Wednesday’s analyst upgrades and downgrades

Inside the Market’s roundup of some of today’s key analyst actions
While Canadian property and casualty insurance companies have enjoyed steep gains already in 2024, National Bank Financial analyst Jaeme Gloyn sees the potential for further near-term share price appreciation.
“Our view that the combination of hard market conditions, moderating inflationary pressures, and higher investment income would create a strong setup for our P&C insurance coverage has largely played out as expected,” he said. “Our P&C coverage has gained 36 per cent year-to-date on average, outperforming the S&P/TSX Composite Index (up 17 per cent year-to-date) and the TSX Financials index (up 21 per cent). While multiple expansion through 2024 has brought valuations toward historical highs, we continue to see upside as we expect the record catastrophe year to maintain the currently firm market conditions, and continued inflation moderation to drive enhanced profitability facilitating ROE expansion.”
Mr. Gloyn thinks the “record-setting” catastrophe events in 2024 are likely to alleviate investor concerns that rate increases seen through the industry over the past two years “may decelerate and provide incremental visibility for continued robust personal lines premium growth into 2025.”
“Combined with rate increases implemented in H1 in response to elevated claims inflation, we believe the outlook for premium growth remains robust,” he said. “We maintain a favourable view on the mid-term profitability set-up, with the potential for M&A to enhance the outlook. Our pecking order remains FFH, TSU, DFY and IFC, largely reflecting near-term valuation upside.”
In a research report released Wednesday previewing third-quarter earnings season for Diversified Financials, Mr. Gloyn revised his estimates and price targets for many of the companies in his coverage universe. He also named six companies with “upside potential as we enter 2025.” They are:
* Element Fleet Management Corp. (EFN-T) with an “outperform” rating and $37 target (unchanged). The average target on the Street is $31.47, according to LSEG data.
Analyst: “We selected EFN as a top pick for 2024 as we saw a ‘beat and raise’ story developing on the back of 1) the order backlog driving high-margin revenue upside, 2) continued execution on organic growth strategies, and 3) mega-fleet wins not baked into guidance or consensus estimates. These remain key aspects of our thesis, but subsequent marketing meetings with management in May and the Mexico investor visit in September both further enhanced our confidence in Element’s growth outlook … We see the current FCF [free cash flow] yield of 7 per cent on 2025 estimates as an attractive entry point. We believe double-digit growth in EPS and FCF will drive compression in the FCF yield to the low to mid-single digits in line with other high-quality peers.”
* goeasy Ltd (GSY-T) with an “outperform” rating and $240 target, up from $235. Average: $225.29.
Analyst: “Shares of GSY have dropped 7 per cent since releasing preliminary guidance on October 21st , and 14 per cent from its 2024 highs in July. We believe the recent decline in share price creates a compelling buying opportunity as we approach Q3 results. We believe the lower revenue yield guidance (33-34 per cent vs. 34-35 per cent previously) and concerns on credit have contributed to the recent sell-off, but we are not concerned with either. The revenue yield was driven by three factors: 1) a faster mix shift to lower-yielding secured loans (which is part of the long-term strategy and factored into GSY’s 3-year guidance), 2) higher non-performing loans and more aggressive collections tactics that cause more loans not to accrue interest, and 3) management likely building in a degree of conservatism ….. . With credit improving and the softlanding macro backdrop becoming increasingly likely, we see this as an attractive opportunity to buy a midteens grower at a discounted multiple.”
* Fairfax Financial Holdings Ltd. (FFH-T) with an “outperform” rating and $2,200 target, up from $2,100. Average: $1,995.65.
