Inside the Market's roundup of some of today's key analyst actions. This file will be updated during the trading day.
Analysts have been quickly moving up their price targets on Tim Hortons Inc. in the wake of the merger deal with Burger King Worldwide Inc.
Burger King agreed to acquire Tim Hortons for about $12.5-billion (Canadian), but because the deal involves both cash and stock, the precise value is a moving target. Tim Hortons investors will receive $65.50 in cash and 0.8025 a share of the combined entity for each share they own. 3G Capital, the investment firm that owns about 70 per cent of Burger King, will convert that stake into roughly 51 per cent of the new company.
Based on Burger King's closing price on Monday, the deal values each Tim Hortons share at $94.05 (Canadian). The stock today is down 2.5 per cent at $86.46 in late afternoon TSX trading.
Canaccord Genuity raised its price target on Tim Hortons to $91 (Canadian) from $86. Raymond James raised its price target to $92.50 from $72. Desjardins raised its target to $89 from $85. BMO Nesbitt Burns raised its price target to $92.75 from $79. Credit Suisse set a new price target of $89, and CIBC World Markets now has a price target of $90.
All of those research houses now have the equivalent of hold ratings on Tim Hortons shares. According to the latest Bloomberg data, 15 of 18 analysts who cover the stock rate it as a hold, two as a buy and one as a sell, with an average price target of $87.63.
Here's a snapshot of what some analysts are saying about the deal:
CIBC World Market's Perry Caicco: "Although the near-term value of over $90 (depending on the BKW share price) seems reasonable, investors need to understand the new company in order to assess the longer-term upside. The new company will be highly levered, but will have strong cash flows. The pro forma valuation is not unreasonable on a P/E basis, but higher on EV/EBITDA (hence the need for debt paydown). However, there are future benefits from the taxes, synergies and international growth. THI has almost reached our latest price target. Although there may be further upside from here, it might not be apparent for six to 12 months."
Raymond James analyst Kenric S. Tyghe: "We are intrigued that the conviction level on the accelerated international expansion is such that both management teams were adamant that not only would the brand and operational management remain independent, but also that there would be no co-branding (i.e. restaurant images would also remain independent). Bottom line, no BkCafe is envisaged or planned. Given that coffee is the weapon of choice in the breakfast wars, and that breakfast and beverage are the only two growth nodes in the U.S. quick service restaurant space, the international expansion-centered plan appears rather bold."
BMO Nesbitt Burns' Peter Sklar: "Our assessment of the future prospects of Burger King has taken into account a number of considerations. Burger King has experienced impressive international store growth and EBITDA expansion as a result of 3G Capital's leadership. While the intention is to employ the same framework and process to accelerate Tim Hortons' growth internationally, we note that Burger King's international success can, in part, be attributed to its international brand recognition outside of North America. On the other hand, while Tim Hortons has iconic status in Canada, the brand has limited recognition outside of Canada, and the company has had difficulty successfully expanding its brand internationally. We have also considered that the underlying credit profile related to the debt securities of Tim Hortons will change substantially. While Tim Hortons' debt is currently investment grade, clearly, with a pro forma adjusted net debt to EBITDAR ratio of 6.2x, Burger King will have a notably weaker credit rating on its debt. In addition, our calculations indicate that the transaction will be dilutive to Burger King's earnings by US$0.17 per share (18% dilution) on a pro forma basis."
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Bank of Montreal's U.S. segment could be turning the corner after a string of weak quarters, Canaccord Genuity analyst Gabriel Dechaine said.
On Tuesday, BMO reported its second-quarter earnings, beating analyst expectations largely as a result of capital markets and Canadian banking.
But the U.S. segment posted flat year-over-year earnings growth after three-quarters of declines.
"If BMO can maintain this performance, which is challenging in a low rate/intensely competitive environment, we could easily argue for a re-rating of the stock," Mr. Dechaine said.
