Inside the Market’s roundup of some of today’s key analyst actions
In response to a steep drop in its share price following the release of its third-quarter 2024 results and reduction to 2025 guidance, DA Davidson analyst Brandon Rolle recommends buying BRP Inc. (DOO-T) on weakness, reaffirming his bullish longer-term view.
Shares of the Valcourt, Que.-based recreational vehicle manufacturer fell 11.8 per cent on Thursday following the release before a narrow 1.9-per-cent rebound on Friday. That came after the company lowered its normalized EBITDA guidance from a 9-13-per-cent increase in the next fiscal year to flat to 2 per cent. It now expects EPS of $11.10-$11.35 from $12.35-$12.85 previously due to weakening demand and after it “proactively adjusted production and deliveries to manage network inventory and protect [its] dealer value proposition.”
“The updated guidance implies another challenging quarter in 4Q24 from both a revenue and EPS growth perspective,” said Mr. Rolle. “The company indicated 3Q24 ORV retail started to see a material slowdown in October which has continued throughout November. In addition, BRP’s FY25 targets will be postponed as macroeconomic factors and a looming inventory rationalization period has negatively impacted their FY25 outlook. Although the company is still working through their official FY25 guidance, BRP did provide early FY25 assumptions of revenue down a low-to-mid-single digits year-over-year with EBITDA margins contracting 100-200 basis points year-over-year.”
While BRP continues to gain market share within the North American off-road vehicle market, Mr. Rolle said slowing retail trends as well as macroeconomic and geopolitical risks drove a more cautious outlook. He said its Powersports segment, in particularly, has taken a “step back” due those difficult conditions.
“3Q24 Powersports segment sales were 9.0 per cent year-over-year due to lower volume shipments,” he said. “Year-Round Products sales decreased 7.8 per cent year-over-year to $1.181-billion, primarily attributable to a lower volume of SSV and 3WV sold, combined with higher sales programs. The decrease in SSV wholesale is partially explained by the U.S.-Mexico border slowdown, where the implementation of systematic cargo inspections adversely affected the company’s ability to complete certain deliveries. The decrease was partially offset by favorable FX variation. Seasonal Products sales decreased 14.9 per cent year-over-year to $868.7-million, primarily attributable to a lower volume of PWC and Sea-Doo pontoon sold due to late shipments in the prior year. The decrease was partially offset by a higher volume of Snowmobiles sold as well as favorable pricing across all product lines. Powersports P&A and OEM Engines sales increased 5.5 per cent year-over-year to $314.5-million, mainly attributable to a higher volume sold, coming from aircraft engine and mechanical gearbox sales for traditional and electric bicycles, and favorable pricing, partially offset by higher sales programs.”
With BRP’s update, Mr. Rolle reduced his full-year 2024 and 2025 EPS estimates to $11.20 and $9, respectively, from $12.30 and $12.60. The consensus projections on the Street are currently $11.61 and $10.95.
Maintaining a “buy” rating, he cut his target for the company’s shares to $99 from $126. The average is $103.28.
Elsewhere, Scotia Capital’s Jonathan Goldman lowered his target to $109 from $145 with a “sector outperform” rating.
“We view the magnitude of the guidance cut and F2025 commentary as more precautionary than predicative,” said Mr. Goldman.” With two months to go in the fiscal year, the company proactively adjusted production to align with softening demand trends in certain regions/categories, particularly International, which began in October (and continued in November). We materially lowered our estimates incorporating a healthy dose of conservatism. Industry volumes are currently at or slightly below 2019 levels. We assume high single-digit decline in the powersports industry next year and margins of 15.5 per cent (100-150 basis points below what we view as sustainable at midcycle).
“Shares are trading at 6 times EV/EBITDA on our 2024E (7.6-per-cent FCF yield) – a trough multiple on trough earnings (at least the way we model it). What’s getting lost in the macro narrative is the company’s progress and runway to expand structural earnings power. It’s telling we’re discussing15.5-per-cent margins as being trough next year compared to 2019 levels of 12.5 per cent. On the top-line, the company has expanded market share by 17 per cent since F2016 (and outperformed the industry in 31 of last 35 quarters) while maintaining pricing power, which we attribute to its low cost position (Mexican footprint/modularity approach).”
