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

Despite an improved outlook, Raymond James analyst Andrew Bradford said he has "trouble chinning-up to the more recent consensus estimates" for Mullen Group Ltd. (MTL-T).

"According to our analysis, Mullen has leverage to rising activity in the conventional oilpatch, but the absence of major oil sands development has left a material void in its cash flow generating capacity," he said. "We appreciate that Mullen has a track record of effecting cost-effective acquisitions, but at this point we can't anticipate the degree or magnitude of value accretion. We are also concerned that the high multiples that have prevailed over the last three downturn years could revert toward more normalized multiples seen in the years prior to 2014."

The company's shares dropped 6 per cent on Thursday in reaction to the release of its first-quarter financial results, which failed to meet expectations. They fell a further 1.8 per cent on Friday.

In reaction to both the results and its current valuation, Mr. Bradford lowered his rating to "market perform" from "outperform."

"While expositions into 'valuation' and market multiples are usually instant cures for insomnia, we believe the issue to be particularly germane for investors as Mullen emerges from the downturn," said Mr. Bradford.

"The topic of valuation is among the driest for analysts to tackle, and so we usually just avoid it by adopting a simple yet intuitively appealing approach: most of what we are seeing today has taken place by degrees in prior cycles, and therefore, the multiples that prevailed then are a good starting point for considering where they should be today. Which brings us to Mullen…

"Mullen has a long history as a public company, which affords us a long perspective on market value and multiples. But the most telling aspects of Mullen's multiple history can be found over the last 8 years. Mullen's EBITDA [earnings before interest, taxes, depreciation and amortization] multiples have been unusually high since 2014 inclusive. We definitely understand that downturn multiples tend to expand, and because year-over-year EBITDA began declining in 2014, MTL's multiples took a step-up – by about 35 per cent – from 7.9 times over the 2009-2013 period to 10.6 times between 2014-2016. At some point, investors will stop thinking of MTL's EBITDA as cyclically-suppressed, so what then happens to its multiple? For instance, how many investors a year or two from now will still be holding their breath waiting for oil sands projects to pick-up meaningfully? How many investors will pay up-front for LNG [liquefied natural gas] projects that have yet to receive FID [final investment decision] (none that we've seen lately)? Even Mullen's most steadfast supporters would have to concede that ''normalized, 'steady-state', run-rate'' multiples are lower than we've become accustomed to over the last 3 years. Our solution to this problem is going to be to straddle the fence: we're targeting Mullen at 9.5 times 2018 EBITDA, which is on the lower-end of the last three years, but still higher than the nondownturn years preceding them."

Mr. Bradford lowered his full-year 2017 and 2018 revenue projections to $1.13-billion and $1.20-billion, respectively, from $1.16-billion and $1.26-billion. His EBITDA estimates moved to $182-million and $215-million from $219-million and $247-million.

The chief reason for his earnings decline is concerns about the contributions from its Trucking and Logistics segment.

"Mullen suggests that Trucking & Logistics margins should migrate toward 15 per cent as the year progresses. We don't think this is a stretch," he said. "The margin in 1Q17 was near an all-time low at 12 per cent, but 1Q is typically a slower trucking quarter for consumer products. MTL's own 1Q T&L margins have averaged 140 basis points lower than the full-year margin over the last 5 years. And to be sure, a return to the oil sands heydays aren't on the investment horizon, but construction and infrastructure projects should be thought of in a normalized context. Trucking & Logistics division margins had been ranging between 16 per cent and 18.5 per cent since 2010. So even though we consider the drop in higher margin work from the likes of Kleys en Group as partially permanent, the 12-per-cent margin in 1Q implies more like 13.5 per cent on a full-year basis (all else equal) and in addition, MTL repeatedly stated that it should be able to drive higher pricing toward the back half of 2017. These factors suggest to us 15-per-cent Trucking & Logistics margins are very achievable."

