Inside the Market’s roundup of some of today’s key analyst actions
Citi analyst Ariel Rosa is taking a “constructive” view on the North American Transportation and Logistics industry, seeing a “cyclical downturn in transports is in its late stages, with rates and margins near trough, offering the prospect of strong earnings growth in 2025 and into 2026 as rates recover.”
“Our positive stance is further supported by a view that (a) many of the companies in our coverage have strong management teams with track records of disciplined capital allocation, and (b) transportation companies provide an irreplaceable, essential service to the North American economy, limiting disruption or replacement risk,” he said.
In a research report released late Tuesday titled Positioning for the Cycle to Turn, Mr. Rosa initiated coverage of 19 companies, recommending investors “should be positioned for a cyclical recovery, with attractive opportunities in companies that are leveraged to realize outsized benefits as freight conditions tighten.”
“Transports have faced one of the most challenging downturns in recent memory, with moderating post-pandemic demand coupled with persistent oversupply of freight capacity resulting in one of the longest stretches of cyclical weakness in more than two decades,” he said. “This unfavorable supply-demand balance has put downward pressure on freight rates, which in turn has negatively impacted margins and earnings across transportation companies. For investors, the net result of these conditions has been an extended and somewhat unprecedented stretch of underperformance, with the Transports Index (down 0.5 per cent year-to-date) significantly trailing the S&P500 (up 20.6 per cent YTD). In our view, this weakness presents an opportunity to buy quality companies at reasonable prices with significant earnings upside potential as the cycle turns. Against this backdrop of underperformance, we believe select Transportation and Logistics stocks are well-positioned to deliver strong relative outperformance in the year ahead.”
He did acknowledge “a relative lack of compelling near-term catalysts that could quickly resolve the problem of industry-wide overcapacity.”
“Nevertheless, we believe reasonable valuations relative to normalized earnings offer potential upside as the market begins to anticipate a gradual improvement in the freight cycle,” said Mr. Rosa. “Our top picks are JBHT, SAIA, CSX, and UPS, which we segment based on investment style (risk) and size (market cap).”
For stocks listed on the TSX, he has these ratings and targets:
* Canadian National Railway Co. (CNI-N, CNR-T) with a “neutral” rating and US$125 target. The average on the Street is US$130.01, according to LSEG data
Analyst: “CNI has made multiple downward revisions to its outlook, partly due to ongoing labor relations, which appears to be putting inflationary pressure on its cost structure. Canadian peer CP has achieved enhanced network capabilities through its merger with KCS, which allows it to reach the U.S. Gulf Coast and Mexico, posing a competitive challenge to what has historically been one of CN’s biggest advantages, namely its tri-coastal access. Conversely, any CP operational stumbles with integrating KCS could present an opportunity to pick up clients and market share. Further, the recent relative underperformance of CN possibly may reveal structural/operational issues that extend beyond the change in its CEO. It may be possible that CNI, as the PSR pioneer, has tapped out ‘low-hanging fruit’ operational efficiency opportunities. However, we believe structural network advantages (long-haul lengths and tri-coastal access) warrant premium valuations for CN, which has historically been a leader among rails.”
* Canadian Pacific Kansas City Ltd. (CP-N, CP-T) with a “buy” rating and a US$97 target. The average is $127.75 (Canadian).
Analyst: “CP has arguably the best management team in rails, in our view, with a strong track record of meeting or exceeding targets. This suggests upside to its KCS synergy targets, as we believe few management teams are better positioned to unlock value from such a combination. CP has attractive organic growth opportunities from the linking of the existing CP network and acquired KCS network, with enhanced capabilities for customers and intermodal, industrial, and commodity opportunities. However, competition from other rails is proving to be fierce as they look to limit CP-KCS customer expansion by forming partnerships and providing tri-coastal service at similar transit times. CP also has the richest valuation among rails, trading well above its historical trading range; with significant upside priced into consensus Street estimates.”
* TFI International Inc. (TFII-N, TFII-T) with a “buy” rating and a US$159 target. The average is US$172.92.
