Wednesday's analyst upgrades and downgrades

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Inside the Market's roundup of some of today's key analyst actions. This file will be updated during the trading day.

Raymond James today downgraded several Canadian REITs, saying their strong year-to-date performance has left them trading at high valuations, especially given that a rise in interest rates is on the horizon.

Calloway REIT, Canadian Real Estate Investment Trust, and RioCan REIT were all downgraded to "market perform" from "outperform," while Boardwalk REIT and InterRent REIT were downgraded to "outperform" from "strong buy."

Canadian REITs have delivered a total return of 10 per cent year-to-date. While that's in line with the TSX composite, they are now back to within 3 per cent of all-time highs reached in April 2013, pushing valuations to the high end of historical ranges, Raymond James analyst Ken Avalos noted in a research note.

"On an AFFO (adjusted funds from operations) multiple basis, not only does the aggregate REIT universe currently trade at a 1.3x premium to its long-term (10-year) historical average (13.8x), in our universe of 18 names, only four companies trade at or below their long-term average," Mr. Avalos said. "On an net asset value basis, things are slightly more compelling. The aggregate REIT universe trades at a 4 per cent discount to its long-term historical average (4 per cent premium) and 11 companies in our coverage universe trade at a discount to their long-term averages."

Together, these metrics point to a number of large caps looking expensive, both relative to where they have traded historically in isolation and versus their peers, he said.

Raymond James believes the recent pullback in interest rates to fresh lows for the year was overdone. It expects the U.S. economy to continue to show sporadic but steady growth in the second half of this year, and that should put upward pressure on yields, while capital is likely to flow out of REITs in favour of sectors with greater growth.

"Longer-term, we continue to believe that the return and capital environment will be more difficult than over the last 10 (if not 30) years where interest rates and cap rates have been steadily falling," Mr. Avalos said. "This type of environment will be more favourable to REITs with well structured, flexible balance sheets, that can generate outsized NOI (net operating income) growth via asset management, own high quality properties and have sound governance. Good companies that focus on net asset value and disciplined capital management should be able to continue generating solid total return for investors even in a rising rate environment – after all, real estate is an inflation hedge.

"Shorter-term, we believe Allied Properties and Boardwalk still have enough internal growth and balance sheet flexibility to drive outsized net asset value growth, bolstering valuation. Furthermore, there is still attractive value relative to net asset value and AFFO multiples in small and mid-cap names like Amica Mature Lifestyles, Killam Properties, and InterRent REIT, which should all be able to generate solid NOI growth via lease-up/redevelopment over the next 12–18 months," he said.

Mr. Avalos maintained a $70 (Canadian) price target on Boardwalk REIT and $6.50 target on InterRent REIT. Allied Properties REIT, rated "outperform," has a $40 (Canadian) price target; Amica Mature Lifestyles, rated "outperform," has a $9 target; and Killam Properties, also rated "outperform," has a $12 target.

Raymond James does not provide price targets on securities it rates "market perform." It no longer rates any Canadian REITs as a "strong buy."

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B. Riley analyst Scott Tilghman thinks a turnaround at RadioShack Corp. is "nearly impossible" at this point and cut his price target to zero.

He sees that odds of a bankruptcy at the retailer, which reported surprisingly weak quarterly results on Tuesday, at greater than 50 per cent.

"Based on recent and expected cash burn, working capital and debt are likely to be at best, offsets to one another. We think a turnaround is nearly impossible for the company at this point, and think liquidation value is minimal," Mr. Tilghman said in a research note, according to StreetInsider.com.

Comparable sales at the retailer fell 14 cents from a year earlier in its latest quarter, disappointing the Street that had expected sales to shrink 9 per cent. "The company blamed the broader consumer electronics market, yet its comps were far worse than those of Best Buy for the comparable period suggesting market share is being ceded and traffic driving challenges persist. We expect sales declines to persist and think it will be nearly impossible for the company to drive traffic successfully without significant advertising expenditures or discounting at the expense of gross margin," the analyst was quoted as saying.

His price target on RadioShack shares was previously $1 (U.S.). The average analyst price target is $1.50.

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RBC Dominion Securities analyst Robert Stallard downgraded Boeing Co. to "sector perform" from "outperform," believing that most of the good news concerning the company is already reflected in the stock.

