Inside the Market’s roundup of some of today’s key analyst actions
Credit Suisse analyst Andrew M. Kuske upgraded his rating on Brookfield Infrastructure Partners LP (BIP-N) to “outperform” from “neutral”, citing impressive third-party fund raising, the potential for enhancing its organic growth, and recent stock market performance.
But he kept his price target at US$49.50. The average analyst price target is US$46.79, according to Refinitiv Eikon.
“From our perspective, as with much of the overall Brookfield Group, Brookfield Infrastructure Partners LP (BIP) is likely positioned to benefit from rather positive potential across a variety of activities, including: (a) an abundance of prospective deployment opportunities; (b) notably positive fund raising activities across the Brookfield Asset Management (BAM) franchise – with a particular focus on various infrastructure-related capital; and, (c) a selection of capital recycling opportunities,” Mr. Kuske said in a note to clients.
The analyst said there are some concerns about part of BIP’s portfolio being vulnerable to a downturn in the economy and negative foreign exchange movements. “Yet, the growth dynamics in the core portfolio, selected valuation re-rates and the broader Brookfield business support looks to provide an interesting opportunity for the ongoing compounding of capital at BIP. These factors help underpin our upgraded outperform rating, in our view, along with potential catalysts providing news flow,” he said.
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UBS analyst Ross Fowler downgraded Canadian utility Fortis Inc. (FTS-T) to “sell” from “neutral,” citing risks arising from regulatory challenges alongside a steeper-than-expected rise in interest rates.
His price target was cut to C$56 from C$61. The average analyst target is C$61.46.
“We are downgrading Fortis to sell from neutral in line with our updated valuation methodology, which decreased the relative premiums and discounts for growth and increased the premiums and discounts for regulation,” he said.
“We see significant regulatory headwinds in Arizona and New York which are both Tier 5 regulatory jurisdictions. This will likely limit Fortis’ ability to accelerate rate base growth beyond current guidance of 6% per annum.” By contrast, the average growth for the utility sector is improving to 6%-8% with best in class companies growing 9%-10% over the next five years, he said.
The rating change was contained in a “half-time report” on the North America Power and Utilities sector, in which he pointed investors to other names with more advanced clean energy initiatives.
“In the near to intermediate term, we see a shift to a stock-picking environment for utilities from an environment with macro tailwinds that allowed the sector to outperform the market in the first half of the year,” he wrote, noting the S&P 500 Utilities Sector SPDR ETF declined 2.8% over the period versus a 18.2% drop for the S&P 500.
“With the Fed raising by 75 basis points in June, it is now looking more likely that it could raise by more the 300 basis points in total, which could impact utility performance,” he added.
Mr. Fowler suggests investors search for “valuation entry points” in lower-risk names that should have accelerating growth from the clean energy transition. His screening of stocks suggest some of these are: American Electric Power Company (AEP-Q), Centerpoint Energy Inc. (CNP-N), Emera Inc. (EMA-T), Oge Energy Corp. (OGE-N), Public Service Enterprise Group Inc. (PEG-N), and Sempra (SRE-N).
He said that he doesn’t expect outflows from mutual funds to be a material headwind to performance.
“If utility stocks experience outflows we expect it is more likely once the Fed has hiked 300 basis points. Precedent exists for a condition where the group remains overvalued for a period of time,” he said.
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TD Securities analyst Aaron Bilkoski upgraded Tourmaline Oil Corp (TOU-T) to “buy” from “hold” and raised his target price to C$96 from C$80. The action was tied to the bank upping its forecasts for oil and gas prices, as well as a more attractive entry point for the stock given recent softness in the sector.
TD’s update to its oil and gas assumptions increased cash flow and net asset value estimates for Tourmaline.
TD’s models are now based on an average US$100 per barrel WTI oil in 2022 (up from US$85/barrel) and US$80/bbl WTI oil in 2023 (up from US$75/bbl). Natural gas assumptions, based on prices at the Henry Hub in the U.S., were raised to US$6.05 per million btu in 2022 (from US$4.50/mmbtu) and US$3.75/mmbtu in 2023 (from US$3.50/mmbtu).
These changes resulted in an 11% increase in Tourmaline’s 2023 cash flow per share forecast and a 22% improvement in its net asset value.
“We believe Tourmaline is a fantastic Canadian natural-gas business with excellent execution, best-in-class management, industry-leading strategic vision, and very high-quality assets,” the analyst said.
