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File photo of a Canadian Imperial Bank of Commerce location in a Toronto suburb.Deborah Baic/The Globe and Mail

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

Taking a negative view of its intention to acquire PrivateBancorp Inc. (PVTB-Q) for $4.9-billion, BMO Nesbitt Burns analyst Sohrab Movahedi downgraded Canadian Imperial Bank of Commerce (CM-T, CM-N).

Moving his rating to "market perform" from "outperform," Mr. Movahedi said: "In our view, with this acquisition (a full valuation premium, in our view), CM has conveyed two important messages: 1) geographic diversification and earnings growth trump profitability (as measured by return on equity) in its capital deployment framework by more than we believed; and 2) it is now focused on growing the contribution of total bank earnings from the U.S. to "25-per-cent-plus over time," which we view as a relevant updated message regarding future capital deployment priorities."

Mr. Movahedi did note that the bank's total return, including dividends, over the past year has been almost 11 per cent, the second-highest amongst the Big Six banks and 7 per cent better than the bank index.

"Our previous rating on the bank was based on its appeal to defensive-minded investors given: 1) relatively higher earnings mix towards the higher-multiple retail segment, which stands to benefit from restructuring efforts at the bank (to improve the expense-to-revenue ratio); 2) higher overall profitability as measured by ROE notwithstanding relatively higher capital ratios; and 3) one of the highest dividend yields in the group," he said. "To be fair, deployment of capital into the U.S. banking market has been a fairly consistent message from the bank since Victor Dodig was appointed CEO about two years ago. To be clear, we are not 'surprised' by the bank's announcement; however, the size of the acquisition was somewhat higher than the range the bank had communicated and the nature of the assets acquired is a bit more lending and a bit less wealth than we had expected."

After he lowered his 2017 earnings per share projection to $9.70 from $9.80, Mr. Movahedi also dropped his target price for the stock to $97 from $102. The analyst average is $101.69, according to Bloomberg.

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RBC Capital Markets analyst Jon Arfstrom downgraded PrivateBancorp Inc. (PVTB-Q) due to its announced acquisition by Canadian Imperial Bank of Commerce (CM-T, CM-N).

Moving his rating to "sector perform" from "outperform," Mr. Arfstrom said the purchase price of $3.8-billion (U.S.) was "attractive" and believes PrivateBancorp "did the right thing in accepting the CIBC offer." He noted the calculated premium was 2.2 times tangible book value and 18.5 times 2016 estimates.

"We like this transaction for PrivateBancorp shareholders and also believe it solves some of the headwind issues for the company," the analyst said. "Over the last few years, the company had shown tremendous progress in its business transformation plan to move away from commercial real estate and into a commercial lending heavy model. This transformation is largely complete and the company's results and stock price are very tied to short-term interest rate expectations. Given the recently lowered expectations for short-term rate increases, we think this was a good time for the company to consider partnering with a larger bank. We continue to believe that the company has a large market share gain opportunity in Midwestern commercial lending, and having a larger parent with more diverse funding sources and larger lending limits could be a material benefit to the outlook for the company. At this point, our assumptions for growth, margins and credit remain the same."

His price target for the stock remains $46 (U.S.). The average is $43.87.

Elsewhere, the stock was downgraded by the following analysts:

  • Keefe, Bruyette & Woods’ Christopher McGratty moved it to “market perform” from “outperform” with an unchanged target of $45.
  • Raymond James’ David Long dropped it to “market perform” from “strong buy” with an unchanged target of $49
  • EVA Dimensions’ Neil Fonseca lowered it to “underweight” from “overweight” without a target.

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After reporting second-quarter 2016 financial results which met expectations, BMO Nesbitt Burns analyst Tom MacKinnon upgraded AGF Management Ltd. (AGF.B-T) to "market perform" from "underperform."

"AGF continues to show steady improvement in net redemptions and fund performance -- key to increasing gross sales," he said. "While company fundamentals are improving, we still believe AGF faces challenges in a changing industry, as a changing regulatory environment puts greater pressure on fees, increases costs, and squeezes EBITDA margins. Nevertheless, AGF has an attractive 6.4-per-cent yield and a valuation that we believe has stabilized relative to its peers."

On Tuesday, the Toronto-based investment management company reported operating earnings per share of 13 cents, beating both the analyst and consensus projection of 11 cents. Its retail net outflows came in at $282-million, topping Mr. MacKinnon's estimate of $300-million and representing an improvement from the same quarter in 2015 ($406-million).

