Thursday's analyst upgrades and downgrades

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

Despite losses related to the Fort McMurray fires, Intact Financial Corp. (IFC-T) remains "nicely profitable," said Raymond James analyst Michael Overvelde.

However, in the wake of the release of its second-quarter results, Mr. Overvelde downgraded his rating for the stock to "market perform" from "outperform" based on valuation.

"We regard Intact as a best-in-class operator with leading scale and sustainable competitive advantage in a mature industry that still offers plenty of consolidation potential," he said. "2Q16 results featured still-impressive organic premium growth, steady investment income, improved investment gains and better-than-expected underlying underwriting profitability as well as a sizeable catastrophe loss related to Fort McMurray wildfires."

On Wednesday, Intact reported adjusted earnings per share of 76 cents, topping the analyst's projection of 42 cents. Net operating income per share of 83 cents also exceeded Mr. Overvelde's estimate of 47 cents (as well as the consensus of 62 cents).

He noted the results were negatively impacted by 97 cents per share due to the Fort McMurray fires. Without those losses, adjusted EPS would have been $1.73, an increase of 11 per cent year over year and ahead of his estimate of $1.52. NOIPS would have risen 15 per cent from the previous year.

"Current-year claims losses were particularly low in both personal and commercial property lines, due to both favorable weather conditions and profitability initiatives gaining traction, while catastrophe losses (other than Fort McMurray) were low," said Mr. Overvelde.

He also emphasized organic premium growth "remains impressive" in each of the company's two largest segments.

"In Personal Auto, organic premium growth of 5 per cent (6 per cent year to date) was entirely related to increased market share, with overall price levels remaining flattish," the analyst said. "Similarly, the bulk of Personal Property's 8-per-cent year-over-year organic premium growth has been volume related, bolstered by the successful introduction of new products. Both businesses are benefiting from a growing owned distribution network and improved co-branding with brokers, whose success was also evident in strong distribution revenues earned in the quarter. On an industry-wide basis, the company's industry outlook continues to call for low single-digit premium growth in personal auto and mid-to-high single digit growth in personal property, and we'd expect Intact to fare at least this well supported by continued market share gains. Consistent with recent trend, premium growth in commercial lines was muted with the favorable impact of rate increases largely offset by continued softness in the Alberta economy. The company expects low single-digit growth in commercial lines over the next 12 months."

In reaction to the results, Mr. Overvelde raised his 2016 and 2017 EPS forecasts to $5.11 and $7.19, respectively, from $4.79 and $7.10. His book value per share estimates rose to $42.26 and $46.26 from $41.61 and $45.51.

However, he noted the stock is currently trading above its historic average price-to-earnings multiple at 14.1 times with a total projected return of 5 per cent to his target price. Thus, he downgraded his rating.

He did raise his target by a loonie to $97. The analyst average target price is currently $101.07, according to Bloomberg.

"Our $97.00 target price is based on a 2017E P/E of 13.5x, in-line with its one-year average forward P/E of 13.7x and established at a premium to the average valuation of large Canadian financial peers to account for its relative earnings growth, defensive investment characteristics and M&A optionality," he said.

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Secure Energy Services Inc. (SES-T) stock has lagged its oilfield services peers in the summer thus far, said Raymond James analyst Andrew Bradford.

Viewing this gap has an opportunity for investors, Mr. Bradford upgraded his rating to "strong buy" from "outperform."

On Wednesday, Secure reported second-quarter earnings before interest, taxes, depreciation and amortization of $8-million, topping both the forecasts of both Mr. Bradford ($6.5-million) and the consensus ($7-million). He pointed to lower-than-anticipated costs in the company's Process Recovery and Disposal business and higher-than-projected revenue from its Onsite business.

"Drilling & Production Services' EBITDA contribution was negative $3.5-million in 2Q16," he said. "This was in-line with our expectations, though it's worth noting that its still-fledgling Specialty Chemical product grouping continues to detract from DPS EBITDA – we expect by about $1.0 to $1.5-million each quarter. We expect Specialty Chemicals will be EBITDA neutral by year-end 2016."

He added: "Secure's recent PetroLama acquisition began contributing to EBITDA for Secure on Jun. 1 - we're anticipating about $2-million per full quarter from the PetroLama Alida facility going forward. Also, subsequent to 2Q16, Secure acquired the JV interests that it didn't already own in its La Glace and Judy Creek facilities. We expect these two JVs will jointly contribute just over an additional $1-million per full quarter beginning in 3Q16. Ultimately, we expect the addition of the two JVs could contribute over $7-million annually in a more constructive environment."

Mr. Bradford maintained his price target of $10.75. The analyst average price target is $11.44.

Elsewhere, TD Securities analyst Scott Treadwell downgraded the stock to "buy" from "action list buy" and lowered his target to $12 from $14.

EVA Dimensions analyst Neil Fonseca raised his rating to "hold" from "underweight" without a target price.

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Barrick Gold Corp. (ABX-T) has displayed "strength in consistency," according to Canaccord Genuity analyst Tony Lesiak.

Following the release of the company's second-quarter results, Mr. Lesiak upgraded his rating for the stock to "buy" from "hold."

