Thursday’s analyst upgrades and downgrades

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

The positives of Apple Inc. (AAPL-Q) are "largely known," according to Wells Fargo analyst Maynard Um, who expects the tech giant's shares to remain range bound in the wake of recent gains.

Despite the hype surrounding the release of the company's new  iPhone 7 at its fall product event on Wednesday, Mr. Um downgraded the stock to "market perform" from "outperform."

"Our prior thesis was predicated on reasonable visibility to Dec quarter iPhone sell-in/gross margin given the extra week and, hence, low risk of an earnings/guidance miss," he said. "However, with calendar year end in sight, sell-through, rather than sell-in, in our opinion, becomes more important and, given limited visibility and with shares up 12 per cent since earnings on July 26 (S&P up 1 per cent), we see risk/reward as balanced."

He added: "We also believe expectations for 1) Street raising Dec quarter estimates, 2) an up year-over-year March quarter (March last year impacted by excess inventory), and 3) stable gross margins in this cycle are now largely anticipated by investors. We make slight adjustments to our fiscal 2017 EPS [earnings per share] to $9.28 from $9.44 as we see some potential average selling price (ASP) risk from a shift to mid-tier from changes in storage capacities."

Mr. Um said water resistance and an improved camera are "visibly the most attractive" features of the new iPhone model. He added: "However, we see risk that prior high end 128GB buyers may not necessarily opt to purchase the 256GB high-end this year. While the Lightning to 3.5mm dongle will allow people to use existing headsets, it will limit the ability to use a headset and charge at the same time, creating some inconvenience."

Mr. Um reduced his target price for Apple shares to a range of $105-$120 (U.S.), down from $115-$125. The analyst average target price is currently $123.76, according to Bloomberg.

"[We] see limited upside potential beyond the high end of our revised range given investor expectations for the raise, narrow visibility into Mar/Jun quarters (dependent on Dec sell-through) and potential for pull-in of demand from future quarters due to more aggressive country launch plans," he said. "While iPhone 8 has the potential to be a big cycle, we believe there is limited visibility given the off cycle and, if history is an indicator, believe it too early to be investable."

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The risk-reward for Hudson's Bay Co. (HBC-T) leaves CIBC World Markets analyst Mark Petrie "less bullish" going forward.

Despite seeing upside as its retail business improves, he downgraded his rating for the retailer to "sector performer" from "sector outperformer."

Citing the "significant" pressure facing both the department store and apparel industries over the past year, Mr. Petrie said HBC has outperformed its peers largely due to its diversification and the strength of its Canadian opportunities. However, he cautioned that the company is not immune to the issues facing the industry as a whole.

 "The explanations for the broad slowdown are many and don't need to be rehashed in detail, but we acknowledge that the department store industry is facing fundamental challenges as consumers evolve and shopping preferences shift," he said. "Though North American consumers are relatively healthy when it comes to jobs, income, and discretionary cash buoyed by gas savings, the decline in SSS [same-store sales] across the board highlights that there are broader issues at play. The industry is always competitive, but the primary barrier to entry has historically been real estate, along with a number of other factors including access to brands. The emergence of ecommerce has flipped the real estate angle on its head, though we continue to believe that top-notch locations still win, and HBC has many. Access to brands remains vital, and HBC excels across off-price, mainline and luxury, but ecommerce is also a great equalizer here, and brands are increasingly going direct to consumer, and the barrier to creating a new brand with buzz has never been lower. Consumer behavior is shifting, and the idea of a one-stop shop has declined in appeal. Retailers are continually trying to improve their in-store experience, and HBC has undoubtedly made massive progress here, particularly in its renovated Canadian stores. But more and more consumers are avoiding malls entirely; top-tier locations still perform, but those in the middle are suffering, and we do not foresee this issue going away. Furthermore, there's even less retailers can do about another headwind - a structural shift among consumers choosing to direct more of their discretionary spending to experiences.

