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Canadian bank headquarters stand on Bay Street in Toronto.Brent Lewin/Bloomberg

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

Despite a momentum shift in favour of Canadian lifecos, Canaccord Genuity analyst Gabriel Dechaine is "sticking with the banks" in 2017.

"The Big-6 Canadian banks rose by an average of [approximately] 25 per cent in 2016, exceeding the average 15-per-cent of the Big-4 Canadian lifecos," said Mr. Dechaine in a research note. "However, the lifecos had a stronger fourth quarter, outperforming the banks by 400 basis points. With performance momentum shifting in favour of the lifecos, it is tempting to switch our relative bias. However, we are reluctant to do so since: (1) we believe the timing of how rates will impact earnings will be more gradual than the market expects; (2) not all macro factors have been positive over the past three months; and (3) though higher rates will help build excess capital, near-term/accretive deployment is low probability, in our view."

On banks, Mr. Dechaine said earnings per share revisions are likely to drive performance rather in re-rating.

He said: "While 2016's phenomenal performance will be tough to match, we remain positive on the sector: (1) the macro environment is more supportive than it was in 2016; (2) the banks are well capitalized and regulatory headwinds may be fading; (3) the banks could easily exceed what we view as conservative Street forecasts. Admittedly, these positives are reflected in the sector's 12.5x forward P/E multiple, which is [approximately] 15 per cent above the 10-year average. As such, the onus for positive bank stock performance falls on positive EPS revisions. In our view, the likelihood of this outcome being achieved is high considering 'achievable' 5-per-cent consensus growth forecasts and since the banks have managed to exceed start of year growth forecasts in eight of the past ten years."

Mr. Dechaine made the following target price changes for the banks:

- Bank of Montreal (BMO-T, buy) to $104 from $99. The analyst consensus is $96.59, according to Thomson Reuters.

- Bank of Nova Scotia (BNS-T, buy) to $84 from $80. Consensus is $79.26.

- Canadian Imperial Bank of Commerce (CM-T, hold) to $115 from $111. Consensus is $112.75.

- Canadian Western Bank (CWB-T, hold) to $31 from $30. Consensus is $29.83.

- Laurentian Bank of Canada (LB-T, buy) to $62 from $58. Consensus is $57.73.

- National Bank of Canada (NA-T, buy) to $59 from $53. Consensus is $55.85.

- Royal Bank of Canada (RY-T, buy) to $99 from $95. Consensus is $91.56.

- Toronto-Dominion Bank (TD-T, hold) to $69 from $68. Consensus is $66.71.

"Although Canadian bank valuations have become lofty on an absolute basis (i.e. we see little room for multiple expansion), they remain attractive on a relative basis," said Mr. Dechaine. "The group is trading at above average valuation discounts relative to the U.S. mega-banks (i.e. they normally trade at a premium to this group), the U.S. regional banks as well and to the S&P/TSX. Moreover, they are trading at a narrower premium to the Canadian lifecos, albeit not in a substantial manner."

On lifecos, Mr. Dechaine said: "While rising rates are undeniably positive for the companies' earnings and capital ratios, we caution investors to expect rate-driven earnings upside at a gradual pace … Despite our reluctance to upgrade the sector, we do not believe avoiding it entirely is a wise strategy."

The analyst upgraded his rating for Sun Life Financial Inc. (SLF-T) to "buy" from "hold" and raised his target price to $58 from $50. Consensus is $53.07.

"Our rating change coincides with the introduction of our 2018 EPS estimates for the group, which implies 9-per-cent average sector EPS growth," he said. "This growth is partially driven by our assumption that the U.S. corporate tax rate drops to 25 per cent in 2018 from [approximately] 35 per cent, currently. We note that this assumption generates interesting valuation and growth outcomes for SLF, in particular. Specifically, it boosts MFS' earnings by 16 per cent, or by 4 per cent on a consolidated basis. Additionally, this adjustment results in SLF's pro forma valuation falling to 11 times forward price-to-earnings from 11.4 times, despite being in a position to deliver above average growth (i.e. 14 per cent versus 7-per-cent peer average) from its highest valuation segment. Aside from valuation, we appreciate SLF's solid balance sheet, good growth potential in high valuation segments and generally stable financial results and risk profile."

