Thursday’s analyst upgrades and downgrades

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Inside the Market's roundup of some of today's key analyst actions. This file will be updated often during the trading day so check back for new details.

The nature of the mattress industry, with big ticket and infrequent purchases, gives Raymond James analyst Kenric Tyghe "pause" when analyzing Sleep Country Canada Holdings Inc. (ZZZ-T).

Emphasizing tough comps and a weak macro backdrop, Mr. Tyghe initiated coverage of the company, which recently became public following a $300-million initial public offering, with a "market perform" rating.

"While recent performance has been impressive (underpinned by strong same-store sales growth, higher gross margins and improved selling, general and administrative expensive leverage), and long-term industry fundamentals appear attractive, we are mindful of a number of key headwinds through our forecast window," he said.

Mr. Tyghe noted that an 8.4-per-cent same-store sales increase in 2014 was on a weak 2013 comparable of just 1.0 per cent, thus a two-year stacked SSS growth of 4.7 per cent. He is "conservatively" projecting 2016 same-store-sales growth of 4.3 per cent.

"The 4.5-per-cent midpoint (long-term guidance is 3.0-6.0 per cent) imputes a further moderation (versus the two-year comp) of SSS momentum through our forecast," he said. "The new store format rollout and strong (higher margin) bedding accessories traction, while broadly positive, are not without risk in our opinion, as key competitors (most notably in the accessories category) are going to try to steal back the duvet."

He added: "While industry fundamentals are solid, and Sleep Country is the leading specialty bedding retailer with a 23 per cent national share, traffic remains a little challenged. An improvement in SSS growth attribution would be incrementally positive."

He set a target price of $16 (Canadian).

Elsewhere, BMO Nesbitt Burns analyst Stephen MacLeod initiated coverage with an "outperform" rating and $18 target.

"Investors are buying a well-known, established specialty mattress company with prior history as a public company, and reasonable targeted growth rates," said Mr. MacLeod. "Sleep Country has a strong competitive position and broad brand awareness in Canada, and the mattress industry provides a positive fundamental backdrop. Based on these factors, we believe that the company's five- to seven-year targets are achievable and reasonable. In addition, Sleep Country's attractive store economics position the company to achieve its growth objectives without the need for external financing."

CIBC World Markets analyst Mark Petrie initiated coverage with a "sector outperformer" rating and a $18 target.

Shares opened Thursday morning up 1.3 per cent at $15.32.

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Though RBC Dominion Securities analyst Nelson Ng forecasts a "weak" 2015 for Superior Plus Corp. (SPB-T), he has a "favourable outlook" for both 2016 and 2017, including another dividend increase in the next 12 months.

Mr. Ng initiated coverage of the stock with an "outperform" rating.

"Although we forecast [earnings before interest, taxes, depreciation and amortization] to decline in 2015, we expect a strong increase in 2016," he said. "Some of the factors that we expect to drive EBITDA growth include the roll-off of unfavourable currency hedges (adding $20-million to EBITDA), improvement in sodium chlorate prices as 8 per cent of North American capacity is scheduled to be decommissioned, and higher margins from the CPD division due to the IT systems upgrade. For 2017, we expect the roll-off of currency hedges to add an incremental $7-million to EBITDA."

The analyst emphasized the fact that the streamlining of company's operations "are well under way" and smaller-sized acquisitions appear to "the next logical step."

"Since the current CEO [Luc Desjardins] was appointed in [the fourth quarter of 2011], the company has implemented significant changes to its operations, as well as its pricing and procurement strategies," he said. "As a result, the operational efficiency and EBITDA have steadily improved. Management indicated that approximately 80 per cent of the operational improvements have been completed, but there is significant room to enhance the Construction Products Distribution (CPD) division, which is undergoing a two-year IT systems integration and upgrade process."

He added: "Over the last several years, Superior Plus has been less active on acquisitions. Going forward, we believe management will place more focus on tuck-in acquisitions to leverage its streamlined operations. The propane and heating oil distribution sector is very fragmented and ripe for consolidation."

Mr. Ng said the company possess a healthy balance sheet which such allow for a further dividend increase on the heels of a 20-per-cent rise in the fourth quarter of 2014. He forecasts the payout ratio to be approximately 42 per cent.

He set a price target for the stock of $14. Consensus is $13.89.

"We believe that the combination of EBITDA growth and an increase in the trading multiple back to its 10-year historical average of 8.2x forward EBITDA will provide attractive upside to the share price," he said.