“The only hurdle that limited our ability to recommend investors buy the equity was valuation. However, this has been rectified by the combination of Tourmaline’s lower share price and our increased CFPS and NAV estimates.”
The average analyst price target is C$89.88.
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Several analysts reduced their price targets on Corus Entertainment Inc. (CJR-B-T) in the wake of an earnings report Wednesday that sent its stock price down by nearly 8%.
The Canadian media firm reported higher costs in its TV segment than many analysts had expected.
But Canaccord Genuity analyst Aravinda Galappatthige described top-line results as “solid,” with a sharper-than-anticipated recovery at its radio assets.
He noted that while adjusted EBITDA was down 5.3% year over year, much of that was non-recurring items. When those are excluded, adjusted EBITDA was down only 1.2%.
“Given the Q3/22 miss was very much around TV operating expenses....we are careful not to over-interpret the bottom-line result with respect to Corus’ outlook,” Mr. Galappatthige said in a note to clients. “However, much depends on how costs would be managed going into F2023.”
He trimmed his price target by 75 cents to C$5.25, due mostly to a cautionary macro economic outlook and additional programming costs in the pipeline. He maintained a “buy” recommendation.
“While there may not be any near-term catalysts to call for a meaningful recovery in the stock price, we do believe that with an improving balance sheet position and a free cash flow yield of 33%, the downside is limited. Additionally, the step-up in recent buybacks is also encouraging and management has signalled an appetite to maintain an active repurchase program,” he said.
Elsewhere, CIBC cut its target price to C$6.5 from C$8, National Bank trimmed its target to C$5 from C$6.25, and BMO cut its target to C$5 from C$6.
The average analyst target is now C$5.94.
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While Air Canada’s (AC-T) apology late Wednesday to its passengers over widespread flight delays, and plans for summer capacity cuts, add greater uncertainty over its speed of recovery, ATB Capital Markets analyst Chris Murray is looking at the bright side.
“We see the news reinforcing the level of pent-up demand in the system coming out of the pandemic, despite significant macroeconomic headwinds, which we expect to translate into a healthy demand environment over a multi-year period, including later in 2022 and into 2023,” the analyst said in a note to clients Thursday morning.
Mr. Murray reiterated an “outperform” rating and C$35.00 price target. The average analyst target is C$28.79.
Air Canada said it is cancelling 154 flights per day in July and August, or 15 per cent of its schedule, due to “unprecedented strains” on the airline industry from resurgent travel.
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RBC Capital Markets analyst Nelson Ng trimmed his price target on shares of Methanex Corp. (MEOH-Q; MX-T) given higher risks of a recession, which would potentially lead to lower methanol prices.
But while his target was reduced to US$60 from US$65, he reiterated an “outperform” rating, as he expects the methanol producer to continue to generate strong free cash flow, supporting “a robust pace” of share buybacks.
Methanol prices in China have trended lower recently due to healthy inventory levels and weak sentiment, he noted. But there are expectations that a new methanol-to-olefins facility in China should increase demand and support higher prices for methanol in the second half of this year.
The average analyst price target is US$58.29.
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In other analyst actions:
Alimentation Couche-Tard Inc (ATD-T): CIBC cuts target price to C$58 from C$64
Algoma Steel Group Inc (ASTL-T): Stifel GMP initiates coverage with “hold” rating and C$15.50 price target
Aritzia Inc (ATZ-T): TD Securities cuts target price to C$55 from C$62
Richelieu Hardware Ltd (RCH-T): TD Securities cuts target price to C$44 from C$48
Whitecap Resources Inc (WCP-T): BMO raises target price to C$16 from C$15; Haywood Securities raises target price to C$18 from C$17; RBC raises target price to C$16 from C$14
Bed Bath & Beyond Inc (BBBY-Q): B Riley cuts target price to US$5 from US$7; Jefferies cuts target price to US$5 from US$17; Keybanc cuts target price to US$2 from US$5.50; Telsey Advisory Group cuts target price to US$3 from US$6; Wedbush cuts target price to US$5 from US$7
Micron Technology Inc (MU-Q): Citigroup cuts price target to $85 from $100
Texas Instruments Inc (TXN-Q): Benchmark starts with buy rating; target price $205
With files from Reuters
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Darcy Keith