Analyst: ” TFII has an exceptional track record of acquiring businesses and improving operations to drive value for shareholders. The company’s management has honed a repeatable playbook that it consistently applies to both large acquisitions and small tuck-ins across various trucking businesses. The current M&A environment has also been favorable for TFII to conduct accretive M&A. We view CEO Alain Bedard and his management team as among the best capital allocators in the industry. Margin improvement opportunities exist at TFII’s U.S. LTL [less-than truckload] segment (legacy UPS Freight) and the newly acquired Daseke truckload business. The impending spin/sale of TFII’s Truckload segment could also enable the remaining LTL business to see its multiple re-rate.”
Elsewhere, Bernstein’s David Vernon cut his CN target to $173 (Canadian) from $179 and his CP target to $125 from $126 with “market perform” recommendations for both.
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Ahead of third-quarter earnings season in Canada’s Real Estate sector, National Bank Financial analyst Matt Kornack raised his target prices for equities in his coverage universe by an average of 9 per cent, pointing to “lower bond yield expectations across the curve with a particular focus on longer-term rates, which declined by 30 to 50 basis points vs. prior forecasts in Canada and the U.S., respectively.”
“We passed this through on NAV [net asset value], albeit to a lesser extent (cap rates down on average 20 bps),” he added. “Our view is we are at a crossroads where the rate environment is improving but pandemic induced inflationary pressures are subsiding (and we expect this will funnel down to rents).”
In a research report released Wednesday, Mr. Kornack said the impact of pandemic continues to impact economic performance, emphasizing “sequencing is important.”
“The playbook seems to be transitioning from an equity investment standpoint, but we are still sticking to a focus on quality of assets and defensive growth profiles,” he said. “We expected moves at the short end of the curve to push equity investors into yield product and for REITs to be a beneficiary. That appears to have happened. Given a focus on fundamentals, we don’t entirely agree with some of the undiscerning chasing of higher yields in spite of prevailing fundamentals. As such, we are maintaining a defensive bias, and this is reflected in our asset class pecking orders.”
“Asset class pecking orders largely unchanged with Seniors being re-added and with a strong showing. By total return, we favour seniors (23 per cent), apartments (22 per cent), industrial (20 per cent), retail (17 per cebt), office (8 per cent) and diversified (7 per cent). The aggregate total return across our coverage universe is currently at 18 per cent. Admittedly, in the course of writing this note and setting target prices, there has been some trading volatility around continued gyrations in bond yields, which are likely to continue as economic data emerges.”
Mr. Kornack’s “Focus Ideas” are currently:
Healthcare
* Chartwell Retirement Residences (CSH.UN-T) with an “outperform” rating and $18.50 target, up from $16. The average on the Street is $16.50.
Analyst: “Within the healthcare group, CSH is now the top focus idea. As we’ve seen in industrial, self-storage and multi-family, when a real estate asset class gets moving, surprises tend to persist beyond initial expectations. We are taking the view that a similar setup is happening in seniors housing, and specifically for CSH. Our bullish posture is anchored around a Street high 2025 FFO/u estimate that is driven by rental/service increases of 5 per cent (which may be conservative as suite availability declines/a tight rental market persists) and modest opex/occupied suite growth of 1.5 per cent (from labour market slack / softening inflation data). Ultimately, we won’t have a full understanding of this trend until Q4 annual results which disclose data points on labour spend/occupied suite. Secondly, assuming the WELL transaction closes before year-end, Q1 results will be crucial for observing how the remaining suites performed on a top / bottom-line basis year-over-year after accounting for the new same-property pool. Both potential catalysts may turn into notable drivers of stock performance over the next 12 months.”
Canada Multi-Family
* InterRent REIT (IIP.UN-T) with an “outperform” rating and $15 target, up from $14.75. Average: $14.95.
Analyst: “For the first time in a long time, InterRent tops our total return expectations for the apartment segment (was KMP going into Q2/24) — this is largely on the back of lacklustre trading performance relative to what we expect to be pretty solid fundamentals and a more favourable interest rate exposure. IIP’s strategy of targeting locations with structurally higher transience positions the REIT to better capture its imbedded MTM opportunity than peers. Capital recycling has seen the REIT dispose of lower growth assets, funding accretive unit buyback activity. Financial flexibility has improved while in-place interest rates are now relatively close to prevailing 5-year CMHC mortgage costs, meaning rent growth will better translate into earnings performance.”
