A Labrador Iron Ore Royalty mine.
Inside the Market's roundup of some of today's key analyst actions. This file will be updated often during the trading day so check back for new details.
Though oil price weakness has weighed on the entire sector, Canadian Natural Resources Ltd. (CNQ-T, CNQ-N) has "underperformed all of its Canadian large cap peers" over the last three months, said Raymond James analyst Chris Cox.
Noting shares of the company are down 22 per cent over the span compared to an average of a drop of 13-per-cent for its peers, Mr. Cox upgraded his rating for the stock to "outperform" from "market perform."
"Furthermore, we believe CNQ remains a relatively secure way of remaining invested in the energy space, with solid performance in driving down operating costs, a large diverse asset base providing significant flexibility with respect to capital allocation and a funding position that still looks relatively balanced even at strip prices (our numbers point to dividends and capex exceeding cash flow by only $460-million in 2015 under strip pricing)," he said.
CNQ released second-quarter results Thursday that fell largely in-line with Mr. Cox's expectations. Its cash flow per share of $1.34 narrowly beat the analyst's forecast of $1.32 and fell just below the $1.35 consensus. Production came slightly below estimates, due largely to an extended turnaround at its Horizon project in the Alberta oil sands. He noted stronger-than-expected operating costs offset the impact of this miss.
"On a year-over-year basis, Canadian Natural has been able to drive down unit operating costs across the business by an impressive 14 per cent, with noticeable improvements across all of the major asset classes. Notably, operating costs at Horizon have been materially better than expected, resulting in another downward revision in guidance to $30-33/bbl (from $31-34/bbl previously)."
Noting the company sits in a "relatively strong" funding position despite the headwinds brought on by recent commodity weaknesses, he maintained his target price for the stock of $39 (Canadian). The analyst consensus is $43.98, according to Thomson Reuters.
"With growth capital at Horizon of [about] $2.5-billion and progress towards the overall Phase 2/3 expansion remaining on track, we believe Canadian Natural continues to provide investors visibility toward meaningful increases in free cash flow, despite current oil prices," he said.
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Labrador Iron Ore Royalty Corp. (LIF-T) exceeded expectations with its second-quarter results and remains profitable despite weak commodity prices, according to Desjardins Securities analyst Jackie Przybylowski.
However, based on relative valuation and share price appreciation as well as seeing fewer major company-specific catalysts going forward, Ms. Przybylowski downgraded her rating of the company to "hold" from "buy."
The company reported earnings per share of 23 cents, a result that topped both the analyst's 17-cent estimate and the consensus of 15 cents. Revenue fell in line with expectations, while its equity earnings in the Iron Ore Company of Canada, in which it holds a 15.10-per-cent stake, was $4-million. That result topped her expectation of a loss of $2-million.
Though she changed her rating, Ms. Przybylowski maintained her target price of the shares of $18.50 (Canadian). The analyst consensus is $15.79.
"LIORC's share price has outperformed the other producers in our coverage universe in [the second and third quarter to date], largely on higher iron ore spot prices, the continued weakening of the Canadian dollar (versus the U.S, dollar), elimination of the risk of shareholder dilution with the 'no' vote at LIORC's May AGM, and the equity investment by Osisko Gold Royalties," she said.
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Despite "mixed" second-quarter-results, recent share price weakness and an "improved risk-reward profile for investors" caused Raymond James analyst Ben Cherniavsky to upgrade his rating for Finning International Inc (FTT-T) to "outperform" from "market perform."
The company reported earnings per share of 36 cents for the quarter, lower than both Mr. Cherniavsky's 44-cent forecast and the consensus estimate of 40 cents. It was 14 cents less than their performance at the same period in 2014. Adjusted for severance costs and the impact of Alberta's new tax regime, the result was 40 cents.
"Although officially a miss, we believe that, in the current macro context, 2Q15 results could have been much worse—and that the market was indeed fearing a more distressed outcome," he said. "Furthermore, despite lower 2Q15 EPS and the related cut to our forecast, it is becoming more evident that Finning's 2015 earnings will remain well above the 'stress-test' EPS scenario of $1.45 that we presented at the start of the year. Some of this is a reflection of management's effective cost control and reported progress on the 'operational excellence' agenda."
The analyst did admit the company's quarterly free cash flow of $69-million was "modestly disappointing." The result was down from $123-million during the same period a year ago due partially to lower Canadian operating results.
"Management committed to an acceleration of free cash flow from working capital in 2H15," said Mr. Cherniavsky. "We will be the first to admit that the promise of more aggressive inventory reductions now sounds like a broken record—not just from Finning but everyone in the industry. That said, the fact that Finning has 'not ordered from the factory since November' gives us reason to believe that—for the next few quarters at least—the company will be selling from its existing stock of equipment without any meaningful replenishment."
Mr. Cherniavsky lowered his EPS estimates for both 2015 and 2016 to $1.64 and $1.85 from $1.72 and $1.92 respectively. However, he maintained his target price for the shares at $26 (Canadian), compared to a consensus of $26.14.
"Finning now trades near the low end of its historical [price-to-earnings] range and at a discount to its peers," he said). "Most notably, the P/E gap between Finning and Toromont has never been wider in the last four years. Although we have long argued for a premium on Toromont, we believe the current discrepancy is excessive."
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On the heels of an "underwhelming" quarter and a negative guidance update, CIBC World Markets analyst Adam Gill downgraded his rating for Paramount Resources Ltd. (POU-T) to "sector performer" from "sector outperformer."
