Inside the Market’s roundup of some of today’s key analyst actions
Toronto-Dominion Bank’s (TD-T, TD-N) second-quarter results were “solid all around,” according to RBC Dominion Securities analyst Darko Mihelic, adding its low expenses and provisions for credit losses (PCLs) “definitely impress” despite being unlikely to continue.
On Thursday, TD reported adjusted earnings per share for the quarter of $1.62, exceeding Mr. Mihelic’s projection of $1.48 and the consensus of $1.50. All of the bank’s business segments topped his performance expectations.
“Canada P&C results were solid and loan growth was better than we were expecting,” he said. “Canada P&C earnings (excluding Wealth) were up a solid 17 per cent year-over-year reflecting lower provisions for credit losses (PCLs) and solid efficiency gains. Total loan growth strengthened modestly and net interest margins were up 2 basis points quarter over quarter.
“TD’s total Canadian real estate secured lending (RESL) growth was relatively stable quarter-over-quarter versus peer banks who thus far have reported decelerating RESL growth. After digging a bit deeper into Canada P&C loan growth data, the Canadian banks seem to be experiencing stronger unsecured lending growth that (for now) offsets slowing RESL growth. Unsecured lending growth trends are worth monitoring at this stage of the economic/credit cycle.”
With the results, Mr. Mihelic raised his full-year 2018 and 2019 EPS estimates to $5.92 and $6.56, respectively, from $5.72 and $6.45.
“We view the quarter as strong on many metrics but since expenses will rise in the back half of 2018 (i.e., unsustainably low in Q2/18) and provisions for credit losses (PCLs) are perhaps as good as it gets (i.e., they too will naturally rise over time) our changes to forward estimates are positive but not fully reflective of the strength demonstrated in Q2/18,” he said.
“Changes to our estimates largely reflect higher assumed net interest income over our forecast period and better cost control in 2019. We also now assume TD repurchases 1.5 million shares per quarter over the next 12 months.”
Though he said the stock is trading slightly above historical valuations, he also increased his target price to $89 from $84, keeping a “sector perform” rating. The average target on the Street is currently $83.07, according to Thomson Reuters Eikon data.
“TD is trading at 11.8 times our 2018 EPS estimate — 2 per cent above its historical average premium to the other large Canadian banks,” he said. “In our view, valuations for Canadian banks may be at risk as earnings growth slows into 2019/20, particularly if credit deterioration should emerge in late 2018 (but so far, credit quality is pristine).”
Elsewhere, Canaccord Genuity’s Scott Chan said TD remains his top pick among Canadian banks after a “stellar quarter with a high-quality beat.”
He raised his target by a loonie to $85 with a “buy” rating (unchanged).
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Credit Suisse analyst Andrew Kuske upgraded Hydro One Ltd. (H-T) to “outperform” from “neutral” with a $22 target, which sits 46 cents below the average on the Street.
“June 7th will mark the end of Ontario’s Provincial election campaign with voters heading to the polls. Unfortunately, Ontario’s power politics (i.e. electricity or, commonly referred to as “hydro” in much of Canada) have a long and often negative history,“ he said. “With that backdrop, Hydro One (H) has become a part of the campaign rhetoric with negative impacts on the share price. From our vantage point, the rhetoric should be contrasted with the underlying reality. Clearly, there are some political risks associated with Ontario’s election. Yet, the 6-per-cent decline in H’s shares over the last month looks overdone. As that decline supports a better risk-reward relationship, we upgrade Hydro One.“
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The blocked takeover of Aecon Group Inc. (ARE-T) by China Communications Construction Co. Ltd. is “creating a compelling opportunity to trade the stock profitably again,” said Raymond James analyst Frederic Bastien.
He raised his rating for the Calgary-based construction and infrastructure development company to “outperform” from “market perform” in a research note released Friday.
“Uncertainty around a renewed CEO search and another forthcoming bid will almost certainly continue to weigh on the stock in the near-term, in our view, but it should also give value investors time to dust off the old Aecon file and better appreciate the factors poised to drive significant outperformance over a 12–18 month horizon,” said Mr. Bastien.
He increased his target price for Aecon shares to $20.50 from $20.37. The average target is $18.79.
“The common shares closed at $14.67 [Thursday], implying a 2019 estimated EV/EBITDA multiple for the construction business of 4.2 times that compares favourably to Aecon’s 10-year forward average,” he said. “In times of volatility, however, the yardstick we favour to underscore value is tangible book, and on that basis the stock is trading at 1.1 times. The only other times in the past decade when Aecon traded at a similar price-to-tangible-book value were in the aftermath of the Suncor Firebag mishap (early 2011) and immediately following the energy sector’s implosion (early 2015). So we are certainly of the view the stock price offers an attractive risk-reward profile at current levels.”
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Though Computer Modelling Group Ltd. (CMG-T) released better-than-expected fourth-quarter 2018 financial results, Industrial Alliance Securities analyst Elias Foscolos downgraded his rating for the stock to “buy” from “hold” based a “more tempered” outlook.