* Flagship Communities REIT (MHC.UN-T) with an “outperform” rating and $20 target, up from $19. Average: $19.50.
Analyst: “MHC is our top U.S. housing pick and highest total return in our coverage, given its steep valuation discount, despite offering some of the highest organic growth and defensibility in the REIT sector. Trading liquidity is sparse but for those that can, we would recommend buying this name.”
Industrial
* Dream Industrial REIT (DIR.UN-T) with an “outperform” rating and $17 target, up from $16.50. Average: $16.05.
Analyst: “Our highest total return to target for the industrial segment goes to Dream Industrial, again, as the REIT remains relatively inexpensive vs. its medium-term growth outlook. DIR’s ability to grow its NOI is driven by its exposures to Canadian urban mid-Bay properties. As was highlighted at its investor day, demand for this segment has remained more resilient supporting elevated market rents, with still a significant MTM opportunity. We see nearer-term industrial fundamentals as stabilizing with peak vacancy in Canada forecasted for Q2/25 with an inflection in market rent growth likely thereafter.”
Retail
* RioCan REIT (REI.UN-T) with an “outperform” rating and $23 target, up from $20. Average: $21.15.
Analyst: “RioCan supplants First Capital as our top total return potential in the retail segment (in part because of relative trading strength of the latter). We like REI for its strong structural organic growth potential (3-plus per cent SPNOI growth guidance), comparably cheaper valuation and limited value attributed to an established development vehicle with sizeable near-term and leverage positive completions. On the latter, REI is slated to receive $700-million in condo sales and $500-plus-million in rental development completions through 2026, providing greater certainty over earnings and helping management achieve its 8 times D/EBITDA target. REI trades at 12 times 2025 estimate FFO/u, which is a half turn discount to peers, despite offering above average growth and a largely derisked development pipeline.”
Office
* Allied Properties REIT (AP.UN-T) with a “sector perform” rating and $20 target, up from $18. Average: $19.67.
Analyst: “Our highest total return to target in the office sector remains Allied, given the REIT’s relative asset quality (including an exceptional urban land footprint) vs. its Canadian office peers. There is an ongoing flight to quality where tenants are prioritizing built-out space with access to amenities, and as such, we believe Allied is better positioned on a relative basis given broader office turbulence. Additionally, their above-noted ultra-core urban portfolio provides for a value floor and could appeal to investors with a long-term view on the Canadian market and particularly its top cities. We continue to like the quality and footprint of the portfolio offering relative to valuation and expect management to continue proving this value through monetization of select assets while also improving balance sheet metrics. Nonetheless, office fundamentals are likely to remain challenging.”
Diversified
* H&R REIT (HR.UN-T) with a “sector perform” rating and $11.50 target, up from $10.50. Average: $11.33.
Analyst: “Within the diversified group, H&R remains our top focus idea, driven by exposure to multi-family assets in U.S. markets and industrial development lease-up around the GTA combined with a better balance sheet and limited office maturities. Recent transaction activity was a plus as management continues to showcase their progress in achieving reasonable pricing on a blended basis for the REIT’s assets in a market where transactions are still at somewhat of a standstill. These sales are incrementally positive given that the stock trades at an implied cap rate of 8.5 per cent and continues to move the pro forma entity more towards apartment ownership (we are still waiting on a broader inflection within the Sunbelt markets). We think there is torque to the upside on lower rates as the portfolio remains defensive but don’t see urgency to this trade.”
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Eight Capital’s Jamie Somerville is taking a “neutral” stance on Canada’s waste and recycling industry despite expecting it to “continue to generate above average returns on investment.”
In a report released before the bell, the equity analyst initiated coverage of GFL Environmental Inc. (GFL-T), Secure Energy Services Inc. (SES-T) and Waste Connections Inc. (WCN-T), touting their “remarkable success in recent years, by pursuing strategies of steady consolidation and operational enhancement with a focus on stakeholder relations, supporting high returns on investment.”
