National Bank Financial analyst Maxim Sytchev released his quarterly preview report for Canadian industrials, which he thinks “are generally doing well” but warned “earnings season will hit during U.S. elections and China stimulus thoughts.”
“Common feedback we hear is that ‘Republican win = negative for anything ESG-related’ but multiple recent marketing trips with management teams suggest that tariffs/re-shoring could lead to more in-situ manufacturing capacity,” he said. “It’s hard to make a call on these things, but we believe our coverage will work regardless of the outcome due to secular/bipartisan funding sources for most programs in the U.S. Most other geographies are robust (ex-Australia transportation, but the latter represents a footnote for most companies; NOA’s exposure there is commodity-driven). Interestingly, Chinese stimulus talk (and Google search volume) also points to positive returns for our space. Since 2004, we saw three distinct time periods when interest in news about Chinese stimulus spiked - average returns within our coverage universe came in at 41 per cent through Nov. 2009, 35 per cent through Sept. 2013, and 115 per cent through April 2021. Something to think about.”
He added: “In each instance, 12-month returns were significantly higher than the six-month returns as the rally progressed over an extended period of time. While we do not foresee a similar magnitude of returns over the next 12 months given that current valuations are broadly elevated vs. historical norms, this historical precedent at least suggests that positive returns are still a very realistic possibility despite the continued run-up in equity prices (and associated multiple expansion).”
Mr. Sytchev made a series of target adjustments heading into earnings season. They are:
- Aecon Group Inc. (“outperform”) to $25 from $20.50. The average is $23.23.
- Ag Growth International Inc. (“outperform”) to $74 from $77. Average: $75.75.
- AtkinsRalis Group Inc. ( “outperform”) to $74 from $68. Average: $68.55.
- RB Global Inc. ( “outperform”) to US$97 from US$90. Average: US$90.90.
- Russel Metals Inc. ( “outperform”) to $47 from $46. Average: $46.67.
- WSP Global Inc. ( “outperform”) to $271 from $255. Average: $261.46.
The analyst explained his changes by saying, “WSP (more upside as Power market continues to accelerate), ATRL (less bad LSTK bucket of losses/higher multiple on Nuclear which is all the rage), ARE (cleaner expected quarter and close to 50 per cent of business being Power / Nuclear = higher multiple), RBA (multiple expansion as service levels are improving vs. Copart based on our due diligence) and RUS (seeing more upside in 2025E as HRC troughed); AFN target down by -$3 on Farm inflection uncertainty.
“Best ideas: We continue to like RBA; this a great name for an all-weather industrial bucket. After material ATRL re-rate since Sept. 2024 trough (up 7 per cent vs. TSX up 7 per cent), we now think STN [”outperform” and $128 target] is the most attractive consulting engineer in the space. ATS [”outperform” and $52] remains controversial, but we like the long-term set-up + below-trend valuation. FTT [”outperform” and $47] looks good to us, especially in light of Chinese stimulus (i.e., helps copper).”