Monday's analyst upgrades and downgrades

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

Shares of New Gold Inc. (NGD-A, NGD-T) are fairly valued based on both spot and commodity prices forecasts, said RBC Dominion Securities analyst Dan Rollins.

Accordingly, Mr. Rollins downgraded the Vancouver-based company to "sector perform" from "outperform."

He noted the share price has increased 66 per cent since the start of 2016, compared to a 50-per-cent rise from the broader Gold Miners Index (GDX). He added the performance is "even more impressive" when benchmarking against a mid-January low, jumping 114 per cent versus a 65-per-cent bump from the GDX.

"We attribute the performance to 1) stronger gold and copper prices; 2) improved confidence in ability to fund Rainy River post investor day; and 3) smart/prudent short-term hedging strategy which provides a floor price of $1,200 per ounce and ceiling of $1,400/oz (April of 2016 through December 2016)," said Mr. Rollins.

He added: "Backed by low cost production from New Afton, improving costs at Mesquite and start-up of Rainy River, we remain quite positive on New Gold's fundamentals. Once in full production, we expect Rainy River to have a material impact on the company's sustaining and operating free cash flow potential. We expect a renewed focus on exploration could further enhance New Gold's fundamentals considering the company sits on two relatively under-explored gold districts in Canada (Rainy River/Blackwater) and depth potential at New Afton."

Mr. Rollins raised his price target for the stock to $3.75 (U.S.) from $3 after updating his forecasts "to reflect near-term gold hedges, year-end reserves, modestly higher cash flow multiple (16 times versus 15 times) and rolling our valuation forward to Q2/16 from Q1/16." The analyst consensus price target is $4.51, according to Thomson Reuters.

"We believe New Gold's share price and valuation fairly reflects the company's fundamentals when taking into consideration Rainy River is in the midst of a key de-risking phase," he said. "Our sector-perform rating is supported by New Gold's valuation as the company trades at a premium to its Tier II peers on RBC forecast prices and at a premium relative to historical net asset value (NAV) and adjusted cash flow (AdjCF) relationships with peers at spot prices."

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In reaction to "strongly improving sentiment," TD Securities analyst Scott Treadwell downgraded Precision Drilling Corp. (PD-T, PDS-N) to "buy" from "action list buy."

Mr. Treadwell noted the stock has increased in price by 72 per cent since the company reported its fourth-quarter 2015 results, which included the elimination of its dividend, on Feb. 11.

"Our belief is that two main drivers have been behind the strong rise on stock price since Q4 results," he said. "First, crude oil prices have increased on the order of 50 per cent in that time frame — likely the main driver of increased interest in the sector. Second, Precision remains one of the most liquid trading names in the space (recently approaching $50-million daily value across all exchanges), and screens well on short-term company-specific risks, making it, in our view, a good investment vehicle for recovery in the [oil-field services] space and likely the most direct beneficiary of equity inflows. Though short-term volatility appears set to continue, we would continue to add weight on any dips in the short term."

In reaction to his 2017 estimates, Mr. Treadwell did raise his target price for the stock to $8 from $6. The analyst consensus is $6.61.

He said the stock is currently trading at 5.1 times enterprise value (EV) to EBITDA, and he believes it should "over time" return to a premium multiple in comparison to both its peers and historical mid-cycle range of five times to six times.

"Precision remains our top pick in the drilling segment and across the coverage group," the analyst said. "Its high-spec fleet and process-driven cost management systems should ensure that the company's rigs are among the first picked up in a recovery, and that incremental revenue will result in EBITDAS growth."

He added: "Precision's top-tier rig fleet and cost management system are well suited to industry conditions, throughout the cycle. With a cross-border fleet capable of drilling in all resource plays Precision remains a highly relevant contractor that has the scale and experience to operate for any producer in North America. Its growing international footprint offers long-term growth with higher visibility and excellent counterparty risk. A well-structured balance sheet with liquidity and term offers financial risk mitigation and funding mechanisms for further growth."

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RBC Dominion Securities analyst Arun Viswanathan likes the $9.3-billion (U.S.) acquisition of Valspar Corp. (VAL-N) by Sherwin-Williams Co. (SHW-N) as it provides immediate access to market-leading industrial coatings franchises.

"Given the minimal overlap, we believe the deal will be approved with limited divestitures," said Mr. Viswanathan, who upgraded his rating for Valspar to "sector perform" from "underperform."

Under the all-cash deal of $133 per share, announced Sunday, Sherwin-Williams will pay a 35-per-cent premium on Valspar's March 18 closing price. Mr. Viswanathan expects the deal to close in the first quarter of 2017 or earlier.

"Given the complementary nature of the two businesses, we believe the deal makes strong strategic sense and any divestitures should be minimal," the analyst said. "In the event that divestitures total more than $650-million of Valspar's 2015 revenues, the transaction price would be adjusted to $105/share. Sherwin has the right to terminate the deal if the divestitures exceed $1.5-billion in 2015 revenues."