“We expect the waste & recycling sector to continue to generate above average returns on investment, and given the stable, low-risk, and growing nature of these businesses, we view these companies as important core holdings in a diversified equity portfolio,” he said. “However, large-cap waste management stocks are trading at relatively high valuations, compared to both historic norms and the wider market. As a result, we note a possibility of multiple compression leading to occasional periods of share price performance that is only in line with, or below, the market average.”
Citing its “attractive relative valuation, with significant re-rating potential, as well as balance sheet strength, operating margins, technical factors, and growth potential,” Mr. Somerville named Secure Energy his “top pick” and gave it a “buy” recommendation and Street-high $20 target. The average is $14.58.
“We expect the company’s focus on the energy industry in western Canada will serve it well over coming years, but note this focus also creates concentration and perception risks, relative to other waste management stocks,” he said.
Mr. Somerville also gave a “buy” rating to GFL with a $70 target (matching the Street high), while he gave WCN a “neutral” recommendation and $270 target. The averages are $55.86 and $269.28, respectively.
“Waste Connections (WCN-T) has a very strong long-term track record of creating value for all its stakeholders since its founding in the late 1990s, thanks to a very high-quality corporate culture that underpins our expectation for continued success,” he said. “We are similarly optimistic that GFL Environmental (GFL-T) can continue its slightly shorter (founded in 2007) but similarly impressive growth and value creation track record. GFL likely has slightly more growth potential than WCN, an aggressive acquisition strategy coupled with a potential rationalization event and deleveraging catalyst, as a result of which we wouldn’t be surprised to see GFL outperform over the next 12 months. However, meaningful profitable growth through acquisitions becomes increasingly difficult with size, and valuation for WCN in particular already appears to have priced in reasonable growth expectations, without overly discounting for risks.”
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Scotia Capital analyst Robert Hope thinks the outlook and sentiment surrounding Canada’s pipeline and midstream group is “as strong as it has been in many years.”
“The Canadian pipeline and midstream group has had a strong 2024, with median share price returns of 26 per cent (ex. SOBO-T and TWM-T),” he saidd. “Share price performance has largely been driven by multiple expansion, though we have seen some estimate revisions upwards as well. That said, while strong, we do note that the Canadian group has again underperformed its U.S. peers which have increased by 33 per cent year-to-date. Sentiment for the midstream and pipeline space has turned more favourable driven by moderating interest rates, strong quarterly results, improving outlook for natural gas demand, strengthening balance sheets, and new project announcements. Overall, tailwinds have greatly exceeded headwinds this year, which we expect will continue into 2025. Our view is that the sentiment for energy infrastructure stocks is as strong as it has been since 2017.”
In a report released Wednesday, Mr. Hope revisited valuations in the space with the expectation the environment for natural gas infrastructure should continue to improve in 2025.
“Our preference is for names levered to natural gas infrastructure as we expect this asset class has the best growth outlook,” he said. “Our favourite names are TRP-T and KEY-T in the group.”
He added: “The growth outlook for natural gas infrastructure levered names turned notably more positive in 2024. In Canada, the ramp-up of LNG Canada is just around the corner, which we expect will drive both natural gas and natural gas liquids (NGLs) volume growth in 2025 and beyond. This should improve returns for existing infrastructure as well as provide incremental investment opportunities. This is despite the weakness in AECO gas pricing in 2024, which has caused some volumes to shut in, though we expect these to return in 2025. More broadly, across the continent, we see electricity demand inflecting higher. While renewable generation will have a part to play, it is increasingly clear that natural gas power demand will move higher. This, in addition to increasing LNG demand, should drive continued high utilization of the North American pipeline network and provide investment opportunities to debottleneck and enhance the system. We continue to expect crude oil infrastructure will be highly utilized, but see fewer significant upside growth opportunities. Overall, we maintain our bias for natural gas levered infrastructure names (KEY-T, PPL-T, TRP-T).”
Mr. Hope made these target adjustments:
* Enbridge Inc. (ENB-T, “sector perform”) to $57 from $54. The average is $55.84.
Analyst: “Enbridge has benefited in 2024 from stronger-than-expected results, which has driven EPS estimates higher, as well as the closing and financing of its Dominion utility acquisition.”