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Seeing a “more balanced” risk-reward proposition for investors, Wells Fargo’s Ike Boruchow downgraded Lululemon Athletica Inc. (LULU-Q) to “equal weight” from “overweight” on Monday, seeing fewer growth drivers moving forward.
The analyst thinks most of the factors powering the Vancouver-based activewear company’s outperformance, including improving inventories, strong growth in China and a recovery in margins, are now played out.
“The main question we have following 24 months of well above plan growth is can LULU sustain their algorithm into 2024 and beyond,” said Mr. Boruchow.
With its valuation no longer cheap, he maintained a US$445 target, representing 4.6-per-cent downside to its Friday closing price, and removed the company from the firm’s “top picks” list in favour of rival Nike Inc. (NKE-N). The average on the Street is US$440.49.
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National Bank Financial analyst Gabriel Dechaine sees Bank of Montreal (BMO-T) “pulling the expense lever (harder)” to keep the accretion from its acquisition of Bank of the West “on track.”
Shares of BMO rose 2.1 per cent on Friday despite reporting a fourth-quarter profit that missed analysts’ estimates as it saw a jump in expenses stemming from in its takeover of the California-based bank. It earned $1.6-billion, or $2.06 per share, a 64-per-cent drop from the same quarter a year ago. Adjusted to exclude certain items, including costs related to BMO’s acquisition of Bank of the West and legal expenses, the bank reported profit of $2.81 per share – below the $2.86 per share analysts expected, according to Refinitiv.
A breakdown of the big banks’ fourth-quarter earnings
“The bank reiterated its target for 7-per-cent EPS acquisition accretion in 2024,” Mr. Dechaine said. “We note this figure excludes the December, 2022 equity issuance that management attributes to OSFI’s decision to raise the DSB buffer/range last year.”
“We were concerned that mounting top-line pressures would cause BMO to reduce/defer accretion. However, by increasing its expense synergy target to more than US$800-million from US$670-million, the bank still expects to deliver on this objective. It achieved a US$220-million expense synergy run-rate during fiscal 2023, which it expects to increase to US$770-million during fiscal 2024.”
Seeing the quarterly release as “neutral” overall, featuring lower-than-expected provisions from credit losses (PCLS) and higher-than-anticipated common equity tier 1 (CET1) ratio of 12.5 per cent, Mr. Dechaine now sees BMO in a “strong capital position,” however he reduced his estimates to reflect higher PCLs and lower net interest income.
That led him to trim his target for BMO shares to $117 from $120, reiterating a “sector perform” recommendation. The average is currently $125.75.
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Following First Quantum Minerals Ltd.’s (FM-T) decision to launch arbitration proceedings against Panama after the country’s President ordered the closing of its biggest copper mine, Eight Capital analyst Ralph Profiti is now expecting a restart of production at Cobre Panama in the first quarter of 2025, “coinciding with a six-month process after the May 2024 general elections in Panama.”
“We believe increased balance sheet concerns of an extended Cobre-Panama closure will bring forward concerns over liquidity and debt covenants as well as the debt carrying capacity of the existing operating assets (primarily Zambia),” he warned.
However, Mr. Profiti emphasized the Vancouver-based miner has “historically been very successful in international arbitration.”
“FM has submitted to the Ministry of Commerce and Industry of Panama a notice of intent to initiate arbitration pursuant to the Canada-Panama Free Trade Agreement, which facilitates consultations between the Government of Panama and MPSA in order to avoid the need to file any such arbitration,” he said. “Additionally, MPSA has initiated arbitration before the International Court of Arbitration to protect its rights under the 2023 concession agreement that the Government of Panama agreed to earlier this year. FM previously entered into a $1.25Bln settlement with ENRC over expropriated assets in the Democratic Republic of Congo (DRC).”
The analyst thinks the company’s net debt-to-EBITDA covenants can be satisfied in 2024 with “aggressive cuts” to its growth capital expenditures.