He raised his price target on BMO stock to $85 (Canadian) from $83 while maintaining a "hold" rating.
Several other analysts also raised their BMO targets: Desjardins Securities went to $84 from $81, BMO Nesbitt Burns to $84 from $78, National Bank Financial to $86 from $82, RBC Dominion Securities to $85 from $77, and TD Securities -- which also upgraded its rating on the stock to "buy" from "hold" -- raised its target to $88 from $84.
The analyst consensus price target for Bank of Montreal over the next year is $82.71, according to Thomson Reuters data.
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Concerns over low earnings growth and profitability abroad prompted Credit Suisse analyst Kevin Choquette to downgrade Bank of Nova Scotia.
Scotiabank reported adjusted third-quarter earnings per share of $1.41, up 8 per cent year-over-year, driven by global baking and markets and wealth management. Higher securities gains also aided earnings.
But Scotiabank's international banking earnings growth was weak, at 3 per cent. "International earnings growth is expected to remain under pressure with credit marks from Colpatria in Colombia declining (estimated drag to 2015 International earnings of 3 per cent) and the potential for further margin contraction from interest rate cuts in Chile, Mexico and Peru," he said.
Mr. Choquette downgraded Scotiabank to "neutral" from "outperform" and cut his price target to $80 (Canadian) from $84. TD Securities also downgraded Scotiabank today, to "buy" from "action list buy," with a price target of $77 (Canadian).
The analyst consensus price target is $75.74, according to Thomson Reuters.
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A recent pullback in the stocks of Canadian contract drillers has opened up a buying opportunity, Raymond James analyst Andrew Bradford said.
Over the last 30 days, this group of stocks is down by an average of 8 per cent, compared with a 3-per-cent increase for the S&P/TSX composite index, Mr. Bradford said.
And while the contract drilling group is priced in line with historical averages based on 2014 earnings, current valuations do not necessarily reflect a pickup in business next year, the analyst said.
He adjusted his price targets on the following stocks: Ensign Energy Services Inc. to $18.50 (Canadian) from $19; Precision Drilling Corp. to $17 from $16.50; Savanna Energy Services Corp. to $9.75 from $10.00; and Trinidad Drilling Ltd. to $14.50 from $15.50.
He downgraded his rating on Ensign Energy Services to "market perform" from "outperform." Precision Drilling and Savanna Energy Services are both rated "outperform" and Trinidad Drilling as "strong buy."
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CIBC World Markets analyst Mark Kennedy is initiating coverage of Acadian Timber Corp. with a "sector performer" rating.
Mr. Kennedy notes that Acadian is the only publicly traded private timberland company in Canada and owns 1,062,000 acres of timberlands in New Brunswick and Maine. "We believe Acadian is a good, steady state cash generator with modest upside assuming improved sawlog prices in coming years," he says.
He also mentions that Acadian's dividend yield of 6 per cent is a 225-basis point premium to U.S. timber REITs at 3.75 per cent.
Mr. Kennedy has assigned a $15 (Canadian) price target to Acadian. The analyst consensus price target is $13.83, according to Thomson Reuters.
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In other analyst actions:
Industrial Alliance Securities reiterated Pacific & Western Bank of Canada at "speculative buy" with a price target of $8 (Canadian).
HSBC initiated coverage on Canacol Energy with an "overweight" rating and $7.20 (Canadian) 12-month price target.
RBC Dominion Securities initiated coverage on DeeThree Exploration with an "outperform" rating and $15 (Canadian) 12-month price target.;
Janney Capital downgraded Facebook to "neutral" from "buy" with a price target of $82.50 (U.S.).
Canaccord Genuity upgraded Rent-A-Center to "buy" and raised its price target to $32 (U.S.) from $25.
(An earlier version of this story incorrectly stated Pacific & Western Bank of Canada was upgraded to a "buy" rating at Industrial Alliance. A "speculative buy" rating had in fact been reaffirmed.)