Monday’s analyst upgrades and downgrades

Inside the Market’s roundup of some of today’s key analyst actions

Stifel analyst Martin Landry thinks a reduction to the fiscal 2025 earnings per share guidance from BRP Inc. (DOO-T) could “represent near-term noise” and “blur the company’s earnings power and industry demand.”

Shares of the Valcourt, Que.-based recreational vehicle maker dropped 6.1 per cent on Friday after it reported in-line first-quarter 2025 EPS of 95 cents, down 60 per cent year-over-year and matching the Street’s expectation. However, it reduced its full-year forecast by 16 per cent o reflect a proactive decision to further reduce inventory at dealerships.

“The bulk of the inventory reduction is expected in Q2FY25 with guidance calling for Q2FY25 revenues to be down in excess of 30 per cent year-over-year and for Q2FY25 EBITDA to be down 60 per cent year-over-year,” said Mr. Landry. “This is significantly below consensus expectations, as management decided to accelerate the inventory depletion and alleviate financing costs pressure for dealers. Hence, earnings growth could come back in Q4FY25, assuming no further deterioration in consumer confidence.”

“Management reiterated its view that the proactive inventory reduction ongoing this year at the dealer level will lead to replenishments in the future and as such it can be perceived as a non-recurring impact to EPS. According to our calculation, this headwind could reverse next year and boost EPS by $2.00. Management mentioned having a limited number of unsold non-current model with model year 2023 representing less than 1 per cent of total inventory. Hence, despite the large reduction in FY25 EPS guidance, we have not made significant changes to our FY26 EPS forecasts.”

The analyst cut his full-year EPS estimate by 17 per cent to $6.19, noting he now stands at the low-end of management’s guidance for conservatism “given the earnings volatility seen in the last two quarters.”

“However, our FY26 EPS estimates decrease by only 5 per cent to $9.55,” he said. “We continue to view several headwinds impacting FY25 as non-recurring and thus while FY25 will be more challenging than previously expected, we should see a strong earning recovery in FY26, assuming no further deterioration in the macroeconomic environment.”

Keeping a “buy” recommendation for BRP shares, Mr. Landry trimmed his target to $106 from $112, believing its earnings power warrants a higher share price and recommends using “share price weakness as accumulation opportunities.” The average on the Street is $104, according to LSEG data.

“While FY25 is expected to be a challenging year for BRP with EPS down 40 per cent year-over-year, we believe that one-time items are blurring BRP’s underlying earnings power including (1) a 15-20-per-cent one-time inventory reduction at dealerships, (2) higher promotional activity than historical levels and (3) the impact from a weak snowmobile season in FY24, which results in lower shipments in FY25,” he said. “Excluding these headwinds, a level we view as more reflective of true earnings power for BRP would be in excess of $9.00 in EPS.”

“In our view, the challenging macroeconomic environment and investors reluctance to own cyclical names during an economic downturn has blurred BRP’s impressive performance. Compared to pre-COVID, BRP’s retail volumes have increased by 35 per cent compared to an industry that has been flat. This impressive performance has allowed BRP to become the #1 OEM in powersports and we expect momentum to continue in the coming years, which should results in strong revenue and earnings growth as industry demand improves.”

Other analysts making target changes include:

* Desjardins Securities’ Benoit Poirier to $116 from $137 with a “buy” rating.

“BRP has decided to take the short-term hit to reduce shipments and increase promotional support to its dealer partners to give them some breathing room,” said Mr. Poirier. “On the positive side, BRP maintained its $750-million FCF guidance, which should enable management to remain active with its NCIB. We believe the market is underestimating the number of investors who are sitting on the sidelines and the level of support BRP shares could get in FY25 as we approach a potential interest cut environment.”

* Citi’s James Hardiman to $100 from $107 with a “buy” rating.

“Given the unusually broad range of macro, industry, and company-specific factors that could affect the next 12 months, just as management’s guidance is especially volatile, our target multiple is especially conservative,” he said. “If the next year plays out as we anticipate, however, we could easily make the argument for a return to a more normalized multiple, which would imply higher potential upside.”

* National Bank’s Cameron Doerksen to $109 from $112 with an “outperform” rating.

