Inside the Market’s roundup of some of today’s key analyst actions
Citi analyst Tyler Radke upgraded his recommendation for shares of Shopify Inc. (SHOP-N, SHOP-T) to “buy” from “neutral” on Monday, expressing “confidence in near-term results following a recent round of conference visits/channel checks which highlight a more resilient e-commerce backdrop and accelerated share gains up market.”
“We’ve always admired Shopify as a company, given its strong product quality, unique business model spanning across software/payments/e-commerce etc., and exposure to an enormous e-commerce TAM [total addressable market] ($849-billion theoretical TAM from investor day),” he said. “That said, our investment view has historically been less constructive as we’ve struggled with valuation, its lower gross margins, questionable capital allocation decisions, and underwriting the durability of growth. Since our launch of coverage in July of 2020 with a neutral/high-risk rating, shares have fallen 23 per cent vs. the IGV’s [iShares Expanded Tech-Software Sector ETF] 42-per-cent rise. We believe the company has addressed many of the margin/profitability issues following the divestiture and cost-cutting actions in 2023. With the recent pullback in shares (20 per cent off February highs) we are upgrading the stock to Buy/High Risk. Our positive view is supported by three key points: 1) Solid set-up into FQ1 results; 2) Increased confidence in growth durability of Merchant Solutions following our deep dive; 3) More reasonable valuation on a growth-adjusted basis with EPS/FCF estimated to compound 34/44 per cent over the next five years, respectively.”
In a research report released before the bell, Mr. Radke said he expects results for the Ottawa-based e-commerce giant to be “more resilient with room for upside on profitability.”
“First, heading into 1Q24 we are expecting healthy upside driven by a more resilient eCommerce backdrop in 1Q, which is supported by alternative data including incrementally positive non-store and SMB retail spending trends, positive commentary from our partner/ customer checks, and Shopify’s increasing share gains amongst top commerce players,” he said. “Channel checks from employees, customers, partners, and competitors highlighted Shopify is moving aggressively upmarket, its pace of innovation is strong, and eCommerce and spending amongst SMBs has increased in 1Q and through April. We also see upside to margins given conservative opex guide, efficiency gains, and leverage in the model.”
Mr. Radke also thinks the Street is currently Shopify’s potential of newer merchant solutions and ability to accelerate take rate expansion beyond fiscal 2025.
“We see a clear path to $17.8-billion in Merchant Solutions revenue by 2028 and expect take rate expansion to double, driving Merchant Solutions take rate to 2.9 per cent by FY28. Merchant Solutions growth will be driven by 1) continued adoption of the Shopify platform both in the U.S. and internationally, accelerating the merchant flywheel and driving GMV and 2) take rates expanding from 2.21 per cent in FY23 to 2.9 per cent in FY28, supported by increased attach of Shopify Payments and existing merchant solutions coupled with newer solutions as Shopify continues its rapid pace of innovation,” he said.
Seeing a “more favourable” risk-reward proposition and valuation, Mr. Radke raised his target for Shopify shares to US$105 from US$93. The average target on the Street is US$82.70, according to LSEG data.
“We believe the current risk/reward is in favor as shares have traded off 13 per cent over the last three months coupled with a conservative guide, lowered expectations, and a solid setup into 1Q24,” he said. “At 0.71 times Citi est. CY26 EV/FCF/G (vs. large-cap peers at 1.48 times), we believe valuation is attractive. That said, we increase our 1Q-FY24-FY28 estimates.”
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While its results fell “modestly” below expectations and freight market dynamics “remain soft,” National Bank Financial analyst Cameron Doerksen thinks the first quarter for TFI International Inc. (TFII-T, TFII-N) feels “like a trough,” leading him to raise his recommendation for its shares to “outperform” from “sector perform” previously.
“We still believe a better freight market backdrop could materialize later in 2024 and into 2025,” he said. “We also see earnings growth tailwinds for the company in 2024 and 2025 driven by margin improvement in the U.S. LTL [less-than-truckload] segment and from the integration of recently acquired Daseke. Finally, as we detailed in our Q1/24 preview), there is strong upside potential for the stock if the company moves forward with the split into two separate publicly traded companies at some point in late 2025 or early 2026.
“TFII management introduced 2024 guidance for EPS of $6.75-$7.00, which comes in below our prior forecast of $7.52 and the consensus of $7.31 so we expect downward estimate revisions following the Q1 print (we also lowered our forecast).”