Analyst: “While one of the strongest performers in our coverage year-to-date, up 44 per cent vs. the TSX Financials index up 20 per cent, we continue to see upside for FFH. With Q4-23 results FFH upgraded its annual operating income guidance by over 30 per cent to $4-billion, consisting of $2 billion from interest and dividend income, $1.2-billion in underwriting profit and $750-million from associates and non-insurance. Two quarters later, the conservatism in this guidance has become clear. As of Q2, run-rate interest and dividend income has already reached $2.2-billion, plus underwriting income and associates and non-insurance are tracking above guidance. Strong H1 results and deployment of excess capital to drive ROE accretion increase our confidence that operating ROE in the mid-teens is sustainable and a valuation re-rate is warranted.”
* ECN Capital Corp. (ECN-T) with a “sector perform” rating and $2.50 target (unchanged). Average: $2.47.
Analyst: “After a challenging start to the year, we believe ECN is a name to watch as we approach 2025 and we begin to see signs of a better road ahead. Q2 results in the Manufactured Housing segment showed improvement, approvals were up 25 per cent year-over-year, Skyline JV is picking up speed as balances doubled q/q, industry data is showing mid-teens shipment growth through Q3, and Q3 results from peers that have reported show double-digit volume growth (e.g., Champion Homes (SKY: NYSE).”
* Brookfield Business Partners LP (BBU-N/BBU.UN-T) with an “outperform” rating and US$33 target (unchanged). Average: US$30.89.
Analyst: “We believe BBU is well set-up for a strong finish to 2024 and the start of 2025. Previous concerns on the impacts from the cyberattacks at CDK Global are in the rear-view mirror which sets the stage for strong results and a lower rate environment to push shares higher. BBU has a solid runway to drive value through operational improvements as 50 per cent of its businesses were acquired over the last three years. … BBU trades at a 46-per-cent discount to NAV (61 per cent excluding a potential Clarios monetization at US$10/unit of value), which is expected to nearly double over the next three to five years through increases in FCF and capital recycling. Further rate cuts and progress on operational improvements could narrow the discount, turning BBU into a top performer.”
* Trisura Group Ltd. (TSU-T) with an “outperform” rating and $67 target (unchanged). Average: $57.89.
Analyst: “We moved Trisura up our pecking list in Q1-24 as we believe TSU is set up for a strong recovery in 2024. After a challenging 2023, the story is significantly de-risked following an upgraded AM Best outlook and costs associated with the run-off firmly in the rear-view mirror. This derisking shifts the focus to operating performance, where the outlook remains strong. The investor day in June confirmed our view that Trisura will deliver high-teens operating EPS, adjusted ROE and book value per share growth in the coming years.”
Mr. Gloyn’s other target changes are:
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Scotia Capital analyst Meny Grauman thinks the sell-off in long-dated Treasuries just weeks after the Fed’s interest rate reduction “highlights just how good the macro environment is for lifecos right now.”
“As we have highlighted in the past, central bank easing is not a key risk for these names since what really matters for their longer-term earnings power is long-dated yields which are clearly not under pressure despite central bank easing,” he said. “In fact, we are seeing the opposite forces at work, especially in the wake of a better-than-expected U.S. jobs number for September which has caused investors to question the need for any further cuts. Also pushing up yields is rising odds of a Trump win which in the minds of many market watchers would be inflationary. Whatever the ultimate path of short rates is, we have a high degree of conviction that low-rate era is over farther out the curve, and that remains a key positive for life insurance stocks.”
Heading into third-quarter earnings season for the sector, Mr. Grauman’s expectations largely fall in line with the Street’s forecast.
“Overall we are neutral on the quarter and don’t see much downside risk, but don’t expect big moves in the shares either,” he said. “That said we do see some catalysts on the horizon including investor days for SLF (Nov. 13) and IAG (Feb. 24), and the potential for another reinsurance deal at MFC.
“On a fundamental basis, we assume resilient underlying insurance results, along with improving wealth management profitability thanks to rallying equity markets. Broadly speaking, we continue to take a conservative approach to the quarter’s core EPS numbers, but looking ahead our 2025 EPS estimates continue to forecast solid EPS growth broadly in line with medium-term targets. Headline results should benefit from rising equities, but continue to be negatively impacted by real-estate related losses. We assume modest negative impact’s from Q3′s assumption review for GWO, IAG, and MFC, and neutral for SLF.”
