Wednesday’s analyst upgrades and downgrades

Inside the Market’s roundup of some of today’s key analyst actions
Ahead of the Nov. 5 release of Restaurant Brands International Inc.’s (QSR-N, QSR-T) quarterly results, Citi analyst Jon Tower is concerned unit growth challenges “may persist” for the parent company of Tim Hortons and Burger King.
“We expect momentum at Tims and a commitment to manage to 8-per-cent [sales growth] offers a buffer to annual earnings/EBITDA estimates, and potential weakness at BK U.S. (we are flat vs the Street at up 0.4 per cent) won’t come as a meaningful surprise,” he said. “However, we have concerns that the tone around unit growth into 2025 is tempered (e.g., 5 per cent may be at risk). Even with valuation below long-term averages, unit growth concerns likely remain an overhang on shares.”
For the quarter, Mr. Tower continues to project earnings per share of 99 US cents, which exceeds the average on the Street by 4 cents. He also reaffirmed his full-year projection of US$3.47, which also tops the consensus by 4 US cents.
He said: “What the Data Says — (1) BK U.S. Footfall ticked down in 3Q vs 2Q (down 1.6 per cent year-over-year vs down 0.6 per cent), and consistent share of the big 3 vs the prior year started to move lower in mid-August/is now showing the largest year-over-year declines of 2024 (11.8-per-cent share vs 12.2 per cent at this time last year). (2) Canada LSR [limited service restaurant] sales have remained steady at mid-single digits percentage (albeit with data only available thru July), and unemployment continues to tick higher. (3) France (important market for BK Intl) services confidence index continues to move lower, with a steady unemployment backdrop.”
“Key topics/questions – (1) Have ongoing value pushes across the US LSR industry shifted broader perceptions about the ability to find value in the category? (2) Trends in U.S. wages – recent BLS data suggests flat-lining if not declining LSR wages, and, if that is the case (along with a relatively benign commodities backdrop) how quickly does that show up in additional deals? (3) Thoughts on the unit growth outlook into 2025, both in terms of total number (we see risk to the 5 per cent) and the composition (a heavier tilt towards the smaller brands/their international footprints not a positive). (4) How did the partnership with WMT+ materialize, and any early reads on engagement vs expectations? (5) Understanding the current make-up of the China store base (e.g., mix of kiosk/smaller units) and current thoughts on potential strategic shifts/changes to brand positioning?”
After maintaining his 2024 and 2025 estimates, which he said reflect a “slightly softer” same-store sales outlook with cost offsets, Mr. Tower increased his target for Restaurant Brands shares to US$77 from US$75, keeping a “neutral” recommendation. The average target on the Street is US$84.15.
“The company has demonstrated an ability to improve franchisee profitability in core home markets across the portfolio and we expect this broadly continues, along with strong unit growth for Burger King International, ramping of PLK brand globally and solid comp growth at TH Canada,” he said. “However, limited visibility into the economics of nascent businesses outside core markets (e.g., PLK [Popeyes Louisiana Kitchen] INTL, TH INTL, FHS [Firehouse Subs]) means its difficult to underwrite NRG (new restaurant growth) returning to and sustaining at more than 5 per cent and layering this into valuation. At the same time, we see above average room for near- to medium-term estimate volatility related to the Burger King U.S. brand repositioning/reinvestment (including the integration of the TAST business) particularly as the competitive set struggles to drive traffic.”
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In a research report released Wednesday titled Still queuing for takeoff, Stifel analyst Daryl Young initiated coverage of Air Canada (AC-T) with a “hold” recommendation, predicting “a choppy second half of 2024 given impacts related to [its] new pilot contract and potential downside risks to 2025 estimates (cracks emerging for leisure travel demand, normalizing yields/load factors given industry-wide capacity adds and broad-based cost pressures).”
“At 3.0 times 2025 EBITDA, we acknowledge the valuation is already discounting significant downside risks and as the company lays clean its go-forward growth/margin targets and plans for balancing capex versus shareholder returns amid the narrowbody fleet refresh, the stock could resume its momentum towards a U.S. valuation,” he added.