Shares of the Montreal-based company slipped 2.3 per cent on Friday after reported total revenue for the quarter of US$1.871-billion, falling below both Mr. Doerksen’s US$1.926-billion estimate as well as the consensus projection of $1.902-billion. Adjusted earnings per share of US$1.24 was also weaker than anticipated (US$1.34 and US$1.26, respectively).
While TFI’s management also introduced full-year guidance of US$6.75-US$7 that fell short of forecasts (US$7.52 and US$7.31), Mr. Doerksen thinks LTL trends are “starting to look more positive” and expects a better second half of the year for freight market.
“A key component of management’s strategy to improve profitability in the TForce Freight U.S. LTL segment is to attract higher quality revenue by improving customer service and increasing weight per shipment,” said Mr. Doerksen. “Q1 results demonstrated some positive trends on that front as U.S. LTL revenue was up 5.2 per cent year-over-year with shipments down 5.7 per cent, but revenue per shipment ex-fuel up a solid 11.5 per cent. Average weight per shipment was also up 13.7 per cent year-over-year.”
“TFII is targeting $825-$900 million in free cash flow this year, which is a solid performance in a tough market. With the recent acquisition of Daseke completed earlier this month, the capital deployment focus for the company will be on debt reduction ($500-$600 million planned) that will bring leverage down to 1.8 times by year-end based on our forecast, but management also indicates it will still be active with tuck-in acquisitions and opportunistically with its NCIB.”
The analyst trimmed his target for TFI shares to $217 (Canadian) from $222 after “modest” reductions to his forecast, however he thinks its valuation “looks more interesting” following recent share price depreciation. The average target on the Street is $198.63.
“TFII shares are down 18 per cent from their recent high and are now trading at 19.5 times our updated 2024 EPS estimate (based on trough-like market conditions), which is below the weighted average peers (based on TFII’s revenue exposure by segment) of 25.2 times,” said Mr. Doerksen.
Elsewhere, other analysts making changes include:
* Desjardins Securities’ Benoit Poirier to $208 from $216 with a “buy” rating.
“While TFII’s conference call presented some positive commentary on the progress of service improvements and the LTL flywheel, we believe its EPS guidance disappointed investors. Consensus for 2024 and 2025 likely has more downward than upward bias given the reality of the freight backdrop. That said, the impressive FCF outlook despite a depressed year for earnings reinforces our thesis that TFII is a long-term FCF compounder,” said Mr. Poirier.
* Scotia’s Konark Gupta to $230 from $235 with a “sector outperform” rating.
“We are not surprised by the market reaction [Friday], despite the stock’s more than 10-per-cent pullback heading into the earnings,” he said. “Q1 didn’t turn out to be as good as expected (see our first look) while debut guidance (mainly EPS) also fell short. However, the silver lining is that U.S. LTL is finally showing meaningful improvement as the TL and smaller P&C segments are weighing on EPS. Further, FCF remains strong and is guided to increase this year, implying an attractive high single-digit FCF yield. We remain convinced that TFII’s self-help levers should drive an EPS rebound this year, followed by accelerated growth in 2025. We have adjusted our estimates to align with the low end of guidance, which drives our target down ... We maintain our Sector Outperform rating, expecting a 2H rebound, M&A, buybacks, and TL spin-off to be catalysts over the next two years.”
* BMO’s Fadi Chamoun to US$140 from US$145 with a “market perform” rating.
“TFII has reduced its near-term outlook as a persistently challenging freight market weighed on first quarter results. U.S. LTL continues to represent a significant profit improvement opportunity; however, we believe the near-term potential will be more modest absent a broader seasonal demand uplift in LTL markets. We reduce our EPS forecast to US$6.77 from $7.44 in F2024 and to $8.77 from $9.56 in F2025,” said Mr. Chamoun.
* CIBC’s Kevin Chiang to US$172 from US$175 with an “outperformer” rating.
“As we work our way through Q1 earnings, it is clear that the freight economy remains stuck in a recession and TFII is not immune to this. That said, its earnings growth is less dependent on a cyclical recovery (which should eventually happen) given the multiple self-help levers at its disposal, including the ongoing restructuring within U.S. LTL. We continue to have a positive medium- to long-term outlook on TFII and view the current share price as close to floor levels,” said Mr. Chiang.
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After updating his forecast to reflect its pending US$11-billion stock and cash deal to combine with Chord Energy Corp. (CHRD-Q), RBC Dominion Securities analyst Greg Pardy downgraded Enerplus Corp. (ERF-N, ERF-T) to “sector perform” from “outperform” previously, seeing the potential for higher returns elsewhere.
