Scotia CapitalA quiet BB. Just initiated a position at the open because below $40 seems like a good deal for a long term investor. Will soon post a couple of analyst reports from two weeks ago following their earnings. GLTA
Scotia Capital analyst Jonathan Goldman recommends exposure to the heavy equipment sector.
“Positive commodity fundamentals should support equipment and service demand through our forecast horizon while improved availability suggests growth with be volume-driven,” he said. “We expect the resilient 1H EPS trend to segue into a reacceleration in the 2H as the comps ease and catalyze a positive re-rate for the sector as views on cycle longevity are extended.
“Our pecking order in terms of end-market exposure is: 1) Precious metals (Gold); 2) Base metals (Copper); 3) Oil Sands; and 4) Construction. Positive commodity fundamentals should support mid double-digit production growth in Canadian gold mining; high single-digit production growth in Chilean copper mining; and LSD% production growth in Canadian oil sands mining. The construction outlook is region-dependent with the backdrop more supportive in Eastern Canada, whereas Western Canada is lapping the completion of major pipeline projects. TIH should benefit from its gold exposure (total mining accounts for 23 per cent of sales) and infra/non-res exposure in Eastern Canada (construction 43 per cent). For FTT, mining accounts for 50 per cent of end-market exposure (primarily oil and copper); construction is 40 per cent.”
In a research report released Wednesday, Mr. Goldman resumed coverage of Finning International Inc. and Wajax Corp. with a “sector outperform” recommendation, while he gave Toromont Industries Ltd. with a “sector perform” rating.
“In terms of positioning, we prefer the less expensive, more catalyst-visible names, that’s FTT and WJX. Both are trading at an 30-per-cent discount to midcycle valuations. For FTT, further proof of structurally improved earnings power (via mix shift), progress on the cost optimization program, and potential working capital unlock and buybacks could lead to upside to estimates/valuation. For WJX, scheduled deliveries of large mining shovels in 4Q should reverse new equipment declines year-to-date and precipitate destocking and deleveraging.”
His pecking order for the three companies is:
1. Finning with a $51 target. The average on the Street is $49.13.
Analyst: “We believe FTT (Sector Outperform) has the most room for outperformance. Shares are trading near trough levels at 9.5 times P/E on our 2025E – the same multiple during the GFC. We expect EPS to reaccelerate in the 2H as the comps ease (particularly in product support), which should alleviate concerns around cycle longevity. Moreover, structural mix shift and ongoing internal initiatives has high-graded earnings power by 2 times at midcycle (and likely more at trough). Further proof of a more resilient earnings profile should alleviate concerns that FTT is ‘over-earning’.”
2. Wajax with a $29 target. Average: $29.
Analyst: “WJX (Sector Outperform) falls into the ‘misunderstood’ category. Shares are down more than 30 per cent since the 1Q miss – but we attribute that to incorrect modeling by the Street. Results can be lumpy depending on the timing of mining shovel deliveries. The company expects all three shovels this year to be delivered in 4Q24, whereas it delivered three through the first nine months of 2023. Further, consensus estimates for IP/ERS have been rebased lower in line with peers. Shares are trading at 6.7 times P/E on our 2025E and the dividend yield is 5.7 per cent.”
3. Toromont with a $136 target. Average: $138.38.
Analyst: “We rate TIH Sector Perform due to the narrow return to target. We think the company merits its premium valuation, but we see limited room for further multiple expansion while gross margin normalization could weigh on earnings growth this year. M&A would be the main catalyst for a re-rate, in our view, but we have limited visibility on the timing, asset, or probability. TIH shares are trading at a 4.1-per-cent FCF yield on our 2025.”