On Friday, Jefferies issued a downgrade for Element Fleet Management (EFN:CN) (OTC: ELEEF) stock, changing its rating from Buy to Hold and adjusting the price target to Cdn$30.00 from Cdn$32.00. The downgrade follows Element's significant share price increase, which has outpaced the S&P/TSX Index's return for the year.
The firm cites multiple reasons for the downgrade, including industry headwinds such as pressure on the peso and non-recurring service fees expected in 2024. These factors are anticipated to moderate the top-line outlook for Element, despite the company's solid underlying revenue growth prospects.
Jefferies acknowledges Element's history of surpassing guidance and expectations. However, the analyst points out that the stock's over 30% year-to-date increase has pushed its valuation to a level that aligns with its growth outlook, suggesting that further multiple expansion might be difficult.
The firm also notes a modest reduction in the 2025 free cash flow per share forecast, leading to the $2 decrease in the price target. The current valuation is seen as a limiting factor for expected total returns, prompting the move to a Hold rating.
Jefferies will be monitoring Element's performance, specifically looking for an increase in vehicles under management and operating margin improvements that exceed forecasts, which could potentially lead to an adjustment in the firm's estimates and valuation outlook.
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