“Debt maturities and preservation of ex-Cobre Panama asset values will be more pressing issues for management in our view. At Q3/23, FM held cash of approx. $1.260-billion (net debt: $5.627-billion) and total liquidity of $2.265-billion (ex-trading facility). We now estimate FM will exit FY23 with net debt of $6.391-billion and total liquidity of $1.274-billion (ex-trading facility) and a ND/EBITDA ratio of 2.4 times, with debt maturities of $625-million due in 2024 and $1.793-billion due in 2025. Assuming a $4.00/lb copper price and a 50-per-cent reduction in growth capex, including Kansanshi S3 expansion capex, we estimate a ND/EBITDA ratio of 4.0 times at year-end 2024 vs. a max covenant ratio of 3.5 times. We assume the dividend is suspended and there are care & maintenance costs of $50-million per year at Cobre Panama, but this is highly subject to government clarification on closure scenarios and environmental considerations.”
Maintaining a “neutral” rating, Mr. Profiti reduced his target for First Quantum shares to $16 from $31. The average on the Street is $22.44.
“Latin American risks highlight why North American-exposed copper miners should trade at a premium,” he concluded. “Our valuation methodology places a premium on relative jurisdictional exposure, a successful track record in building operational consistency, strong governance practices, dedicated senior executive relationships, and strong in-country/region management, including local communities. We do recognize that a focus on strong execution and positive relationships at all levels of government and communities can offset higher country risk, but this is becoming increasingly challenging in certain jurisdictions, highlighting the relative attractiveness of preferred jurisdictions (Canada in particular).”
Elsewhere, others making target changes include:
* BMO’s Jackie Przybylowski to $20 from $28.50 with an “outperform” rating.
“Panama continues to evolve; we now assume that Cobre Panama is closed for the first nine months of 2024 (as well as remainder of 2023), from our previous assumption of mine restart January 2024. We believe the government has lost the confidence of the market, and it’s increasingly unlikely that resolution will be possible before the May 2024 election,” she said.
* Canaccord Genuity’s Dalton Baretto to $18 from $20, maintaining a “buy” rating.
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Ahead of the release of its third-quarter 2024 financial results on Dec. 13, Scotia Capital analyst George Doumet reaffirmed Dollarama Inc. (DOL-T) as “a top defensive pick, especially under a hard landing scenario for 2024.”
“For Q3, we are modestly above consensus (on a higher top line) – and when compared to the mid-point of DOL’s F24 guidance, we believe we could see a lower SG&A rate (driven by operating leverage) and higher gross margins (driven by lower product/transport costs and higher price), depending on consumables’ relative performance versus the general merchandise/seasonal categories,” he said. “All in all, we expect topline growth to decelerate but remain robust, supported by sustained healthy demand as consumers hunt for value. We will be looking for updates on the latest demand trends for consumable products and seasonal category’s performance (Halloween, etc) in the quarter.”
Mr. Doumet is projecting revenue of $1.495-billion and 88 cents, both exceeding the Street’s forecast ($1.479-billion and 86 cents). Those are driven by a “strong” same-store growth expectation of 10 per cent.
“We expect trade-down trends to continue to propel growth across all three product categories,” he said. “That said, we expect the continued shift toward the discount channel and essential categories to disproportionately benefit consumables performance. Coupled with 14 net new stores quarter-over-quarter, we look for top-line growth of 15.9 per cent in Q3.
“On gross margin, we look for an expansion of 67 basis points to 44.0 per cent (vs. consensus of 44.2 per cent), driven mainly by favourable shipping costs and logistics costs (as inventory position improves year-over-year). We expect limited mix tailwind in Q3 given the anticipated consumables strength.”
After modest increases to his estimates to reflect lower expenses and the introduction of his 2026 forecast, Mr. Doumet raised his target for Dollarama shares to $104 from $99.50, keeping a “sector outperform” recommendation. The average is $102.50.
“DOL shares are currently trading at a 9-per-cent premium (versus its five-year average); and we believe the premium is justified in the current macro-environment, considering DOL’s unique combination of defensiveness and favorable growth prospects,” he said.
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While Tecsys Inc.’s (TCS-T) second-quarter 2024 featured “soft results on the surface,” National Bank Financial analyst John Shao emphasized its “core growth driver [is] still solid.”
“Tecsys’ FQ2 results resembled what we’ve seen in the past with unfavourable project timing lowering overall performance while the core growth driver SaaS remained solid,” he said. “Whenever that temporary dip happened, it was almost certainly followed by a rebound in the subsequent quarter, and we believe this time is no exception. What’s supporting that view is the strong bookings, continued margin expansion associated with the SaaS business, and more importantly, a growing partnership ecosystem with the Company getting incrementally comfortable shifting some work to its partners. Our thesis remains unchanged, and we continue to see Tecsys as a high-quality name with multiple tailwinds to drive healthy organic growth and consistent margin expansion.”
