Inside the Market’s roundup of some of today’s key analyst actions
Several analysts reduced their price targets on Rogers Communications Inc. (RCI-B-T) in the aftermath of the company’s second-quarter results, which disappointed many because of weakness in the wireless division. Yet, even with the reduced targets, some analysts suggest watching out for a longer-term buying opportunity given valuations are not looking expensive.
“RCI missed expectations in 2Q as wireless bore the brunt of the pandemic, which affected roaming, overage and activation revenue,” noted Desjardins Securities analyst Maher Yaghi.
“Media operations were also impacted more than expected as live professional sports has not yet resumed. As the economy reopens, we believe Rogers’ profitability should begin to improve significantly. Given its current valuation is well below that of its large-cap peers, we continue to see this weak period as a good entry point for long-term investors,” Mr. Yaghi said.
He cut his 12-month price target to C$65 from $70. Nevertheless, “We believe the lifetime value of its wireless and wireline networks, in addition to a very strong wireless spectrum position and brand, continue to support our long-term buy rating,” he said.
Canaccord Genuity analyst Aravinda Galappatthige cut his target to C$58 from $60 and also reiterated a “buy” rating.
He notes that valuations should continue to provide some downside protection. “Given the steep declines expected in Q3 as well and the lower visibility around Q4, we expect the stock to be somewhat volatile in the near term. While the market has had to adjust its 2020 expectations more than expected in April/May, we believe that RCI.b’s valuation provided some downside protection. RCI.b’s FCF yield is now near 7.3% (on F20E), closing the gap on BCE which historically had the higher FCF yield by far among incumbents. On an EV/EBITDA basis, RCI is at 6.4x 2021E (and 7.1x when adjusting EV for other investments like CCA, Jays, MLSE etc.), well below TELUS at 7.4x and BCE at 7.5x.”
Scotiabank analyst Jeff Fan similarly sees longer-term potential in the stock even after the disappointing second quarter that prompted him to cut his one-year price target to C$62 from $64.
“We lowered our target price .... due to lower 2020 and 2021 estimates that reflect the weaker than expected Q2 wireless results and outlook for the 2H/20. While 2020 results will remain challenging, we think 2021 is setting up for a healthy recovery as COVID-related revenue streams return. After our estimate revisions to EBITDA and wireless contract assets (device subsidies), we estimate RCI is trading at 7.8x next 12 months EV/EBITDA and 6.1% free cash flow yield (fully taxed). This is above the 7x and 6.5% FCF yield entry point that we have highlighted previously. We estimate $52/share would equate back to 6.5% next 12 months FCF yield and 7x 2021E EBITDA (reflecting recovered COVID-19 impact). For investors looking out to 2021, we think RCI offers value at these levels and we expect the F21 recovery will help improve the share price performance over the next year. We maintain our sector outperform rating,” he said.
CIBC also cut its target price to C$62 from $66, UBS to C$58 from $63, and Cormark to C$65 from $67.
The median price target among analysts is now C$65, according to Refinitiv Eikon, down $2 from a month ago.
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Canadian Pacific Railway Ltd. (CP-T) reported “an almost perfect quarter,” remarked Scotiabank analyst Konark Gupta, who - like many analysts - raised his price target on the stock. Earnings per share beat the entire Street, he noted, and the railway’s key Operating Ratio metric not only improved from a year ago but also reached one of its best ever and widened its lead over peers. Meanwhile, management raised guidance, resumed buybacks and raised the dividend.
“Yet, the market reaction (Wednesday) was relatively muted (shares closed +0.1% on TSX and +0.9% on NYSE). We believe profit-taking could be one of the factors, given the stock had reached an all-time high earlier in the day and expanding rail sector valuations could be a cause of concern for some investors, although CP shares have performed in line with U.S. rails over the past three months (FX-adjusted). We also think tough volume and OR comps in Q3 could have added to near-term concerns or short-term profit-taking. We remain positive on CP, driven by its unique growth opportunities, room for further improvement in industry-leading OR to mid-50%‘s, accelerated shareholder returns, and high-teen ROIC,” Mr. Gupta said.