Mr. Bradford's target price for the stock dropped to $16.25 from $18.50. The analyst consensus price target is $18.90, according to Thomson Reuters.

Elsewhere, CIBC World Markets analyst Jon Morrison raised his target to $21.50 from $20.50 with a "neutral" rating (unchanged).

"While Mullen's stock was under meaningful pressure over the past two days given the headline miss on consensus numbers, we can't say that we were that surprised by anything in the results and/or the core messaging from the company," he said. "And while Mullen's small miss relative to our estimates is not positive, the net impact is only a 6-per-cent reduction in our 2017 and 2018 estimates and a trim of our price target ... Neither of which is thesis-altering in nature."

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In a preview of the earnings seasons for Canadian forestry companies, CIBC World Markets analyst Hamir Patel called it "the quarter that won't matter."

"With lumber CVDs [countervailing duties] expected to be announced on April 25, we expect the duty levels will overshadow quarterly earnings," said Mr. Patel.

He added: "While we remain comfortable with our existing fundamental valuations for the lumber companies in our coverage universe, we believe the share prices for the Canadian group may be range-bound for the next few months pending greater clarity on the proportion of the ADD/CVD duty costs that will be passed on to consumers in the form of higher lumber prices. We also see potential for the shares to come under near-term pressure when CVDs are announced on April 25."

He downgraded Canfor Corp. (CFP-T) to "neutral" from "outperformer" with a target price of $14 (unchanged). Consensus is $20.50.

"Following strong share price appreciation year to date, and with risks of U.S. lumber duties being initiated at higher-than-expected levels, we are moving to the sidelines on Canfor," said Mr. Patel. "Our Neutral rating on the company is now in line with the Neutral ratings we have adopted in recent months across all the other lumber companies in our coverage universe."

Mr. Patel also made target price changes to four stocks, emphasizing the increases to Norbord Inc. (OSB-T) and Interfor Corp. (IFP-T).

"When we initiated coverage of both companies 14 months ago, they were our two top ideas in the space," he said. "We moved to the sidelines on both in Q3/16 following share price appreciation and the spectre of capacity re-starts on the horizon for [Norbord]. In retrospect, our downgrades proved premature as OSB [oriented strand board] prices have held up better than we (or most forecasters) expected and SYP [Southern yellow pine lumber] prices have also surprised to the upside."

With a "neutral" rating, his target for Norbord rose to $43 from $36. Consensus is $32.28.

His target for Interfor jumped to $22 from $18 with a "neutral" rating. Consensus is $21.

Mr. Patel also raised his target for Western Forest Products Inc. (WEF-T) to $2.25 from $2 with a "neutral" rating. Consensus is $2.39.

He moved Resolute Forest Products Inc. (RFP-T) to $6 from $5 with an "underperformer" rating. Consensus is $7.56.

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Canaccord Genuity analyst Aravinda Galappatthige expects "solid" wireless results from BCE Inc. (BCE-T, BCE-N) when it releases first-quarter financials on Wednesday, however "continued" pressure could dampen both Internet and television subscriber numbers.

Mr. Galappatthige is projected consolidated EBITDA of $2.213-billion, slightly ahead of the Street's expectation of $2.210-billion and represented growth of 2.3 per cent year over year. His earnings per share estimate of 84 cents is in line with the Street and a cent below last year's result.

"While we have not revised up our estimates post the Rogers results, it is clear that the strength we have seen in wireless postpaid subscriber loading is alive and well," the analyst said. "Our forecast is 30,000 in postpaid net adds in Q1/17 up from 25,900 last year (consensus of 27,000). However, given the RCI [Rogers Communications Inc.] numbers (60,000 in postpaid net adds), there is substantial upside here. In addition to strong subscriber growth, we also expect sector leading 4-per-cent ARPU [average revenue per user] growth for BCE translating to 6.7-per-cent wireless service revenue growth. In terms of EBITDA we have taken a slightly more conservative stance due to still elevated COA/COR [cost of acquisition/cost of retention], and thus call for 5.5-per-cent growth."