"This is not to say that there is no money to be made in a well-run department store; there most certainly is. But beyond a banner year of weather, it is difficult to make a compelling argument that there are reasons to expect a dramatic turnaround in this industry."

Mr. Petrie cautioned against reading too much into HBC's "good" second-quarter performance, noting the period is a "seasonally small contributor" and adding "all eyes are on Q3 and Q4." He feels the back-to-school period went well for the company, but he expects department stores to underperform other channels.

"Factors that are outside management's control are impacting the entire department store industry, and HBC is not immune," he said. "A strong U.S. dollar has kept some tourists away and weather adds volatility, but the evolution to online and a structural shift in spending among consumers mean this industry faces a difficult path ahead. Of course, the additional layer at HBC is the complicated structure established to highlight and access the tremendous real estate value buried within the company. The value is undoubtedly there, but the heavy rent burden also narrows the margin for error. Combine this with heavy capex plans and de-leveraging is virtually impossible in the near term."

Mr. Petrie did not change his target price of $20 per share. The analyst average is $24.46.

"We continue to apply a 20-per-cent discount to our sum-of-parts valuation to reflect the higher leverage in the business and the longer timeline to any reduction given the elevated capex," he said. "We also believe this discount reflects the challenges in the next step to surfacing this value, which will likely require greater tenant diversification within the JVs. This most likely means acquisitions, which will require capital, which will likely mean additional dilution to HBC. In the end, owning less of a more valuable entity, which the market will give more credit for should be a positive development, but will take time. While the real estate holdings do provide a floor of value, it is difficult to see notable catalysts to move the stock beyond significant earnings growth, which does not seem likely this year. HBC has already gathered investing partners for the larger of its JVs – and while a REIT spin-off would bring in cash to deleverage, we do not expect that the values placed on the underlying real estate would be materially higher than our estimates."

Elsewhere, the stock was also downgraded to "hold" from "buy" by Canaccord Genuity analyst Derek Dley with a target of $20.50, down from $22.

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The resurgence of Adidas AG has "taken a toll" on the European growth rate of Nike Inc. (NKE-N), according to Piper Jaffray analyst Erin Murphy.

Following a multi-market tour, Ms. Murphy downgraded the apparel maker to "neutral" from "overweight," emphasizing the competition from by other brands in Europe, including Puma, New Balance and "surprisingly" Reebok. She said those pressures and a more "muted" innovation pipeline are likely to weigh on Nike shares for the next 6-12 months.

"Unlike other brands, markdowns of Nike product were consistent across our wholesale checks," the analyst said.

Ms. Murphy maintained a price target of $58 (U.S.) per share. The average is $65.90.

"We are stepping to the sidelines and expect NKE shares to be in a period of digestion until we see evidence of new platform innovation and earnings acceleration," she said.

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In reaction to the release of an update on its Rainy River project, Desjardins Securities analyst Michael Parkin downgraded his rating for New Gold Inc. (NGD-T).

On Wednesday, the company said the project remains on track for first production in 2017, with overall construction 45-per-cent complete. However, the capital expenditure budget is expected to rise by $105-million (U.S.), including $20-million in contingency.

"Due to multiple capex revisions year-to-date in connection with Rainy River, our conviction on New Gold achieving the remaining development budget of $480-million is relatively low," said Mr. Parkin, who moved his rating to "hold" from "buy." "We are now assuming an [approximately] 11-per-cent capex overrun."

Mr. Parkin added 10 per cent to his second-half 2016 spending projections and 15 per cent to his first-half 2017 capex assumptions, adding "we had previously already assumed a modest overrun."

Also citing recent stock price appreciation, he reduced his 12-month price target to $7 from $7.25. The average is $7.41.

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"The athleisure trend is now starting to peak," said Piper Jefferies analyst Randal Konik.

Accordingly, he downgraded Lululemon Athletica Inc. (LULU-Q) to "hold" from "buy."

"While we believe LULU still has ample opportunity to grow its top-line and expand operating margins, we believe this is now largely factored into the stock," said Mr. Konik.