Mr. Gupta raised his target to C$395 from $384 on modest tweaks to his estimates, and he maintained a “sector outperform” rating.
Elsewere, CIBC raised its target price to C$410 from C$370; JP Morgan raised its target price to C$390 from C$37; and RBC raised its target price to C$408 from C$401.
The median price target is now C$380, up $30 from a month ago.
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RBC Capital Markets analyst Alex Zukin lowered his price target on Microsoft Corp. (MSFT-Q) to US$230 from $240 after the company reported strong quarterly financial results. In a report, the analyst said that while an accounting change will drive bottom line estimates higher, a mix of COVID headwinds and tailwinds will keep total revenue in check.
“Azure growth of +47% came in line with guidance and Street consensus while some weakness in the company’s SMB segment and transactional businesses limited upside in the PBP segment. With all secular growth stories intact, we maintain OP rating but modestly reduce PT given near-term headwinds.”
Mr. Zukin maintained his “outperform” rating on the stock. Elsewhere on the Street, JP Morgan raised their target price on Microsoft to US$220 from $190 and Piper Sandler raised their target price to $218 from $192.
The median price target is US$230, up $30 from a month ago.
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Steven Li, an analyst at Raymond James, started coverage of Mogo Inc. (MOGO-T;MOGO-Q) with an “outperform” rating and a stock price target of C$4, saying there was plenty of upside for the Vancouver-based financial technology company - if they execute.
“The new Mogo is leveraging its low cost of customer acquisition (via free identify fraud protection, credit monitoring) to further build its member base (already 1 mln+, adding ~20k/month) all the while monetizing with a multi-product finance app to drive the value of its users up. We have not seen many in the Canadian market bring multiple products digitally in one finance app. That makes it intriguing.”
The median analyst target is also $4.
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CIBC analyst Mark Petrie sees greater upside in shares of Empire Company Ltd. (EMP-A-T) following its new three-year plan announced this week called “Project Horizon.”
He raised his price target to $40 from $37 while reiterating an outperform rating. The median analyst target is $39.
Empire Company Ltd. plans to spend $2.1 billion over the next three years on building and renovating stores, expanding its e-commerce offering and growing its private label portfolio as it drives to add $500 million in annualized earnings.
The Nova-Scotia-based grocery chain that owns Sobey’s and other banners says it will use some of the money to add about 20 new Farm Boy locations in Ontario and convert between 30 and 35 conventional stores in Western Canada to FreshCo. The targeted $500 million increase in yearly EBITDA (earnings before interest, taxes, depreciation and amortization) will come from increasing its market share and building on its “cost and margin discipline.” The financial target does not include impacts related to the COVID-19 pandemic.
Mr. Petrie says the plan “presents an aggressive view to potential margin expansion and earnings growth. Ontario is the key battleground, and strong competitors will deliver strong resistance. However, the company has clear levers for outperformance including differentiated ecommerce (Voila) and brick & mortar (Farm Boy), and a store asset base that remains significantly less productive than peers'”
“More broadly, we believe Empire still has significant opportunity to improve its store offering, including in private label, fresh, prepared foods and HBA. Overall, we continue to believe EMP carries the greatest risk of the grocery group largely as a result of the pace of change, but we are encouraged by the execution in the last three years,” he added in a note.
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In other analyst actions:
Tesla Inc. (TSLA-Q): Cowen and Company upgraded its rating to “market perform” from “underperform” and raised its target price to US$1,100 from $300. JP Morgan raised its target to $325 from $295; Piper Sandler to $2,400 from $2,322 and RBC to $850 from $765. The median price target is now $940.36, compared with $650 a month ago.
Shopify Inc. (SHOP-N): Piper Sandler raised its target price to US$1,015 from US$843.
Suncor Energy Inc. (SU-T): National Bank of Canada raises target price to C$28 from C$27
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Darcy Keith
Roma Luciw