“Our position has consistently been that while the powersports market was clearly softening, the market was already pricing in a significant downturn for BRP,” said Mr. Doerksen. “Indeed, a year ago, the EPS expectations for F2025 were $13.00 per share, but the company’s updated guidance for F2025 is for EPS that is 50 per cent lower than expectations a year ago yet the stock is only down 10 per cent over the last year. On our updated F2025 estimates (with our forecast slightly below the low end of the guidance ranges for EBITDA and EPS), which we consider to be trough earnings, BRP is trading at 7.7 times EV/EBITDA versus its longer-term forward average of 8.2 times. On P/E, DOO is trading at 15.1 times earnings versus its longer-term average multiple of 14.7 times.”

* Scotia’s Jonathan Goldman to $103 from $105 with a “sector outperform” rating.

“Structural improvements are showing through despite the challenging operating environment,” he said. “The company continues to gain share – we estimate more than 10 per cent since 2019 – including SSV (highest gains among OEMs in 1Q), ATV (quarterly record), and Snowmobile. Powersports gross margins of 26.2 per cent (on high-teens sales declines) were up 210bp v. 2019 supported by the Mexican footprint, in-sourcing, modularity, and cost efficiencies. The company reiterated its expectation to return to 17-per-cent EBITDA margins. All this should eventually pay significant dividends in the upturn.

“In the near-term, our main concern is greater industry promo. But, we take comfort in the fact that: 1) peers maintained guidance in late April; 2) current dealer margins leave little (if any) meat on the bone left to cut; 3) BRP has demonstrated an ability to flex costs; and 4) valuation. Our downside case, where industry promo accelerates, assumes a $0.65 headwind to the midpoint of EPS guidance, or $5.85. At 14.5 times P/E (up 10 per cent to historicals), that implies a share price of $85, or what they’re trading today. Besides the obvious macro catalysts, we think shares offer an attractive risk/reward for a high quality cyclical with (proven) structural earnings drivers.”

* RBC’s Sabahat Khan to $108 from $110 with an “outperform” recommendation.

* CIBC’s Mark Petrie to $100 from $110 with an “outperformer” rating.

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While emphasizing its “long-term opportunity remains,” National Bank Financial analyst Dan Payne downgraded Enerflex Ltd. (EFX-T) to “sector perform” from “outperform” previously after a recalibration of his pecking order for oilfield services providers, seeing it sitting “in line with the balance of its peer group (with neutral ratings held throughout).”

“The primary cause for the downgrade comes as a function of a) its rank order scorecard position against the peers, b) perceived risk of execution, and c) prospects to re-establish market sentiment in support of multiple expansion as a result,” he said. “Bottom line, the volatility and uncertainty delivered by the company have unseated market sentiment, and we believe any opportunity to re-establish that (which certainly remain) are likely long term in nature from here.”

“As previously noted, the company continues to target a validation of its returns through stability, but which it has struggled to do through the integration of its Exterran merger as reflected through first quarter results that brought a recurrence of volatility (mixed relative to expectations, as noted in our report). Of note, the provisions and commentary around its Kurdistan project, while relatively minor in their totality, continued to speak towards that unpredictability. That, in addition to prior experienced drag to results and outlook have entrenched a lack of confidence in the market, and which is unlikely to be resolved in the short term. In our view, multiple quarters of consistent and stable returns will be needed to re-instill that confidence in support of structural multiple re-expansion.”

Mr. Payne thinks the integration of Exterran has largely concluded, though a “minor cost drag” is likely to persist through midyear.

“The opportunity remains over the long term to validate an improved risk/reward proposition as a function of the stability of its contracted and recurring revenue from its Energy Infrastructure and After Market Service business units, with support of the strong foundation offered by the backlog of its Engineered Systems division (all-time record levels recently observed),” he said. “To that point, net of one-time items in the first quarter, performance has been solid, with margins outperforming at 17.2 per cent (vs. the headline 10.8 per cent and the prior quarter 16.1 per cent), while its balance sheet continues to trend positively below targeted leverage levels (last noted at 2 times D/EBITDA).