He noted gross sales declined 9 per cent year over year, below the industry average of 11 per cent.

"Performance continued to improve, with 50 per cent of AUM [assets under management] above median for the one-year period at the end of Q2/16, up from 47 per cent at the end of Q2/15, and 54 per cent of AUM above median for the three-year period at the end of Q2/16, up from 45 per cent at the end of Q2/15," the analyst said. "One-year performance has now stabilized around AGF's target of 50 per cent, and management still expects to reach its three-year performance target of 60 per cent by the end of 2016."

Mr. MacKinnon raised 2016 and 2017 EPS forecasts to 52 cents and 55 cents, respectively, from 45 cents and 45 cents, "reflecting better results in the quarter, slightly better net flows going forward, and a lower guided-to tax rate."

He raised his target price to $5.25 from $4.50. The average is $5.24.

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Credit Suisse's global metals and mining team updated their commodity forecasts in a research note.

The group raised their gold price forecast for the second half of the calendar year by 8 per cent to $1,413 (U.S.) per ounce and 10 per cent for 2017 to $1,450 per ounce "on prolonged macro and political uncertainty following the Brexit vote." Their silver projections rose 12 per cent to $18.75 per ounce for the second half and 15 per cent to $19.03 per ounce in 2017.

"Our silver forecast tracks gold as we forecast the physical market will be in a significant deficit in 2016 and 2017 driven by elevated financial demand and challenged mine supply," they said.

Anticipating gold equity performance to continue, the group upgraded the following stocks

  • Alamos Gold Inc. (AGI-N, AGI-T) to “outperform” from “neutral” and a target of $11 (U.S.) from $7.25. Consensus is $10.62.

    Analyst Anita Soni said: “We rate Alamos outperform due to its strong project pipeline, favourable FX exposure, balance sheet and exploration opportunities. In a $1,100/oz gold price environment, AGI had focused on expanding its operating assets with the Young Davidson ramp up and Cerro Pelon and La Yaqui satellite development at Mulatos. With a higher gold price environment, AGI is well positioned to more rapidly advance its pipeline of projects including Agi Dagi/Kirazli, Lynn Lake and Esperanza, which can add to its growth over the next five years.”
     
  • Yamana Gold Inc. (AUY-N, YRI-T) to “outperform” from “neutral” with a target of $6.50 (U.S.) from $4.50. Consensus is $5.28.

    Ms. Soni said: “AUY's recent outperformance has been driven by its above-average gold price leverage and management commitment to $300-million of debt reduction over 2016-2017. We view gold leverage as a theme that will continue to benefit AUY from both a leverage standpoint and by providing a more favourable environment for AUY to restructure its asset portfolio to focus on its core (Malartic, El Penon and Chapada) while reducing debt. While we see some risk from a potential cost guidance revision as currency and commodity spot rates are a $33/oz headwind vs. AUY guidance, our cash cost estimates are already $40/oz above AUY guidance. In our view, positive catalysts through portfolio optimization, balance sheet deleveraging and exploration at Malartic and Chapada are more significant.”
     
  • IAMGOLD Corp. (IAG-N, IMG-T) to “neutral” from “underperform” with a target of $5.25 (U.S.) from $3. Consensus is $3.87.

    Ms. Soni said:  “We believe IAMGold is turning the corner on operational and financial delivery following a challenging three-year period. IAG has above-average leverage to gold prices and benefits from cost exposure to the Canadian dollar and Euro. We forecast positive FCF [free cash flow] beginning in Q3/16 on our price deck. Higher gold prices and a strong balance sheet ($587-million cash versus $635-million of debt) provides the opportunity to deploy capital and demonstrate management's commitment to improving returns. IAG has internal mine life extension and capital deployment opportunities through a Sadiola expansion, satellite deposits at Essakane and Rosebel and advancement of exploration prospects in Canada, Senegal, Brazil and Mali.”

At the same time, analyst Ralph Profitti upgraded Silver Wheaton Corp. (SLW-T) to "outperform" from "neutral" with a target price of $35 (Canadian) from $28. Consensus is $31.09.

"While CRA tax risk likely continues as an overhang, SLW's business model still provides investors with a highly-levered play on precious metals prices and SLW should still command a multiple in line with royalty valuations and a premium to precious-metals miners based on its leverage to underlying prices, free cash flow, and strong balance sheet," said Mr. Profitti.