“The announced $11 billion stock and cash merger will create the largest Williston Basin producer with enhanced scale and a bolstered inventory position,” he said. “The deal makes strategic sense to us given that we had pegged Chord as Enerplus’s closest comparable within the Bakken, which points toward operational and overhead synergies.
“The combined company’s (which will continue to exist as Chord Energy) fourth-quarter 2023 production sat at 287,000 boe/d amid a strong balance sheet (0.1 times 2024 estimated year-end net debt-to-EBITDA pro-forma under our base outlook). Chord will apply conservative well spacing and transition to 3-mile laterals on more than 40 per cent of its pro-forma inventory (while also evaluating 4-mile laterals), which should drive productivity gains and greater returns. The combined entity will have more than 1,800 drilling locations (at sub-$60 WTI) in the Williston Basin.”
Mr. Pardy thinks the deal, which faces a May 24 shareholder vote, comes with a “reasonable” valuation.
“The implied transaction price of $18.42 for Enerplus shares on the date of deal announcement represented a 15-per-cent premium to ERF’s pre-announcement share price on market close of February 21,” he said. “The deal values Enerplus’s equity at about $3.8-billion, which equates to a flowing barrel metric of approximately $39,700/boe/d on 2024 net production. Notably, Enerplus’s share price increased by about 15 per cent in the days leading up to the transaction announcement (between February 8 and 21) in connection with the unconfirmed report of an acquisition bid by Devon Energy ... to purchase Enerplus for $3 billion.”
Accordingly, Mr. Pardy raised his target for Enerplus shares by US$1 to US$22. The average target on the Street is $21.34.
“Under futures pricing, Enerplus is currently trading at a 2024 debt-adjusted cash flow multiple of 4.8 times (vs. our North American Intermediate E&P peer group avg. of 4.1 times) and free cash flow yield of 8 per cent (vs. our peer group avg. of 10 per cent),” he said. “We believe ERF should trade at an average/above-average multiple given its consistent operating performance, capable leadership team, shareholder alignment, and strong balance sheet, partly offset by portfolio concentration.”
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When Canadian Tire Corp. Ltd. (CTC.A-T) reports its first-quarter results on May 9, National Bank Financial analyst Vishal Shreedhar is anticipating “soft” revenue, reflecting “tepid consumer demand.”
“We expect a disconnect between CTR sales and revenue, in part reflecting tepid replenishment due to incrementally higher dealer caution (draw down existing spring/summer inventory),” he said. “Recall that approximately 60 per cent of CTC’s spring business is classified as discretionary; management indicated expectations for meaningful difference in performance between essential and discretionary.
Quarter-to-date (Q4/23 earnings call was mid-February), management suggested CTR was flat, and down overall for the other banners. Also, March represents 45-50 per cent of Q1/24. Our analysis of weather data reveals March was warmer year-over-year; all else equal, we expect warmer weather to be supportive to CTR sales”
Mr. Shreedhar is currently projecting earnings per share for the quarter of $1.01, up a penny from the same period a year ago and 33 cents above the consensus estimate on the Street. He attributes that “flattish” performance to “SG&A leverage (reduced headcount), lower minority interest, lower tax rate (NBF models 26 per cent vs. 31 per cent last year) and share repurchases over the last 12 months, offset by softer results in Retail, softer results in CTFS and higher interest expense.”
“We expect Financial segment results to be pressured, reflecting labour market softening and incrementally deteriorating aging rates at Glacier Credit Card Trust,” he said.
“CTFS is undergoing a strategic review. This could encompass many permutations. However, if CTFS were sold, it could command a valuation of $30-$40 per share (6x-8 times CTFS EPS). This imputes a CTC share price of $146+ today.”
After lowering his estimates for both 2024 and 2025 to reflect a “deteriorated” retail backdrop, Mr. Shreedhar cut his target for Canadian Tire shares to $144 from $146, maintaining a “sector perform” recommendation. The average is $153.20.
“We see more attractive opportunities elsewhere in our coverage universe due to soft consumer demand (albeit stabilizing) and uneven operating performance,” he said.
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Heading into first-quarter earnings season for Canadian diversified financial companies, RBC Dominion Securities analyst Geoffrey Kwan revealed his top three “best ideas” for the industry while making a series of target price adjustments.