Mr. Grauman also noted Canadian lifeco stocks have “come under some pressure” recently after a period of relative outperformance.
“In our view this is a buying opportunity for a group that remains trading at an average of just 10.5 times next year’s consensus EPS despite strong and expanding ROEs,” he said.
“Top Picks: MFC is our top pick, followed by IAG. Our pecking order for the lifecos is MFC, IAG, SLF and GWO. We also have a Sector Outperform rating on SFC which we highlight as an actionable small-cap idea that will benefit from the continued boom in the US annuity market.”
Mr. Grauman made these target adjustments:
* Manulife Financial Corp. (MFC-T, “sector outperform”) to $48 from $41. Average: $40.24.
Analyst: “Heading into Q3 reporting, MFC remains our top pick. Even after outperforming insurance peers by an average of 30 per cent year-to-date, and the large banks by an average of 27 per cent over that same time frame, Manulife remains the most actionable stock in our insurance coverage. The stock was a value trap for many years following the Global Financial Crisis, but in the wake of a normalization in long-term yields and December’s landmark LTC sale, we believe that it is now a true value name with significant upside, even after a period of significant revaluation. The lifeco’s June Investor Day hammered that point home as Manulife boosted its ROE guidance from 15 per cent plus to 18 per cent plus while reaffirming EPS growth of 10-12 per cent over the medium-term, and guiding to cumulative remittances of $22-bilion between 2024 and 2027. The gap between realized and expected ALDA returns remains a key unresolved issue, but at this juncture we don’t see a trigger for the company to change its return assumptions. Another issue is performance in Asia, which remains a key driver of the lifeco’s updated financial targets. That said, performance in this segment has been good, fueled by strong momentum in Hong Kong in particular despite some softness in markets like Vietnam that are dealing with regulatory change. The bottom line for us is that we believe MFC’s tail risk is still smaller than what the shares are currently pricing in, and we think that this gap should continue to close as we move into 2025.”
* IA Financial Corp. Inc. (IAG-T, “sector outperform”) to $126 from $110. Average: $115.50.
Analyst: “Our second favourite name in the space remains IAG. We continue to view the lifeco’s $1.1-billion in deployable capital as a key strength. Its deployment is still an important potential catalyst for the shares, and despite disappointment surrounding the now closed Vericity deal, we were encouraged by the firm’s July acquisition of two blocks of business (Final Expense and Term Life products) issued by Prosperity Life in the US. We believe that the company was clear that we should expect more modest buyback activity going forward given the strong move in the stock price over the past 3 months, but at the same time at our conference we also heard a more optimistic outlook for future M&A even as we see a more robust recovery in the US dealer business only likely for next year.”
* Sun Life Financial Inc. (SLF-T, “sector outperform”) to $85 from $73. Average: $79.31.
Analyst: “We also maintain our Sector Outperform rating on SLF, but it remains our third-place pick behind IAG. We continue to view Sun’s near-term challenges in the US as temporary and not structural, but with the stock continuing to trade at a premium to peers, there is window here for that relative valuation gap (with MFC in particular) to further narrow and even close completely. That will be harder to justify if the lifeco is able to boost its ROE target at its upcoming investor day, but we take await and see approach to that development.”
* Great-West Lifeco Inc. (GWO-T, “sector perform”) to $50 from $44. The average is $46.30.
Analyst: “After peer-leading stock performance in 2023, we see a more subdued return profile for the name this year as GWO looks fairly valued in our view. Earnings performance at Empower has been good, and will likely continue to be fueled by rising equity markets, but investors are likely to continue to be worried by ongoing net outflows at Empower’s DC business (even excluding noise from the Prudential deal), and the challenges inherent in building out its wealth business. The key catalyst driving the shares in 2023 was a significant improvement in the outlook for Europe after some restructuring activity, but that lever is not likely to be available as we look out to next year.”