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In a research note on the oil and gas sector sector, BMO Nesbitt Burns analysts modestly increased their 2016 oil price decks with the expectation of trading in a relatively narrow range for the remainder of the year before moving higher in 2017 and 2018.

"North American oil and gas equities have delivered solid performance over the first half of the year and outperformed the broader markets. In Canada, the S&P/TSX Oil & Gas index has gained roughly 15 per cent compared to a 7-per-cent gain for the broader market, while in the United States, the S&P Oil & Gas Index is up 14 per cent compared to flat performance for the S&P 500," the analyst said. "The performance over the first half of the year largely mirrors the performance of crude oil prices. Commodity prices strengthened through the second quarter on the back of an improving supply and demand balance for both crude oil and natural gas. Brent crude oil improved from roughly $39/barrel at the start of the quarter to more than $50 in mid-June before easing somewhat on Brexit concerns. We expect crude oil prices to trade in a relatively narrow range of $45-55/bbl over the balance of the year as the market balances positive factors, such as the ongoing disruption in Nigerian production, against negative factors, such as the economic uncertainty introduced by the Brexit vote and the fact that U.S. producers have demonstrated a willingness to add rigs at oil prices in the $50/bbl-range. This could limit further share price gains for the group over the second half of the year. Our core oil leveraged recommendations are Canadian Natural Resources, Suncor and Total."

BMO increased its 2016 Brent estimate to $46 (U.S.) per barrel from $42.40. Their 2017 projection of $55.50 did not change.

They also increased their WTI estimate to $44.50 from $40.10. Their 2017 estimate rose by two dollars to $45.

"As commodity prices collapsed at the beginning of the year, companies with higher financial leverage materially underperformed less-leveraged peers; however, as commodity prices recovered those equities were re-rated and outperformed as the bankruptcy risk receded," they said. "Over the second quarter, financial leverage has not been a factor that has materially influenced performance, as shown in Chart 7. One factor that has influenced equity performance over time is full-cycle cost performance. Relying on our annual Global Cost Study, we have demonstrated many times that those companies with lower supply costs outperform companies with higher supply costs ... Accordingly, we recommend that investors continue to focus on companies with the lowest cost structures, as those companies are best positioned to generate value for shareholders. Our top investment recommendations include Cabot, Canadian Natural, Parsley, Peyto, Pioneer, QEP, Raging River, Range, Seven Generations, Suncor, TORC and Total."

In conjunction with the changes, analyst Ray Kwan upgraded Baytex Energy Corp. (BTE-T, BTE-N) to "market perform" from "underperform."

"Our previous underperform rating was predicated on the company's above-average leverage and our bearish oil forecast," said Mr. Kwan. "After appreciating roughly 71 per cent year to date, we were simply wrong on the shares being a relative underperformer.

"As we look back, one of the lessons we learned is being overly 'bearish' at the bottom of the cycle. Don't get us wrong: Baytex continues to have high leverage relative to its peers on the BMO deck at 7.2x [times] D/CF [debt to cash flow] for 2016 (versus peers at 3.5x); however, the company has secured generous covenant terms on its credit facility, and as such, we see no liquidity issues over the next few years. To that end, we think Baytex has option value to higher oil prices."

Mr. Kwan raised his price target for Baytex shares to $8 from $6. The analyst consensus price target is $7.07, according to Thomson Reuters.

At the same time, Mr. Kwan downgraded Tamarack Valley Energy Ltd. (TVE-T) to "market perform" from "outperform" based on the price deck changes and a recent rally in share price.

"Although fundamentally we continue to like Tamarack Valley longer term, we believe crude oil prices will be range-bound in the near term and believe companies like Tamarack will underperform its gas-weighted peers as a result," he said. "Note that the shares have appreciated 23 per cent year to date, outperforming the S&P/TSX Energy Index by 6 per cent over that time period. Additionally, while we thought the previously announced 1,900 boe/d [barrels of oil equivalent per day] acquisition was slightly positive, we do think the Penny acquisition was outside the company's core focus area. We await more detailed information on the acquisitions after the closing of the deal."

He raised his target price to $4.75 from $4.50. Consensus is $4.98.

"The company maintains a strong balance sheet with a 2016E D/CF of 1.0x versus its peers at 3.5x on BMO's revised price deck," he said. "On a 2017 estimated EV [enterprise value]/EBITDA basis, Tamarack trades at 7.0x versus the group at 8.2x. We look for the company to pursue further accretive acquisitions in its core area in the coming quarters."