Though overall production results exceeded Mr. Gill's expectations, he noted condensate and oil production only account for 45 per cent of the company's liquids mix, below the 55-per-cent result he expected. Realized pricing came in 17 per cent below his forecasts, and, accordingly, accounted for a miss in his operating netback expectation.
"The company still struggles with take-away/surface issues in getting the plant running at full capacity, with more downtime potential later this year resulting [in a second half of 2015] production estimate of 56,000 Boe/d (our prior estimate was 63,400 Boe/d) and no mention of hitting 70,000 Boe/d before [year end]," he said. "We already lowered our [second and third quarter] outlook significantly ahead of the quarterly report but still find our estimates under pressure. [Second half] guidance lowers our production outlook, and flowing through to 2016 results in our production estimate for next year coming down 14 per cent to 63,000 Boe/d with a 34-per-cent reduction in cash flow assisted by the high interest leveraging the net back."
After lowering his net asset value estimate and expressing concern over the company's debt load and relative valuation, he dropped his price target for the shares to $29 (Canadian) from $40. Consensus is $35.43.
"We do believe that this story still has upside but the onus is on management to start delivering on volumes and even with that we see the competitors in the area in a better operational and financial position," said Mr. Gill.
Elsewhere, Macquarie analyst Chris Feltin also downgraded the company, moving his rating to "neutral" from "outperform" with a target of $25 (also down from $40).
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The "risk-reward looks attractive" for stock of Altus Group Ltd. (AIF-T), said BMO Nesbitt Burns analyst Stephen MacLeod.
Noting a 15-per-cent drop in price since first-quarter results were revealed in May, Mr. MacLeod upgraded the stock to "outperform" from "market perform."
Altus's second-quarter results met the analyst's expectations and exceeded consensus views, highlighted, according to Mr. MacLeod, by 16-per-cent revenue growth and a 2-per-cent increase in earnings before interest, taxes, depreciation and amortization.
"We believe the recent stock price weakness has largely been related to concerns around Geomatics in the context of lower oil & gas drilling activity (approximately 19 per cent of EBITDA; Q2/15 Geomatics results were in line with our estimates, with EBITDA down 45 per cent)," he said. "However, we believe the market is largely discounting this weakness into the stock, and we see more upside than downside from current levels. Our 2015E and 2016E EBITDA estimates are essentially unchanged. Our 2015E and 2016E EPS estimates have declined modestly due to non-operating items."
He maintained a $21 (Canadian) target price. Consensus is $23.10.
Cormark Securities analyst Sarah Hughes moved her rating for Altus to "top pick" from "buy" with an unchanged target of $22.50.
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In other analyst actions:
Barrick Gold Corp (ABX-N) was raised to "equal-weight" from "underweight" at Barclays by equity analyst Farooq Hamed. The target price is $10 (U.S.) per share.
Coca-Cola Enterprises Inc (CCE-N) was downgraded to "hold" from "buy" at HSBC by equity analyst James Watson. The target price is $54 (U.S.) per share.
Coach Inc (COH-N) was raised to "buy" from "neutral" at UBS by equity analyst Michael Binetti. The 12-month target price is $42.00 per share.
3D Systems Corp (DDD-N) was raised to "neutral" from "underweight" at Piper Jaffray by equity analyst Troy Jensen. The 12-month target price is $14 (U.S.) per share.
IGM Financial Inc (IGM-T) was raised to "buy" from "hold" at Canaccord Genuity by equity analyst Scott Chan. The 12-month target price is $42 (Canadian) per share.
Michael Kors Holdings Ltd (KORS-N) was raised to "buy" from "hold" at BB&T Capital by equity analyst Corinna Freedman. The 12-month target price is $58 (U.S.) per share. It was downgraded to "underweight" from "neutral" at Piper Jaffray by equity analyst Erinn Murphy with a 12-month target price of $38 per share.
McCoy Global Inc (MCB-T) was downgraded to "market perform" from "outperform" at Raymond James by equity analyst Theoni Pilarinos. The 12-month target price is $4.50 (Canadian) per share.
Micron Technology Inc (MU-Q) was downgraded to "hold" from "buy" at Drexel Hamilton by equity analyst Richard Whittington. The 12-month target price is $19 (U.S.) per share.
Pioneer Natural Resources Co (PXD-N) was raised to "buy" from "accumulate" at KLR Group by equity analyst John Gerdes. The target price is $181 (U.S.) per share.
Stantec Inc (STN-T) was downgraded to "Hold" from "Buy" at Laurentian Bank by equity analyst Mona Nazir. The 12-month target price is $36.50 (Canadian) per share.
Teradata Corp (TDC-N) was downgraded to "neutral" from "positive" at Susquehanna by equity analyst J Wood. The 12-month target price is $35 (U.S.) per share. It was downgraded to "neutral" from "buy" at Longbow Research by equity analyst Joe Wittine and raised to "neutral" from "sell" at Monness Crespi by equity analyst Jeffrey Fidacaro.
Texas Instruments Inc (TXN-Q) was downgraded to "hold" from "buy" at Drexel Hamilton by equity analyst Richard Whittington. The 12-month target price is $50 (U.S.) per share.
Viacom Inc (VIAB-Q) was downgraded to "market perform" from "outperform" at Wells Fargo by equity analyst Marci Ryvicker.
Xilinx Inc (XLNX-Q) was downgraded to "hold" from "buy" at Drexel Hamilton by equity analyst Richard Whittington. The 12-month target price is $45 (U.S.) per share.
Zynga Inc (ZNGA-Q) was raised to "buy" from "hold" at Benchmark by equity analyst Michael Hickey. The 12-month target price is $2.93 (U.S.) per share.
With files from Bloomberg
David Leeder