Inside the Market’s roundup of some of today’s key analyst actions.
CIBC World Markets has lowered its earnings estimates on Canadian National Railway Co. while downgrading its rating on the stock to "sector performer" from "sector outperformer."
The actions, which partly reflect lower shipment volume expectations for coal and grain, came in the wake of the Lac-Mégantic train derailment in Quebec.
In a research report, CIBC analyst Jacob Bout said he sees three likely outcomes from the accident this weekend that could have negative implications for Canadian National.
1. Increased regulator (and cost) for rail car safety, including a fail-safe technology called “positive train control" that automatically stops trains moving at unauthorized speeds. Regulators may also review the type of the tanker car to be used for crude movement. New types of tankers have been developed for moving crude, but they are more expensive for railways to purchase.
2. An increased focus on rail safety among the general public. This is despite the fact that derailments as of the first quarter of this year are in line with historical averages. CP’s average train accidents rate per million miles travelled is 1.76, while CN’s average accident rate is 2.18.
3. A greater push to move crude by pipeline. “The incident could be used as an argument by pipeline proponents to push forward pipelines such as Keystone,” Mr. Jacob wrote.
Mr. Bout noted that CN has been heavily investing in upgrading its infrastructure to accommodate larger volumes of crude shipments. A big portion of its expected 2013 capital expenditure of $2-billion was expected to go towards such upgrades.
The analyst kept his price target on CN at $110 despite the downgrade. But he now sees CN reporting earnings per share of $1.62 in the second quarter, down from his earlier estimate of $1.68. Earnings per share estimates in 2013 and 2014 were reduced to $6.23 and $7.18, from $6.17 and $7.14, respectively.
As for Canadian Pacific Railway Ltd., the analyst slightly raised his earnings projections for this year and next, amid expectations of more job cuts and a more favourable operating ratio for both years. He maintained a $122 price target and “sector performer” rating on CP.
Target: The average target for CN among analysts is $103.63, according to Bloomberg data.
Clarification: In its research report this morning, CIBC had attributed the lower earnings estimates for Canadian National to the Lac-Mégantic rail disaster. It has since corrected the report to clarify that the earnings changes were made to reflect shipment volume expectations.
Industrial Alliance Insurance and Financial Services Inc.'s valuation next to its peers has become less attractive, said Credit Suisse analyst Gabriel Dechaine as he downgraded the stock to "neutral" from "outperform."
He notes the stock trades at a 7 per cent forward price-to-earnings premium to both Manulife Financial and Sun Life Financial Inc., well above its 2 per cent historical discount. "More importantly, valuation derived from its 2015 EPS target implies single-digit compounded return potential," he said.
Overall, however, Mr. Dechaine is positive on Canada's life insurers, believing they should generate above-average returns among Canadian equities "for an extended period" - in part because of the outlook for higher interest rates.
Target: Mr. Dechaine raised his price target to $45 from $42. The average target is $40.50.
Primero Mining Corp.’s solid asset base in Mexico, strong funding resources, and growing production “allows it to stand out relative to its peers,” Stonecap Securities analyst Brian Szeto said in initiating coverage with an “outperform” rating.
“In addition, we expect that the company will be active on the merger and acquisition front in the short and medium term as it continues to build out its development pipeline through accretive acquisitions,” he said.
Target: Mr. Szeto set a $7 price target. The average target is $8.09.
Canaccord Genuity analyst Yuri Lynk has withdrawn his bullish take on Ritchie Bros. Auctioneers, citing “worrisome trends” developing in its business.
Gross auction proceeds for the second quarter were 16 per cent below Mr. Lynk’s estimates, despite a 13 per cent year-over-year increase in its sales force and a full quarter of revenue from EquipmentOne, its newly launched online marketplace for the private sale of equipment and materials.
“As a result, we believe 2013 guidance for GAP may be at risk,” he said.
Mr. Lynk reduced his valuation multiple to 20 times 2014 estimated earnings per share from 25 times. “We believe the investments that management is making in the business will eventually bear fruit. However, the multiple is likely to gravitate towards the lower end of the 20-30x range until visibility improves,” he commented.
Target: Mr. Lynk downgraded his rating to “hold” from “buy” and cut his price target to $20 (U.S.) from $25. The average target is $20.73.
Desjardins Securities analyst Adam Melnyk upgraded Rio Alta Mining Ltd. to a “buy” from “hold,” believing the stock is trading at an attractive entry point.
Second-half 2013 production is expected to be strong, its La Arena gold mine in Peru is a “cash flow machine,”and the company could be a potential takeover candidate, he said.
Target: Mr. Melnyk cut his target to $4 from $4.75 due to a lowering of sector-wide asset valuations. The average target is $4.81.
For more analyst actions, breaking investing news and analysis, follow Darcy Keith on Twitter at @ eyeonequities