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The fourth-quarter 2016 results for Empire Company Ltd. (EMP.A-T) highlighted the enormity of the challenges it faces, said Raymond James analyst Kenric Tyghe.

On Wednesday, the parent company of grocer Sobeys Inc. reported adjusted earnings per share of 35 cents, a penny ahead of the analyst's forecast. In explaining the result, he pointed to a lower-than-expected effective tax rate of 21.5 per cent (versus his 26-per-cent estimate).

Sales of $6.283-billion also exceeded his projection ($6.002-billion), while in line with the consensus of $6.258-billion.

"SSS [Same-store sales] (excluding fuel) decreased a surprising 1.3 per cent (we were modelling a 0.5-per-cent increase), on a 3.6-per-cent Western Canadian SSS decrease, which on internal food inflation of 2.2 per cent imputes material share losses in the quarter," said Mr. Tyghe. "The weak SSS performance was a function of continued operational and integrational challenges in Western Canada (with weakness expanding to all banners in the region), weak traffic, increased price investments and heightened competitive intensity in key markets. While Empire implemented a permanent price reduction in its Quebec banners under its Simplify Buy and Sell program, which has received a positive customer response, the initiative is still in its early days."

Mr. Tyghe said a 1.15-per-cent decline in gross margin to 24.6 per cent highlighted greater-than-expected price investments (versus weak traffic). He added EBITDA of $270-million (below the consensus of $274-million) reflected that material gross margin compression.

"While the challenges in the west were previously concentrated within Safeway, the weakness, on macro and consumer dynamics, expanded to all banners in the region," the analyst said.

In reaction to the results, he lowered his 2017 and 2018 EPS projections to $1.44 and $1.66, respectively, from $1.59 and $1.76. His revenue projections fell to $24.252-billion and $24.636-billion from $24.486-billion and $24.954-billion.

Mr. Tyghe maintained his "market perform" rating for the stock. He lowered his target price to $21 from $24. The analyst average price target is $21.44, according to Bloomberg.

"Our new target price is based on our SOTP [sum-of-the-parts] calculation, which applies a 14.0-times multiple to our revised estimated 2017 fiscal year EPS, for a NAV [net asset value] of $21.49," he said. "We believe that our target multiple (a discount to Sobeys' three-year average of 16.1x) appropriately reflects the challenges of winning back customers in key markets, given both current market dynamics and Sobeys' full service weighted footprint."

Elsewhere, Credit Suisse analyst David Hartley upgraded the stock to "neutral" from "underperform" while lowering his target to $20 from $21.

"We are closer to the bottom being priced in for an otherwise viable and stable business in Canada," said Mr. Hartley. "However, we remain unconstructive on the stock. Further challenges to profitability are a risk given significant structural/organizational changes being made/still to come."

He added: "Second shoe drops: another sizable writedown was shocking and there is no timetable from management for a fix to ongoing operational and demand issues at Sobeys. Furthermore, the market has become increasingly promotional and price-focused. Management is in midst of "restructuring" its offering, pricing, go to market strategies (which may/not include incorporating a new discount banner), and supporting senior management (new CMO & Head of Ontario/Atlantic announced). It's unclear whether top-line trends get worse before a fix is found. Announced vendor negotiations is a work in progress (designed for volume growth but margin neutral), previously announced cost synergies may be priced in by the Street, and further cost reductions."

Barclays analyst James Durran downgraded the stock to "underweight" from "equalweight" and dropped his target to $19 from $24.

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In other analyst actions:

TD Securities analyst Travis Wood upgraded Crescent Point Energy Corp. (CPG-T, CPG-N) to "action list buy" from "buy." His target rose to $31 from $27, compared to an average of $25.44.

Evercore ISI analyst Steve Sakwa upgraded Marriott International Inc. (MAR-Q) to "buy" from "hold" with a target of $75 (U.S.), down a dollar. The average is $76.67.

Lucara Diamond Corp.
(LUC-T) was upgraded to Haywood Securities analyst Geordie Mark to "buy" from "hold" with a target of $3.90 (Canadian), down from $4.40. The average is $3.97. The stock was downgraded to "sector perform" from "sector outperform" by Scotia Capital's Craig Johnston with a target of $3.50, falling from $4.

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