Thursday's analyst upgrades and downgrades

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

Stock of Boardwalk Real Estate Investment Trust (BEI.UN-T) has "gotten ahead of itself" recently, according to Desjardins Securities analyst Michael Markidis.

Noting it has risen 16 per cent since a sell-off coinciding with the release of its third-quarter results on Nov. 11, compared to a 6-per-cent rise from the S&P/TSX Capped REIT index, Mr. Markidis downgraded his rating to "sell" from "hold."

The change was based largely on his bearish stance on near-term apartment fundamentals in Alberta.

"BEI generates [approximately] 65 per cent of its net operating income (NOI) from Alberta," said Mr. Markidis. "The majority of this exposure is derived from the REIT's two largest markets, Edmonton (39 per cent) and Calgary (20 per cent). Apartment fundamentals in these two cities have been under pressure (albeit from a strong starting point) for two years. Owing to the relatively short average lease term inherent in the apartment business, this weakness has rapidly become visible in BEI's operating performance. Stabilized NOI was down 14.6 per cent year over year in 3Q16, bringing the nine-month erosion to 9.8 per cent."

Adding supply pipelines have "adjusted" but remain "elevated," he added: "CMHC released its 2016 fall rental market survey on Nov. 28. Market vacancy in Edmonton and Calgary came in at 7.1 per cent and 7.0 per cent. These figures compare with the prior cycle peaks of 4.4 per cent and 5.3 per cent recognized in the aftermath of the global financial crisis.

"Not surprisingly, bloated supply pipelines have been a key driver of vacancy expansion over the past two years. Interestingly, however, the number of units under construction did not peak until early 2016 (more than a year following the oil price downdraft). Although the supply curves have adjusted rapidly (down by 40–50 per cent), the number of units under construction is still meaningful when compared with the existing inventory of apartment units in Edmonton (2.9 per cent) and Calgary (3.2 per cent). We believe most of these units will be ready for occupancy over the next 12–24 months."

Mr. Markidis said a resurgence in demand will remain elusive in 2017, projecting market stabilization is at least 6-12 months away.

"Moreover, the absolute level of vacancy versus the prior cycle peak should not be ignored as, in our view, it suggests that it will take much longer for landlords to regain pricing power when compared with the most recent recovery cycle," he said.

Accordingly, he our reduced his funds from operations per unit estimates for 2017 and 2018 to $2.72 and $2.82, respectively, from $2.74 and $2.86.

Mr. Markidis lowered his target price for the stock by a loonie to $46 per unit. The analyst consensus price target is $46.61, according to Thomson Reuters.

"BEI closed at $46.49 on Nov. 10," he said. "3Q16 results, which (1) were substantially below expectations, (2) introduced disappointing 2017 guidance, and (3) were ultimately followed by substantial cuts to consensus estimates, were released immediately after market close. Not surprisingly, the stock sold off by 6 per cent the following day, closing at $43.68 on Nov. 11.

"Subsequently, BEI has recouped more than 100 per cent of the post-3Q sell off … In light of the macro factors cited above, we do not believe this period of relative outperformance is justified."

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Saying he needs to see better sustained asset growth from Sprott Inc. (SII-T), Canaccord Genuity analyst Scott Chan downgraded his rating for its stock to "hold" from "buy."

On Wednesday, the Toronto-based alternative asset management company announced its preliminary December, 2016, assets under management (AUM) and performance fees.

Sprott projected AUM as of Dec. 31 of $9.3-billion, up from $7.4-billion in the previous year. The company estimated $11.1-million in gross performance fees, compared to $3.6-million in 2015.

Mr. Chan called the results "mixed" with AUM down from greater-than $10-billion for the third quarter.

"After three quarters of positive AUM growth momentum, Q4/16 AUM growth of a decline of 8 per cent was disappointing to end the year," he said. "To get more positive on SII stock, we need to see more scalability, specifically on the AUM front. We do expect Sprott to have slightly positive net sales ($40-million), but below the $94-million average over the past two quarters. New products could benefit net sales this year."

He added: "Due to the specialty product suite, Sprott's fund performance remains volatile. In 2016, Sprott's absolute performance was solid driven by strong resource markets, and Bullion (i.e. Gold, Silver). However, Sprott's relative fund performance remains below peers over 1- and 3-year periods. Retail has incurred net redemptions over the past few quarters, and we expect that to continue in Q4. Mr. Mitchell's Focused funds (not performance fee eligible) have had a slower uptake than we initially envisioned. We think a potential turn around in retail net flows could prove difficult in 2017 (i.e. regulatory headwinds, resource volatility, lower relative fund performance, higher fee products, increased demand for ETFs)."

