Inside the Market’s roundup of some of today’s key analyst actions
Following a “big time” second-quarter beat, BMO Nesbitt Burns analyst Randy Ollenberger raised his recommendation for shares of Suncor Energy Inc. (SU-T) to “outperform” from “market perform,” seeing its execution continuing to “impress.”
“Suncor reported much better-than-expected Q2/24 financial and operating results as the company completed its heavy turnaround activities ahead of schedule,” he said. “Upstream production and refining throughput came in materially higher than expected, while oil sands operating costs were much lower than estimated. This marks the third consecutive quarter of significantly improved operational performance. We see further upside to the shares if the company can maintain recent performance and make progress towards its net debt floor.”
After the bell on Tuesday, Calgary-based Suncor reported quarterly cash flow per share of $2.65, blowing past the expectations of both Mr. Ollenberger ($2.26) and the Street ($2.28) due largely to stronger oil sands production and lower operating costs.
“Suncor reported total production of 770.6 mboe/d, ahead of consensus of 734.0 mboe/d and our estimate of 735.1 mboe/d,” he said. “The volume beat stemmed from turnarounds being completed ahead of schedule, which also drove lower-than-expected oil sands operating costs. Additionally, Suncor was able to leverage its asset integration to derive a high level of volume transfers. As a result of these factors, reported cash flow of $3.1 billion was far ahead of our $2.7 billion estimate and consensus of $2.8 billion.
“Downstream also outperformed. Similar to the upstream segment, a betterthan-expected turnaround schedule resulted in downstream throughput averaging 430.5 mb/d versus our and consensus’ estimates of 403.2 mb/d and 399.6 mb/d, respectively. Due to this, downstream cash flow came to $893 million compared to our estimate of $808 million and consensus of $799 million.”
While he raised his full-year 2024 and 2025 expectations in response to the results, Mr. Ollenberger said the results were “better but still room to improve.”
“This quarter marked the third consecutive data point in tracking Suncor’s improved reliability and competitive operating costs goals,” he said. “The company was able to execute its significant turnaround activity more efficiently than expected, which could result in it achieving the high end of its 2024 production and throughput guidance. That said, the second half of the year may be a little bumpy as Suncor progresses with the Fort Hills mine pit transition and further Base Plant maintenance. We believe the company needs to continue to demonstrate strong operating performance as well as make progress toward achieving its net debt goals to deliver further gains for shareholders.”
The analyst maintained a $62 target for Suncor shares. The average on the Street is $60.36, according to LSEG data.
Elsewhere, TD Cowen’s Menno Hulshof upgraded Suncor Energy Inc. (SU-T) to “buy” from “hold” with a $59 target.
“SU posted a strong production and FFOPS beat (16 per cent) in a turnaround-intensive quarter. The Street appears to have overestimated turnaround impacts, with maintenance completed ahead of schedule. YTD upstream production/refinery throughput are H1 records. Upgrading to BUY on consistent execution (has ‘beat’ for four consecutive quarters) and recent share-price weakness,” said Mr. Hulshof.
=====
Following Tuesday’s release of “mixed” second-quarter financial results and a reduction to its full-year financial guidance, Stifel analyst Martin Landry expects shares of Pet Valu Holdings Inc. (PET-T) to remain range bound until next year “when the narrative may become more positive.”
“While Pet Valu’s shares are down 10 per cent year-to-date, the decline is related to negative earnings revision and hence not translating into to cheaper valuation metrics,” he said. “In fact, we see limited multiple expansion potential from current levels as we believe Pet Valu’s shares are fairly valued, trading at 15-16 times 2025 earnings estimates. This represents a PEG ratio of 1.5 times assuming a normalized earnings growth rate of 8-12 per cent. Hence, we see the risk/reward profile currently balanced on Pet Valu’s shares.”
Shares of the Markham, Ont.-based retailer slid 5.2 per cent after it reported revenue of $265-million, up 3.5 per cent year-over-year but lower than both Mr. Landry’s expectation of $273-million and the consensus estimate of $267-million. Lower expenses led to adjusted EBITDA of $58-million, matching the analyst’s estimate and higher than consensus of $56-million, while earnings per share of 36 cents was 2 cents higher than expectations.
“Given the continued softness in consumer spending and timing of actions, management revised downward its full year guidance,” he said. “The guidance now calls for EPS to range between $1.50-1.55, a decline of 5 per cent at the midpoint vs the previous guidance. Management revised downward its same-store-sales growth guidance now expecting flat SSS vs a growth of 2-5 per cent previously. In addition, changes in the timing of new store openings as well as in the sale of corporate stores to franchisees, both later than previously expected, are weighting on earnings vs previous expectations.