His best picks are
No.1: Element Fleet Management Corp. (EFN-T, “outperform”) with a $31 target (unchanged). The average on the Street is $27.33.
Analyst: “With the share price flat year-to-date, here are some things we think are being overlooked: (1) we think EFN is likely to increase 2024 guidance when Q1/24 results are reported; (2) with OEM production normalizing in H2/23, 2024 should see much stronger origination activity, which should significantly increase both financing and service (e.g., titling, insurance, registration, upfitting, re-marketing) revenues that were subdued during the OEM production shortage; and (3) with almost 65 per cent of EFN’s business coming from the U.S., EFN should significantly benefit from the rally in the USD vs. CAD. Furthermore, we forecast ROEs to increase from 15 per cent today to 23 per cent in 2028, so we view the stock as mispriced, trading at just 14 times P/E and 8.5-per-cent FCF yield.”
No. 2: Brookfield Asset Management Ltd. (BAM-N/BAM-T, “outperform”) with a US$53 target, up from US$50. Average: US$43.31.
Analyst: “We see significant potential valuation upside driven by strong FRE growth (BAM said it expects ‘outsized’ FRE growth in 2024) and a 3.4-per-cent dividend yield. Furthermore, additional valuation upside could come from BAM’s 23.5 times FRE multiple being a substantial discount to its closest peer (each 1 times improvement = US$2 or 5-per-cent upside per BAM share).”
No. 3: Brookfield Corp. (BN-N/BN-T, “outperform”) with a US$51 target, down from US$53. Average: US$50.07.
Analyst: “BN’s shares trade at a substantial 23-per-cent discount to NAV (which already includes our 30-pr-cent discount to BN’s Real Estate IFRS fair value). While investor concerns regarding Real Estate is understandable, the current share price implies zero value for BN’s Real Estate investments plus a 12-per-cent discount to IFRS fair value for BN’s non-Real Estate private assets (e.g., Insurance). We think BN benefits from multiple catalysts including successful fundraising at BAM, improving financial performance within its Real Estate segment, insurance segment demonstrating consistent organic growth and other options (e.g., share buybacks, monetizations) that could further narrow its discount to NAV.”
His other target changes are:
- Brookfield Business Partners LP (BBU.UN-T, “outperform”) to US$32 from US$33. Average: US$29.57.
- CI Financial Corp. (CIX-T, “sector perform”) to $20 from $19. Average: $19.94.
- Definity Financial Corp. (DFY-T, “outperform”) to $50 from $49. Average: $47.45.
- Goeasy Ltd. (GSY-T, “outperform”) to $201 from $195. Average: $208.33.
- Intact Financial Corp. (IFC-T, “sector perform”) to $236 from $229. Average: $236.50.
- Sprott Inc. (SII-T, “sector perform”) to $59 from $54. Average: $53.50.
- TMX Group Ltd. (X-T, “sector perform”) to $38 from $36. Average: $38.
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Citing an “improved geopolitical risk, increased EBITDA outlook and improved capital structure expected in the following quarters,” National Bank Financial analyst Mike Parkin raised Equinox Gold Corp. (EQX-T) to “outperform” from “sector perform” after coming off restriction following the close of a US$299-million bought deal offering that will be used to finance its US$995-million acquisition of the remaining 40-per-cent interest in the Greenstone mine in Ontario from Orion Mine Finance.
“[We are] maintaining our Speculative risk qualifier due to the continued project ramp-up risk,” he said. “Overall, we like the deal as it adds more of the best asset in the portfolio on a (1) geopolitical risk, (2) cash margin, and (3) LOM [life-of-mine] basis; at a fair-to-good price.”
“We updated our model to include the 98.4 million shares issued (bought deal gross proceeds approximately US$299-million). Additionally, we included the three-year US$500-million term loan which includes interest, covenants and other terms that are consistent with the company’s existing RCF. With the 100-per-cent ownership of Greenstone, we see a strong improvement in our company-wide AISC [all-in sustaining costs], EBITDA and FCF estimates beginning in 2H24. Additionally, we see ND/EBITDA estimates peaking in 2Q24 before EQX’s financial leverage quickly improves as the high-margin Greenstone operation ramps up to commercial production.”
Mr. Parkin trimmed his target to $10.25 from $10.50. The average is $9.88.
Elsewhere, other changes include:
* Scotia’s Ovais Habib to $6.75 from $7 with a “sector perform” rating.