In reaction to the results, Mr. Chan lowered his 2016, 2017 and 2018 earnings per share estimates to 13 cents, 13 cents and 15 cents, respectively, from 18 cents, 15 cents and 17 cents.

" We have marked lower AUM, along with negative returns on Sprott's proprietary capital book in Q4," he said. "Our Base EBITDA estimate for 2017 decreases to $24.4-million (from $28.5-million)."

His target price for the stock fell to $2.50 from $2.75. Consensus is $2.54.

"Due to SII's lower total rate of return (5 per cent), we are downgrading shares," he said.

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The recent acquisitions by Ag Growth International Inc. (AFN-T) have "fundamentally changed" it from "a U.S.-based to a more Canadian/Brazilian growth story," according to CIBC World Markets analyst Jacob Bout.

He raised his rating to "outperform" from "neutral."

"With the acquisitions of Westeel, Entringer, NuVision, Mitchell and VIS, the sales mix shifts towards Canada (29 per cent in 2015 to 44 per cent in 2017) and Brazil (from very little to $40-million; note, as a percentage of revenues, the U.S. drops from 46 per cent in 2015 to 37 per cent in 2017," he said. "We consider this trend a positive one given our bullish outlook on Canadian and Brazilian agriculture and relatively muted outlook for U.S. agriculture."

Mr. Bout expects the acquisitions over the past 18 months to contribute "significantly" to earnings going forward.  Maintaining his EBITDA estimate of $101-million for 2016, he raised his 2017 projection to $114-million from $109-million in order "to reflect a higher contribution from recent acquisitions and the improved outlook of certain international markets such as Brazil."

"The company's focus in 2017 will likely be on consolidating/integrating recent acquisitions," he said. "That being said, AFN indicates that the current leverage ratio for covenant purposes (i.e., excluding convertibles) is [approximately] 1.8 times. Post-acquisition of Yargus, the leverage ratio is expected to increase to 2.2 times-2.3 times, still comfortably within the 3.25 times covenant."

His target price for the stock rose to $60 from $52. The analyst average is $56.17, according to Bloomberg.

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Polaris Industries Inc. (PII-N) is "rising from the ashes," said BMO Nesbitt Burns analyst Gerrick Johnson.

He raised his rating for the Minnesota-based manufacturer of recreational vehicles to "outperform" from "market perform."

On Monday, Polaris announced it was shutting down its unprofitable Victory brand of motorcycles after 18 years in order to focus on its Indian Motorcycle brand as well as other products. The company said it has lost money on Victory in three of the past five years.

"We are upgrading shares owing to several improvements we are seeing in the company's off-road vehicle business, which we think could lead to upside to current investor estimates," said Mr. Johnson. "First, we believe that the off-road vehicle industry is performing better than published registration data would indicate, and better than many investors may think. We expect a rebound for the industry in 2017 as Polaris [has] a leading market share in the industry.... We think overall demand has remained robust in the recreational market, and believe the utility market will show improvement in 2017 as agricultural demand rebounds. We note that feedback from dealers who rely on purchases from the agricultural community has improved in recent months.

"We also see a boost for Polaris, and all powersports products for that matter, owing to the results of the U.S. presidential election. The majority of dealers we've spoken to in the last two months have indicated that they have experienced an increase in sales following the presidential election. We expect this recent improvement in demand will continue. We also believe that, despite tremendous disruption to the company's business in 2016, long-term damage to the Polaris brand from its string of recent recalls was actually fairly minimal. Consumers in this market are very loyal and often have short memories, and three-fourths of dealers we recently surveyed do not expect any negative impact from the recalls in 2017."

Mr. Johnson called consumer sentiment around Polaris stock "overwhelmingly negative" and currently presents a "contrarian opportunity."

He noted: "Of 20 other covering analysts, only five have the equivalent of buy ratings and short interest is over of 20 per cent of the public float. While the stock is not necessarily 'cheap,' it does trade at 15.2 times our 2017 EPS estimate and 14.3 times our 2018 EPS estimate. This valuation range is within its historical range. Though we view the earnings estimates we are basing valuation on as depressed and anticipate growth as the company's business recovers from a very difficult 2016. Our 2017 EPS estimate of $5.40 is still 20 per cent below the company's recent peak of $6.75 in 2015."

Without factoring in Monday's announcement, Mr. Johnson raised his 2017 earnings per share projection to $5.40 (U.S.) from $5. His 2017 estimate rose to $5.75 from $5.45.