Calling its flat year-over-year same-store sales growth result for the quarter a “disappointment” and seeing its accessories and specialty pet business remaining a headwind, Mr. Landry cut his 2025 EPS estimate by 7 per cent to “reflect the lower revenue base in 2024, which spills over into 2025.” His 2025 same-store-sales growth projection slid by 1 per cent to 3 per cent, anticipating “the current industry dynamic (weak consumer and intense competition) could spill into early 2025.
Reiterating a “hold” rating for Pet Valu shares, Mr. Landry dropped his target price to $27.50 from $32. The average target on the Street is $36.13.
“We are decreasing our valuation multiple applied to our earnings estimate for Pet Valu to reflect the depressed industry conditions,” he said. “Our target price is derived using the average of (1) a 9.5-times multiple (10.25 times previously) on our 2025 EBITDA estimate, (2) a 17 times multiple (18.5 times previously) on our 2025 EPS estimate, and (3) a DCF calculation. The narrative is not favorable to the company currently with slowing samestore-sales growth, intense competition, a frugal consumer and earnings headwind from the company’s investment in its supply chain. Given the earnings decline expected for H2/24, we believe investors may wait to revisit the story until next year.”
Other analysts making target changes include:
* Desjardins Securities’ Chris Li to $31 from $34 with a “buy” rating.
“Despite a longer-than-expected period of continued macro pressures, we believe PET remains well-positioned to achieve low-double-digit EPS growth over the long term. Looking beyond softer overall industry growth in 2024, we expect PET to deliver 10-per-cent earnings growth in 2025, supported by SSSG improvement, new store openings, supply chain efficiencies and good cost control,” said Mr. Li.
* National Bank’s Vishal Shreedhar to $30 from $34 with an “outperform” rating.
“We hold a positive view on PET, reflecting its strong business positioning, attractive industry characteristics (notwithstanding near-term softness) and high returns on capital,” said Mr. Shreedhar. “Revenue, EBITDA and FCF are expected to grow in 2024+ (NBF 2025 FCF is $100-million), with EPS growth accelerating in H2/25+.”
* ATB Capital Markets’ Chris Murray to $40 from $41 with an “outperform” rating.
“PET delivered a decent quarter despite a challenging backdrop, and its two-pronged growth story remains intact. We would look to add to positions as valuations remain attractive as we see an H2 and 2025 recovery as feasible with additional upside,” said Mr. Murray.
* RBC’s Irene Nattel to $34 from $35 with an “outperform” rating.
“We view Pet’s 2-2.5-per-cent trim to 2024 EBITDA outlook despite solid Q2 financial results as reflective of the very real, challenging consumer spending backdrop in Canada,” she said. “Having said that, valuation is already reflecting NT [near-term] consumer spending headwinds and macro uncertainty, with shares trading 9 times NTM [next 12-month] EBITDA, bottom of the three-year range, more than 1 standard deviation below the mean, and notable discount to Chewy and Petco. Caveat remains potential consumer spending trajectory in 2025+, with our revised forecasts reflecting a more dovish tone.”
* CIBC’s Mark Petrie to $33 from $36 with an “outperformer” rating.
* Barclays’ Adrienne Yih to $28 from $37 with an “overweight” rating.
* TD Cowen’s Michael Van Aelst to $32 from $38 with a “buy” rating.
=====
In a research note reviewing second-quarter earnings season for North American railroad companies, RBC Dominion Securities analyst Walter Spracklin knocked Canadian National Railway Co. (CNR-T) to the bottom of his pecking order of preferred stocks, seeing investor sentiment around it deteriorating.
“Inbounds we received on CN’s Q2 results were negative as results came in below lowered expectations into the quarter,” he said. “CN also lowered its 2024 EPS guide but maintained its 2024-26 10-15-per-cent EPS CAGR target. Given this now suggests an elevated EPS growth rate of 12 per cent in 2025 and 2026 in order to hit the low end of the 10-15 per cent guidance range (or 15 per cent to hit the midpoint), we are mindful of the implied guidance setting expectations too high.”
Conversely, Mr. Spracklin thinks the sentiment direction for Canadian Pacific Kansas City Ltd.’s (CP-T) turning “positive.”
“CP had a solid Q2 result that came in ahead of elevated expectations into the quarter,” he said. “Further, guidance for a record Q4 operating ratio, which if achieved, provides strong operating momentum into next year.”
