Inside the Market's roundup of some of today's key analyst actions. This file will be updated during the trading day.
Goldman Sachs analyst Theodore Durbin downgraded TransCanada Corp. to "sell" from "neutral," saying the stock is expensive on various metrics, especially when compared to peers.
Mr. Durbin, who has a $47 (U.S.) price target, noted TransCanada has outperformed large-cap peers by 12 per cent since the start of the second quarter of this year, partly driven by speculation the company could separate its power business from its pipeline assets. But he said this thesis is overdone at current valuations, given "(1) fundamental headwinds in its core natural gas pipeline business and (2) excessive optimism over its backlog given sub-10 per cent returns on two-thirds of its projects and elevated regulatory and execution risk."
He said he expects TransCanada to underperform peers due to factors that include relatively weak earnings growth, recurring volatility issues in its Energy business segment, and expensive valuation, according to StreetInsider.com.
The analyst consensus price target over the next year is $53.88 (U.S.).
======
AltaCorp Capital raised its price target on WestJet Airlines Ltd. to $38 (Canadian) from $34 and reiterated an "outperform" rating after the company announced it will start charging for baggage domestically. AltaCorp analyst Chris Murray estimates the first bag fee should generate ancillary revenue of $11.9-million in 2014 and $87.5-million in 2015.
======
Citibank initiated coverage on three of the biggest retailers in the United States, and is recommending investors load up on stock in one of them: Costco Wholesale Corp.
Citibank analyst Oliver Chen said Costco has a lot to benefit from its focus on high-end consumers at a time when the U.S. economy is growing. "COST's average customer earns $96,000, who we believe will continue benefiting the most from economic growth and wealth effect (housing & equity markets)," he said in a note.
The company's unique subscription model should drive profitable growth, with its membership fees continuing to provide an annuity-like cash flow given its loyal customer base. He applauds Costco for its cash position, free cash flow generation and potential for growing share buybacks. He also believes Costco has several years of low-risk store expansion ahead.
Mr. Chen set a target price of $150 (U.S.).
He was less enthused about Target Corp. and Wal-Mart Stores Inc. Both received "neutral" ratings.
He set a $66 (U.S.) target price on Target, commenting, "Under new leadership, TGT is working to reinvigorate product newness, advance its omnichannel agenda, & find a viable Canadian strategy. In our view, TGT is taking the right steps to improve execution, but we believe stock offers fair risk/reward with valuation at 3 year highs (16x vs. 3 year avg. of 10x) & Street estimates already incorporating improving fundamentals (2015 EPS growth +18%)."
While the new Canadian operations have been a drag on earnings, he said Canada is a healthy retail market and Target could be successful here with an improved strategic direction. He sees three possible scenarios for Canada: New cost savings initiatives, the closure of some stores, or the launch of a Canadian e-commerce site.
Mr. Chen, meanwhile, set an $83 (U.S.) target price on Wal-Mart stock. "We like WMT's global scale and reach, model sustainable omnichannel growth, & like the defensive nature of WMT as a large-cap stock. Nonetheless, we believe stock could be rangebound and we rate WMT neutral given: the potential for lack of upside at the core U.S. business (75 per cent of EBIT) and that international and online expansion plans are a near-term earnings headwind," he said.
======
Bank of Montreal analyst Fadi Chamoun has raised his profit forecast for Calgary-based Canadian Pacific Railway Ltd. for 2016 and 2017, by 5 per cent and 6 per cent, respectively, pointing to strong growth in two business segments: the domestic intermodal business and energy.
He noted that under the management put in place in 2012 by chief executive officer Hunter Harrison, CP has improved the reliability and speed of its domestic intermodal operations, taking advantage of rail lines that are the shortest available between such major markets as Calgary-Toronto, Vancouver-Chicago and Montreal-Chicago.
"For a long time, CP Rail had underutilized this competitive advantage," said Mr. Chamoun, who added the operations changes have yielded a 15-per-cent rise in domestic intermodal volume year to date and 19 per cent so far in the third quarter. "We attribute the strong increase to market share gains from trucking and from CN Rail," Mr. Chamoun said.
Mr. Chamoun listed four major routes, and noted CP's travel time was shorter than that of CN in all but one. He said a CP train can travel to Chicago from Vancouver in 106 hours, compared with 159 hours for a CN train and 106 hours for a truck. A CP train going to Vancouver from Calgary takes 34 hours, compared with 94 hours for a CN train and 29 hours for a truck. CN is faster going to Vancouver from Toronto (86 hours compared with 89.)
He said CP's domestic intermodal market share in these routes is "modest" and should continue to rise at the expense of trucking.
