Scotia Capital “Taking profits after a strong run,” Scotia Capital analyst Phil Hardie lowered his recommendation for Element Fleet Management Corp. to “sector perform” from “sector outperform” on Monday.
“Following a strong rally that has seen the stock rise 50 per cent over the last year, we are making a tactical downgrade given what we believe to be a shift in the risk/reward of holding the stock over the next 12 months,” he said. “We continue to have a solid earnings outlook for 2023 and 2024 and our long-term thesis remains intact, however we believe this is largely reflected in the stock price. With relatively muted expected returns for equity markets over the next twelve months, and likely some volatility ahead, we believe investors should look for tactical opportunities to generate alpha, and we recommend taking profits at these levels.
“The combination of an elevated valuation multiple and broad investor expectations for the company to deliver EPS above management’s target for 2023 will likely limit the upside and potentially introduce downside risks over the next twelve months.”
Mr. Hardie now sees an expected 12-month return in the mid-single digits for the next year, which he said is “well below” the average expected return of just over 25 per cent for his mid-to-large cap stock coverage universe.
“Investor expectations heading into 2023 are already set relatively high,” he added. “Street expectations for 2023 have been on the rise as 2022 progressed but now sit above management’s target range for the year. With the bar set high, this likely sets up for disappointment if results simply fall within the targeted range, and potentially an outsized sell-off if earnings miss.
“We see a relatively low margin of error with EFN’s valuation multiple nearing an all-time high (see Exhibit 2). We think valuation looks relatively fair, with limited opportunity for further expansion. P/FCF is likely an interesting secondary valuation metric, but we would not build an investment thesis around a valuation re-rate predicated on a migration to this valuation approach. We believe demonstrating continued resilience and the sustainable growth of the platform will remain the key drivers to support its valuation multiple.”
He maintained a target of $20 for Element Fleet shares. The average is $22.08.