Noting the combined entity will become the world's largest global paints and coatings company, he raised his target price for the stock to $113 (U.S.) to $82 in accordance with the agreement. The analyst average target price is $91.91, according to Bloomberg.

He expects the deal will be a positive for other chemicals and coatings companies, particularly PPG Industries Inc. (PPG-N) and Axalta Coating Systems Inc. (AXTA-N).

"The deal implies 15 times/14.4 times 2016/2017 estimated EBITDA presynergies and 10.5 times/10.2 times post-synergies," he said. "AXTA and PPG are currently trading at 9.2 times and 10.6 times 2017 estimated EBITDA, respectively, (AXTA is trading at 7.8 times including cash generation) and we expect both to trade higher on this news. Given the deal premium and other M&A interest in chemicals ... we expect the entire space to also trade higher. While the increased activity may also indicate fewer organic growth opportunities in the medium term due to slowing global growth, savvy companies such as SHW are deploying their large cash generation to accretive M&A now before acquisition multiples become too inflated."

Elsewhere, Sherwin-Williams was downgraded to "sector weight" from "overweight" at KeyBanc by equity analyst Ivan Marcuse. The stock was raised to "positive" from "neutral" at Susquehanna by equity analyst Donald Carson with a target price of $370 (from $260) per share. The analyst average is $306.31.

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Citing concerns over the potential for earnings recovery as well as the difficult economic picture in Western Canada, CIBC World Markets analyst Mark Petrie downgraded AutoCanada Inc. (ACQ-T) to "sector performer" from "sector outperformer."

On March 17, the company reported fourth-quarter 2015 results to summarized as "mixed" by Mr. Petrie, with EBITDA exceeding his expectation but earnings per share falling lower than his projections.

"New vehicle same-store sales (SSS) were down 21 per cent in Q4," he said. "With ACQ SSS tracking Alberta unit sales data, we lower our outlook to negative-7 per cent for 2016 (on top of negative-15 per cent in 2015). We are forecasting a bottoming in 2017, but the actual timing is based on employment and consumer confidence trends, which are tough to predict. The reality that a six-plus-year cycle in Canadian new vehicle sales growth will turn at some point adds another layer of risk.

"Partially offsetting new vehicle weakness, we expect used to continue to improve and stable parts and service revenues. Adding in full-year contributions from the six acquisitions since Q4/14, as well as cost-cutting, we are still forecasting solid EBITDA growth."

He added: "We calculate roughly $100-million in capacity for deals in 2016, or about five large ones; our assumption in our valuation is four, down from eight previously. With the dividend payout ratio at roughly 80 per cent (after committed growth capex) in 2016 and the payment eating up about a quarter of deal capacity, it would not shock us to see the board re-evaluate it as the best use of scarce capital."

Mr. Petrie dropped his target price to $20 from $33. Consensus is $27.47.

"We have been valuing AutoCanada at a premium to U.S. peers given the better M&A pipeline and operating outperformance," he said. "This premium is no longer defensible in our view and we are lowering our multiples in line with U.S. peers. The comps are trading at 7.9-times trailing EBITDA and 10.7-times trailing price/earnings, leading us to move our target multiples to 7.5 times and 10.5 times. Longer term, we would expect ACQ to again earn a premium valuation, but should-be catalysts like a Honda deal have been shrugged off by investors and it will take a more positive view on Alberta to propel ACQ back upwards.

"For valuation purposes, we assume four deals in 2016 (from eight previously), reflecting tighter capital. Applying our lower target multiples to our reduced earnings forecasts we generate a value of $20 … Looking out to 2017 and assuming six additional deals, we get to $25. AutoCanada is a best-in-class dealer, but the economic environment in Alberta makes it difficult to recommend the shares at this point."

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The decision by Paramount Resources Ltd. (POU-T) to sell a natural gas processing complex in Alberta' Montney shale formation to Pembina Pipeline Corp. for $556-million provides balance sheet relief and will allow it to refocus its drilling program in the area, according to Desjardins Securities analyst Kristopher Zack.

After the deal, his 2016 and 2017 debt-to-cash flow forecast moved to 15.5 times and 7.7 times, respectively, based on current strip.

"While this represents an improvement from prior levels, it remains above the peer group average," said Mr. Zack. "We expect POU to pursue additional measures to help reduce debt while also carefully managing capital spending in the current market. The company plans to release formal guidance with its [first-quarter] report in early May; while 1Q spending should be limited, there is potential for a ramp-up in activity through 2Q–3Q to mitigate production declines from current levels of [approximately] 51,000–52,000 barrels of oil equivalent per day [boe/d], commodity prices pending.

"While transaction metrics were not disclosed, we estimate an implied cash flow multiple of 8.5–10.0 times. We base this on the estimated fixed capital fee of $3 (Canadian) per boe on products sold, depending on liquids throughput assumptions. Although it is difficult to pinpoint the market's response to the transaction given the fairly wide range of expectations, we view it as notionally positive to the extent that it removes a major distraction."

