Thursday’s analyst upgrades and downgrades

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

Despite citing the potential for a "prolonged" recovery for metal prices, Raymond James analyst Chris Thompson maintained his "constructive" outlook for the mining sector, "reflective of on-going global political uncertainty and skepticism over U.S. economic growth."

However, the firm dropped its precious metals price desk for gold and silver by 11 per cent and 10 per cent, respectively, to $1,250 (U.S.) per ounce and $18 per ounce, "driven principally by potential for prolonged recovery of metal prices, stymied by recent U.S. dollar strength."

"From an equities perspective, whilst valuations have suffered (caught in the down draft of recent metal price weakness) precious metals stocks aren't oversold," said Mr. Thompson. "As such, whilst we recommend investors use this opportunity to build positions in favorite names, we urge investors to be selective and focus on companies that offer a combination of funded growth, attractive near-term FCF [free cash flow] yields and leverage to metal prices."

Mr. Thompson upgraded his ratings for both OceanaGold Corp. (OGC-T) and MAG Silver Corp. (MAG-T) to "strong buy" from "outperform," noting their "attractive mix of valuation, catalysts and/or near-term FCF potential."

His price target for stock of OceanaGold fell to $5 from $6. The analyst consensus is $5.66, according to Thomson Reuters.

"We view production ramp ups at OGC's Haile mine (commissioning anticipated in 1Q17E) as compensating for production declines from Didipio, enabling OGC to satisfy our consolidated 2017 estimated production and cost expectations," he said.

Mr. Thompson's target price for MAG fell to $19.50 from $23.75. Consensus is $23.72.

Mr. Thompson also made several target price changes to stocks in the sector. They include:

- Asanko Gold Inc. (AKG-T, outperform) to $4.75 from $6.75. Consensus is $6.50.
- B2Gold Inc. (BTO-T, outperform) to $4 from $5. Consensus: $5.05.
- Coeur Mining Inc. (CDE-N, outperform) to $11.75 (U.S.) from $16.50. Consensus: $13.86.
- Endeavour Mining Corp. (EDV-T, outperform) to $24.50 from $30.75. Consensus: $32.17.
- Mandalay Resources Corp. (MND-T, outperform) to 85 cents from $1.10. Consensus: $1.33.
- Orezone Gold Corp. (ORE-X, outperform) to 90 cents from $1.10. Consensus: $1.38.
- Roxgold Inc. (ROG-X, outperform) to $1.75 from $2.25. Consensus: $2.29.
- SEMAFO Inc. (SMF-T, outperform) to $5.25 from $7. Consensus: $6.72.
- Tahoe Resources Inc. (THO-T, outperform) to $19 from $24.50. Consensus: $22.37.
- Victoria Gold Corp. (VIT-X, outperform) to 75 cents from $1. Consensus: 99 cents.
- Bear Creek Mining Corp. (BCM-X, outperform) to $3.25 from $4. Consensus: $3.93.
- Endeavour Silver Corp. (EDR-T, market perform) to $4.75 from $6.75. Consensus: $6.61.
- First Majestic Silver Corp. (FR-T, market perform) to $9 from $11.50. Consensus: $20.82.
- Fortuna Silver Mines Inc. (FVI-T, outperform) to $9.50 from $12.25. Consensus: $12.49.
- Pan American Silver Corp. (PAAS-Q, outperform) to $18 (U.S.) from $22.25. Consensus: $19.75.
- Silvercorp Metals Inc. (SVM-T, market perform) to $3.15 from $4. Consensus: $6.75.

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The recovery in comparable same-store sales growth and margins for Finish Line Inc. (FINL-Q) is delayed again, according to Canaccord Genuity analyst Camilo Lyon.

In response to the release of the U.S. retailer's third-quarter 2017 results on Wednesday, he downgraded his rating to "hold" from "buy," saying he sees few catalysts for the stock through the first half of 2017 to drive share price appreciation.

The Indianapolis-based company reported comps and earnings per share for the quarter of 0.7 per cent and a 24-cent loss, respectively, below Mr. Lyon's projection of 8.5 per cent and a 17-cent loss.

The company lowered its full-year adjusted earnings per share guidance of $1.24-$1.340 from $1.50-$1.56. It is also expecting flat to 1-per-cent comp growth from 3 per cent to 5 per cent.