“We view the transaction as mixed for EQX shares as the asset’s purchase price is dilutive to our model estimates based on our $1,800/oz long-term gold price assumption, despite being fairly priced at spot. Orion’s $250-million investment in EQX demonstrates its continued confidence in the deposit and in the management of the asset,” said Mr. Habib. “As first gold pour approaches in May 2024, we remain focused on Greenstone’s successful commissioning and ramp-up that would enable the company to subsequently deleverage the balance sheet and rebuild liquidity.”
* BMO’s Kevin O’Halloran to $10 from $8 with an “outperform” rating.
“We view the transaction positively, as it increases EQX’s exposure to its best asset and should allow the company to achieve its goal of 1Moz annual production,” he said.
* Desjardins Securities’ John Sclodnick to $10.50 from $11 with a “buy” rating.
“While we brace for a potential negative update regarding the resumption of mining at Aurizona, overall we like the transaction and see potential for the stock to trade at a higher multiple as EQX advances deleveraging,” he said.
* Canaccord Genuity’s Jeremy Hoy to $12 from $11.75 with a “buy” rating.
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In other analyst actions:
* Barclays’ Adrienne Yih downgraded Lululemon Athletica Inc. (LULU-Q) to “equal weight” from “overweight” and dropped her target to US$395 from US$546. The average on the Street is US$459.41.
“We downgrade LULU shares to Equal Weight from Overweight based on: 1) Americas, while still solidly positive but decelerating, offset by China; 2) athleisure normalization with potential marginal spend shifting back to apparel; 3) more competitive landscape in aggregate; and 4) more limited margin expansion drivers,” she said.
* JP Morgan’s Rodolfo Angele cut Canacol Energy Ltd. (CNE-T) to “underweight” from “neutral” with an $8 target, below the $11.93 average.
* Berenberg’s Aron Ceccarelli upgraded Nutrien Ltd. (NTR-N, NTR-T) to “buy” from “hold” with a US$66 target, up from US$60 but remaining below the US$67.18 average.
* Desjardins Securities’ Chris MacCulloch moved his Advantage Energy Ltd. (AAV-T) target to $13.50 from $13 with a “buy” rating. The average is $13.21.
“Continued strong well results, particularly at Glacier, have opened the door to potential further moderation in capital spending, which could support an acceleration of share buybacks, even within the context of extremely depressed natural gas prices. We continue to highlight the stock as our top pick in the small-cap natural gas space,” he said.
* Piper Sandler’s David Amsellem raised is Bausch Health Companies Inc. (BHC-N, BHC-T) target to US$9 from US$7 with a “neutral” rating. The average is US$10.50.
* Ahead of the release of its first-quarter results on Wednesday, Desjardins Securities’ Chris Li raised his Loblaw Companies Ltd. (L-T) target to $157 from $148 with a “hold” rating. The average is $157.36.
“We expect 1Q results to reflect Loblaw’s consistent execution and strong positioning within the food and drug retailing market (discount, private label, loyalty, expanded scope of practice, specialty drugs, etc), supported by favourable industry trends,” said Mr. Li. “The high earnings visibility is further highlighted by management’s expectation that its fullyear high-single-digit EPS growth outlook should be consistent through the quarters. This should support L’s continuing outperformance in the near term.”
* Scotia’s George Doumet bumped his Restaurant Brands International Inc. (QSR-N, QSR-T) target to US$81 from US$80 with a “sector outperform” rating. The average is US$84.88.
“QSR has been delivering solid home market performance, particularly at BK U.S. and Tim’s Canada, while International has seen moderating growth in comps and NRG,” he said. “For Q1, we continue to expect a mixed internal picture at home vs overseas, and are largely in line with consensus. QSR shares are trading at 5 per cent vs the historical average and an 11-per-cent discount vs IHF peers. Continuing healthy SSSG trends (BK U.S. improvements, healthy TH Canada results) and mid-4-per-cent NRG should help narrow the gap.”
* Expecting a “relatively flat” first-quarter performance, TD Cowen’s Brian Morrison trimmed his Sleep Country Canada Holdings Inc. (ZZZ-T) target to $33 from $34 with a “buy” rating. The average is $32.42.
“Sleep remains one of the more compelling risk/reward profiles within our coverage universe for investors with a mid-term investment horizon. We see modest downside as we view the current valuation as attractive as we near trough earnings. Meanwhile, its M&A/ investment strategy, earnings growth potential and strong FCF profile, provide meaningful EPS upside as consumer demand stabilizes/improves,” he said.
David Leeder