A pedestrian walks past the TransAlta building in downtown Calgary, in this file photo.The Canadian Press
Inside the Market's roundup of some of today's key analyst actions. This file will be updated during the trading day. For breaking analyst actions prior to market open every day, read our Before the Bell morning report.
TransAlta Corp. is being slammed in the analyst community this morning for its surprise decision on Thursday to cut its dividend, with several ratings downgrades and at least one close observer warning that the board's credibility has been significantly diminished.
TransAlta shares plunged 7.3 per cent on Thursday, and Canaccord Genuity analyst Juan Plessis believes shares will continue to face considerable selling pressure in the short term as investors - who had gravitated to the name for its income payouts - turn away.
He downgraded his rating to "hold" from "buy" while slashing his price target to $14 (Canadian) from $18.
"After years of statements suggestive of strong support for the dividend, TransAlta has slashed its dividend by 38 per cent to $0.72 annually from $1.16," noted Mr. Plessis in a research note. "While TransAlta has assured investors that it has not changed its strategy with respect to growth, we believe that the dividend cut indicates that management intends to target more of its shareholder return from growth than its dividend yield."
"We suspect the shares will eventually trade based on utility/power/pipeline stock valuation metrics based on earnings, EBITDA, cash flow, free cash flow, growth and other considerations, suggesting a stock valuation of between $13 and $18. However, given the limited amount of secured growth prospects, the older asset fleet relative to its peers and a decline in management and Board credibility, the stock should attract metrics at the low end of this valuation range," he added.
Judging by past dividend cuts announced by companies such as Just Energy and TransCanada, TransAlta's share price could fall by as much as 35 per cent to below $10 as dividend investors sell their shares, Mr. Plessis said. But, the potential for a dividend cut by TransAlta was probably already partly reflected in its stock price, and so the potential downside is more modest, he speculated.
"That said, we caution that the stock could potentially decline closer to the $12 level before recovering to $14 and suggest investors step aside in the near term. If the company proves out its near term growth strategy, the valuation could expand," he said.
Elsewhere, CIBC World Markets downgraded its rating to "sector underperform" and TD Securities downgraded its rating to "hold" from "buy."
"Given management's view last year that cash flows were sufficient to pay the dividend and reinvest in the current fleet, and the decision to maintain the dividend level through the restart of the Sundance 1 & 2 units in the past few years, we are surprised at the timing of this cut in dividend," commented TD Securities analyst Linda Ezergailis. She also noted that TransAlta reported weaker-than-expected quarterly results in its coal, gas and hydro generation segments.
TransAlta shares are down a further 3 per cent in early TSX trading this morning at $13.32.
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Raymond James analyst Kenric S. Tyghe upgraded Tim Hortons Inc. to "outperform" from "market perform," commenting that "there is a more pronounced shift in both urgency and strategy than widely appreciated" at the ubiquitous coffee chain.
Tim Hortons has dropped its Cold Stone Creamery partnership in Canada and has also entered the retail arena with single-serve coffees being sold in supermarkets.
"While both the single serve entry in Retail and the exit from the Cold Stone Creamery (Canada) business are (long) overdue in our opinion, what matters more is the speed with which the new CEO has moved to refocus, with coffee at centre (ice)," Mr. Tyghe commented in a research note.
According to at least one industry estimate, the rapidly growing single-serve coffee market in Canada is worth more than $725-million, and almost half of that comes from grocery distribution.
"While Tim Hortons has been happy with the traction of its single serve offering, the runway in Retail is material, and the tailwind for its single serve growth (and share) is meaningful," Mr. Tyghe said.
He also applauded Tim Horton's palns for a new loyalty program centered on a co-branded credit card with CIBC. "The increased focus on loyalty, we believe will improve both traffic and promotional efficiency."
He maintained a $66 (Canadian) price target.
Analysts at Credit Suisse are less enthusiastic. While raising their price target on Tim Hortons to $52 from $49, they reiterated an "underperform" rating, concerned about the outlook for near-term earnings and growth prospects.
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A number of factors will combine to finally push Russel Metals Inc. out of the trading range it's been confined in over the past 15 months, said Raymond James analyst Frederic Bastien as he upgraded his rating on the stock.
"These include our expectations for continued market share gains and gradually improving demand and pricing environments in the months to come. Accordingly, we encourage investors to buy the stock today," Mr. Bastien said as he raised his rating to "outperform" from "market perform."
He noted that scrap and heavy plate prices are moving up, management has streamlined the company's pipe business, and that a good year is anticipated in its legacy energy operations.
Mr. Bastien raised his price target to $34 (Canadian) from $26.
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In other analyst actions:
Canaccord Genuity downgraded Canadian Utilities to "hold" from "buy" on share price appreciation. It raised its price target, however, to $42 (Canadian) from $40.
Raymond James hiked its price target on North American Energy Partners to $9 (Canadian) from $7.50 and kept an "outperform" rating.
TD Securities upgraded Alamos Gold to "buy" from "hold" with a price target of $14 (Canadian), saying its significant underperformance means a buying opportunity. But Dundee Securities downgraded its rating to "neutral" from "buy" to reflect interim risks, with an unchanged price target of $12.50.
Desjardins Securities downgraded Lundin Mining to "hold" from "buy" on share price appreciation and kept a $6 (Canadian) target.
TD Securities upgraded Pan American Silver to "buy" from "hold" and raised its price target to $19 (U.S.) from $14. Credit Suisse raised its price target to $15.50 (Canadian) from $13 and maintained a "neutral" rating.
Canaccord Genuity raised its price target on Chorus Aviation to $2 (Canadian) from $1.50 and maintained a "sell" rating.
BMO Nesbitt Burns downgraded Capstone Mining to "market perform" from "outperform" but maintained a $3.50 (Canadian) price target.
Credit Suisse raised its price target on Loblaw Companies to $63 (Canadian) from $58 and maintained an "outperform" rating.
Stifel Nicolaus downgraded Wal-Mart Stores to "hold" from "buy" and removed its prior price target of $83 (U.S.).
Evercore Partners cut its price target on Groupon to $8 (U.S.) from $10 and reiterated an "equal weight" rating. RBC Dominion Securities downgraded his rating to "underperform" from "sector perform" and slashed his price target to $7 (U.S.) from $11.
Susquehanna raised its price target on Priceline to $1,500 (U.S.) from $1,350 and maintained a "positive" rating. FBR Capital raised its target to $1,500 from $1,300 and reiterated an "outperform" rating. Evercore Partners raised its price target to $1,480 from $1,350 and reiterated an "overweight" rating.
BMO Nesbitt Burns cut its price target on Goodrich Petroleum to $20 (U.S.) from $30 and maintained an "outperform" rating.
For more analyst actions, breaking investing news and analysis, follow Darcy Keith on Twitter at @eyeonequities
Darcy Keith