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CIBC World Markets analyst Paul Holden also raised his target prices for insurance stocks on Wednesday.
“What a difference a quarter can make,” he said. “The group has now outperformed the TSX Composite year to date, and performance has become more than just a single-stock story. What’s next? We expect solid EPS growth for the group with Q3 results (6 per cent on average) and see potential upside to 2025 consensus EPS.
“Our top pick going into the quarter is SLF, which reports the evening of November 4 and will follow that with an Investor Day on November 13. Key catalysts for the name are: 1) higher earnings and better fund flows for MFS; 2) a path to profit improvement at DentaQuest; 3) SLC earnings growth; and 4) an increase in ROE target to more than 18 per cent.”
His changes are:
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Calling it “a leader in the Alberta power market given its large hydro, wind and gas fleet in the province,” Desjardins Securities analyst Brent Stadler initiated coverage of TransAlta Corp. (TA-T) with a “buy” recommendation on Wednesday.
“We are of the view that data centres and hyperscalers drive demand for power in Alberta, which should be a tailwind for TA,” he said. “This tailwind could (1) provide clarity around more sustainable power prices in the province; (2) reduce uncertainty around the useful life of certain assets; and (3) present contracting opportunities that could unlock value and provide cash flow certainty.”
“What we like. (1) TA is a proven owner and operator of power generation, taking a balanced approach to the energy transition; (2) it owns the largest hydro fleet in Alberta (922MW); (3) it is poised to benefit from load growth in Alberta (specifically data centres); (4) its legacy gas assets could provide significant value creation; and (5) its retained FCF and low payout ratio provide financial flexibility to execute on its 5.5GW potential development pipeline.”
In a report titled Poised to benefit from load growth in Alberta, Mr. Stadler did express concern over TransAlta’s merchant exposure and legacy gas assets, seeing “more Alberta power price risk with the name.”
“We believe near-term share price performance could hinge on Alberta power demand, specifically the province’s ability to attract data centres and hyperscalers — which we view as likely but we would need to see this materialize,” he said. “We buy into the thesis that increased renewables penetration and more extreme weather on average (milder temperatures have weighed on power prices in 2024) could drive increased volatility in power prices, but it is not completely clear how the increased supply in the Alberta power market (~GW) could affect this without incremental load. If power demand does not materially increase and there is a lack of volatility in power prices over the near term, this could drive downward earnings revisions, we could see near-term CTG retirements, the Heartland deal could prove to be unattractive (although we have excluded Heartland from our numbers) and Brookfield’s ownership in TA’s Alberta hydro fleet could materially increase compared with our modelled expectations (could reduce our NAV/share by $1.00–1.50).”
While acknowledging “relatively higher risk with the story,” the analyst thinks “more likely than not that data centres and hyperscalers will drive material demand for power in Alberta — which we expect would be a significant tailwind for TA’s portfolio.”
He noted: “Potential near-term catalysts. These include: (1) data centres/hyperscalers driving power demand in Alberta; (2) announcement of an agreement with a technology company to power data centres; (3) signs of volatility in Alberta power prices; and (4) renewables FIDs and M&A (including clarity on Heartland).”
Mr. Stadler set a target of $15.50 per share, exceeding the current average on the Street by 14 cents.
“Our target price is based on a risk-adjusted discounted cash flow valuation using an average discount rate of mid-7 per cent for the renewables assets and high 8 per cent for the thermal assets. Including the modest annual dividend of 24 cents per share, our target implies a potential total return of 11.4 per cent,” he said. “While this is a tad on the skinny side, our Buy rating is predicated on load growth materializing in Alberta, specifically from data centres and hyperscalers, which could breathe new life into TA’s legacy gas assets and drive more sustainable power prices in the province.”
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In a note titled We’ve only just begun, Desjardins Securities analyst Lorne Kalmar reaffirmed First Capital REIT (FCR.UN-T) as one of his “highest-conviction names” following the release of in-line third-quarter results, continuing to “see plenty of upside in the stock as the multiple reverts to, and potentially exceeds, the historical average.”