* Keyera Corp. (KEY-T, “sector outperform”) to $48 from $42. Average: $41.45.
Analyst: “Keyera remains one of our favourite stocks given the numerous upside opportunities in front of it. We are increasingly confident that Keyera will move forward with additional fractionation capacity at Fort Saskatchewan, and now include $1.50/sh of upside in our target valuation. We also note that the quality of its gathering and processing cash flow continues to improve as its contracted Northern assets represent the lion’s share of cash flow from that segment”
* Pembina Pipeline Corp. (PPL-T, “sector outperform”) to $64 from $57. Average: $59.21.
Analyst: “We believe Pembina is well positioned to benefit from continued volume growth at its core asset base, and in recent months, we have seen the company very active in adding several tuck-in acquisitions with value-chain benefits. With a strong balance sheet and leverage forecasted near the bottom end of its targeted range in 2025, we think Pembina has the ability to pursue future growth while maintaining its ability to pay down debt and buy back shares.”
* TC Energy Corp. (TRP-T, “sector outperform”) to $68 from $61. Average: $59.57.
Analyst: “With the spin-out of South Bow completed on October 1, we believe TC Energy’s attractive business mix, highly contracted asset base, and visible growth profile warrants a premium valuation. Our target price increases to … as we increase our target EV / 2026E EBITDA multiple to 12.1 times from 11.5 times. The new target multiple is largely driven by a higher natural gas pipeline multiple to reflect a robust growth outlook and the continued de-risking of the Southeast Gateway pipeline. Our valuation is roughly in-line with the 10-year average, though we note that this historical average would include its prior Liquids business that put downward pressure on the multiple.”
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Ventum Capital Markets analyst Rob Goff is bullish on the “the transformative growth” of Healwell AI Inc.’s (AIDX-T) “complementary portfolio assets together with opportunities envisioned through its WELL Health (WELL-T) alignment.”
In a research report titled Organic Growth, Inorganic Wins—A Perfect Symbiosis, he resumed coverage of the Toronto-based company, formerly known as MCI Onehealth Technologies Inc., with a “buy” recommendation, calling it “an advantaged acquirer adding significant shareholder value through acquisitions where its platform directly and through its partners offers unique earnout leverage to attract strong target acquisitions on accretive terms.”
“We are bullish on the profitable growth prospects for HEALWELL AI’s symbiotic portfolio assets where its AI-driven identification and prognostic care integrate with its Healthcare Software, Electronic Health Records (EHR), and Contract Research Organization (CRO) services,” he said. “The portfolio is then uniquely leveraged by its alignment with WELL Health whose reach into 30 per cent of Canadian clinics and strong U.S. profile has the potential to source significant upselling opportunities. The portfolio and partner strength can be leveraged to attract and execute accretive, strategic, and inorganic growth. The Board and senior leadership team’s strong track records and industry profile and the revenue synergies within its portfolio broaden the pool of potential targets while offering unique earnout economics. Where WELL monetizes its highest growth assets, we see HEALWELL taking on greater portfolio value.
“Our bullish view draws on HEALWELL’s AI capabilities to drive revenues directly and across its partner streams. We also have confidence in HEALWELL’s AI capabilities where it has secured six master service agreements (MSAs) from the top ten global pharmaceutical organizations, including industry giants like Johnson & Johnson (JNJ-NYSE, Not Covered) and AstraZeneca (AZN-LSE, Not Covered).”
Mr. Goff emphasized access to capital and prospective clients are “fundamental cornerstones” of his positive view on Healwell’s “aggressive acquisition mandate.”
“The strength of the WELL Health partnership ensures that HEALWELL draws interest from the strongest potential acquisitions where prospective revenue synergies support unique earnout economics,” he adde. “Consequently, we see HEALWELL positioned to follow a comparable acquisitive growth strategy to WELL Health (completed $1-billion-plus in M&A across 70+ transactions with no write-downs) where HEALWELL functions as WELL’s vehicle for efficient capital allocation, targeting preventive health and AI ventures. HEALWELL’s cost of capital is expected to remain below that of WELL’s given its maturing growth profile and discounted valuation. Growth will be driven by a robust M&A pipeline, with the current estimated cash reserves at $15-million including the $20-million equity financing completed in May 2024.”