On Wednesday, Barrick reported quarterly adjusted earnings per share of 15 cents, a cent better than the forecasts of both Mr. Lesiak and the Street. Gold production and sales of 1.3 million and 1.29 million ounces, respectively, was slightly both the analyst's projection of 1.37 and 1.4 million. Cash costs of $578 per ounce exceeded his forecast ($531) as well.

"Barrick's turn-around story continues with the company focused on core assets, operational improvements and repairing the balance sheet," said Mr. Lesiak. "Year to date, the company has paid down $968-million of debt, about half-way to its $2-billion goal for 2016. The additional funds for the residual repayment could come from either cash flow ($2.5-billion in 2016) or the potential sell-down of its interest (63.9 per cent) in Acacia or Kalgoorlie for 50 per cent.

"Given this continued turnaround and the 6-per-cent pull back in share price since the beginning of July (4-per-cent relative underperformance), we are revising our rating," he said.

Mr. Lesiak did not change his target price for the stock of $33, versus the average of $29.95.

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Amid a "tempered" growth outlook, Canaccord Genuity analyst Scott Chan lowered his rating for Alaris Royalty Corp. (AD-T) to "hold" from "buy."

Alaris reported second-quarter adjusted earnings per share on Wednesday of 37 cents, below Mr. Chan's projection of 44 cents and the consensus of a penny less. In explaining the miss, he pointed to "slightly" lowered royal distributions (a 3-cent loss), higher bonus accrual and non-cash stock compensation (a 1-cent loss) and higher tax rate (3-cent loss).

In reaction to the results, Mr. Chan lowered his new investment expectation for 2016 to $100-million from $150-million, which he said implies a $50-million net for the balance of the year. His 2016 EPS forecast fell to $1.75 from $1.88.

"Our downgrade mainly reflects: (1) slower pace of investments (tracking lower than last year); (2) slow progression on a KMH [Cardiology L.P.] resolution with an additional write-down on FMV [fair market value] of $7-million (3) continued operational issues at certain partner companies (i.e. SCR, Kimco, Agility and SMi); and (4) lower dividend growth outlook for 16/17."

He added: "We choose to be on the sidelines until we see some of the above mentioned stock overhangs removed. We believe the main potential catalysts include: (1) final resolution at KMH; (2) incrementally positive updates from challenged partner companies (i.e. SCR, Kimco, Agility and SMi); and (3) new investment activity supporting better growth."

He lowered his price target for the stock to $28 from $33. The average is $30.67.

The stock was also downgraded by the following analysts:

• Haywood Securities’ James Reid to “hold” from “buy” with a target of $30 (down from $34.50)
• Alta Corp Capital’s Chris Murray to “sector perform” from “outperform” with a $29 target (from $37)
• Cormark Securities’ Gavin Fairweather to “buy” from “top pick” with a $30 target (from $35)

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The key pieces are in place for TSO3 Inc. (TOS-T), said Desjardins Securities analyst Mark Jarvi, who added it's all about execution.

He initiated coverage of the Quebec-based health care stock with a "buy" rating.

"We believe TOS is well-positioned, with industry-leading technology and claims, a strong and committed partner (Getinge), and a solid balance sheet. In our view, the company is poised to gain market share in an established, yet growing, low-temperature sterilization market and we believe TOS is well on its way to realizing its significant potential—continued strong execution (notably sales) should unlock further value," said Mr. Jarvi.

Emphasizing its market and valuation upside, he added: "Recently-cleared expanded claims on sterilizing multichannel flexible endoscopes enhance the value proposition (for customers and investors) and have the potential to drive an expanded addressable market (GI and ambulatory clinics); additionally, we believe that with its strong product capabilities, TOS could exceed the longer-term 25-per-cent market share we forecast."

Mr. Jarvi set a price target for the stock of $5.50. The analyst consensus price target is $4.88, according to Thomson Reuters.

"TOS is in the early stages of commercialization and we see a path to strong growth and value creation," he said. "The stock has had a decent rally recently on the back of news of the U.S. extended claims. However, we believe there remains good upside potential to our target and view TOS as a possible takeout candidate (not that it's needed to get excited about TOS). Catalysts that could sustain or accelerate the strong momentum include signing of key customers, proof of sell-through with Getinge, support of GPOs/IDNs and further expansion of claims."

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In other analyst actions:

First Quantum Minerals Ltd. (FM-T) was upgraded to "outperform" from "neutral" by Credit Suisse analyst Ralph Profiti. He raised his target to $13 from $10. The average is $11.75.

Mr. Profiti downgraded HudBay Minerals Inc. (HBM-T) to "neutral" from "outperform" with a target price of $7 per share (unchanged). The average is $7.83.

Marquee Energy Ltd. (MQL-X) was rated new "speculative buy" by Beacon Securities analyst Lyndon Dunkley with a 12-month target price of 50 cents per share. The average is 48 cents.

Torstar Corp. (TS.B-T) was downgraded to "reduce" from "hold" at TD Securities analyst Bentley Cross with a target of $1.40 (from $2.25). The average is $2.13.

Monness, Crespi, Hardt & Co analyst James Cakmak downgraded Facebook Inc. (FB-Q) to "neutral" from "buy."  He didn't specify a target price. The consensus target is currently $154.05 (U.S.).

Raymond James analyst Aaron M. Kessler upgraded TripAdvisor Inc. (TRIP-Q) to "market perform" from "underperform." He did not specify a target, while the consensus is $67.12 (U.S.).