Emphasizing a weaker-than-expected yield across the group and operating ratios “continue to struggle,” Mr. Spracklin’s current pecking order is:
- Union Pacific Corp. (UNP-N) with an “outperform” rating and US$275 target. The average on the Street is US$261.95.
- Canadian Pacific Kansas City Ltd. (CP-T) with an “outperform” rating and $133 target. Average: $124.96.
- Norfolk Southern Corp. (NSC-N) with an “outperform” rating and US$267 target. Average: US$264.45.
- CSX Corp. (CSX-Q) with a “sector perform” rating and US$36 target. Average: US$38.81.
- Canadian National Railway Co. (CNR-T) with a “sector perform” rating and $169 target. Average: $177.86.
======
Ahead of the Aug. 13 release of its second-quarter results, Stifel analyst Daryl Young sees few near-term catalysts for Superior Plus Corp. (SPB-T).
“We are squarely in the summer doldrums for propane heating and given the overhang related to slowing O&G [oil and gas] markets; regardless, we think the 9-per-cent dividend yield is attractive and sustainable,” he said.
Noting the quarter is normally “seasonally weaker” for the Toronto-based company given the impact of warmer spring weather on its residential propane heating operations, Mr. Young is projecting adjusted EBITDA of $47.5-million, which is 4 per cent below the consensus estimate of $49.6-million but up 59 per cent year-over-year, “reflecting the Certarus acquisition, offset by an 6-per-cent year-over-year decline in adj EBITDA at the propane operating levels.”
“We are anticipating a challenging quarter given continued unseasonably warm weather across the U.S. and Eastern Canada which will temper propane volumes, combined with potential pricing/utilization impacts at Certarus from declining O&G activity,” he added. “Traditionally, Certarus has rapidly re-deployed its MSU fleet between utility customers across the winter (backup gas supply), into the U.S. O&G markets during spring/summer drilling season. However, given the slow down in drilling and completions activity this year, we see potential for a more competitive pricing environment.
“SPB’s shares have been under significant pressure in recent months, down 19 per cent, and are now arguably more than pricing in the current downside risks.”
Reaffirming a “buy” rating for its shares, the analyst trimmed his target to $12.50 from $13. The average is $12.
“We have conservatively reduced our Certarus assumptions for Q2/Q3 2024 to account for the O&G headwinds, trimmed our propane assumptions to account for the weather, and updated our FX rates,” he explained. “Our target price declines slightly to $12.50 from $13.00 on the back of the lower estimates. Our key focus for the quarter is the outlook for the utilization and profitability of the Certarus fleet; under the worst case scenario, whereby a deeper and more protracted O&G downturn occurs, we think Certarus (and its peers) would act rationally with a focus on profitability and temporarily dial-back MSU fleet growth (with a modest silver lining that it could reallocate FCF towards debt repayment).”
=====
Medical Facilities Corp. (DR-T) continues to “comfortably” funding its dividend with distributable cash as its performance consistency persisted with its second-quarter results, according to Leede Financial analyst Douglas Loe.
“As with most preceding quarters, EBITDA and distributable cash generated far exceeded actual dividend in the period, thus solidifying the firm’s status as a leading dividend-bearing (and as one of the sustainably lowest payout ratios) within our coverage universe,” he said.
“We are maintaining our BUY rating based on dividend yield stability as driven by the firm’s physician-owned specialty hospital infrastructure in SD-OK-AR.”
Before the bell on Tuesday, the physician-owned specialty hospital operator reported reported facility revenues of $107.2-million, up 2.4 per cent year-over-year and narrowly higher than the Street’s expectation of $107-million. EBITDA of $22.9-million topped the consensus projection of $21.5-million.
Mr. Loe emphasized all profitability metrics contributed to adjusted funds from operations that “far exceeded actual dividend, generating low payout ratio in the period as in all quarters since FQ419.”
“Though Medical Facilities quarterly financial data has not in recent periods exhibited the sequential revenue/EBITDA/margin strength that it has in earlier years, we do expect FQ324 to be as strong as FH124 was, and we do expect FQ424 to be specifically strong on both top-line and EBITDA margin,” he said.
