Scotia Capital Pointing to escalating investor concerns that the Fed’s hawkish approach could trigger a downturn as well as the impact of a weakening Canadian dollar, Scotia Capital analyst Konark Gupta made further notable reductions to his long-term estimates for transportation and aerospace companies in his coverage universe.
“Although the path remains unclear, we are of the view that a potential recession could be less damaging for the aviation sector than freight transportation as consumption is shifting toward services (including travel) from goods coming out of the pandemic. Various industry monitors we track support our thesis,” he said. “This would be unlike the prior cycles where aviation equities underperformed. Thus, we are sticking with AC as our top conviction idea, along with TFII and EIF, all of which offer a good combination of growth visibility and value. TFII and EIF offer attractive shareholder returns.”
Pointing to three factors, Mr. Gupta downgraded Mullen Group Ltd. to “sector perform” from “sector outperform” with a $16 target, below the $17.35 average.
“First, we believe inflation and rate hikes are likely to weigh on MTL’s largest segment, LTL, over time given its high exposure to consumers, although MTL’s oilfield services business appears more resilient in the strong energy tape, providing an offset,” he said. “Second, the company recently noted that it was slowing down on acquisitions, which pushes out a potential catalyst. Lastly, we see relatively better risk/reward elsewhere as MTL has significantly outperformed year-to-date, although its forward EV/EBITDA valuation is near historical trough.”
Mr. Gupta also cut his 12-month targets for eight other stocks by average 12 per cent. They are:
- Air Canada ( “sector outperform”) to $25 from $26. Average: $26.53.
- Andlauer Healthcare Group Inc. (, “sector perform”) to $53 from $57. Average: $55.40.
- Bombardier Inc. ( “sector outperform”) to $50 from $55. Average: $50.26.
- CAE Inc. (“sector outperform”) to $30 from $37.50. Average: $34.08.
- Chorus Aviation Inc. ( “sector outperform”) to $4 from $4.50. Average: $4.84.
- Cargojet Inc. ( “sector outperform”) to $180 from $200. Average: $200.91.
- Heroux-Devtek Inc. ( “sector outperform”) to $17 from $18. Average: $19.75.
- Transat AT Inc. ( “sector underperform”) to $1.50 from $2.25., Average: $2.45.
“We like SO-rated AC, EIF [”sector outperform” and $58 target] and TFII [”sector outperform” and $160] as top picks for different reasons,” he said. “Other SO-rated stocks – BBD.B, CAE, CHR, CJT, and HRX – also look attractive at current levels. That said, these eight stocks may still have downside risk, on an absolute basis, if the broader market continues the downtrend. We like AC because airlines, especially Canadian carriers, could continue to grow through a potential recession given they are still emerging from the pandemic while forward bookings are trending up, currently led by international travel. Higher-margin corporate travel is also picking up. Similarly, EIF has yet to fully recover organically while its largest-ever acquisition (Northern Mat) will provide growth into the first half of 2023. In addition, EIF’s M&A potential has improved a lot following the recent equity raise while private equity competition is lessening due to rate hikes. Further, EIF is a defensive stock and offers the highest dividend yield (currently 5.6 per cent) in our coverage with a near record-low payout ratio. Similar to AC, TFII screens well on valuation vs. history, while it remains aggressive on buybacks and has a low dividend payout ratio. Most importantly, we believe TFII can surprise on the upside during a potential recession with its self-help story (U.S. LTL integration), improved resilience from the divestiture of U.S. TL dry van business, and potential for larger M&A.”