“HEALWELL is strategically positioned for success in AI-driven health data analytics, particularly in early disease detection. With AI stocks anticipated to excel, we see HEALWELL as a compelling investment opportunity in this dynamic sector. The strategic fit of the portfolio brings greater confidence that management has more levers to pull ensuring accelerated AI development and commercial traction.”
Seeing the potential for it to be EBITDA positive in 2025, the analyst set a target price of $3.50. The average on the Street is $3.91.
“Where AI stocks are negatively impacted by early delays in building commercial traction, HEALWELL stands to outperform its peers. Its integrated capabilities and platform reach bring greater confidence that it will see successful deployments whereas an acquirer with access to capital could benefit from reduced target valuations,” he concluded.
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In a separate report, Mr. Goff initiated coverage of Propel Holdings Inc. (PRL-T) with a “buy” recommendation, seeing it set for “sustained outperformance given [a] underserved market.”
“Propel stands out amongst its fintech peers where its AI-powered technology platform profitably serves the needs of N. American consumers for non-prime credit solutions where legacy banks facing the limitations of traditional credit scores, labour-intensive procedures, and risk-averse cultures have largely avoided the market,” he said.
The analyst said Propel’s recently announced US$71-million purchase of Britian-based fintech lender Stagemount Ltd., known as QuidMarket, “provides further evidence of management’s exceptional stewardship from the strength and fit of the partner, the accretive terms, and the in-depth due diligence ahead of the announcement.”
“Management has a rich, shared history of organic stewardship with PRL and inorganic success in prior endeavours fully commensurate with the market opportunity,” said Mr. Goff. “CEO, Clive Kinross, previously co-founded OPENLANE, Inc. (a subsidiary of KAR Auction Services (KAR-NYSE, Not Covered), where he similarly positioned and developed the company as a next-gen, disruptive end-to-end digital marketplace platform for used vehicles before its exit for $210-milllion in 2011. Notably, KAR facilitated the sale of 1.3M vehicles in 2023 while it averages 300K monthly listings, making it the largest platform in the N. American off-lease market.”
He set a target of $38 for Propel shares. The current average is
“Peer performance validates sector demand, scale economics, and the importance of management,” he sai. “Where growth opportunities abound, stewardship, screening, and cost efficiencies determine ROE. Continued quarterly outperformance and new partnerships are expected to positively redefine expectations.
“From a macro perspective, the success of Propel and its fintech peers bears witness to the relevancy of the Bill Gates attributed quote, ‘Banking is necessary; banks are not.’ For perspective, we note that advanced data analytics and digital platform efficiencies have significantly transformed traditional media and retailing landscapes. This is exemplified by Netflix (NFLX-NASDAQ, Not Covered) and Amazon (AMZN-NASDAQ, Not Covered), where digital advantages have usurped the limitations of legacy cost structures and playbooks.”
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In other analyst actions:
* BMO’s Brian Quast lowered his Aris Mining Corp. (ARIS-T) to $9 from $10 with an “outperform” rating, while Cormark Securities’ Richard Gray cut his target to $12 from $13 with a “buy” recommendation. The average is $10.21
* Barclays’ Lauren Bonham cut her targets for BCE Inc. (BCE-T) to $46 from $48 and Telus Corp. (T-T) to $23 from $24 with an “equal-weight” rating for both. The averages on the Street are $50.06 and $24.46, respectively.
* CIBC’s Dennis Fong raised his target for Canadian Natural Resources Ltd. (CNQ-T) to $59 from $57.50 with an “outperformer” rating. The average is $55.21.
“Canadian Natural has further consolidated its interest in the Athabasca Oil Sands Project (AOSP) by acquiring Chevron’s 20-per-cent working interest stake. Canadian Natural will also acquire Chevron’s 70-per-cent operated working interest in the Duvernay and other assets for total consideration of US$6.5 billion cash,” said Mr. Fong. “The acquisitions will add 122.5 MBoe/d production with a targeted close in Q4/24. We view these acquisitions as a net positive as the acquisitions present additional growth opportunities and cost synergies with low execution risk. The cost synergies associated with the asset consolidation, cash flow and NAV accretion has driven an increase to our price target.”