His other changes for the group were:

- Great-West Lifeco Inc. (GWO-T, sell) to $35 from $32. Consensus is $34.82.

- Industrial Alliance Insurance and Financial Services Inc. (IAG-T, hold) to $56 from $53. Consensus is $55.60.

- Manulife Financial Corp. (MFC-T, hold) to $26 from $21. Consensus is $25.12.

"2016 provided a perfect illustration of the relationship between bond yields and lifeco stocks," the analyst said. "Over the first three quarters of the year, the stocks declined 6 per cent on average, which coincided with a 70 basis points fall in the U.S. 10yr over the same time period. In the last quarter of 2016, performance reversed, with lifeco stocks rallying 17 per cent on average, tracking an 85 bps rise in the 10-year. We believe this perspective is important in order assess whether the rise in bond yields that drove the sector rerating (i.e. from a trough of 10 forward P/E to 12.5 times currently) can also result in accelerated earnings growth."

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Desjardins Securities analyst Maher Yaghi sees Cogeco Communications Inc. (CCA-T) stock as currently being unvalued.

"We believe the company should be able to deliver industry-leading dividend growth over the next few years at the same time as it undertakes additional acquisitions in the U.S. cable market," said Mr. Yaghi.

On Thursday, Cogeco reported first-quarter 2017 financial results that largely met the analyst's expectations. Revenue of $549-million was just below Mr. Yaghi's projection of $553-million, and represented a 2-per-cent increase year over year. Earnings before interest, taxes, depreciation and amortization of $250-million topped his estimate by $3-million.

"Both U.S. and Canadian cable performed well," he said. "The company implemented price increases of [almost] 5 per cent in each geography and, so far, it appears that these increases are being absorbed by clients. The Canadian segment eked out a marginal increase in TV subs as the recent rebranding and improved promotional activity seem to have generated traction with consumers. Management is continuing to look for acquisitions in the US, which we view as a good way to improve shareholder value by leveraging the company's existing presence there.

"The company's business segment continued to show weak results. We continue to believe that a sale of this business and refocusing of capital toward cable is the best way forward."

In reaction to the results, Mr. Yaghi raised his 2017 and 2018 earnings per share projections to $5.85 and $6.09, respectively, from $5.40 and $6.04.

He maintained a "buy" rating for the stock and target price of $72.50. Consensus is $71.79.

"We believe the shares offer good downside support at these levels, given their relative discount vs peers (6.1 times EV/FY2 EBITDA versus 7.9 times for peers)," said Mr. Yaghi. "The company's staggered investment approach in the U.S. is growing FCF without exerting undue pressure on shareholder capital. We believe management will continue with this gradual acquisition strategy, which should allow for a long runway of incremental FCF growth and, hence, dividend increases over the medium term."

Elsewhere, BMO Nesbitt Burns analyst Tim Casey raised his target price for the stock to $70 from $68 with a "market perform" rating (unchanged).

"Q1/F17 results represent a continuation of recent trends," said Mr. Casey. "The core Canadian Broadband business continues to manage profitability, while American Broadband continues to drive organic and M&A growth. A turnaround in the Business ICT segment remains a challenge, with no growth expected in the near term. We expect competitive conditions to continue to tighten."

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With the deployment of its X1 technology, Shaw Communications Inc. (SJR.B-T) now has a "a clear go-to-market strategy in wireline after years of inconsistency," said BMO Nesbitt Burns analyst Tim Casey.

"Management hosted a sell-side event in Calgary [Thursday] with a demonstration of Shaw's new entertainment platform, branded BlueSky TV, which is powered by Comcast's X1 platform," he said. "Not surprisingly, it is very impressive and a major upgrade from its legacy video service. It is now available in Calgary, with Vancouver to follow shortly and the remainder of Shaw's footprint through the year. We came away with a greater sense of confidence from management with respect to Shaw's technology roadmap (X1 for video, DOCSIS 3.1 for broadband, and rollout of LTEAdvanced in wireless) and particularly its go-to-market strategy in wireline."

