Thursday's analyst upgrades and downgrades

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

An "uncertain" economic environment necessitates a more "cautious stance" on Canadian Pacific Railway Ltd. (CP-T, CP-N), according to Desjardins Securities analyst Benoit Poirier.

Despite reporting "solid" first-quarter results, Mr. Poirier downgraded the stock to "hold" from "buy."

"We are taking a more cautious stance on CP as we believe the risk/reward ratio is becoming less attractive at current levels," he said. "On the one hand, we believe the ongoing uncertainty in the global economic environment will continue to pressure volumes in the short to mid-term, while the impact of several headwinds expected in the coming quarters (foreign exchange (FX), fuel, stock-based compensation, pension plan expense) remains a concern. On the other hand, CP shares are up 11 per cent since April 6, and now provide only 9-per-cent potential upside to our target price. As a result, while we continue to like CP's business model, we would recommend investors wait for more visibility on volumes and shock absorbers, or a pullback in the stock, before buying CP shares."

On Wednesday, CP reported quarterly sales of $1.548-billion, missing Mr. Poirier's forecast of $1.637-billion and the consensus of $1.613-billion. It was a decline of 4 per cent year over year.

Adjusted fully diluted earnings per share of $2.48 topped the consensus of $2.42. Mr. Poirier pointed to an "impressive" operating ratio (OR) of 58.9 per cent for the beat. He had estimated a 59.7 per cent OR, a measure of railway efficiency with a lower figure being more optimal, and the consensus was 60.1 per cent.

"CP remains confident it can achieve its double-digit EPS growth guidance for 2016, implying adjusted EPS of at least $11.11," the analyst said. "However, given the recent appreciation of the Canadian dollar, the company no longer expects a tailwind from FX. Based on our estimates, FX has turned from a 75-cent year-over-year tailwind on 2016 adjusted EPS as of 4Q results (Jan. 21) to a 5-cent headwind as of today. Recall that CP's adjusted EPS benefits from a 5-cent tailwind from every penny decline in the Canadian dollar. Instead, management expects adjusted EPS growth will mainly be driven by operational efficiency and a volume recovery during [the second half of 2016]. Management now forecasts volume will decline 5 per cent (based on RTM or revenue ton mile) in 2016 (mostly unchanged; we expect negative 4.9 per cent for the year). That said, we remain cautious on the likelihood of a sizeable volume recovery during  [the second half of 2016] at this time, in light of the ongoing macroeconomic uncertainty in North America. (U.S. industrial production forecasts for 2016 and 2017 have been reduced significantly since the beginning of the year). Recall that U.S. industrial production has historically been a leading indicator of North American carloads. Meanwhile, we already assume that the adjusted EPS growth guidance will benefit from the incremental tailwind from the share buyback program (we derive 15 cents of adjusted EPS accretion in 2016)."

Mr. Poirier lowered his target by a dollar to $204. The average is $206.81, according to Bloomberg.

Elsewhere, FirstEnergy Capital analyst Steven Paget also downgraded the stock, moving it to "market perform" from "outperform." His $200 target did not change.

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In reaction to recent "strong" share price performance, Canaccord Genuity analyst Scott Chan downgraded his rating for IGM Financial Inc. (IGM-T) to "hold" from "buy."

Mr. Chan noted the stock has rallied from $31.78 on Feb. 11 to $39.75 at the close of markets on Wednesday, an increase of 27 per cent. He said that rise has "significantly outpaced peers," including a 6-per-cent rise from CI Financial Corp. (CIX-T) and a 23-per-cent jump by AGF Management Ltd. (AGF.B-T) as well as equity benchmarks.

On May 6, IGM will release first-quarter financial results. Mr. Chan projects retail assets under management (AUM) growth to slow by 0.3 per cent, better than its peers, and supported by market performance (down 0.6 per cent) and net sales of $348-million (a decline of 36 per cent year over year versus an industry-wide drop of 57 per cent). His earnings per share (EPS) estimate is 71 cents, compared to the Street's projection of 73 cents.

"Jeffrey Carney will be appointed president and CEO of IG (and IGM)," the analyst said. "We are very interested to hear his early commentary at IG as he was very active in changing the MKF [Mackenzie Financial Corp.] brand and culture. As suggested last quarter, IG had a decent RRSP season with net sales of $467-million (versus $588-million last year) as Fund performance has steadily improved. The question remains if sales can be material in other quarters besides the seasonally strong RRSP season. We don't believe so this year based on current industry trends. Similar to peers, fee pressure is an issue at IG. In 2015, IG's fee declined 6 basis points to 1.68 per cent (mostly related to remaining client's eligible transfer to Series J and U HNW product). IG last materially reduced their fees in 2012. We believe additional fee cuts are coming, but mostly reflected in IGM's discounted valuation. Currently, IG's fee structure is higher than independent peers and RBC's recent fee cut could place additional pressure to lower."