* TD Cowen’s Daniel Chan raised his target for Celestica Inc. (CLS-N, CLS-T) to US$68 from US$61 with a “buy” rating. The average is US$64.11.
“Celestica is appreciated for its success with AI compute servers, but we believe its communications business is not well understood,” he said. “As a leading data centre networking equipment vendor, we believe Celestica will be a major beneficiary of continued AI infrastructure investments, Ethernet gaining market share, and an increasing mix of 800G equipment. PT increases to $68 on higher Communications estimates.”
* Stifel’s Justin Keywood bumped his DRI Healthcare Trust (DHT.UN-T) target to $17 from $16 with a “buy” rating. The average is $19.27.
“DRI is a portfolio of 25 royalty assets tied to the global pharmaceutical industry,” he said. “After a period of substantial capital deployment and solid growth quarters recently, a surprise development related to the prior CEO and alleged expense irregularities led to a sharp correction in share price on July 8. We also downgraded the stock at the time with uncertainty of the eventual fall-out of an ongoing investigation. However, our discussions with several members of DRI’s executive team and chairman have provided us confidence that the identified US$6.51-million in irregular expenses is accurate and several initiatives to improve governance and controls are underway.
“We also see limited impact on DRI’s revenue and cash flow receipts for 2024 but expect onetime expenses related to the investigation. DRI has conveyed a still active M&A pipeline as an inflection in the industry is underway in capital-constrained markets and is on pace to more than double in 2024. We see additional transactions for DRI as positive catalysts for the stock, reinforcing a high-margin growth outlook, additional scale and the potential to narrow valuation vs larger royalty peer RPRX at 40-per-cent greater valuation.”
* Expecting “continued good execution” to be evident when Gildan Activewear Inc. (GIL-T) reports its third-quarter results on Oct. 31, National Bank Financial’s Vishal Shreedhar hiked his target for its shares to $68 from $58 with an “outperform” rating. The average on the Street is $58.
“We reiterate our view that the reconstitution of GIL’s Board of Directors, implementation of an activist operating strategy and reinstatement of Mr. Glenn Chamandy as CEO will represent a period of increased focus and execution for GIL,” he said. “From a fundamental standpoint, we believe that GIL is well positioned to grow EPS in 2024 given: (i) Revenue growth, (ii) Improving costs, and (iii) Ongoing share repurchases (we calculate potential Q4/24 capacity of $455-million to reach 2.0 times leverage; NBF models $200-million and 1.7 times leverage).”
* Ahead of its third-quarter results, National Bank’s Zachary Evershed trimmed his Mattr Corp. (MATR-T) target to $19.50 from $20, below the $20.06 average, with an “outperform” rating.
“As at Q2 reporting, management expected both revenues and Adj. EBITDA at Composite to tick down modestly on a sequential basis,” he said,” Since then, rig counts and frac spreads have continued to drift, seeing us tighten our organic growth forecast for H2/24. We note that tank demand is likely to remain strong as the SC facility comes online, however, as our channel checks indicate demand from data centers remains hot, supporting fuel station markets. Connection is expected to see a quarter-over-quarter rise in sales from market share gains and new projects, but Adj. EBITDA should fall quarter-over-quarter as an unfavourable mix shift weighs on profitability.”
* RBC’s James McGarragle raised his Stella-Jones Inc. (SJ-T) target to $97 from $94 with a “sector perform” rating. The average is $102.50.
* RBC’s Walter Spracklin cut his TFI International Inc. (TFII-N, TFII-T) to US$167 from US$171 with an “outperform” rating. The average is US$172.92.
“Our Q3 estimate moves lower to $1.83 (from $1.88), above consensus $1.80, mainly to reflect a weaker than expected industrial backdrop in line with recent commentary from CN and FedEx,” he said. “Our 2024 estimate decreases to $6.75 (from $6.80), above consensus $6.68, and at the lower end of guidance for EPS of $6.75 to $7.00. Our price target decreases to US$167 (from US $171) on our lower target multiple of 14x (from 17 times). We expect focus into the quarter to be on the integration of Daseke as well as an update on operations in the LTL segment.”