“As in all periods during our coverage history of Medical Facilities, a substantial proportion of the firm’s equity is held by physician owners of facilities in SD (Black Hills Surgical Hospital, Sioux Falls Surgical Hospital), OK (Oklahoma Spine), and AR (Arkansas Surgical Hospital), with minor contribution from ambulatory surgery centers in CA (specifically in Newport Coast). For valuation purposes, we base our valuation on the proportion of equity held by common shareholders, about 52.5 per cent at the end of FQ224 by our calculation. By applying this percentage to FQ224 EBITDA, we calculate that adjusted EBITDA in the preceding quarter was US$12.0-mi,llion.”
Also noting it has recently received partial forgiveness of legacy U.S. government stimulus repayment obligations that should “positively impact full-year financial risk and specifically impact FQ324 net income,” Mr. Loe raised his target to $15.50 from $15, maintaining a “buy” recommendation for its shares. The average is $14.
“Our financial forecasts and valuation methodologies are essentially unchanged, but revised capital structure (sequentially lower LT debt, reduced S/O on share buyback activity in the quarter) largely justifying our PT revision,” he said.
Elsewhere, RBC’s Doug Miehm, the other analyst on the Street covering the stock, raised his target by $1 to $14, keeping a “sector perform” rating.
“We believe DR will perform in line with its peer group for the following reasons: • Competition in the two largest markets. In the company’s two largest markets, Sioux Falls (SFSH) and Rapid City (BHSH), we anticipate a reduction in the amount of referred business. We believe it is important for investors to adopt a cautious view of the business due to the magnitude of revenues that these two centers bring to the business (approximately 60 per cent of total revenues). • Reimbursem*nt reductions offset volume gains. We believe there should be a modest uptick in volumes associated with U.S. healthcare reforms, although unreimbursed care represents only a small portion, 3–4 per cent, of the business. The fundamentals of the aging population with increasing levels of chronic conditions should also drive volumes. These additional volumes and cost-management initiatives should help to partially offset reimbursem*nt pressures not only from government but also private payors,” said Mr. Miehm.
=====
In response to “strong” second-quarter results, Desjardins Securities analyst Frederic Tremblay remains “constructive” on 5N Plus Inc.’s (VNP-T) “status as a supplier of choice for high-margin specialty materials in the western world” and continues to see potential upside to its 2025 guidance.
After the bell on Monday, the Montreal-based company reported quarterly revenue of US$74.6-million, up 26 per cent year-over-year, led by a 44.1-per-cent “surge” in its Specialty Semiconductors business. Adjusted EBITDA jumped 24.4 per cent to US$13.5-million, exceeding both Mr. Tremblay’s US$11.9-million estimate and the consensus projection of US$11.4-million.
“VNP’s contract signing activity has been stellar year-to-date, with a record amount (US$135-million) of new contracts signed in 1Q24 by AZUR and the renewal of the supply agreement with First Solar (VNP’s largest customer) in 2Q24,” he said. “As announced on June 4, 2024, this renewal calls for a 50-per-cent volume increase over the next two years (2025–26) compared with the 2023– 24 agreement. First Solar management recently indicated that ‘bookings are going out into 2027 and 2028′. In the satellite market, AZUR’s timely capacity addition should advantageously position it to benefit from strong demand in Europe and North America.
“Capacity expansion projects are progressing on plan and are nearing completion. Capacity additions in Germany and Montréal are anticipated to be commissioned in 3Q24 to serve the space solar power market and First Solar. On a related note, capex is expected to moderate in 2H24.”
With “persistent tailwinds for profitable growth,” Mr. Tremblay suggested the release could be the beginning of positive updates after 5N Plus reiterated its full-year EBITDA guidance of US$45-50-million and now sees it landing at the upper range.
“We agree and now forecast US$50.0-million,” he said.
“We continue to see upside to 2025 guidance (we now forecast US$56.0-milllion) from higher-than-expected volume with existing clients, incremental wins with other customers and/or continued margin outperformance.”
Reiterating his “buy” recommendation, Mr. Tremblay raised his target for VNP shares to $7.25 from $6.75 after increased his revenue and earnings projections through 2026. The average target on the Street is $7.19.
=====
In other analyst actions:
* JP Morgan’s Stephen Tusa cut his Street-low ATS Corp. (ATS-N, ATS-T) target to US$36 from US$38 with a “neutral” rating. The average is US$62.
* Jefferies’ Glen Santangelo lowered his Bausch Health Companies Inc. (BHC-N, BHC-T) to US$9 from US$13 with a “buy” rating. The average is $7.64.
* Raymond James’ Steve Hansen lowered his Boyd Group Services Inc. (BYD-T) target to $325 from $350 with a “strong buy” rating. The average is $297.15.