Mr. Chan raised his target price for the stock to $39 from $37. The analyst consensus is $37.55, according to Thomson Reuters.

He said the increase was derived from a higher enterprise value to earnings before interest, taxes, depreciation and amortization (EV/EBITDA) multiple "to reflect better relative fundamentals (i.e. recent market performance and sales." He said his target price implies a total return of 3.8 per cent, including a dividend yield of 5.7 per cent.

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RBC Dominion Securities analyst Shailender Randhawa lowered his rating for Pengrowth Energy Corp. (PGF-T, PGH-N) citing relative implied return.

"We believe visible funding capacity is key to sustained multiple expansion," said the analyst, moving the Calgary-based energy company to "underperform" from "sector perform."

Mr. Randhawa said Seymour Schulich's recent move to raise his stake in Pengrowth to 14.7 per cent should viewed as a vote of confidence for its asset potential.

"We believe Pengrowth's long-term risk/reward is compelling with 1.2 billion boe [barrels of oil equivalent] of potential resources including Lindbergh SAGD expansion to 30,000 bbl/d and its early-stage Montney assets at Groundbirch and Bernadet," he said. "We estimate the future payoff from these assets at $4.45/share unrisked but carry them at 25 cents/share risked in our NAV [net asset value] given approximately $5-billion of future development capital, which will require a significant rebuild of balance sheet capacity."

Though he raised his target to $1.25 from $1.10, the analyst said Pengrowth's premium multiple is not currently warranted given its stage of "rehab."

"Pengrowth trades at a 2016 estimated EV/DACF [enterprise value to debt-adjusted cash flow] multiple of 18.6 times, excluding realized hedges (versus oil-weighted peers at 12.3 times) and a P/NAV [price to net asset value] ratio of 1.7 times (versus peers at 1.1x) at RBC's price deck," he said. "Pengrowth's 2016 and 2017 estimated net-debt-to-trailing cash flow ratios map to 4.6 times and 5.6 times, versus peer averages of 2.4 times and 2.7 times at our price deck."

The analyst average price target is $1.43, according to Bloomberg.

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Citing a lack of near-term catalysts, CIBC World Markets analyst Kevin Chiang downgraded TransForce Inc. (TFI-T) following the release of its first-quarter 2016 results.

On Wednesday, the Quebec-based transportation and logistics services provider reported earnings before interest, taxes, depreciation and amortization (EBITDA) of $85.9-million, a decline of 1 per cent year over year. The result was lower than Mr. Chiang's forecast of $94-million and the consensus of $91-million. Revenue rose to $867-million, from $858-million in the prior year, but it fell short of Mr. Chiang's estimate of $874-million.

"TFI has done a good job in taking the necessary steps to support its share price in a tough economic environment," the analyst said. "After hitting a 52-week low on Feb. 3 at $19.46, TFI's share price has increased 15 per cent versus the S&P/TSX at 11 per cent. This reflects the sale of its waste assets and subsequent deleveraging (leverage ratio at 2 times now) along with its ramped up share buyback (active on NCIB and modified Dutch Auction).

"There is a lack of near-term catalysts to crystallize a higher value for TFI given the softness in the North American trucking market (we expect this market will remain challenged through 2016) with the company having pulled its two big levers (selling waste and aggressively repurchasing shares). So while on a SOP [sum-of-parts] basis, a case can be made that TFI's inferred value is $28+/share, in order to crystallize this value, TFI will need to pursue its M&A/divestiture strategy. While TFI has the balance sheet capacity to make an acquisition, we believe the current environment makes a larger transaction more difficult to complete."

Mr. Chiang maintained his price target of $24.50. The analyst average is $24.25.

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Renewable-weighted independent power producers are on the threshold of "significant" opportunity, said Raymond James analyst David Quezada.

"With the specter of climate change, the renewable power sector has long been the beneficiary of supportive government policies geared towards reducing greenhouse gas emissions. While this continues to be the case (perhaps more so than ever), we believe the industry is also now approaching grid parity: the point where the cost of producing electricity from renewable energy sources becomes competitive with traditional fossil fuels," he said. "What's more, as evidenced by the unprecedented engagement of world leaders at the recent Paris Climate Conference, the political will behind mitigating climate change has never been greater."

Emphasizng "stable, long-term contracted cash flows and sporting robust pipelines of attractive growth projects," Mr. Quezada initiated coverage of several companies, including:

- Boralex Inc. (BLX-T) rated "outperform" with a $20 target. Consensus is $18.11.