Despite his cautious stance, Mr. Young touted the airline’s “impressive history of growth” and sees “more to come,” believing its “well positioned to navigate near-term industry headwinds.”
“Over the five years leading up to the pandemic, Air Canada reported an impressive 7.6-per-cent revenue CAGR [compound annual growth rate], well above the 2.2-per-cent growth reported by the big three U.S. network carriers,” he said. “The pandemic was unkind to Air Canada given its international exposure (approximately 74 per cent versus less than 40 per cent for the U.S. big three) but 2023 was a pivotal year and the platform is now back on track to restart the growth engine, leveraging its proximity to the U.S. and the Sixth Freedom of the air to capture traffic on route to global destinations (via a Canadian stop-over). Management has not set hard growth targets but has indicated it sees a pathway to GDP+ growth well into the 2030s, underpinned by further international expansion. In our view, the moat around Air Canada’s international network is underappreciated by investors, with the company carefully curating the experience over the past two decades and selectively targeting underserved markets. We think that Air Canada’s dramatic head-start and scale advantage in serving global destinations will be very challenging to replicate, not to mention the issues new entrants face gaining scale in the structurally challenged domestic market.”
“Air Canada uniquely benefits from Canada’s existing diverse population base and robust immigration targets, creating structural demand for international travel as new entrants have demonstrated a general propensity to travel more broadly, including a desire to visit friends and relatives (“VFR”) and to conduct business abroad. These dynamics combined with the long-term shift by consumers towards experiences versus goods could see a somewhat more resilient demand profile for Air Canada than in prior economic downturns.”
Emphasizing its “strong” balance sheet, “robust” liquidity, a relatively new mainline fleet and a highly diversified customer base, Mr. Young set a target of $20 per share. The average is $22.13.
“When do we get more bullish? We like Air Canada’s global strategy and think that initiatives around the Aeroplan loyalty program, the lounge network and the company’s demonstrated ability to provide ‘all things to all travellers’ continue to fortify the airline’s position in Canada and globally,” he concluded. “Our more tempered near-term view on the shares is primarily a function of the macro environment but improving clarity on the 2025 outlook and the free cash flow profile will be key markers for us to look to upgrade the shares. Moreover, the company is at a post-pandemic turning point and has teased the idea of an upcoming investor day that should lay clean the go-forward strategy and longer-term growth/margin targets, which we think will be a catalyst for an improving valuation.”
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Desjardins Securities analyst Gary Ho raised his recommendation for Dominion Lending Centres Inc. (DLCG-T) to “buy” from “hold” on Wednesday in response to the recent “collapse” of its preferred structure, which he thinks “positions the company well for future M&A.”
“Its history of chunky acquisitions (MCC in 2013, MA in 2016 and 30-per-cent stake in Newton in 2022) is a testament to the co-founders’ willingness to build and expand its market share,” he said. “Otherwise, funded mortgage volumes should benefit from the lower rate outlook, refis, recent OSFI changes and FINTRAC’s AML requirements.”
On Oct. 2, the Vancouver-based corporation announced it has entered into an acquisition agreement with KayMaur Holdings Ltd. and other minority holders to acquire all of the issued and outstanding non-voting class “B” preferred shares in exchange for $137-million to be paid in common shares and cash.
“We were positively surprised by the collapse of the pref structure at very reasonable valuations,” said Mr. Ho. “This materially simplifies its corporate structure … As a result, we foresee M&A picking up. Recall that in 2Q24, DLCG acquired a 70-per-cent stake in Broker Financial Group (BFG), a mortgage brokerage, for $3-million plus a $0.5-milllion earnout. We believe other brokerages are M&A candidates at attractive valuations. Otherwise, we believe adjacent businesses (home insurance brokers, real estate appraisers, MICs/lenders) are possibilities.”
Pointing to a “pick-up in home sales activity” nationally, Mr. Ho raised his revenue and earnings projections through 2025 ahead of the release of its third-quarter results in mid-November , leading him to bump his target for Dominion shares to $5.50 from $4. The average is $5.38.