"With the higher speed Internet offerings from cablecos starting to now consistently impact the balance of power between cablecos/Telcos, we expect further pressure on internet and TV net additions. In Internet, we are calling for 12,800 in net adds versus 19,800k last year and consensus of 16k. In terms of IPTV net adds, we have seen a steep declining trend of nearly 50 per cent year over year. We expect that to continue as footprint expansion has matured and call for 29.2k in net adds down from 47,700 last year. With respect to the financials, we expect flat EBITDA, but ex Q9, likely down low single digits. We expect wireline revenues to fall 1.4 per cent to $2.999-billion with near flat residential trends and low single digit Enterprise decline. On the positive side, there are early signs that the promotional battles we have seen in Ontario is easing, particularly with Rogers revising their 24-month promotional periods to 12 months and essentially telegraphing a desire to focus on profitability. However, on the other hand, the negative impact of the lower wholesale revenues due to the new Internet tariff structure would continue to be a drag on results."

Mr. Galappatthige has a "hold" rating and $60 target for the stock. Consensus is $61.26.

He added: "On the conference call we would focus on 1) the FTTP rollout in Toronto and its potential impact on Internet net adds trends 2) the emerging threat from Internet re-sellers, some of whom have lowered prices to reflect the recent CRTC decision 3) Thoughts on the sustainability of the strong wireless fundamentals 4) Options to counter the future threat on the TV front as Rogers rolls out X1 5) Potential revenue synergies in Manitoba 6) Guidance revisions: We expect the company will formally offer up revisions to guidance to reflect the acquisition of MTS. Market focus however would largely be on 2018."

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Desjardins Securities analyst Keith Howlett expects Metro Inc.'s (MRU-T) second quarter to be the most challenging period of fiscal 2017, citing a flat contribution from Alimentation Couche Tard Inc. and food price deflation.

Ahead of the release of its quarterly results on Tuesday, Mr. Howlett lowered his earnings per share expectation by 3 cents to 52 cents from 55 cents.

"Metro's management has a track record of delivering EPS growth in the most challenging of conditions," he said. "Results for 2Q will reflect the twin headwinds of almost flat year-over-year contribution from Couche-Tard and food price deflation of 3.5 per cent. We expected 1H FY17 to be challenging, but not to that extent. Metro continues to gain market share and invest productively in its store network. Our positive expectation for 2H FY17 is unchanged."

With the change, Mr. Howlett's full-year EPS projection fell to $2.57 from $2.60, while his EBITDA estimate moved to $959-million from $963-million.

His rating for Metro stock remains a "buy" and his target is $46. Consensus is $45.91.

"Questions on the conference call are likely to focus on the outlook for grocery pricing, the impact of drug reform in Quebec, consolidation of the pharmacy market in Quebec, the competitive landscape in grocery, and the performance of new and expanded stores," he said.

In reaction to Alimentation Couche Tard Inc.'s third-quarter earnings release, BMO Nesbitt Burns analyst Peter Sklar also lowered his earnings expectations.

His second-quarter EPS estimate fell to 51 cents from 53 cents, while his third-quarter projection moved down by a penny to 75 cents.

His full-year EPS estimate is now $2.43, down from $2.45. His 2018 estimate dropped a penny to $2.63.

He kept a "market perform" rating and $43 target.

"We are expecting Metro to continue to experience some deflation for the next several months, creating pressure on topline growth," said Mr. Sklar. "However, we do not believe Metro will significantly underperform despite this backdrop, as the company historically has been able to mitigate deflation with merchandising initiatives."

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Investor focus is likely to center on the weak U.S. retail climate when Gildan Activewear Inc. (GIL-N, GIL-T) reports first-quarter results on May 3 after market close, said RBC Dominion Securities analyst Sabahat Khan.

He is projecting quarterly earnings per share of 34 cents (U.S.), a penny below the consensus projection but up 6 cents year over year. He's expecting revenues of $655-million, up 10 per cent and $9-million below the Street.