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Cantor Fitzgerald analyst Laura Champine said Lumber Liquidators Holdings Inc. (LL-N) still has "regulatory and legal hurdles to clear" in an ongoing probe by the U.S. Consumer Product Safety Commission in the wake of well-publicized allegations its products have excessive formaldehyde.

However, she feels the downside risk to the shares is already priced in, and said they look "washed out" after a fall of close to 80 per cent since the beginning of the calendar year.

Accordingly, she upgraded her rating for the stock to "buy" from "hold" and noted she feels the company has improved its oversight in the wake of the controversy, including Wednesday's announcement of a new chief compliance and legal officer, in the wake of the departure of both its chief executive officer and chief financial officer following a 60 Minutes report.

Following a recent tour with management, Ms. Champine said she thinks her previous gross-margin forecast for was too conservative and the impact of the report on sales may prove to be "limited."

She raised her price target to $18 (U.S.) from $15. The average analyst target, according to Bloomberg, is $13.88.

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In the midst of a capital expenditure lull, LM Ericsson Telephone Company (ERIC-Q) is now focused on monetizing and optimizing costs, according to RBC Dominion Securities analyst Mark Sue.

However, he said the pace of change may take longer than expected.

"The industry and Ericsson are moving towards more software and recurring revenues, helping transition towards more predictability and better margins," said Mr. Sue "It's early and for now, it is about pushing it out across installed customers, likely an incremental process over multiple years vs. a sudden shift over a few quarters. Longer-term, Ericsson sees the software transformation as positive both for its SP customers and itself as carriers move closer to an IT-type model including [software-defined networking/network functions virtualization] with distribution via ELA's. Ericsson doesn't see the software transformation as mutually exclusive of hardware and there are cost benefits to be had in both lower implementation and maintenance costs vs. the current bi-annual software release/sales cycle."

He added: "Ericsson has reinvented itself over the past decade, and with scale, the company may have a dominant share of industry profits. Ericsson's networks operating margins have improved closer to primary competitor Nokia Networks. However, the mix of coverage vs. capacity projects impacts gross margins, and it is a constant tug of war on margins for this cyclical business driven by carrier spending. Further, transition towards greater software can improve the [gross margin percentage] but may impact absolute gross margin profit depending on network densification. Increased software contributions may also be a mult-year longer-term endeavor rather than quarter-to quarter."

Maintaining his "outperform" rating, Mr. Sue lowered his target price to $12 (U.S.) from $14 based on his 2016 sales estimate with "strength in the mobile broadband business and diversified nature of Ericsson's business, weighed by the lumpiness of North American carrier spending."

The analyst consensus is $13.07.

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The recent weakness of the Canadian dollar against the U.S. greenback "raises questions about expectations built into valuation multiples for Canadian consumer equities," said Credit Suisse analyst David Hartley.

Though he said foreign exchange analysis is "unclear" on the possibility of a return of the loonie to 2001/2002 levels, he said it "makes sense" that stock prices for the consumer sector be "marked to market" with consumer movements.

"Prospects for continuing strength could compound upon and raise expectations for some stocks under coverage that influence valuation targets," he said. "We consider a scenario where CAD falls to 2001/2002 lows of $1.615 USD."

Mr. Hartley raised his price targets for the stock of a trio of companies - Alimentation Couche-Tard Inc; Metro Inc. and Saputo Inc.

"We suspect a weakening CAD/strengthening USD is drifting into the valuations of the above stocks, perhaps in part to help justify all-time high valuations given elevated, perhaps "euphoric" M&A expectations," he said.

His changes were:

Alimentation Couche-Tard Inc (ATD.B-T) to $56 from $47. Consensus: $61.88.

The analyst said:  "We believe a premium has been priced into the share price owing to M&A potential and supported by a favourable view of the strength of the USD in the near-term. Couche Tard is well-positioned to continue to lead consolidation in the c-store space in Europe and North America. Couche's balance sheet has sufficient room, at 1.3x net debt to [earnings before interest, taxes, depreciation and amortization] and 0.4x net debt/capital to support a large acquisition. The most likely near-term acquisition catalyst could be the acquiring of a portion of 500 Esso locations in Canada that are up for auction in the near-term—which, would be considered a relatively small acquisition. Furthermore, we believe that Couche Tard could exceed stated cost synergies of $85-million from the Pantry acquisition given potential for revenue synergies."

Metro Inc. (MRU-T) to $34 from $33. Consensus: $39.23.