“Our investment thesis is based on: (1) funded mortgage volumes accelerating in 2025, benefiting from the refi cycle, lower rates and friendlier mortgage rules; (2) EBITDA margin expands with significant torque when mortgage volumes return; (3) further upside in Newton penetration; and (4) M&A possibility near-term (low-1 times leverage),” he said.
In a separate note, Mr. Ho cut his Superior Plus Corp. (SPB-T) target by $1 to $9.50 with a “buy” rating, “awaiting some strategic direction.” The average is $10.09.
“With some lingering questions on capital allocation decisions and Certarus entering new verticals, we lowered our valuation multiple—our target is now $9.50,” he said.
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TD Cowen analyst Michael Van Aelst thinks “weak” crack spreads, capture rates and international wholesale volumes are likely to prevent Parkland Corp. (PKI-T) from achieving its 2024 earnings guidance.
“Minimal unexpected refinery downtime and soft demand industry-wide has produced an oversupply situation that is pressuring crack spreads and wholesale vols/margins,” he said. “This pushes our adj. EBITDA estimates lower by 7 per cent/4 per cent/4 per cent in 2024/2025/2026, leaving us 7 per cent below the bottom end of PKI’s 2024E adjusted EBITDA guidance range of $1.9-$2.0-billion, and makes it harder to envision PKI achieving its 2028 EBITDA target of $2.5-billion.
Mr. Van Aelst added: “We are now 7 per cent below the [2024] range and expect consensus to follow. That said, 2025/2026 estimated FCF yields look attractive and, at 6.6 times NTM [next 12-month] EBITDA, valuation is at an unjustifiably steep discount to historical averages (7.9 times) and to the weighted-average of its peers (8.6 times).”
Previewing the Calgary-based company’s Oct. 29 release of its third-quarter results, the analyst emphasized “many investors track crack spreads, so this could be partly reflected in the share price already.” He cut his target to $53 from $55, keeping a “buy” rating. The average is currently $51.17.
“Support could come from PKI’s already low valuation, still strong FCF outlook and the assumption that greater near-term challenges may raise the odds of incremental activist activity,” said Mr. Van Aelst.
“PKI now trades at 6.6 times our NTM [next 12-month] EBITDA, a material discount to the 8.6 times weighted peer-group average as elevated leverage and temporary profit headwinds taint investor optimism. Much of the weakness is caused by weak crack spreads, which should recover once industry-wide refinery downtime normalizes, though soft demand is also magnifying the oversupply challenges. We expect 2024 guidance to be cut, but management will likely look for alternative avenues to achieve its $2.5-billion EBITDA target by 2028E. Support for activists or Simpson could get a boost from the additional near-term challenges, though the latter may have to await the court’s decision on the validity of its governance agreement (expected in Q1/25) before supporting a proxy battle or another takeover attempt. FCF yields of 9 per cent/14 per cent(pre-divestitures) in 2025/2026 look attractive, and we see this ultimately allowing valuation to return closer to historical averages as PKI deleverages.”
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TD Cowen analyst Brian Morrison thinks Gildan Activewear Inc.’s (GIL-N, GIL-T) third-quarter results are likely to “illustrate attractive year-over-year EPS growth/strong FCF, as the company gains market share in the key verticals of Fleece/Ringspun.”
“We forecast modest year-over-year revenue growth as market share gains in key verticals (fleece/ringspun/private label/national accounts) are partially offset by the loss of its Under Armour contract,” he said. “We forecast attractive gross margin expansion from lower commodity prices and improved product mix, and favourable year-over-year SG&A performance due to beneficial tax credits and ongoing operating efficiencies. Along with its active NCIB we forecast Q3/24 EPS of $0.84 (approximately 15-per-centr year-over-year growth) that is in line with consensus.”
“We believe Gildan’s industry leading cost structure and heightened manufacturing capacity positions it to gain market share in each of its key verticals. This should be further aided as several competitors face financial challenges due to their inferior cost structure. As Gildan continues to demonstrate success with its GSG strategy, we believe investors will gain comfort in its implied 2027 EPS target of $4.50.”