On Thursday, Shaw also reported its first-quarter 2017 results, which were largely met with Mr. Casey's expectations.

Consolidated revenue of $1.313-billion was in line with the consensus estimate of $1.318-billion, and represented an increase of 15 per cent year over year. Adjusted EBITDA was up 6 per cent from the previous year to $539-million, topping the consensus by $1-million).

Earnings per share of 18 cents included a $107-million (16 cents per share) pretax write-down of Shomi. The consensus was 31 cents.

"We forecast low-single-digit EBITDA growth through fiscal 2018, reflecting compression in wireline consumer EBITDA offset by growth in wireless EBITDA," said Mr. Casey. "We foresee extended dividend payout ratios through this period."

Mr. Casey raised his target price for Shaw stock to $29 from $25 with an unchanged "market perform" rating. Consensus is $27.14.

"We believe adding a wireless product to its business mix will improve the long-term growth profile of the company," he said. "However, we expect an investment period will be required over the medium term, which will mitigate free cash flow and therefore dividend growth."

Desjardins Securities' Maher Yaghi raised his target by 50 cents to $28.50 with a "hold" rating.

"We believe Shaw has enough financial flexibility to execute on its wireless strategy," Mr. Yaghi said. "In FY18 and beyond, this should lead to improving overall earnings growth. Given the potential operational risks in furthering this strategy, we believe investors need to pay close attention to valuation. While a few catalysts do exist in FY17 with a possible sale of ViaWest or currently held Corus shares, we prefer to wait for a better entry point."

He added: "We recently downgraded Shaw to Hold (from Buy) given the stock's strong performance and the fact that it now has the highest EV/FY2 EBITDA valuation in the sector. Although we believe the wireless product will be an important asset to bundle with cable services in the future, we estimate the contribution to EBITDA growth from wireless will be modest in FY17."

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Expecting another volatile year, Cormark analyst Richard Grey lowered his 2017 estimates for gold to $1,200 per ounce from $1,300 and silver to $17 per ounce from $20.

With those changes, he downgraded a pair of stocks:

  • Kinross Gold Corp. (K-T) to "market perform" from "buy" with a target of $5.25, down from $8. The analyst average is $5.90, according to Bloomberg.
  • IAMGOLD Corp. (IMG-T) to "market perform" from "buy" with a target of $6.85, down from $8.25. The analyst average is $6.85.

Elsewhere, Credit Suisse analyst Anita Soni downgraded the U.S. issue of IAMGOLD (IAG-N) to "underperform" from "neutral" with a target of $4.25 (U.S.), versus the average of $4.81.

Ms. Soni also downgraded:

  • Alamos Gold Inc. (AGI-N, AGI-T) to "neutral" from "outperform" with a $9.50 (U.S.) target, down from $10. The average is $9.47.
  • Yamana Gold Inc (AUY-N, YRI-T) to "neutral" from "outperform" with a $4 (U.S.) target, down from $4.50. The average is $4.39.

She upgraded:

  • Franco-Nevada Corp. (FNV-N, FNV-T) to "outperform" from "neutral" with a target of $79 (U.S.). The average is $72.81.

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In other analyst actions:

Bonterra Energy Corp. (BNE-T) was rated a new "buy" at Cormark Securities by analyst Amir Arif with a target of $35. The analyst average is $32.07.

Facebook Inc. (FB-Q) was raised to "strong buy" from "outperform" at Raymond James by analyst Aaron Kessler with an unchanged target price of $160 (U.S.). The average is $153.15.

SEMAFO Inc. (SMF-T) was upgraded to "outperform" from "neutral" by Credit Suisse analyst Robert Reynolds with a $6.50 (Canadian) target, up from $6. The average is $6.35.

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