"Our expectation for year-over-year sales growth is driven largely by contribution from acquisitions completed over the last year: Alstyle Apparel (closed May 2016), Peds Legwear (closed August 2016), American Apparel (closed February 2017)," said Mr. Khan. "Excluding contribution from these acquisitions, we expect organic sales growth of 2 per cent year over year, driven primarily by growth in the Printwear segment. We expect the year-over-year sales growth, modest gross margin improvement (25 basis points year over year) and a lower share count year over year, partially offset by higher year-over-year financing and tax expense, to drive Q1 adjusted diluted EPS."

Mr. Khan also said he's keeping an eye on cotton prices, noting: "The price of cotton ranged between 75 cents and 80 cents per pound. for a majority of Q1 2017, driven in part by strong import demand for U.S. cotton (U.S. is the world's largest exporter). High cotton price has incentivized cotton farmers to increase the amount of cotton they intend to plant. The USDA expects farmers to plant 12.2 million acres of cotton in 2017, which represents a 5-year high. China is also auctioning off cotton from its reserve stocks; however, according to industry experts, this cotton is perceived to be relatively 'lower grade,' making it uncompetitive to the higher quality cotton sold in the U.S. At Q4 2016 reporting (Feb 23, 2017) management noted that Gildan implemented a 'modest' price increase in December 2016 in Printwear and has "selective" price increases going into effect during the year in the Branded segment. Management also noted that if cotton price remained at elevated levels, the company would take further pricing heading into 2018. In general, stable cotton price is a positive for Gildan as it limits the mismatch between the cotton cost embedded in its inventory and the price in the market."

He maintained an "outperform" rating for the stock and raised his target price to $30 (U.S.) from $29. Consensus is $31.30.

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BrightPath Early Learning Inc.'s (BPE-X) business model is "achieving validation," said GMP analyst Ben Jekic.

On Friday, the Calgary-based early learning company reported fourth-quarter revenues of $21.8-million and adjusted earnings before interest, taxes, depreciation and amortization of $2.7-million. Both topped Mr. Jekic's projections of $21.2-million and $2.2-million.

"The company's results exceeded our estimates across most metrics demonstrating the validity of the company's business model and management execution," he said. "Note that BPE posted higher centre margin compared to our estimate, yet still a lower level than in 4Q15A. This is due to higher salaries and temporarily lower child to staff ratios emanating from an increase in enrollment at Creekside centre in Calgary (247 spaces) and West Henday in Edmonton (also 247 spaces) which have reached 96 per cent during the quarter, faster than expected. Note that significant increases in 4Q16 (and all of FY16) in revenue and EBITDA were reached with a relatively stable G&A expense of $4.9-million, underscoring both the operating leverage and future growth upside from greenfields and occupancy growth."

With a "buy" rating, he increased his target to 75 cents from 70 cents. Consensus is 64 cents.

"BPE is planning to add 570 additional licensed spaces over the next year in three Alberta locations, and is in advanced negotiations that should lead to a purchase of Peekaboo franchise centres as said on the call," said Mr. Jekic. "Between its credit facility and available cash, BPE has $21.4-million of 'dry powder.' With improving performance BPE has options to address its growth and financial needs (redemption of the $5-million debenture and a $2-million installment related to Peekaboo credit facility)."

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In other analyst actions:

Walt Disney Co. (DIS-N) was downgraded to "hold" from "buy" at Loop Capital Markets by analyst David Miller. His target remains $118 (U.S.), while the analyst average target is $119.59, according to Bloomberg.

Element Fleet Management Corp. (EFN-T) was downgraded to "sector perform" from "outperform" at RBC Dominion Securities by analyst Geoffrey Kwan. His target fell to $13 from $16, while the average is $14.96.

IGM Financial Inc. (IGM-T) was raised to "outperform" from "sector perform" by Mr. Kwan with a target of $47, up from $42. The average is $42.22.

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