On Thursday after the bell, the Montreal-based supply chain technology firm reported revenue of $41.5-million, narrowly lower than both Mr. Shao’s $42-million estimate and the consensus projection of $42.4-million. Adjusted EBITDA of $1-million was alos weaker than expected ($1.6-million and $2-million, respectively).
Despite the misses, which he attributed to its Professional Services business, Mr. Shao said its key Software as a service (SaaS) segment continued to see “strong” momentum, including a year-over-year rise in revenue of 37 per cent.
“The leading indicator of SaaS bookings also performed well, up 32 per cent year-over-year (95 per cent quarter-over-quarter) to $3.7-million,” he said. “The rebound in SaaS bookings was what we predicted in our previous FQ1 earnings note when this metric was temporarily under pressure due to deal lumpiness. The strong SaaS growth, coupled with better-than-expected Maintenance and Support revenue (up 10 per cent year-over-year to $8.9-million vs. our forecast of $8.3-million), resulted in a 19-per-cent year-over-year growth in ARR to $84.9-million. As new customers adopt SaaS by default while existing ones transition to SaaS in the next 18-24 months, we expect that momentum to continue.”
Mr. Shao said Tecsys remains one of his “top ideas,” reaffirming an “outperform” recommendation and Street-high $50 target. The average target is $46.40.
“Time has allowed Tecsys to scale and expand its platform into a growing logistics powerhouse within the healthcare and retail vertical. That fortification along with growth initiatives that include strategic and operational investments and acquisitions is putting Tecsys in a position to scale into broader markets. We believe Tecsys is on the cusp of scaling into a bigger company,” he concluded.
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In other analyst actions:
* In response to its quarterly earnings release, Scotia Capital’s Meny Grauman trimmed his National Bank of Canada (NA-T) target by $2 to $95 with a “sector perform” rating. The average is $100.
“We certainly have a favorable view of NA’s year-end result which beat the Street by 7 per cent, and delivered peer-leading PTPP [pre-tax, pre-provision] growth of 19 per cent year-over-year,” he said. ”That said, we need to acknowledge the source of the beat as stronger-than-expected trading and underwriting revenues. Although there is a good argument to be made that National Bank delivered the best result this earnings season, that performance was inflated as the bank excluded $0.30/share in ‘unusual items’ in a quarter when most peers included those kinds of charges in their core results. After a very weak Q3 for the Financial Markets segment, we were happy to see a bounce back in Q4′s performance. However, looking ahead to next year tax changes targeting the dividend received deduction appear to be a material headwind to that business line. During the call, management guided to positive earnings growth in the Financial Markets segment in F2024, but also acknowledged that the tax change noted above would materially weigh on TEB revenue. We estimate an impact of about $0.55/share or 6 per cent of total earnings before offsets. And although the bank did strongly suggest that there would be offsets, the impact is still likely to be more significant than we had previously assumed.”
* Seeing its “leverage to robust trends in graphene and batteries compelling,” RBC’s James McGarragle initiated coverage of NanoXplore Inc. (GRA-T) with an “outperform” rating and $3.25 target. The average target on the Street is $4.81.
“We see NanoXplore as an early stage company with leverage to very positive long-term demand trends in graphene, trends we expect it to be able to capitalize on, reflecting its global leadership position,” he said.
“We see NanoXplore as benefiting from several key drivers, and it is our view these trends are not reflected in the company’s current valuation. We are optimistic about the company’s graphene technology and facility expansions but highlight in our view commodity, financing, and execution risk.”
* JP Morgan’s Jeremy Tonet lowered his AltaGas Ltd. (ALA-T) target to $32 from $33 with an “overweight” rating. The average is $31.77.
* Canaccord Genuity’s Robert Young raised his Celestica Inc. (CLS-N, CLS-T) target to US$32.50 from US$29 with a “buy” rating. The average is $32.25.
* Barclays’ Theresa Chen bumped her TC Energy Corp. (TRP-T) target to $51 from $50 with an “equalweight” recommendation. The average is $53.
David Leeder