Friday's analyst upgrades and downgrades

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

Though he said there is a lack of a "sure-fire" catalyst to reverse market sentiment in the base metal sector, CIBC World Markets analyst Alec Kodatsky expressed optimism despite noting demand indicators are at a level "normally observed during widespread economic crises or recessions."

In a research note, he pointed to stabilizing Chinese industrial production data; "conditions this awful don't last long" and the potential for fiscal stimulus as the next policy step.

"Global demand conditions have deteriorated to levels substantially worse than we had expected – and it's difficult to see how they can get much worse from here," the analyst said. "As such, relevant valuation metrics are at crisis lows. Fundamentally, this is a cyclical sector that should be revisited when times are bad – and we think that, given the current state of affairs, it's time to start looking. At this point in the cycle, we think some conventional valuation metrics (namely EV/EBITDA and P/NAV) are fundamentally flawed and offer limited insight for investors. In particular, we consider EV/EBITDA a somewhat dangerous metric to follow given its tendency to make the sector look inexpensive at the top of the cycle, and expensive at the bottom. We think it is a worthwhile exercise to re-think how these companies are valued."

He initiated coverage of seven mining equities. They were:

- Cameco Corp. (CCO-T) with a "sector outperformer" rating and a $22 target. The analyst consensus is $22.11, according to Thomson Reuters.

Mr. Kodatsky said: "We think the driver for our constructive outlook on Cameco shares strays slightly from consensus in that it is not contingent on higher uranium prices – although we do expect these to emerge in 2017. The standout for us is the substantial increase in profitability of Cameco's core mining business as realized prices have continued to rise as legacy, low-price, long-term contracts fall away. To quantify, on our numbers Cameco should realize cash operating margins of better than $41 per pound. in 2016 versus something less than $10 per pound in 2006. These margins are largely sustainable even if uranium emerges weaker than we expect, offering superior earnings and cash flow visibility against the remainder of our coverage. We believe the market will begin to take notice as quarterly financial results emerge over the first half of 2016."

- First Quantum Minerals Ltd. (FM-T) with a "sector outperformer" rating and a $10 target. Consensus is $8.36.

Mr. Kodatsky said: "First Quantum's history is dotted with instances where significant challenges emerged, the worst-case scenario carried unappealing consequences, but in the end, what seemed an unlikely recovery actually happened. Importantly, the key players behind these game-saving plays are still there, and continue to conjure up outcomes that defy the odds. We think that the recent stabilization of the copper market, progress at Sentinel, ongoing divestitures and rigorous cost controls have put the company on track to successfully addressing its capital structure. It's not a straight shot to success but things are trending well. The targeted net debt reduction of $1-billion in 2016 has largely been accomplished with the pending $712-million sale of Kevitsa (alleviating much of the imminent covenant risk) and we anticipate further measures to raise a similar amount before the year is out."

- HudBay Minerals Inc. (HBM-T) with a "sector performer" rating and $5.75 target. Consensus is $7.03.

Mr. Kodatsky said: "Since 2013, HudBay has delivered well on its project pipeline, the most significant being Constancia, which continues to ramp. These initiatives have helped rejuvenate a tired production base by extending reserve life, improving the company's cost position and adding geographic diversification. However, this has come with a cost of an increased debt position. In the current price environment, the ability to continue the push for growth has been curbed until both higher copper prices and risk appetite return. We don't view HudBay's transition to a harvesting mode as a bad thing, but it does leave the market few catalysts with which to work outside of watching quarterly production numbers rise. HudBay does show good expected growth for 2016/2017 and by and large should have a manageable financial position until the end of the decade – this should place the company in some degree of standing with investors. We also expect to see exploration results from the Lalor high-grade copper-gold zone in 2016, which offers some potential to excite the market."

- Lundin Mining Corp. (LUN-T) with a "sector performer" rating and $5.50 target. Consensus is $5.

Mr. Kodatsky said: "Lundin has steadily improved its asset base through a blend of M&A acumen and applied technical knowledge, and importantly with very little risk put onto the balance sheet. The result today is a company with a fairly balanced geographical risk profile (more so than in the past), an improved cost position and more metal production, all while maintaining attractive debt metrics. We expect little deviation from this strategy going forward."

