Friday’s analyst upgrades and downgrades

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Inside the Market's roundup of some of today's key analyst actions

The $793-million (U.S.) acquisition of MWH Global Inc. by Stantec Inc. (STN-T, STN-N) will drive "significant" growth for the company in the coming years, said Raymond James analyst Ben Cherniavsky.

On March 29, Stantec announced its intent to purchase the Colorado-based water resources infrastructure company in an all-cash deal. The price tag represents 9.5 times adjusted 2015 earnings before interest, taxes, depreciation and amortization (EBITDA) or 7.3 times 2015 adjusted EBITDA including expected synergies.

"We believe that MWH's scope and geographic breadth, as well as Stantec's strong currency, justifies the price paid (STN's multiple was 11x TTM [trailing 12 month] EBITDA when the deal was proposed)," said Mr. Cherniavsky.

To finance the deal, Stantec raised $604-million through an equity deal (priced at $30.25). It will also draw from two credit facilities, which were increased with the deal.

"While we must admit that we thought a transaction of this nature would occur further down the road, the objective to 'go global' with Stantec's footprint has been on the table for a long time," the analyst said. "It was mainly a matter of finding the right deal on which to act, not so much the right time. Furthermore, the purchase of a U.S. domiciled company with global reach — rather than an internationally domiciled player — has been the clearly communicated path that Stantec wanted to follow for its expansion outside of North America. This makes the MWH acquisition consistent with the company's long-standing strategy and, in our view, easier to integrate."

Maintaining his "market perform" rating for the stock, Mr. Cherniavsky raised his target price to $35 from $30.50. The analyst consensus price target is $34.25, according to Thomson Reuters.

"While the acquisition of MWH is Stantec's largest acquisition to-date and increases the complexity of the business, we take comfort in management's long-standing record of execution," he said. "For the past twenty years, Stantec has successfully integrated over 100 acquisitions, ten of which can be considered 'large"' relative to the size of the company's operations at the time. All of these transactions—but especially the big ones—posed numerous risks to the business, and certainly some have been more successful than others. However, on balance, we see M&A as one of Stantec's 'core competencies' and believe that management has over the years developed something of a 'secret sauce' for doing it well. That's not to say that things can't go wrong with MWH or any other company that Stantec acquires. We just believe that there is reason to give the company the benefit of the doubt when it comes to execution. Fifteen years plus of steady margins and consistently self-financed compounded EPS growth of 15 per cent must surely count for something!"

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Ahead of the release of first-quarter 2016 results, Raymond James analyst Chris Cox updated his forward commodity price assumptions, resulting in target price changes for several companies.

He is now projecting $46.88 per barrel (U.S.) of West Texas Intermediate for 2016, up from $41.01. For 2017, he is using $46.88 from $47.51. His long-term assumption of $70 did not change.

His 2016 natural gas assumption moved to $2.17 per thousand cubic feet (mcf) from $2.45. His 2017 estimate moved to $2.81 from $2.78.

Accordingly, he made several target price alterations, including:

- Gibson Energy Inc. (GEI-T, outperform) to $22 from $23. Consensus: $19.54.

- Keyera Corp. (KEY-T, outperform) to $47 from $48. Consensus: $44.73.

- Baytex Energy Corp. (BTE-T; BTE-N, market perform) to $5.50 from $6. Consensus: $5.28.

- Enerplus Corp. (ERF-T; ERF-N, outperform) to $7.25 from $6.85. Consensus: $6.04.

- NuVista Energy Ltd. (NVA-T, outperform) to $6.25 from $5.75. Consensus: $6.18.

- Seven Generations Ltd. (VII-T, outperform) to $27 from $22. Consensus: $22.86.

- Tourmaline Oil Corp. (TOU-T, outperform) to $34 from $35.25. Consensus: $35.85.

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Shaw Communications Inc. (SJR.B-T) reported "mixed" results in its final quarter before the integration of assets from the $1.6-billion acquisition of Wind Mobile Corp., said CIBC World Markets analyst Robert Bek.