"We believe we will get more clarity as to the impact of this decision when the company reports 4Q16 earnings and provides 2017 guidance on Jan. 24," he said. "We think, on a recurring basis, the decision to exit Victory may be neutral to slightly accretive to EPS, excluding one-time shut-down costs. The main reason for our increase in estimates is a more optimistic outlook for Polaris' off-road vehicle business going forward."

Mr. Johnson's target price for the stock rose to $100 from $70. Consensus is $81.44.

"An investment in Polaris does not come without risk," he said. "The greatest risk we see is the increasingly high quality competition in the marketplace from strong companies such as Can-Am (BRP), Honda, Kawasaki, and Yamaha. Further operational missteps or recalls are also a concern. The company has also been aggressive on the acquisition front, and we are not yet sold on the idea the recent Transamerican Auto Parts deal will be a good strategic fit for the company."

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AGT Food & Ingredients Inc.'s (AGT-T ) recent investments in its bulk-oriented platform could "potentially lead to substantial earnings growth over the next 3-5 years," said CIBC World Markets analyst Jacob Bout.

He raised his rating for the Regina-based processor and splitter of pulse crops to "outperform" from "neutral."

"AGT's recent investments in short-line railroad and storage-related assets have provided the company with an origination/sourcing advantage in the key growing region (lentils, peas, chickpeas and durum) of South Saskatchewan," he said. "Recall that during 2015, the company acquired West Central Railroad (comprising of five bulk loading facilities) and Mobil Capital Holdings (443 kilometres of Big Sky Railway, 136 kilometres of Last Mountain Railway and CN running rights connection for Big Sky and Last Mountain to Saskatoon). More recently, AGT is investing in grain loading terminals that will boost origination capabilities … We are modelling an incremental EBITDA impact of $11-million per year for 2017 and 2018 as the company ramps up volumes by 400 kt/year."

Mr. Bout's target price for the stock rose by a loonie to $42. The analyst average is $44.67.

"We are now using a 9 times enterprise value-to-EBITDA multiple on 2018 estimated EBITDA (previously 10 times on 2017 estimate), which is at a premium to where AGT has traded historically," he said. "We believe the multiple is warranted given recent investments into grain infrastructure, the expected expansion in sales volumes and margins on the back of the Food Ingredients platform expansion, and increased potential for AGT's takeout. We derive our $42 price target by applying a 9 times EV/EBITDA multiple to our 2018 estimated EBITDA of $162-million and using net debt of $488-million.

"To support the valuation, we also performed a sum-of-the parts relative multiple analysis by separating the various components of AGT's business (i.e., pulses and grain process, bulk handling, seed, pasta, CLIC, pet food and food ingredients for human use). We applied a comparable segment multiple to 2018 EBITDA for each component (consolidated 2018E EBITDA of $162-million). Note that we are applying a slightly higher multiple to the company's bulk handling vs. grain processing segment given reduced risk from grain infrastructure and higher growth potential."

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In a research report previewing 2017 for U.S. REITs, BMO Nesbitt Burns analyst John Kim said the sector is "treading water."

"Rising interest rates and peaking fundamentals suggest we are approaching the top for REIT prices. President Trump / Republican Congress policies, including corporate tax reform, adds uncertainty and may be a net negative for REIT stocks," he said. "However, we believe M&A, transaction activity, and employment growth will have a positive impact, and thus see total returns of 5 per cent. We see 20-per-cent upside in our top picks, which are characterized by discounted names with execution risk."

Mr. Kim downgraded his rating for Apartment Investment and Management Co. (AIV-N) to "market perform" from "outperform."

"Over the past 12 months, Aimco has performed well with a 15.1–per-cent total return, outpacing both the MSCI US REIT Index (up 11.6 per cent) and the multifamily REIT sector (up 3.0 per cent) during that timeframe," he said.

He maintained a target price for the Denver-based REIT of $45 (U.S.). Consensus is $47.21.

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Organic growth challenges continue for Corus Entertainment Inc. (CJR.B-T), said BMO Nesbitt Burns analyst Tim Casey in reaction to lower-than-projected first-quarter 2017 financial results.

"Corus's Q1/F17 results (ending Nov. 30) were below expectations, reflecting the federal election and large SVOD [subscription video-on-demand] deals last year, as well as the timing of agency contract renewals this year," he said. "Reported growth rates are not meaningful and reflect the inclusion of Shaw Media, exit from the regional Pay TV business, and ramp-up of the new Disney channels."

Corus reported consolidated revenue of $468-million, below the consensus estimate of $478-million and representing a decline of 5 per cent year over year. Adjusted earnings before interest, taxes, depreciation and amortization fell 3 per cent to $192-million, versus the consensus of $199-million. Adjusted earnings per share of 41 cents missed expectations by 4 cents and last year's result by 8 cents.