“FCR’s solid year-to-date performance resulted in management revising its SP NOI [same-property net operating income] growth target for 2024 to 3 per cent plus (from 2.5–3.0 per cent),” he said. “For 2025, it also expects SP NOI to be in the 3-per-cent-plus range, largely due to rental rate growth — this remains above historical averages, underscoring the favourable fundamental backdrop.”
Mr. Stadler’s revised forecast calls for an annual operating funds from operations per unit growth between 2023 and 2026 of approximately 4 per cent.
“While FCR has been the best-performing large-cap retail REIT year-to-date, it continues to trade at one of the widest gaps vs the LTA on P/FFO among its peers,” he said. “The current 2-multiple-point discount vs the LTA ranks as the second largest behind REI (REI.UN, TSX, Buy–Average Risk, $23.00 target), despite FCR being forecast to deliver the highest FFO growth among large-cap open-air retail peers. We note that from 2012–19, FCR delivered an FFO growth CAGR of 3.0 per cent while trading at an average FFO multiple of 17.4 times.
“The strength of Canadian retail fundamentals vs pre-pandemic is evidenced in FCR’s operating results, with occupancy now nicely above the LTA of 96.2 per cent, increasingly favourable lease terms (eg higher escalators) and rental spreads consistently above the LTA. Further, with the improvement in FCR’s portfolio quality and a more conservative leverage profile, we would argue that FCR should trade at least in line with, if not higher than, its long-term average.”
While raising his FFO projections through 2026, Mr. Kalmar maintained a “buy” rating and $21.50 target for First Capital units. The average is $19.77.
“All that to say we see plenty more room for multiple expansion as FCR continues to execute on its growth strategy,” he said.
Analysts making target adjustments include:
* TD Cowen’s Sam Damiani to $21 from $20 with a “buy” rating.
“FCR delivered another quarter of operational strength with occupancy just 40 basis points shy of the historic high, widened rent spreads, and no signs of any meaningful tenant weakness. The tone of the market — particularly for urban grocery-anchored shopping centres — suggests that well-located retail space is increasingly considered scarce. FCR remains among our best ideas to play this theme,” said Mr. Damiani.
* Scotia’s Mario Saric to $18.75 from $17.50 with a “sector perform” rating.
“Looking to 2025, we think a reasonable valuation, resumption of accretive dispositions, continued short-term strength in both contractual escalators and blended lease spreads + investor questions over FCR privatization probability should see FCR at least hold said relative gains vs. Peers (and likely expand),” he said.
* RBC’s Pammi Bir to $20 from $19 with an “outperform” rating.
* CIBC’s Dean Wilkinson to $21 from $19 with an “outperformer” rating.
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While First National Financial Corp.’s (FN-T) earnings fell short of the Street’s expectations, TD Cowen analyst Graham Ryding concluded the third-quarter release was “neutral,” pointing to a “constructive” near-term outlook, a regular dividend increase of 2 per cent and the declaration of a special dividend of 50 cents per share.
After the bell on Tuesday, the Toronto-based company reported adjusted earnings per share of 90 cents, missing Mr. Ryding’s estimate by 6 cents and the Street’s projection by 9 cents. The gap was attributed to lower placement fees and higher-than-expected operating expenses.
“Q3/24 mortgage originations were soft due to muted market activity and heightened lender competition in the mortgage broker channel,” he said. “That said, management’s commentary was constructive noting near-term origination volumes are expected to be up year-over-year. First National is a solid income investment, and we see room for valuation to expand as they lap easier comparable quarters moving into 2025.”
“We have increased our estimates to reflect a higher securitization NIM forecast (Q3/24 was stronger than expected), and originations growth in 2025 (constructive management commentary, and expectations that lower interest rates and mortgage regulation changes for first-time home buyers will be a tailwind).”
