Inside the Market’s roundup of some of today’s key analyst actions. This post will be updated with more analyst commentary during the trading day.
BMO Nesbitt Burns analyst Tom MacKinnon upgraded both Manulife Financial Corp. and Industrial Alliance Insurance and Financial Services Inc. to “outperform” ratings because of the recent surge in long-term interest rates. He previously rated them as “market perform.”
Insurance companies generate most of their profits from the returns on investment portfolios that can provide funds for paying future claims. The recent move in interest rates – which today saw the 10-year U.S. Treasury yield rise to 22-month highs – helps to bolster insurers’ investment returns. This, in Mr. MacKinnon’s words, has significantly diminished the “tail risks” that has been facing the companies for years now, so he increased his valuation metrics.
For Manulife, he believes a 100 basis point increase in long-term interest rates can translate into a one-time 22 cents per share bolster to earnings – even after the company’s recent efforts to reduce its sensitivity to interest rates. The latest move in bond markets also increases the likelihood of dividend increases and share buybacks.
“While we still believe the stock is a ‘show-me story’ in terms of core EPS growth, especially for the Asian business, we believe the valuation story has changed,” Mr. MacKinnon said in a research note. “In particular, the interest rate tail risk is now significantly diminished, in our view.
“And if MFC over the next six months or so were to clearly demonstrate its ability to hit its aggressive 2016 earnings objectives, and interest rates were to significantly rise to levels over 3 per cent in 2014, we could justify an MFC stock price as high as $22 by the second half of 2014.”
For now, he is projecting the stock will rise to $19 over the coming year, which is up from his last projection of $16.50.
For Industrial Alliance, he believes a 100-basis-point boost in interest rates can translate into a one-time $1.81 earnings per share increase.
“We still see core earnings uncertainty (especially after the new business strain reduction story has largely run its course), in part due to uncertainty over both the acceptability of a newly launched adjustable product and universal life sales after a recent price increase. But this is more than offset by the valuation uplift as the interest rate tail risk is diminished, combined with IAG’s substantial leverage to continued increasing interest rates, as long-term Quebec provincial bond yields continue to climb (up 30 bps since May 9),” Mr. MacKinnon said.
He raised his target price on Industrial Alliance to $45 from $39.
Trinidad Drilling Ltd. is “on the cusp of transitioning from its quiet debt-reduction strategy to a higher-profile growth strategy,” said Raymond James analyst Andrew Bradford.
The company has agreed to sell its 15 coring and pre-set rigs to a private company for $12-million to focus its business on its contract drilling core, he said.
It has also substantially paid down its revolving credit facilities to zero, “at a time when demand for high-spec deep rigs in Canada and in the Middle East is very likely to increase,” Mr. Bradford noted. “Trinidad’s share price multiples are below its own historical average and below its peers. Taken together, we view this as a scenario that could likely drive Trinidad’s share price higher – we recommend buying.”
“Going forward, Trinidad will have to direct its free cash flow to other pursuits, such as taking a more aggressive growth posture or increasing its dividend, or both.”
Outlook : Mr. Bradford rates the stock “strong buy” and has a $9.75 price target.
Canaccord Genuity upgraded Nevsun Resources Ltd., citing its “strong balance sheet, attractive cash flow profile, and excellent operational performance, which in our opinion, leaves the company in an enviable position to continue to create shareholder value even in turbulent market conditions.”
“We also believe the 10 per cent decline in the share price this week (relative to the S&P/TSX Global Mining index)... creates a very attractive entry point,” wrote analyst Rahul Paul in a research note issued early on Thursday.
Troubled miners are selling assets to raise capital, which could provide attractive opportunities for Nevsun to buy them cheap, he noted. The company’s operational track record has also been “outstanding,” he said, pointing out that it raised its gold production guidance again in 2013 and expanded its copper operations on time and under budget. “We view these achievements as remarkable when most peers have struggled with operational challenges,” he said.
Outlook : Mr. Paul raised his rating on the stock to “buy” from “hold and his price target to $5 (U.S.) from $4.
BMO Nesbitt Burns analyst Stephen Atkinson upgraded Weyerhaeuser Co. to “outperform” after the company’s $2.65-billion acquisition last week of Longview Timber LLC from affiliates of Brookfield Asset Management.
“The Longview Timberlands are high quality with a very favourable (older trees) age distribution. The dividend, at 3.2 per cent yield, is attractive and, we expect, will increase as the North American fibre market tightens,” he said.
Target: Mr. Atkinson has a $33 (U.S.) price target. The average target is $33.05.
Canaccord Genuity analyst Yuri Lynk upgraded IBI Group Inc. to “hold” from “sell,” citing its recent share price depreciation.
“IBI continues to win new work and maintain a solid backlog,” Mr. Lynk commented. “Risk/reward looks balanced here, and we are now neutral on the stock.”
Target: Mr. Lynk cut his price target to $2.25 from $3 (Canadian). The average target is $3.66.
Canaccord Genuity analyst Yuri Lynk downgraded Genivar Inc. to “sell” from “hold,” believing the recent rise in its share price has left it vulnerable to a downturn.
“Year-to-date, Genivar shares have appreciated 25 per cent, making it the best performing E&C and Equipment stock over that time period. Investors have flocked to Genivar, attracted by its $1.50 per share dividend, solid balance sheet, and much improved public market float,” he noted.
But “Genivar is now the most expensive professional services stock in North America on almost every measure.”
Target: Mr. Lynk reiterated a $20 (Canadian) price target. The average target is $25.77.
For more analyst actions, breaking investing news and analysis, follow Darcy Keith on Twitter at @ eyeonequities