On Thursday, Shaw reported second-quarter consolidated revenues of $1.51-billion, topping Mr. Bek's projection of $1.14-billion. Earnings before interest, taxes, depreciation and amortization of $502-million narrowly missed his $507-million estimate. Earnings per share of 24 cents also fell below the Street's 32-cent projection, though Mr. Bek said one-time items "blur the comparison." He added: "We would consider clean EPS to be closer to the 1-per-cent EBITDA miss from our numbers."

"Looking at the results more granularly, the EBITDA miss in the quarter was driven by the Consumer segment, where margins came in below expectations (43.1 per cent versus. 43.7 per cent), as employee costs and programming increases weighed on results," he said.

"As expected, Media assets were reported as discontinued in FQ2, and Wind wireless assets were not yet included, as this is the last quarter before the full transformation of the asset base takes hold. To that end, the company also issued updated guidance to account for these changes, with flat-to-slight EBITDA growth (excluding divested media assets) now expected for fiscal year 2016, which is in line with our numbers going in."

Maintaining his "sector performer" rating, Mr. Bek lowered his target price to $27 from $29, noting the "continued macro weakness in Shaw's primary operating region of Alberta, and Wind integration risk."

The analyst average target price target is $26.50, according to Bloomberg.

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Following the release of its first-quarter results on Thursday, RBC Dominion Securities analyst Eric Berg reiterated his stance that BlackRock Inc. (BLK-N) is a core holding in the U.S. asset management sector.

He said Blackrock is "a company we believe will be gaining market share as it successfully navigates its way through the industry's numerous challenges."

"It came as no surprise to us that BlackRock's shares, after initially slumping, rallied sharply Thursday following release of the company's March-quarter earnings and after the company held its regular earnings call," said Mr. Berg. "It was clearer to us than ever after participating in the call that BlackRock's leadership understands – deeply, we think– the most important challenges, trends, and themes shaping the asset-management industry. They include the continuation of low (if negative) interest rates, the arrival of new and potentially highly disruptive regulation in the form of the Department of Labor's Fiduciary rule, and the desire by both retail and institutional investors alike to earn higher investment returns than they have earned in the past – and with less volatility than they've experienced in the past. Believing that Larry Fink, who is BlackRock's CEO, and the rest of his leadership team at BlackRock understand these developments as well as – if not better than – any other group of managers in the business, we are affirming our outperform rating."

Mr. Berg said, on the surface, investors may have been disappointed by the results. The company reported earnings per share of $4.25 (U.S.), lower than both the consensus of $4.30 and Mr. Berg's projection of $4.54. Flows from its equity business were negative.

"But of course these negative equity flows and lower flows all need to viewed in context: Both the stock market and the bond market were extremely volatile in the March quarter, with stocks first falling and then rising and with interest rates see-sawing during the quarter in essentially the same pattern," the analyst said. "Against this backdrop, which in general has acted as a deterrent to client activity, the fact that BlackRock was able to bring in as much money as it did and to grow as quickly as it did in the March quarter is a credit. It speaks to the merit of BlackRock's argument that it is so diversified – its product lineup is so broad – that it really, truly can be a company for all seasons. In this particular quarter, it was fixed-income that did the trick for BlackRock; the company brought in $52-billion into its fixed-income coffers in the quarter, more than 100 per cent of the company's overall $36-billion in net flows and including a record $27-billion into its iShares fixed-income complex. At the end of the day, however, it wasn't the pluses or minuses in the quarter that caught our attention as much as what went on in the conference call. Simply put, we thought the call was one of the best discussions of the major themes and changes taking place in the asset-management business that we have heard in a while. And because we came away from the call thinking not only that BlackRock has a firm grasp of these topics but is positioning itself to take advantage of them."

In reaction to the results, Mr. Berg lowered his 2016 EPS projection to $18.91 from $19.92. His 2017 estimate moved to $21.98 from $21.99.