With that raise, Mr. Ryding bumped his target for First National shares to $46 from $42, reaffirming a “buy” recommendation. The average target is $42.20.
“We see potential for multiple expansion as First National begins to lap easier comparable quarters over the near term. We reiterate our BUY rating,” he said.
“First National is a solid income-generating investment, and we value the low-credit risk ‘originate-to-sell’ model. Earnings can be volatile quarter-over-quarter due to funding mix, interest expense movements, and seasonality. Increasing single-family mortgage originations and improving net interest income would solidify 2025 earnings growth.”
Elsewhere, CIBC’s Nik Priebe raised his target to $44 from $40 with a “neutral” rating.
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In other analyst actions:
* Raymond James’ Frederic Bastien hiked his Aecon Group Inc. (ARE-T) target to $24 from $16 with a “market perform” rating. The average on the Street is $24.59.
“Our recommendations on ARE have proven to be a reliable contrarian indicator in recent years,” he said. “We rode the worst of the Big 4 project losses with an Outperform rating only to go neutral twelve months ago, just as the stock began its 115-per-cent ascent (the TSX was up 31 per cent over the same timeframe). A lot of that is on us to be clear. For one, we underestimated the market’s willingness to give Aecon a pass so early after setting loss parameters around its remaining three legacy fixed-price jobs (the EFGs) on Jul-25-24. In contrast, it took more time for the Street to give the former SNC-Lavalin (now ATRL) the green light after a similar pledge. We also underappreciated the explosive reaction the Microsoft-backed proposal to reopen Pennsylvania’s Three Mile Island energy plant would have on the infinitesimally small sample of stocks exposed to the nuclear sector. To our defense, our miscalculations speak to just how tricky calling construction stocks is.
“At the risk of extending our losing streak, we are sticking to our Market Perform ahead of this week’s 3Q24 earnings release. … We highlight a few trends that should support a structurally higher stock valuation for Aecon. Before we cross that bridge, however, we need to see ARE’s earnings lead the way.”
* Scotia’s Mario Saric raised his targets for Brookfield Asset Management Ltd. (BAM-N/BAM-T) to US$55.50 from US$45.50 and Brookfield Corp. (BN-N/BN-T) to US$65 from US$51.25 with “sector outperform” ratings for both. The averages are US$47.46 and US$56.16, respectively.
* Stifel’s Bill Papanastasiou raised his targets for Galaxy Digital Holdings Ltd. (GLXY-T, “buy”) to $24.50 from $20 and Hut 8 Mining Corp. (HUT-Q/HUT-T, “speculative buy”) to US$18 from US$15. The averages are $20.67 and US$16.50, respectively.
* In a report titled Pulls, Puffs, and Polls — Cannabis and the US Elections, Ventum Capital Markets’ Andrew Semple raised his Trulieve Cannabis Corp. (TRUL-CN) target to $21 from $19 with a “buy” rating, calling the adult-use ballot initiative in Florida a “huge industry growth catalyst.” The average is $24.21.
“Florida is also a highly relevant market for many publicly traded U.S. cannabis companies, providing a huge catalyst opportunity for cannabis investors,” he said. “If the vote passes, we estimate that Florida’s adult-use market could add $3-4-billion of incremental sales over a three- to five-year timeframe, with an overall legal market size projected to be $5-6-billion per year. Medical cannabis incumbents are very well-positioned to become the first suppliers to the possible adult-use market, and are likely to experience large improvements to sales and earnings once adult-use sales begin.
“With Florida polls currently averaging 61 per cent in support of adult-use legalization since July (based on our tracking) against a 60-per-cent required threshold, we believe the vote has a good probability of passage, though it remains a tight race. We believe there is meaningful upside potential in some Florida-based operators if adult-use legalization is approved. Trulieve Cannabis and Ayr Wellness (AYR-CSE, BUY, PT C$4.75) have the most exposure and most torque to a successful outcome, in our opinion.”