“We are trimming our target price on Boyd Group Services ... based upon recent industry data points and conversations with leading multi-store-operators (MSOs) that suggest the recent ‘air pocket’ in collision repair demand has drifted into 3Q24, with July green shoots still proving relative sparse,” he said. “To this end, conversations suggest July repair activity remained broadly lackluster (vs. June), still suffering from lethargic claims data associated with: 1) a sharply lower industry backlog (post warm winter); 2) rising total loss frequency (as used car values fall); and 3) deferred repairs as customers embrace higher deductibles to combat surging insurance inflation. The recent global cyber-attack against software vendor CDK Global is also expected to weigh on near-term results. We have trimmed our estimates accordingly. Notwithstanding these revisions, we reiterate our Strong Buy rating based upon Boyd’s long-term track record, proven growth algorithm, attractive long-term fundamentals, and increasingly attractive valuation.”
* TD Cowen’s Aaron MacNeil increased his Street-low target for Dexterra Group Inc. (DXT-T) to $6 from $5.50, keeping a “hold” rating. The average is $7.87.
“Q2/24 results materially beat our estimates/consensus. However, we believe that the beat was driven by the timing of new contracts and facilitated by overly conservative language by management, and note that we have already contemplated the full impact of these contracts in subsequent quarters. Our Q3/24 estimates and target rise on heightened wildfire activity,” he said.
* TD Cowen’s Mario Mendonca raised his targets for Great-West Lifeco Inc. (GWO-T) to $44 from $43 with a “hold” rating and IA Financial Corp. (IAG-T) target to $114 from $110 with a “buy” rating. The averages are $44 and $102.50.
* Scotia’s Orest Wowkodaw cut his Labrador Iron Ore Royalty Corp. (LIF-T) to $32 from $33 with a “sector perform” rating. The average is $33.83.
“LIF reported in-line Q2/24 financial results and reaffirmed previously issued 2024 Fe guidance for the Iron Ore Company of Canada (IOC). Our dividend outlook remains unchanged. Although spot Fe prices are currently above our forecast, we remain cautious given the ongoing uncertainty in the Chinese steel industry. Overall, we view the update as largely neutral for LIF shares,” he said.
* Barclays’ Adrienne Yih reduced her target for Lululemon Athletica Inc. (LULU-Q) to US$263 from US$338 with an “equal-weight” recommendation. The average is US$358.86.
“We downgrade Retail to Neutral from Positive on erosion of inventory margin recapture as promos intensify and demand weakens. In this ‘leverage phase’ of margin expansion only a minority of companies with company-specific drivers can accelerate sales growth faster than fixed cost growth,” said Ms. Yih in a research report looking at the U.S. retail sector.
* BMO’s Tamy Chen raised her Metro Inc. (MRU-T) target to $82 from $75 with a “market perform” rating. The average is $80.
“Our FQ3/24E EPS is revised to $1.29 from $1.31 (Mean: $1.34; range: $1.29-$1.36), and is the Street’s low due to higher depreciation vs. Street estimates (estimated -$0.05 impact),” she said.
“We have lowered our inflation and tonnage assumptions, resulting in an overall revision to food SSS [same-store sales growth] to 0.2 per cent from 2.5 per cent. Our lowered SSS is partially offset by a slight upward revision in gross margin.”
* National Bank’s Mohamed Sidibe trimmed his Patriot Battery Metals Inc. (PMET-T) target to $10 from 12, below the $13.78 average, with an “outperform” rating, while Raymond James’ Brian MacArthur lowered his target to $12.50 from $13.50 with an “outperform” recommendation.
* After Michigan Lottery disclosed its iLottery contract will not be awarded to Pollard Banknote Ltd (PBL-T) starting in July 2026, Acumen Capital’s Jim Byrne cut his target for its shares to $28 from $47 with a “buy” rating. The average is $42.38.
“With the news from Michigan, following closely on the loss of the iLottery contract in New Hampshire, the future of the company’s prospects in the iLottery sector has become quite cloudy,” he said. “It appears that the incumbent technology platform through NeoGames has a distinct advantage when these contracts come up for renewal and brings attention to future renewals in North Carolina (2026) and Virginia (2029).”
* National Bank’s Adam Shine raised his Stingray Group Inc. (RAY.A-T) to $10 from $9.50 with an “outperform” rating. The average is $10.08.
* JP Morgan’s Arun Jayaram cut his Vermilion Energy Inc. (VET-T) target to $18 from $21 with an “overweight” recommendation. The average is $20.90.