“Its annual guidance remains unchanged and should increasingly reflect a stability of earnings, while emphasizing FCF and deleveraging before pivoting to increased return of capital over the medium-to-long term. It maintains plans to invest a disciplined US$90-110-million capital program (down 20-25 per cent year-over-year; 70-per-cent oriented towards maintenance and PP&E spend and minimal non-discretionary growth allocation), which should be accommodated within a 35-per-cent payout ratio in support of ample FCF to support targeted deleveraging and prospective value expansion. While that budget is expecting to provide stability, upside to the forecast prospectively remains through forthcoming initiatives and allocation of non-discretionary growth capital (i.e., 30 per cent of budget; likely allocated to high-return Energy Infrastructure assets). Incrementally, we continue to believe that thematic opportunities remain across its businesses, with participation in expanding natural gas (see: associated gas expansion), water management and emissions reductions (see: CCUS, electrification) that remain underappreciated in its value proposition.”

Reiterating his financial forecast, Mr. Payne trimmed his target for Enerflex shares to $9 from $10, which he attributed to “a function of a lower suggested target price multiple, which relates to our assessed risk of its recent execution and market sentiment towards re-rating the stock.” The average target on the Street is $10.40.

“Ultimately, management should continue to focus on bolstering market confidence as a function of stability, which should bring a compounding narrative to value once manifested, given the stock continues to trade at a 40-per-cent discount to its historical multiple (2.8 times vs. 4.7 times EV/EBITDA),” he concluded. “However, given our observations of market sentiment and its relative opportunity to impact that, we believe that its opportunity towards multiple expansion and value upside remain long term in nature from here.”

On the broader OFS sector, he said: “On this basis, our pecking order (still a relative dealer’s choice, depending on how you peel the onion, with only modest differentiation within) skews as PD, TCW, PSI, CEU and EFX; however, at this time (relating to breakup and general lack of visibility), we are maintaining our neutral stance and Sector Perform ratings across the group.”

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Investors weren’t impressed by the second-quarter financial results from Canadian Western Bank (CWB-T), however Desjardins Securities analyst Doug Young finds its current valuation “compelling.”

“And we believe the company is positioned to deliver growth when the macro environment improves,” he added.

Shares of the Edmonton-based bank slid 4.2 per cent on Friday after it cash earnings per share of 81 cents, which fell short of Mr. Young’s estimate by a penny and the consensus forecast by 4 cents.

“Adjusted pre-tax, preprovision (PTPP) earnings were 1 per cent below our estimate (up 15 per cent year-over-year),” the analyst said. “While we expected a tough quarter, our estimates were below consensus, so others may not have shared the same view. Management expects a pickup in loan balances and NIMs in 2H FY24, and it has done a good job on expenses so far this year.”

“Positives. (1) NIM was 2.40 per cent, in line with our estimate. The bank is seeing good spreads in various loan categories; however, NIM expansion in 2H FY24 will depend on improving loan growth. (2) It did a good job on expenses; the adjusted expense ratio was slightly below our estimate. It delivered positive operating leverage again this quarter and expects to deliver positive operating leverage in FY24 despite a pickup in expenses in 3Q as it rolls out its cash management platform.”

Expressing concern about flat average loan balances and higher-than-anticipated provisions for credit losses, Mr. Young trimmed his 2024 and 2025 earnings expectations, leading him to lower his target for CWB shares by $1 to $32 with a “buy” rating. The average on the Street is $32.41.

Elsewhere, RBC’s Darko Mihelic downgraded the stock to “sector perform” from “outperform” and cut his target to $28 from $32.

Other analysts making target changes include:

* Scotia’s Meny Grauman to $30 from $32 with a “sector outperform” rating.

“Despite our optimism heading into this year, it has been a disappointing first half for CWB, and management’s formal downward revision to its 2024 guidance only acknowledges the obvious,” said Mr. Grauman. “The reality is that loan growth has been disappointing for this bank for many quarters now, and for the stock to work, this needs to change. The encouraging news is that management is guiding to an improvement in the second half of the year which should be accompanied by margin expansion as well. That combination should help the stock get going again, although we do acknowledge that the positive impact on earnings growth will only really come next year. Although PCLs missed us in Q2, we continue to view this bank as a strong underwriter even as we take a more conservative approach to CWB’s PCL ratio over the next few quarters. Meanwhile, with respect to expenses it is clear that the bank has gotten spending under control, although we acknowledge the guidance on negative operating leverage in Q3. Overall, we have a much more favorable outlook for this bank in F2025, and with the shares trading at just under 0.7 times current book value we see the risk/return profile skewed to the upside on this name.”