On Thursday, CMG, a Calgary-based company that produces reservoir simulation software to the energy industry, reported revenue for the quarter of $19.4-million, meeting Mr. Foscolos’s expectation ($19.7-million) and exceeding the consensus ($18.9-million). Adjusted cash EBITDA was $8.7-million, according to the analyst, which topped his estimate ($7.9-million) and the consensus ($7.4-million).
Based on the results, which also included weaker-than-forecasted core software revenue, Mr. Foscolos lowered his fiscal 2019 EPS estimate by a penny to 29 cents, while his 2020 projection fell to 32 cents from 37 cents.
He kept a target price for CMG shares of $10.50, which tops the consensus on the Street of $9.97.
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After the release of fourth-quarter 2018 financial results that were “softer” than he expected, Raymond James analyst Ben Cherniavsky downgraded Héroux-Devtek Inc. (HRX-T) to “market perform” from “outperform,” citing both recent share price appreciation and a limited upside to his target price.
On Thursday, the aerospace parts manufacturer reported adjusted earnings per share of 29 cents, falling a penny less than the analyst’s projection and 3 cents less than the expectation on the Street. EBIT also missed Mr. Cherniavsky’s estimate and fell 2 per cent year over year.
“We note also that the pattern of strong earnings growth and quarterly ‘beats’ that helped power Héroux’s stock higher through 2015/16 has more recently given way to a trend of flatter organic growth and more earnings ‘misses,’” said Mr. Cherniavksy. “Looking forward, we expect Héroux’s growth will resume as contract activity ramps and recently announced acquisitions close. We thus continue to value the stock using a long-term EPS forecast of $1.15 for F21. But based on this approach, we believe that the market has already accounted for most of our projected growth at the current share price. Moreover, we are mindful that our fully-ramped EPS estimate for Héroux has been repeatedly pushed right over the past few years as the cycle has unfolded and new headwinds have transpired (see Exhibit 3). While we still believe this target is achievable, we would prefer to buy the stock with less of the related upside already priced-in and/or with better visibility that results will not continue to disappoint.”
Mr. Cherniavsky maintained a $17 target for the company’s shares, which is $1 less than the average on the Street.
Elsewhere, Desjardins Securities analyst Benoit Poirier recommend investors buy Héroux-Devtek shares in order to benefit from its “solid” fundamentals ahead of the closing of its acquisitions of Beaver Aerospace & Defense Inc. and Compañia Española de Sistemas Aeronauticos, S.A.
“We continue to like HRX and find the stock attractive,” he said. “We expect management to leverage current excess capacity to drive both revenue and margin expansion, as well as create shareholder value. As a result, we continue to believe the stock could reach C$32–40 by FY21.”
Mr. Poirier believes the company continues to possess “solid” long-term fundamentals, expecting the CESA and Beaver transactions to create further shareholder value. He thinks the stock has the potential to reach $32-40 in the long term.
Héroux-Devtek closed trading on Thursday at $16.10.
“Management’s previous guidance called for revenue of $480–520-million in FY21, which excludes both the CESA and Beaver acquisitions. However, it is currently waiting to close these transactions before providing an update,” the analyst said. “Taking into account these acquisitions and some growth opportunities, revenue of $700–750-million could be achievable, and our current forecast of $641-million seems conservative and assumes minimal contract wins. The ramp-up of several key programs will contribute to revenue growth (KC-390, Legacy 450/500, B-777, Saab Gripen, just to name a few) in the future. We expect HRX to end FY19 with an EBITDA margin of 15.5 per cent, although the customer approval for the last remaining surface treatment process as well as ramp-up of new programs should help to boost utilization rates and improve margins. We calculate that HRX could generate an EBITDA margin of 17–19 per cent in FY21 (our forecast of 16.3 per cent is conservative). In a base case, assuming $700-million of revenue, an EBITDA margin of 17 per cent, net debt of $132-million and an 11 times EV/EBITDA multiple, the stock could be worth $32. In a bullish scenario, assuming $750m of revenue, an EBITDA margin of 19 per cent, net debt of $132-million and an 11 times EV/EBITDA multiple, the stock could be worth $40, providing significant upside from current levels.”
Keeping his “buy” rating for the stock, Mr. Poirier raised his target to $21 from $19 despite lowering his fiscal 2019 EPS projection to 68 cents from 80 cents.
“We continue to like HRX and find the stock attractive,” he said. “We expect management to leverage current excess capacity to drive both revenue and margin expansion, as well as create shareholder value.”
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In other analyst actions:
Deutsche Bank raised Canadian National Railway Co. (CNI-N, CNR-T) to “hold” from “sell” with a target of US$81, rising from US$69. The average on the Street is US$81.03.
The firm downgraded First Quantum Minerals Ltd. (FM-T) to “hold” from “buy” and cut its target to $21 from $23. The average is $23.53.
David Leeder