He raised his target price to $392 (U.S.) from $367. The average is $385.

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In other analyst actions:

Allegiant Travel Co (ALGT-Q) was downgraded to "underweight" from "equal-weight" at Barclays by equity analyst David Fintzen. The target price is $188 (U.S.) per share.

Anadarko Petroleum Corp (APC-N) was raised to "overweight" from "neutral" at JPMorgan by equity analyst Arun Jayaram. The 9-month target price is $55 (U.S.) per share.

Antero Resources Corp (AR-N) was raised to "neutral" from "underweight" at JPMorgan by equity analyst Arun Jayaram. The 9-month target price is $28 (U.S.) per share.

Alibaba Group Holding Ltd (BABA-N) was rated new "Buy" at Needham & Co. by equity analyst Kerry Rice. The 12-month target price is $95 (U.S.) per share.

Briggs & Stratton Corp (BGG-N) was downgraded to "neutral" from "outperform" at Robert Baird by equity analyst Timothy Wojs. The 12-month target price is $23 (U.S.) per share.

Progressive Waste Solutions Ltd (BIN-N) was downgraded to "sector weight" from "overweight" at KeyBanc by equity analyst Joe Box.

Cascades Inc (CAS-T) was raised to "buy" from "hold" at TD Securities by equity analyst Sean Steuart. The 12-month target price is $10.50 (Canadian) per share.

Cooper Cos Inc (COO-N) was raised to "buy" from "hold" at Jefferies by equity analyst Raj Denhoy. The 12-month target price is $175 (U.S.) per share.

Foot Locker Inc (FL-N) was downgraded to "market perform" from "outperform" at Cowen by equity analyst John Kernan. The 12-month target price is $66.00 per share

Hydro One Ltd (H-T) was downgraded to "hold" from "buy" at TD Securities by equity analyst Linda Ezergailis. The 12-month target price is $24 (Canadian) per share.

Hewlett Packard Enterprise Co (HPE-N) was rated new "outperform" at Oppenheimer by equity analyst Ittai Kidron. The 18-month target price is $21 (U.S.) per share.

JetBlue Airways Corp (JBLU-Q) was raised to "overweight" from "equal- weight" at Barclays by equity analyst David Fintzen. The target price is $26 (U.S.) per share.

 Kilroy Realty Corp (KRC-N) was raised to "outperform" from "market perform" at BMO Capital Markets by equity analyst John Kim. The target price is $70 (U.S.) per share.

Southwest Airlines Co (LUV-N) was raised to "equal-weight" from "underweight" at Barclays by equity analyst David Fintzen. The target price is $48 (U.S.) per share.

Micron Technology Inc (MU-Q) was raised to "strong buy" from "outperform" at Raymond James by equity analyst Hans Mosesmann. The 12-month target price is $17 (U.S.) per share.

Southwestern Energy Co (SWN-N) was downgraded to "underweight" from "neutral" at JPMorgan by equity analyst Arun Jayaram. The 9-month target price is $8 (U.S.) per share.

Synaptics Inc (SYNA-Q) was downgraded to "hold" from "buy" at Cross by equity analyst Osten Bernardez. The 12-month target price is $95 (U.S.) per share.

Spin Master Corp (TOY-T) was rated new "overweight" at Piper Jaffray by equity analyst Stephanie Wissink. The 12-month target price is $26 (Canadian) per share.

Virgin America Inc (VA-Q) was downgraded to "equal-weight" from "overweight" at Barclays by equity analyst David Fintzen. The target price is $56 (U.S.) per share.

Waste Connections Inc (WCN-N) was downgraded to "sector weight" from "overweight" at KeyBanc by equity analyst Joe Box.

Wells Fargo & Co (WFC-N) was downgraded to "underweight" from "neutral" at Piper Jaffray by equity analyst Kevin Barker. The 12-month target price is $44 (U.S.) per share.

With files from Bloomberg News