Mr. Quezada said: "With a high proportion of stable, contracted revenues, an attractive pipeline of growth projects, and robust expected free cash flow growth, we are initiating coverage of Boralex with an outperform rating. We take a positive view of the company's significant presence and expected growth in France, an attractive region for the development of renewable power projects, and see rising free cash flow associated with these projects driving a dividend hike in 2017."

- Capital Power Corp. (CPX-T) rated "market perform" with a $18 target. Consensus is $19.63.

Mr. Quezada said: "While we hold a positive view of Capital Power's modern fleet of power assets, attractive dividend, and inexpensive relative valuation, we regard the potential risks posed by the Alberta Government's Climate Leadership Plan (a potential coal phase-out by 2030) and weak Alberta power prices as presenting sufficient uncertainty to prompt a neutral rating on the stock. We point to additional clarity on compensation for the early retirement of Capital Power's coal assets, as well as a potential improvement in Alberta power pricing as possible catalysts."

- Innergex Renewable Energy Inc. (INE-T) rated "strong buy" with a $16.25 target. Consensus is $14.42.

Mr. Quezada said: "We highlight renewable pure play Innergex as our top pick among the IPPs discussed in this report. Our bullish stance is a product of the company's high quality, long-life, hydro-weighted asset base, robust expected free cash flow growth, and potential expansion in France where the company recently acquired a foothold. We also take a positive view of management's hydro development expertise, deal sourcing abilities, and track record of delivering projects on time and budget."

- Northland Power Inc. (NPI-T) rated "outperform" with a $25 target. Consensus is $21.94.

Mr. Quezada said: "We rate Northland outperform due largely to strong growth associated with the company's two world-class offshore wind projects: Gemini and Nordsee One. We see these two projects, each slated for commercial operations in 2017, as transformational in shifting Northland's asset mix more toward renewable power while also driving significant EBITDA, free cash flow, and potential dividend growth between 2015 and 2018."

- TransAlta Renewables Inc. (RNW-T) rated "outperform" with a $13.50 target. Consensus is $13.61.

Mr. Quezada said: "Our outperform rating on TransAlta Renewables reflects good growth visibility via drop-down transactions from sponsor TransAlta Corp., and the company's highly diversified, long-term contracted asset base and good positioning for participation in a large expected renewable power procurement in Alberta. We also highlight the company's attractive 7.0-per-cent dividend yield, with potential upside in 2017."

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In other analyst actions:

Aflac Inc (AFL-N) was downgraded to "market perform" from "outperform" at Raymond James by equity analyst Steven Schwartz.

Bombardier Inc (BBD.B-T) was downgraded to "reduce" from "hold" at TD Securities by equity analyst Timothy James. The 12-month target price is $1.10 (Canadian) per share.

Bankers Petroleum Ltd (BNK-T) was raised to "outperform" from "tender" at FirstEnergy Capital by equity analyst Darren Engels. The 12-month target price is $2.20 (Canadian) per share.

Check Point Software Technologies Ltd (CHKP-Q) was downgraded to "market perform" from "outperform" at Raymond James by equity analyst Michael Turits.

ConocoPhillips (COP-N) was downgraded to "underperform" from "hold" at Jefferies by equity analyst Jason Gammel. The target price is $37 (U.S.) per share.

FMC Corp (FMC-N) was downgraded to "neutral" from "outperform" at Credit Suisse by equity analyst Christopher Parkinson. The target price is $43 (U.S.) per share.

Franco-Nevada Corp (FNV-N) was downgraded to "hold" from "action list buy" at TD Securities by equity analyst Greg Barnes. The 12-month target price is $73 (U.S.) per share.

Guyana Goldfields Inc (GUY-T) was raised to "buy" from "speculative buy" at TD Securities by equity analyst Daniel Earle. The 12-month target price is $8.50 (Canadian) per share.

Las Vegas Sands Corp (LVS-N) was downgraded to "neutral" from "overweight" at JPMorgan by equity analyst Joseph Greff. The 9-month target price is $52 (U.S.) per share.

M&T Bank Corp (MTB-N) was downgraded to "underperform" from "neutral" at Robert Baird by equity analyst David George. The 12-month target price is $115 (U.S.) per share.

Rockwell Automation Inc (ROK-N) was downgraded to "hold" from "buy" at Gabelli & Co. by equity analyst Justin Bergner.

Teck Resources Ltd (TCK.B-T) was downgraded to "market perform" from "outperform" at FBR Capital Markets by equity analyst Lucas Pipes. The 12-month target price is $15 (Canadian) per share.

US Bancorp (USB-N) was downgraded to "neutral" from "outperform" at Robert Baird by equity analyst David George. The 12-month target price is $42 (U.S.) per share.

With files from Bloomberg News