"At issue is the drag on slow-selling apparel that will necessitate higher levels of promotions to clear out the slow-turning product," Mr. Lyon said. "This apparel drag is ill-timed since footwear is comping well, M is performing above plan, and the early remodels are yielding positive results. We now see FINL as having the potential to be a 2H turnaround story assuming the apparel strategy (approximately 4 per cent of mix) is sorted out. That said, success in apparel in this channel has proved elusive for others as well and thus we believe a hold rating is more appropriate until we see evidence of improving apparel trends."

Mr. Lyon lowered his target to $22 (U.S.) from $25. Consensus is $22.61.

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Weak billing growth will "dominate" the stock of Red Hat Inc. (RHT-N) both in the near and longer term, said BMO Nesbitt Burns analyst Keith Bachman.

He downgraded the Raleigh, N.C.-based tech company to "market perform" from "outperform."

On Wednesday, Red Hat reported third-quarter 2017 billings of $679-million, lower than Mr. Bachman's projection of $713-million. Billings growth fell 10 per cent year over year.

Revenue of $615-million also missed both the estimates of both Mr. Bachman ($618-million ) and the Street ($619-million).

"We forecast billings growth of 15 per cent in Q4, but think billings growth will decelerate to 10 per cent to 11 per cent in fiscal 2018," he said. "Our new target price is based on 16 times EV/FCF [enterprise value to free cash flow], whereas our previous target price was based on 18 times EV/FCF. However, we acknowledge that our FCF estimate is heavily influenced by billings growth – we estimate that billings will be 32 per cent of fiscal 2017 FCF and 30 per cent of fiscal 2018 FCF. Given deceleration in billings, and our view that billings growth will remain under pressure, we believe the stock will stay range-bound. Hence, we are moving to a market perform rating on the stock."

His target price for the stock fell to $75 (U.S.) from $89. Consensus is $89.33.

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Accountability Research analyst Jim Marrone downgraded Thomson Reuters Inc. (TRI-T, TRI-N) to "sell" from "hold."

In justifying the change, Mr. Marrone pointed to its valuation, concerns over organic growth in Financial & Risk segment, forex headwinds and ongoing "pressures" in the legal segment.

The analyst said he expects only "modest" revenue growth in the F&R segment.

"We expect lower recoveries revenues and continued residual commercial pricing adjustments associated with the migration of buy-side and foreign exchange customers onto the segment's unified platform," he said. "With significant exposure to EMEA [Europe, the Middle East and Africa] (43 per cent in F&R versus 30 per cent consolidated), we expect growth to be impaired somewhat in this key segment. We also expect that the market has priced in more certainty of a recovery in organic growth for F&R, of which we are not yet convinced. Limited scope for market share gain amid intensifying competition. Competitors, such as S&P's Capital IQ and FactSet, are aggressively marketing their products as a lower cost alternative and offering price incentives to acquire new business and take market share from TRI. As a result, competition has required TRI to reduce the price of some of its products and services and make additional capital investments. Overall, margins in the F&R segment are being pressured more than in TRI's other businesses."

"Competitors, such as S&P's Capital IQ and FactSet, are aggressively marketing their products as a lower cost alternative and offering price incentives to acquire new business and take market share from TRI. As a result, competition has required TRI to reduce the price of some of its products and services and make additional capital investments. Overall, margins in the F&R segment are being pressured more than in TRI's other businesses."

His target for the stock is $54. Consensus is $58.24.

"TRI generally trades in-line with peers on a [price-to-earnings] and [enterprise value-to-EBITDA] basis, and a slight premium on price to cash flow metrics, which is reasonable given its higher dividend yield," the analyst said. "Our concern is the increase in industry and peer multiples of late which have stretched to the topside of historical norms. We have notable concern with the organic revenue growth outlook in the F&R segment, which we are not convinced has recovered and will face a tough 2017 with its greater exposure to EMEA, and uncertain European markets, than the Americas, which forms the base of its remaining segments."

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The current valuation for Greif Inc. (GEF-N) looks "rich," according to BMO Nesbitt Burns analyst Mark Wilde.

Pointing out the stock has more than doubled from first-quarter lows and is now trading at 8.5 times his 2017 EBITDA estimate, Mr. Wilde downgraded his rating for the Ohio-based producer of industrial packaging products and services to "underperform" from "market perform."

He did raised his target price to $48 (U.S.) from $36. Consensus is $49.

"There are encouraging signs of improved execution under the new leadership of Pete Watson," he said. "A containerboard price hike will boost EBITDA in Paper Packaging and margins in Rigid Packaging are improving."