"We think the market recognizes and appreciates the merits of Lundin's strategy and we believe that Lundin was the 'go to' name in the space as the commodity complex declined. This has left the shares fairly priced, in our view, and outside of Timok, fairly quiet on news flow for the foreseeable future. We don't see much reason for downside, believing the shares remain attractive to investors with lower-risk appetites."

- Sherritt International Corp. (S-T) with a "sector performer" rating and $1 target. Consensus is $1.21.

Mr. Kodatsky said: "Sherritt's product mix is predominantly oriented towards nickel and oil & gas, two commodity segments that have been particularly hard hit over the past year. Although the legacy assets have been able to manage, the company's flagship nickel asset, Ambatovy, has proven more problematic. Given the unfavourable economic split caused by aggressive cash sweeps to repay debt, Sherritt has elected not to contribute additional capital to fund operations. We think that the overhang at Ambatovy, and the structure of the resolution, define the path forward with the timing and structure of the debt repayments being key. This process is dictated by negotiations between various lenders and stakeholders giving us limited ability to predict an outcome. We anticipate some news on this front in June, which may help resolve some uncertainties."

- Teck Resources Ltd. (TCK.B-T) with a "sector outperformer" rating and a $16 target. Consensus is $9.39.

Mr. Kodatsky said: "Our positive view on Teck is driven by three factors: 1) After a painfully long wait, met coal is finally taking a positive turn with prices rising from a Q1/2016 benchmark of $81 (U.S.) per tonne to spot levels of $95/t today. We do not think this is an anomaly as trade data indicates less production is hitting the seaborne market, and for us, a long-awaited catalyst has emerged. This is significant for Teck as each $1/t move in met coal translates into $35-million in EBITDA. 2) Monetization of non-core infrastructure assets is underway to help bolster liquidity, and we expect these are likely sold accretively in 2016; and, 3) Oil prices have rebounded above $40 (U.S.) per barrel. At this oil price, Fort Hills should generate free cash flow, and as such, continuing to spend money on the project is likely more favourably viewed by the market than at say at $28/Bbl."

- Turquoise Hill Resources Ltd. (TRQ-T) with a "sector performer" rating and $4.50 target. Consensus is $4.40.

Mr. Kodatsky said: "We think TRQ is a rarity in the base metals space, offering investors pure-play exposure to Oyu Tolgoi, a world-class copper development project operated by Rio Tinto. A key hurdle was crossed in 2015 with the agreement with the Mongolian government to resume development of the underground deposit, and the follow-on financing package. This is critical as the underground represents the bulk of the long-term value of the asset."

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In a first-quarter update on Canadian asset managers, Desjardins Securities analyst Gary Ho downgraded IGM Financial Inc. (IGM-T) on valuation.

"In 1Q16, the share prices of asset managers under coverage gained 2.9 per cent, roughly in line with the S&P/TSX Capped Financials Index (2.5 per cent). Performance of individual stocks varied, led by Fiera Capital (19.0 per cent) and IGM (+10.7 per cent)," he said. "For the quarter, we believe investors will likely hone in on four themes/ topics: (1) 1Q16 net sales (which includes the important RRSP season); (2) expense management – ability to curtail/manage expenses should market conditions deteriorate; (3) margin pressure; and (4) update on the regulatory environment."

He added: "Our cautious sector view is predicated on: (1) uncertainty surrounding fee disclosure and best-interest rules; (2) the lack of clarity on the impact of rule changes on corporate class structure; (3) an acceleration of fee compression; (4) intensifying competition from banks and lifecos, as well as among independent asset managers; and (5) mixed net flow trends. We believe that greater clarity on the first two issues, some improvement in the competitive landscape and/or a turnaround in net flows are needed to be more constructive."

Mr. Ho moved IGM to "hold" from "buy" while raising his target price to $39 from $37. The analyst consensus is currently $38.18.