Mr. Morrison thinks the Montreal-based company appears to be “advancing its strategic initiatives, widening its cost advantage relative to its peers, and is active with its NCIB.” That led him to increase his target for its shares to US$56 from US$50 with a “buy” rating, citing “confidence in Gildan’s strategy increases, supported by financial performance.” The average on the Street is US$47.98,
“We believe the key drivers of its success in the Basic market remain unchanged, as its applies its cost advantage to heighten penetration in adjacent verticals,” he said. “Along with an active NCIB, this should support EPS growth in the mid-teens over our forecast horizon. These inputs along with a motivated management team and improved governance at the Board level, are in our view, supportive of a multiple toward the high-end of its average range.”
“We believe that Gildan’s financial performance continues to illustrate the material advantages of its focus on an industry-leading cost structure. This along with an increase in capacity, support its implied 15-per-cent EPS growth forecast for 2024, despite an industry outlook forecast to be flattish. We believe that Gildan’s low-cost structure, material runway for growth, difficult to replicate assets, and consistent FCF profile warrant an increase in its applied multiple.”
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CIBC World Markets analyst Jacob Bout continues to see “strong momentum” across almost all end markets for the engineers and design industry with most companies reporting record backlogs.
“We remain constructive on ATRL, STN, and WSP, but ATRL remains our top pick given the valuation gap,” he said in an earnings season preview report released Wenesday.
“While we are seeing some softness on rental and residential construction spaces, we prefer FTT over TIH given the valuation gap and strong outlook in Chile for new equipment in 2025 and product support growth in 2026. We are lowering 2024 estimates for AFN given tougher U.S./Brazil Farm environment, but long-term fundamentals remain. ARE should be a much cleaner story within the next 12 months, displaying strong underlying margin performance and backlog levels that could potentially double.”
Mr. Bout made a trio of target price adjustments:
For top pick AtkinsRéalis Group Inc. (ATRL-T), he reiterated an “outperformer” rating and $70 target.
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Activism is pushing Dye & Durham Ltd. (DND-T) “in a positive direction,” according to Canaccord Genuity analyst Robert Young, who thinks its performance has “improved.”
On Monday, the Toronto-based legal software company announced it has reached a “co-operation agreement” with dissident shareholder Blacksheep Fund Management Ltd., which owns 5.9 per cent of the stock. The deal gives the Dublin-based hedge fund the right to designate one person to D&D’s board, which it had sought.
“The move effectively flips a 5.9-per-cent ownership stake into Dye & Durham’s camp – a nearly 12-per-cent shift,” Mr. Young said. “While it is still not clear enough to crown a winner of a proxy contest, the balance of probability has shifted meaningfully towards Dye & Durham. It is a clear sign that negotiations behind the scenes continue, potentially uncoordinated across a less cohesive activist group than previously thought.”
The analyst called the agreement a “surprise,” emphasizing Blacksheep was one of its most vocal activist investors.
“We recently identified Dye & Durham as a top pick given the ongoing activism and strong recent fundamentals, with FQ4 above expectations with approximately 8-per-cent organic growth (building on FQ3 organic growth of 4 per cent),” said Mr. Young. “Management also began to report levered FCF alongside the continued focus on deleveraging to below 4 times NTM [next 12-month] EBITDA. Recent investments in product consolidation and go-to-market are yielding strong ARR [annual recurring revenue] growth. ARR exiting FQ4 was $136.7-million or 29 per cent of revenue, growing an impressive 74 per cent year-over-year due primarily to M&A but also strong organic efforts and tracking towards a 3-year goal of more than 50 per cent of revenue. Dye & Durham also refinanced its debt leading to pushed out maturities and reduced total debt service cost. The company has also taken steps to reduce capital and operating costs. A review of non-core assets was launched, and while it has languished given activist distraction, appears to be ongoing. Our F25 estimates highlight a strong combination of increased revenue growth and consistent EBITDA margins. Despite this, there is a material disconnect between the solid fundamentals and valuation, in our view, which we believe underscores the potential for valuation upside once investor distraction and noise has abated.”