Though he believes the company benefits from a favourable but slowing sector, Mr. Konik said his reasons for a January upgrade  have "largely come to fruition."

"This recovery has largely played out, with gross margin expanding significantly in 2Q'17 and operating margins set to expand in the second half of the year," he said.

Mr. Konik reduced its price target to $76 (U.S.) from $80. The average is $72.

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CIBC World Markets analyst Kevin Chiang raised his target price for Parkland Fuel Corp. (PKI-T) upon resuming coverage of the stock following a $230-million equity offering.

The proceeds are to be used to help finance the $965-million acquisition of the majority of CST Canada's assets.

"We view this acquisition favourably from a strategic perspective, the expected earnings accretion from the deal, and the valuation implications," he said. "We remain constructive on PKI as it actively pursues its roll-up strategy, leveraging its lower supply cost structure, balanced barrel, and geographic reach."

Mr. Chiang maintained his "sector performer" rating and raised his target to $31.50 from $26. Consensus is $28.50.

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Citing increased conviction in its quarterly same-store sales performance and "runway" through his forecast window, Raymond James analyst Kenric Tyghe increased his target price for Sleep Country Canada Holdings Inc. (ZZZ-T).

"The weak results reported by Sears Canada [Wednesday] morning, with core retail sales decreasing 6.2 per cent (on an easy 3.5-per-cent decrease in the year-ago quarter), have further increased our conviction on Sleep Country's ability to secure the market share gains required, to deliver SSS growth in the high single digits in 3Q16 (despite the particularly tough 13.4 per cent prior year comp)," said Mr. Tyghe.

Mr. Tyghe said the "continued" weaker-than-expected performance from competitors, including Sears, provides Sleep Country with a tailwind for SSS growth and also "facilitates for even more disciplined adpend."

"We believe that the expected level advertising intensity (spend) in the context of current market dynamics may overstate reality, for better than expected SG&A leverage," he said.

He added: "We believe that the promotional intensity and mix impact dynamics support a modest increase to our 3Q16 gross margin estimates from 31.8 per cent to 32.0 per cent. While it is perplexing that competitors either can't or won't get out of their own way, the longer it takes, the greater Sleep Country's lead and the harder they'll be to try and catch."

Mr. Tyghe raised his SSS growth estimate for the quarter to 8.2 per cent from 7.4 per cent and his sales estimate to $161.6-million from $160.2-million. His earnings per share rose 2 cents to 58 cents.

His full-year earnings per share projections for 2016 and 2017 rose to $1.33 and $1.64, respectively, from $1.31 and $1.58.

He maintained his "outperform" and bumped his target to $33 from $31. The average is $33.86.

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CIBC World Markets analyst upgraded Spectra Energy Corp. (SE-N), citing the benefits of its proposed merger with Enbridge Inc. (ENB-T).

Moving his rating to "sector outperformer" from "sector performer," he said the deal is favourable for Spectra shareholders "given the premium valuation offering, potential upside, accelerated dividend growth profile, and risk mitigation through geographic and asset diversification."

He moved his target to $55 (U.S.) from $36. The average is $39.

Elsewhere, Goldman Sachs analyst Theodore Durbin downgraded the stock to "neutral" from "buy" and raised his target to $42 from $39. Raymond James analyst Darren Horowitz lowered his rating to "outperform" from "strong buy" with a target of $44, up from $40.

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In other analyst actions:

Canadian Western Bank (CWB-T) was rated new "hold" by Laurentian Bank Securities analyst Marc Charbin with a 12-month target price of $28 per share. The analyst average is $26.04.

Macquarie analyst Michael R. Wood upgraded Johnson Controls International Plc (JCI-N) to "outperform" from "neutral" and raised his target to $55 (U.S.) from $45.03. The average is $51.29.

J.P. Morgan analyst Christopher Scott upgraded Eli Lilly & Co. (LLY-N) to "overweight" from "equal-weight" and assigned a target of  $95 (U.S.). The average is $97.70.