"Since we upgraded IGM in October, the shares have generated a total return of 8.6 per cent, outperforming IGM's closest peer CI with a total return of a loss of 12.4 per cent over the same period," he said. "We view the shares as fairly valued at current levels. In addition, we expect higher non-commission expenses in 2016 (+6-7-per-cent forecast), which will lead to EBITDA margin erosion nearterm. Lastly, we may get regulatory news over the next few months that may be an overhang on IGM (as well as the industry)."

Adjusting his estimates to reflect a "bounce" in assets under management (AUM) since February, the analyst made several tweaks to his targets for other stocks. They changes were:

- CI Financial Corp. (CIX-T, hold) to $30 from $31. Consensus is $31.55.

- Gluskin Sheff + Associated Inc. (GS-T, hold) to $20 from $21. Consensus is $21.75.

- Sprott Inc. (SII-T, hold) to $2.50 from $2.25. Consensus: $2.42.

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Citing ongoing price weakness in Alberta's power market as well as uncertainty with the market transition, Credit Suisse analyst Andrew Kuske downgraded both Capital Power Corp. (CPX-T) and TransAlta Corp. (TA-T)  to "underperform" from "neutral."

"Yet, a considerable amount of information is still unknown in light of the provincial government's market transition plans," said Mr. Kuske. "In our view, there are more questions than answers at this point, which creates a rather unattractive risk-adjusted return versus other opportunities in our coverage universe. Longer-term investors may find the current uncertainty attractive, but we believe better investment opportunities exist elsewhere at this time."

He added: "We continue to believe the major companies with legacy PPA plants (Canadian Utilities Ltd./CU-T, CPX and TA) will need to come to some form of reasonable agreement in relation to the future market structure, developments, compensation (cash, brownfield building rights, government-backed contracts and other mechanisms) and the underlying market rules. At this point in time, we view the market as having too much uncertainty for a capital intensive business with assets that cannot be moved and are critical to societal and economic functioning. As a result of these issues, we genuinely believe a rational outcome will occur, but clarity will take a period of time."

Ahead of the release of its first-quarter results on April 25, Mr. Kuske moved his price target for Capital Power to $18 from $20. Consensus is $19.63.

He pointed to three areas to watch. They were: "(1) updates regarding Alberta's power industry regulation plans; (2) a power pricing update with a particular focus on Alberta; and, (3) future capital investment opportunities from the longer-term repowering of Alberta with a near-term focus on the timing around the Genesee natural gas plant builds."

Mr. Kuske maintained his target for TransAlta of $6. Consensus is $6.03.

It is schedule to release its quarterly results on May 3.

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Norfolk Southern Corp. (NSC-N) is on track to deliver double-digit earnings per share growth in 2016, according to BMO Nesbitt Burns analyst Fadi Chamoun.

On Thursday, the company reported first-quarter 2016 EPS of $1.29 (U.S.), a rise of 29 per cent year over year. The result topped Mr. Chamoun's $1 projection as well as the consensus of 97 cents. Its operating earnings before interest and taxes (EBIT) of $723-million also topped both the analyst's estimate ($601-million) and the consensus ($580-million).

"Revenues were largely in line with our forecast with the beat largely a result of better-than-expected productivity savings, which were originally targeted to be $130-million in the 2016 fiscal year but raised to $200-million concurrent with the release of Q1/16 results. Management reiterated its 2020 target for $650-million in annualized cost savings, below 65-per-cent operating ratio, and double-digit EPS growth. NSC projects under-70-per-cent operating ratio in F2016 from 72.6 per cent in F2015. This target appears achievable given the reported 70.1 per cent in Q1/16, which tends to be the seasonally weakest quarter of the year."

In reaction to the results, Mr. Chamoun raised his 2016 EPS projection to $5.70 from $5.65, compared to a $5.33 consensus. His 2017 estimate moved to $6.48 from $6.43, versus $5.93.

"While the cost curve is lower than we had anticipated in Q1/16, we note the cost savings are somewhat front-end loaded this year with comparables getting tougher in the coming quarters, while at the same time the coal outlook is more challenging with stockpiles near 100 days likely suppressing shipments for most of the current year," the analyst said.