He is also concerned with ongoing 787 Dreamliner production challenges and stiff competition from Airbus, which could endanger its work backlog and could negatively impact cash flows and investor sentiment for the stock.

"With three years of record orders behind us, production rate increases for the rest of the decade all announced, and no new product launches expected we think most of the good news for Boeing is already out there, and that this is reflected in the stock. After its huge move last year (+81 per cent vs. +52 per cent vs S+P 500), and a valuation that is towards the top of the aerospace group (18.2x 2015 GAAP P/E), we think the stock is fairly valued around current levels and likely to see more steady progress going forward," Mr. Stallard said in a research note.

"With its strong backlog, Boeing's revenue profile over the rest of decade is pretty clear, and expectations for execution and cash already appear high. There could even be downside if the airline industry sees passenger demand slow from the current +5% rate. Boeing's aggressive use of cash to buyback stock is likely to put a floor in the share price, but at this valuation we see limited upside from here," he added.

Mr. Stallard maintained a $145 (U.S.) price target. The analyst consensus price target over the next year is $153.91.

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Algonquin Power & Utilities Corp. offers a superior growth profile and a potential 23 per cent total return over the next year, according to BMO Nesbitt Burns analyst Ben Pham.

Mr. Pham sees earnings rising to 61 cents per share, and adjusted earnings before interest, taxes, debt and amortization climbing to $449-million, by 2017, driven primarily by deploying up to $2-billion in organic growth opportunities and currency tailwinds.

"While the shares have performed well, we still see considerably more upside to the AQN shares," he said.

Mr. Pham maintains his "outperform" rating and raised his price target to $9.50 from $8.50. The analyst consensus price target over the next year is $8.19, according to Thomson Reuters.

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Golden Queen Mining Co. Ltd. 's proposed joint venture agreement with Leucadia National Corp. has resulted in a downgrade by M Partners analyst Derek Macpherson.

The $110-million (U.S.) agreement that will give Leucadia a 50 per cent interest in the Soledad Mountain project in southern California implies a valuation of $220-million for the asset, which is materially lower than Mr. Macpherson's previous estimate of $327.6-million.

He says Golden Queen likely needs an additional $30-million to fund 50 per cent of the remaining capital expenditure and repay debt.

Mr. Macpherson lowered his rating to "hold" from "buy" and cut his price target to $1.70 (Canadian) from $2.50. The analyst consensus price target over the next year is $1.74, according to Thomson Reuters.

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In other analyst actions:

National Bank Financial raised its price target on DHX Media to $7.25 from $6.50 and maintained an "outperform" rating.

Paradigm raised its price target on Guyana Goldfields to $4 (Canadian) from $2.50 and reiterated a "speculative buy" rating.

Credit Suisse raised its price target on Bankers Petroleum to $8 (Canadian) from $7 and maintained a "neutral" rating.

Goldman Sachs upgraded Amazon.com to "conviction buy" from "buy" but cut its price target to $400 (U.S.) from $430.

Goldman Sachs raised its target on Home Depot to $93 (U.S.) from $89 and maintained a "neutral" rating.

Merrill Lynch upgraded Reynolds American to "buy" from "neutral" and raised its price target to $65 (U.S.) from $63.

Merrill Lynch upgraded Molson Coors to "buy" from "underperform" and raised its price target to $80 (U.S.) from $55. Goldman Sachs also raised its target to $79 (U.S.) from $69 while maintaining a "buy" rating.

UBS upgraded Entergy to "neutral" from "sell" and raised its price target to $79 (U.S.) from $64.

Credit Suisse raised its price target on Colgate-Palmolive to $78 (U.S.) from $72 and maintained an "outperform" rating.

Canaccord Genuity downgraded BE Aerospace to "hold" from "buy" and cut its price target to $98 (U.S.) from $100.

Merrill Lynch upgraded Micron Technology to "buy" from "underperform" and raised its price target to $40 (U.S.) from $22. Credit Suisse raised its target to $50 from $30 and reiterated an "outperform" rating.

Merrill Lynch upgraded SanDisk to "buy" from "underperform" and raised its price target to $125 (U.S.) from $80.

Nomura Securities upgraded Marvell to "buy" from "neutral" with a price target of $19 (U.S.).

Wunderlich Securities upgraded Angie's List to "buy" from "hold" with a price target of $15 (U.S.).