He said: "We believe Metro's direct exposure to a weak CAD is limited to inflationary pressures from sourcing produce from the U.S.. We believe most, if not all of the exposure can be offset by passing through higher prices to consumers, or via productivity improvements and other operational offsets."

Saputo Inc. (SAP-T) to $31 from $29. Consensus is $33.78.

Mr. Hartley said: "Like ATDb.TO, expectations are high for acquisitions by SAP.TO in the U.S., Oceania and/or South America, and interest rates are low. The above factors, along with positive fund flows into consumer stocks, has driven all-time high valuations, in our view. However, we remain concerned with the low milk and cheese block pricing environment, which affects export sales and SG&A leverage. Furthermore, Trans Pacific Partnership talks could be concluded and impact the dairy industry. At the very least, we expect initial disruption to SAP.TO's business that will create uncertainty about long-term prospects."

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The Fruta del Norte project in southeast Ecuador, the flagship asset of Lundin Gold Inc (LUG-T), is one of the largest high-grade deposits yet to be developed in the world, said BMO Nesbitt Burns analyst Brian Quast.

"While it sits in an arguably less favourable mining jurisdiction - Ecuador - we believe that its size and scale make it a compelling investment for those with a higher-than-average risk tolerance, or a longer-than-usual investment horizon," said Mr. Quast. "While we see the possibilities of bureaucratic delay as real, an [net present value] of  approximately $1.- billion and a production profile of 321 kozpa at cash costs of $543/oz should ensure that it will stay on the market's radar."

Mr. Quast initiated coverage of Lundin with an "outperform" rating due to the high grade at the project and its "compelling scale." He set a price target for the stock of $5 (Canadian), compared to a $6.30 consensus.

"We estimate that the arguably large capital bill of [approximately] $800-million will be funded through a $300-million equity raise, and $450-million in debt, likely around [the second quarter of 2016], when the feasibility study is concluded," he said. "BMO also models an additional $150-million in equity to be raised as construction progresses so that funding is 50-50 debt-equity. Ongoing negotiations for the Investor Protection Agreement and the Exploitation Agreement have the potential to provide positive catalysts before the feasibility study is submitted."

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In other analyst actions:

Walt Disney Co (DIS-N) was downgraded to "market perform" from "outperform" at Bernstein by equity analyst Todd Juenger. The 12-month target price is $114 (U.S.) per share.

DiamondRock Hospitality Co (DRH-N) was raised to "outperform" from "neutral" at Credit Suisse by equity analyst Ian Weissman. The target price is $15 (U.S.) per share.

Exchange Income Corp (EIF-T) was rated new "outperform" at RBC Capital by equity analyst Derek Spronck. The 12-month target price is $32 (Canadian) per share.

Keysight Technologies Inc (KEYS-N) was raised to "outperform" from "neutral" at Robert Baird by equity analyst Richard Eastman. The 12-month target price is $35 (U.S.) per share.

Kansas City Southern (KSU-N) was raised to "outperform" from "neutral" at Macquarie by equity analyst Cleo Zagrean. The 12-month target price is $109 (U.S.) per share.

Lockheed Martin Corp (LMT-N) was raised to "buy" from "neutral" at Sterne Agee CRT by equity analyst Peter Arment. The 12-month target price is $252 (U.S.) per share.

Mattel Inc (MAT-Q) was rated new "outperform" at Oppenheimer by equity analyst Sean Mcgowan. The 12-month target price is $28 (U.S.) per share.

Micron Technology Inc (MU-Q) was downgraded to "neutral" from "outperform" at Robert Baird by equity analyst Tristan Gerra. The 12-month target price is $15 (U.S.) per share.

Syntel Inc (SYNT-Q) was raised to "outperform" from "neutral" at Robert Baird by equity analyst David Koning. The 12-month target price is $54 (U.S.) per share.

Targa Resources Corp (TRGP-N) was downgraded to "underperform" from "hold" at Jefferies by equity analyst Christopher Sighinolfi. The 12-month target price is $59 (U.S.) per share.

Time Warner Inc (TWX-N) was downgraded to "market perform" from "outperform" at Bernstein by equity analyst Todd Juenger. The 12-month target price is $90 (U.S.) per share.

UDR Inc (UDR-N) was downgraded to "underperform" from "neutral" at Credit Suisse by equity analyst Ian Weissman. The target price is $36 (U.S.) per share.

Union Pacific Corp (UNP-N) was downgraded to "neutral" from "outperform" at Macquarie by equity analyst Cleo Zagrean. The 12-month target price is $95 (U.S.) per share.

With files from Bloomberg