Maintaining a "market perform" rating, he raised his target to $93 from $88. The analyst average is $89.88, according to Bloomberg.

"Our conviction in the earnings power of Norfolk in the coming two years is increased notwithstanding poor visibility to demand for coal, and we would consider a more constructive rating on a pullback in valuation," he said.

Elsewhere, the stock was raised to "outperform" from "neutral" by Credit Suisse analyst Allison Landry with a target price of $97 per share (up from $84). Its rating was raised to "buy" from "neutral" at UBS by equity analyst Thomas Wadewitz. His target moved to $102 per share from $84.

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IMAX Corp. (IMAX-N) enjoyed a "stellar" first quarter with results "substantially" ahead of projections, said Canaccord Genuity analyst Aravinda Galappatthige.

On Thursday, the Canadian entertainment technology company reported adjusted EBITDA of $31.5-million (U.S.), an increase of 97 per cent year over year and topping Mr. Galappatthige's projection of $22.3-million and the consensus of $24.3-million. The analyst pointed to stronger-than-expected box office results, resulting in unexpected gains in DMR (digital media remastering) and joint venture arrangements.

IMAX  reported earnings per share of 14 cents, up from nill at the same point a year ago. Mr. Galappatthige had projected 7 cents with the consensus a penny more.

"Q1/16 once again showed the substantial underlying fundamental strength we have been seeing in recent times, namely consistent box office, growing signings and a solid install outlook," the analyst said. "The consistency of the box office strength in Q1 was a stand-out, as North American and international (excluding China) box office strengthened considerably."

"Signings were buoyant as well, rising 75 per cent year over year in Q1 following a 28-per-cent uptick for the full year 2015. In addition to some sizable deals in China, we are seeing Europe, Japan and India show attractive momentum of late. Japan in particular looks promising, as IMAX has now signed on with four of the top five theatre chains in the country. On the China front, with Wanda accelerating installations of late, we wonder if there would be a fresh order on the horizon that further boosts signings. Following the strong Q1, we expect a year-over-year decline in Q2 due to the tough comp from last year. Q2/15 was studded with Furious 7 (the top title in China), Avengers 2 and Jurassic World. While the Q2 slate is decent this year and notwithstanding a strong start from Jungle Book, we suspect it would be difficult to beat last year. Having said that, we are increasingly comfortable about Q3, which in our view carries a strong slate, with potential spillover from Independence Day, Star Trek Beyond and Suicide Squad."

Maintaining his "buy" rating, he raised his target to $39 (U.S.) from $37. Consensus is $41.65.

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In other analyst actions:

Archer-Daniels-Midland Co (ADM-N) was raised to "neutral" from "underweight" at JPMorgan by equity analyst Ann Duignan. The 9-month target price is $36 (U.S.) per share.

Bunge Ltd (BG-N) was downgraded to "neutral" from "overweight" at JPMorgan by equity analyst Ann Duignan. The 9-month target price is $57 (U.S.) per share.

DR Horton Inc (DHI-N) was downgraded to "neutral" from "buy" at Sterne Agee CRT by equity analyst Jay Mccanless. The 12-month target price is $33 (U.S.) per share.

First National Financial Corp (FN-T) was downgraded to "hold" from "buy" at TD Securities by equity analyst Graham Ryding. The 12-month target price is $27 (Canadian) per share.

Nordstrom Inc (JWN-N) was downgraded to "sell" from "hold" at Evercore ISI by equity analyst Omar Saad. The 12-month target price is $40 (U.S.) per share.

Polaris Industries Inc (PII-N) was downgraded to "neutral" from "buy" at B. Riley by equity analyst Michael Jacobs. The 12-month target price is $104 (U.S.) per share.

United Continental Holdings Inc (UAL-N) was downgraded to "neutral" from "buy" at Sterne Agee CRT by equity analyst Michael Derchin. The 12-month target price is $56 (U.S.) per share.

United Rentals Inc (URI-N) was downgraded to "sector perform" from "outperform" at RBC Capital by equity analyst Seth Weber. The 12-month target price is $68 (U.S.) per share.

With files from Bloomberg News