buyback pace),” said Mr. Poirier.