While cautioning its valuation is “creeping higher,” Mr. Young still sees Dye & Durham as “attractive,” reiterating a “buy” rating and Street-high $28 target and emphasizing “most potential outcomes of the activist pressure are positive for investors.” The average is $21.17.
“DND shares have crept higher since June lows and currently trade at 7.9 times calendar 2025 estimated (Q3F25 to Q2F26) EBITDA vs. legal Software and Information services at 21 times and tech consolidators at 17 times,” he said. “Given the focus on deleveraging, growing ARR, and a potential rate driven rebound in both real estate and due diligence volumes in F25, we believe our 10 times EBITDA multiple target offers significant potential upside.”
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In other analyst actions:
* Wells Fargo’s Neil Kalton cut his Algonquin Power & Utilities Corp. (AQN-N, AQN-T) target to US$5.50 from US$6, which is the current average.
* After updating his forecasts for North American natural gas companies to fall in line with commodity price deck changes, Scotia’s Cameron Bean raised his targets for Arc Resources Ltd. (ARX-T, “sector outperform”) to $35 from $34 and Kelt Exploration Ltd. (KEL-T, “sector outperform”) to $10.50 from $10, while he lowered his Birchcliff Energy Ltd. (BIR-T, “sector perform”) target to $7 from $7.50. The averages are $30.50, $8.85 and $6.65, respectively.
* Scotia’s Mario Saric reduced his targets for Boardwalk REIT (BEI.UN-T, “sector perform”) to $84.75 and $85 and CAP REIT (CAR.UN-T, “sector outperform”) to $55.50 from $55.75. The averages are $92.18 and $57.75, respectively.
* Jefferies’ Brian Tanquilut raised his target for Dentalcorp Holdings Ltd. (DNTL-T) to $11 from $10 with a “buy” rating. The average on the Street is $10.92.
* Barclays’ Chris LaFemina lowered his First Quantum Minerals Ltd. (FM-T) target to $17 from $18 with an “equal weight” rating. The average is $20.57.
* Jefferies’ John Aiken increased his targets for Great-West Lifeco Inc. (GWO-T, “hold”) to $48 from $42, Manulife Financial Corp. (MFC-T, “buy”) to $47 from $42 and Sun Life Financial Inc. (SLF-T, “buy”) to $89 from $81. The averages are $45.70, $39.90 and $78.23, respectively.
* TD Cowen’s Vince Valentini increased his Illumin Holdings Inc. (ILLM-T) target to $2 from $1.50 with a “hold” rating. The average is $2.69.
“ILLM shares have recovered a bit this year (up 11 per cent year-to-date), but when one backs out about $0.81 per share in net cash held, the valuation remains arguably very low at 5 times 2025 estimated EBITDA and less than 1 times net sales,” he said. “If new management can deliver better revenue growth but the stock does not react, then we believe privatization could surface value for shareholders at some point.”
* Following the release of an updated mineral resource estimate (MRE) for its Los Reyes gold-silver project in Sinaloa, Mexico after the bell on Tuesday, Eight Capital’s Felix Shafigullin raised his Prime Mining Corp. (PRYM-T) to $3.90 from $3.80 with a “buy” rating, while BMO’s Brian Quast bumped his target to $4.50 from $4.25 with an “outperform” rating. The average is $4.12.
“The Los Reyes project continues to have considerable exploration upside potential as mineralization remains open along strike and at depth, with the ongoing drill program targeting high-grade mineralization along both the northwest and southeast extensions of the Z-T Trend, the southeast extension of the Guadalupe and Central Trends, as well as emerging Generative Areas,” said Mr. Quast. “Since the July 2024 cut-off date the company has completed an additional 9,000 meters of drilling. Additionally, it has increased the 2024 exploration program from 40,000 meters to 50,000 meters with 5 drill rigs currently active on site.”