Mr. Zack raised his target price for the stock to $9 from $5, saying the move is "a substantial increase that reflects the positive impact of lower debt while also factoring in a modest multiple expansion resulting from the reduced risk profile in the current environment."

The analyst consensus is $7.72.

He added: "We are maintaining our hold rating despite the increased target, highlighting that we continue to favour more defensively positioned producers entering the spring given the significantly oversupplied natural gas market, while noting the potential for additional oil price volatility. The stock has also had a fairly strong run recently, which could drive near-term profit taking."

Meanwhile, the stock downgraded to "underperform" from "market perform" by FirstEnergy Capital analyst Cody Kwong with a target price of $5.25 per share (unchanged).

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In other analyst actions:

Valeant Pharmaceuticals International Inc. (VRX-N) was downgraded to "underperform" from "neutral" at Mizuho Securities USA by equity analyst Irina Koffler. The 12-month target price is $18 (U.S.) per share.

AECOM (ACM-N) was downgraded to "hold" from "buy" at BB&T Capital by equity analyst Adam Robert Thalhimer.

Apartment Investment & Management Co. (AIV-N) was raised to "buy" from "neutral" at Mizuho Securities USA by equity analyst Richard Anderson. The 12-month target price is $46 (U.S.) per share.

Arthur J Gallagher & Co. (AJG-N) was raised to "market perform" from "underperform" at William Blair by equity analyst Adam Klauber.

Bankers Petroleum Ltd. (BNK-T) was downgraded to "sell" from "neutral" at Dundee by equity analyst David Dudlyke. The 12-month target price is $2.20 (Canadian) per share.

Brown & Brown Inc. (BRO-N) was raised to "market perform" from "underperform" at William Blair by equity analyst Adam Klauber.

ConAgra Foods Inc. (CAG-N) was raised to "outperform" from "neutral" at Consumer Edge Research by equity analyst Robert Dickerson. The 12-month target price is $57 (U.S.) per share.

Camden Property Trust (CPT-N) was raised to "buy" from "neutral" at Mizuho Securities USA by equity analyst Richard Anderson. The 12-month target price is $93 (U.S.) per share.

CubeSmart (CUBE-N) was downgraded to "hold" from "buy" at Evercore ISI by equity analyst Steve Sakwa. The target price is $33 (U.S.) per share.

Fiserv Inc. (FISV-Q) was downgraded to "market perform" from "outperform" at Oppenheimer by equity analyst Glenn Greene.

Hewlett Packard Enterprise Co. (HPE-N) was raised to "outperform" from "neutral" at Macquarie by equity analyst Rajesh Ghai. The 12-month target price is $22 (U.S.) per share.

Intel Corp. (INTC-Q) was downgraded to "underperform" from "market perform" at Bernstein by equity analyst Stacy Rasgon. The 12-month target price is $26 (U.S.) per share.

Lions Gate Entertainment Corp. (LGF-N) was downgraded to "hold" from "buy" at Stifel by equity analyst Benjamin Mogil.

NetApp Inc. (NTAP-Q) was downgraded to "underperform" from "neutral" at Macquarie by equity analyst Rajesh Ghai. The 12-month target price is $22 (U.S.) per share.

Public Storage (PSA-N) was downgraded to "sell" from "hold" at Evercore ISI by equity analyst Steve Sakwa. The target price is $235 (U.S.) per share.

Range Resources Corp. (RRC-N) was downgraded to "neutral" from "outperform" at Macquarie by equity analyst Paul Grigel. The 12-month target price is $34 (U.S.) per share.

Reliance Steel & Aluminum Co. (RS-N) was downgraded to "hold" from "buy" at Jefferies by equity analyst Seth Rosenfeld. The 12-month target price is $68 (U.S.) per share.

Spectra7 Microsystems Inc. (SEV-T) was rated new "buy" at Dundee by equity analyst Eyal Ofir. The target price is $1 (Canadian) per share.

Symantec Corp. (SYMC-Q) was raised to "overweight" from "neutral" at Piper Jaffray by equity analyst Andrew Nowinski. The 12-month target price is $24 (U.S.) per share.

Theratechnologies Inc. (TH-T) was raised to "buy" from "hold" at Mackie Research Capital by equity analyst Andre Uddin. The target price is $2 (Canadian) per share.

UDR Inc. (UDR-N) was downgraded to "neutral" from "buy" at Mizuho Securities USA by equity analyst Richard Anderson. The 12-month target price is $41 (U.S.) per share.

Western Forest Products Inc. (WEF-T) was rated new "buy" at Dundee by equity analyst Stephen Atkinson. The 12-month target price is $2.80 (Canadian) per share.

United States Steel Corp. (X-N) was downgraded to "underperform" from "hold" at Jefferies by equity analyst Seth Rosenfeld. The 12-month target price is $10 (U.S.) per share.

With files from Bloomberg News