* National Bank’s Gabriel Dechaine to $30 from $37 with an “outperform” rating.

“CWB’s Q2/24 revenues fell 2 per cent short of our forecast, led primarily by lower spread income,” he said. “NIM was flat, as was average loan growth, compared to our expectation of modest improvement from both. Management clarified the primary reason for cutting this year’s EPS guidance is the lower level of loan growth than what they anticipated at the start of the year. The bank sounded cautiously optimistic that loan growth would improve in the second half. However, rate cuts are likely a necessity to stimulate credit demand, though we anticipate a one- or two-quarter lag for monetary stimulus to have an effect.”

* CIBC’s Paul Holden to $30 from $34 with a “neutral” rating.

* Jefferies’ John Aiken to $28 from $29 with a “hold” rating.

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While he raising his full-year 2024 earnings expectations for Methanex Corp. (MEOH-Q, MX-T) after it posted higher reference pricing for June, RBC Dominion Securities analyst Nelson Ng maintained his “sector perform” recommendation for its shares, warning of “potential downside risk should a global economic recession materialize in 2024/25.”

In a research note released Monday, Mr. Ng also noted there is uncertainty on Iranian methanol exports “as the country looks to retain methanol for domestic petrol production, but some industry participants remain doubtful that Iran will/can domestically consume a material amount of methanol.”

“In the past month, there have been a lot of discussions and some government announcements about Iran diverting some methanol to domestic petrol production to address the domestic petrol shortage,” he said. “Iran currently produces 10 per cent of the global methanol supply and the vast majority is exported to China (some to India) at a discount to the spot market. We believe there is some skepticism in the industry if methanol to gasoline (MTG) is a feasible route to produce gasoline, with access to technology being one of the main limitations. The blending of methanol to gasoline could be a potential option, but there may be limitations to the blending ratio. Also, around the time of the announcement that Iranian methanol would be used for petrol production, the National Petrochemical Company of Iran (NPC) announced plans to develop methanol-to-olefins (MTO) and methanol-to-propylene (MTP) capacity that would convert/consume 7-10 million tons of methanol (equal to all of Iran’s current methanol production). While the level of domestic consumption of methanol remains uncertain, a large reduction in methanol exports could constrain the Chinese market and push methanol prices higher.”

In response to the release of its monthly non-discounted reference prices for June, with its North America, Asian, and China all seeing month-over-month increases, Mr. Ng bumped his 2024 EPS projection to US$1.29 from US$1.18, while he cut his 2025 estimate to US$1.44 from US$1.55.

“We note that Methanex’s financial results are very sensitive to the price of methanol. For every $50/MT increase/decrease in methanol prices, we estimate that Adjusted EBITDA could increase/decrease by $350-million (including Geismar 3 contribution),” he said.

Mr. Ng’s target for Methanex shares rose to US$55 from US$50 to reflect higher nearterm methanol prices The average is US$56.27.

“Recession concerns could keep the shares range-bound,” he said. “We see recessionary uncertainties, which could negatively impact near-term and longer-term methanol prices. However, we believe the shares are suitable for investors who have a more constructive view on the economy (i.e., soft landing/minor recession) and expect natural gas prices to remain elevated, which should support methanol prices.”

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In other analyst actions:

* CIBC’s Anita Soni upgraded New Gold Inc. (NGD-N, NGD-T) to “outperformer” from “neutral” with a US$3 target, rising from US$2.10 and topping the US$2.26.

A trio of analysts lowered their targets for Laurentian Bank of Canada (LB-T) after its Friday’s earnings release. They are: National Bank’s Gabriel Dechaine to $26 from $27 with an “underperform” rating, RBC’s Darko Mihelic to $25 from $26 with an “underperform” rating and CIBC’s Paul Holden to $30 from $33 with a “neutral” rating. The average is $27.36.