"We forecast low- to mid-single-digit EBITDA growth through fiscal 2018," said Mr. Casey. "As a reminder, our free cash flow estimates assume the shares held by Shaw Communications receive dividends under the DRIP [dividend reinvestment] program through the end of F2018. We believe there is adequate support for the dividend at current levels."

Maintaining a "market perform" rating for the stock, he raised his target by a loonie to $13. Consensus is $13.07.

"In our view, the acquisition of Shaw Media provides scale and clear cost synergy opportunities for Corus," said Mr. Casey. "That said, we believe longer-term growth challenges remain as the company faces structural and regulatory headwinds."

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BrightPath Early Learning Inc. (BPE-X) is "an investment proposition with an eye to the future," said GMP Securities analyst Ben Jekic.

He initiated coverage of the Calgary-based company with a "buy" rating.

"BrightPath is the only publicly traded company in a fragmented licensed child care industry in Canada," he said. "It is positioned as a premium operator in three provinces, with resilient demand and pricing power. The stock performed strongly in 2016 after the transformative acquisition of Ontario-based Peekaboo boosted capacity by 40 per cent, and after adding new greenfield centres in Alberta. When combined with a solid acquisition pipeline, expected Peekaboo synergies and ongoing projects in development, BPE's adjusted EBITDA should expand by 100 per cent from 2015 to 2017, with an additional 20-per-cent upside in 2018."

Mr. Jekic said the BrightPath's potential for growth is supported by "potent" macro tailwinds.

"BPE's growth outlook is driven by new urban centres and acquisition opportunities in Ontario, against the backdrop of Canadian supply/demand imbalance and growing government child care subsidies," he said. "The company should see year-over-year growth in licensed spaces and occupancy rates through 2018, be positioned to make further select acquisitions in Ontario and benefit from expected stabilization in Alberta's economy."

The analyst set a target price of 70 cents for the stock. Consensus is 61 cents.

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In other analyst actions:

Raymond James analyst Andrew Bradford downgraded the following stocks:

• Western Energy Services Corp. (WRG-T) to “market perform” from “outperform” with a target of $3.70 from $4. The average is $3.74.
• Calfrac Well Services Ltd. (CFW-T) to “market perform” from “outperform” with a target of $4.95, down from $5.50. The average is $5.32.
• Precision Drilling Corp. (PD-T) to “underperform” from “market perform” with a target of $4.96, up from $4.63. The average is $6.35.

Adobe Systems Inc.  (ADBE-Q) was downgraded to "hold" from "buy" at Pivotal Research by  analyst Brian Wieser with a target of $104 (U.S.), down from $136. The average is $121.54.

Alaris Royalty Corp. (AD-T) was downgraded to "sector perform" from "outperform" at RBC Capital by analyst Ben Holton. His target price remains $24 per share. The analyst average price target is $24.67, according to Bloomberg.

Boeing Co. (BA-N) was rated new "underperform" at RBC Capital by analyst Matthew Mcconnell. His target is $136 (U.S.), while the analyst average is $159.67.

Cameco Corp. (CCO-T) was raised to "buy" from "hold" by TD Securities analyst Greg Barnes with a target of $21 per share, rising from $14.50. The average is $15.91.

CBS Corp. (CBS-N) was downgraded to "hold" from "buy" at Pivotal Research by analyst Brian Wieser with a target price of $67 (U.S.), declining from $72. The average is $66.69.

Mr. Wiesner downgraded Walt Disney Co. (DIS-N) to "sell" from "hold" with a target of $85 (U.S.) down from $102. The average is $110.07.

Merck & Co Inc. (MRK-N) was raised to "buy" from "neutral" at Guggenheim Securities by analyst Charles Butler. His target price is $70 (U.S.). The average is $68.67.

The stock was raised to "overweight" from "neutral" by Piper Jaffray analyst Richard Purkiss. His target rose to $72 (U.S.) from $63.

Morgan Stanley (MS-N) was raised to "market outperform" from "market perform" at Vining Sparks by analyst Marty Mosby. His target rose is $47 (U.S.), versus the average of $47.23.

Osisko Mining Inc. (OSK-T) was rated a new "buy" at Industrial Alliance by analyst George Topping. His target is $4.10 per share. The average is $4.01.

Twitter Inc. (TWTR-N) was downgraded to "hold" from "buy" at Pivotal Research by equity analyst Brian Wieser. His target fell to $17 (U.S.) from $26. The average is $16.62.