"From a revenue quality standpoint, this is favourable given the higher revenue per car typically associated with domestic intermodal," he said.
Two-thirds of Mr. Chamoun's revenue growth forecast is based on CP improving its crude business, while domestic intermodal accounts for 15 per cent of the boost. He expects grain shipments will fall by 8 per cent from current levels by 2016, following two strong harvests.
In the energy segment, Mr. Chamoun is forecasting CP's quarterly crude-by-rail volumes will more than double to 75,000 carloads in 2016 from a current 30,000. This will add more than $900-million in revenue.
CP is the lone railway serving two new crude terminals in the prairies, the newly opened Gibson Every/USDG plant in Hardistry, Alta., and Torq Transloading's terminal Kerrobert, Sask., which is expected to open this year.
CP's share price has risen by about 40 per cent this year, an increase Mr. Chamoun said will increase the company's stock-based compensation costs by $30-million and weigh on the closely watched operating ratio.
As a result, Mr. Chamoun expects a per-share profit of $2.33, down from $2.41, when CP reports third-quarter financial results on Oct. 23.
For every dollar increase in the stock price, CP Rail's stock-based compensation increases by just under $1 million," he said, calling the issue a "transient" one that should not affect the stock price.
Mr. Chamoun rates CP "outperform" with a 12-month share price target of $240 (Canadian). The analyst consensus is $204, according to Thomson Reuters. The shares are trading at about $223 on the Toronto Stock Exchange.
======
Canadian National Railway Ltd.'s 12-per-cent jump in revenue has prompted Bank of Montreal analyst Fadi Chamoun to raise his share-price target for the Montreal-based carrier.
CN's quarter-to-date rise in sales has topped Mr. Chamoun's 8-per-cent projection, due to growth in three key areas: international intermodal, agriculture and merchandise.
CN, which is the dominant carrier at the B.C. ports of Vancouver and Prince Rupert, has enjoyed a jump in shipping there amid concerns over work stoppages at ports on the U.S. West Coast, in addition to a rise in Asian imports, Mr.Chamoun said in a research note. Prince Rupert posted volume growth of 36 per cent in July and August, while Vancouver's port saw traffic rise by 8 per cent in July as goods were diverted from 29 U.S. ports amid labour strife. He said the higher volumes should persist as shipping lines upgrade their services in Prince Rupert.
Grain volumes at CN are up 52 per cent in the third quarter so far as the railway works through last year's record crop. A strong harvest in 2014 and carryover from 2013 should keep agriculture shipments strong into next year, before falling by 6 per cent in 2016, Mr. Chamoun said.
In the broad merchandise segment, Mr. Chamoun expects big things from CN in shipments of autos, frac sands and crude oil. He said the delays in approvals for a handful of new pipelines is good for the railway, and CN's 2015 target of 150,000 carloads of crude is "conservative."
Mr. Chamoun has raised his 12-month share price target to $82 from $76. The analyst consensus is $70.12, according to Thomson Reuters. Mr. Chamoun rates the company "market perform."
======
Despite all the speculation over whether it will spin off its real estate assets, Hudson's Bay Co. remains focused on operations as it gears up for a busy Fall season, says CIBC World Markets analyst Perry Caicco.
The retailer reported strong second-quarter earnings, delivering earnings before interest, taxes, debt and amortization of $81-million, far above Mr. Caicco's forecast of $39-million. The key, he explains, was a strong delivery on gross margins for the second quarter in a row, despite same-store sales that were weaker than he had estimated. HBC is also spending heavily on digital advertising and investing in store labour in anticipation of an active Fall season.
"Although most investors are obsessed with the underlying real estate value and the timing and nature of monetization, the company remains focused on operations," says Mr. Caicco. "Renovations, re-merchandising, new stores and boutiques, and rapid growth of digital sales are all contributing to a stronger sales foundation. In the meantime, the real estate value remains a strong piece of the investment."
Mr. Caicco maintains his "sector performer" rating and $20 target price. The analyst consensus price target is $21, according to Thomson Reuters.
======
In other analyst actions:
TD Securities upgraded Northern Blizzard Resources to "buy" from "hold" and with unchanged price target of $21.50 (Canadian), citing the stock's 8 per cent decline last week.
RBC Dominion Securities downgraded DHX Media to "sector perform" from "outperform" - citing recent share price appreciation - and raised its price target to $8 (Canadian) from $7.50. Canaccord Genuity raised its target to $9.50 from $7.60 and maintained a "buy" rating.
BMO Nesbitt Burns raised its price target on Canadian National Railway to $82 (Canadian) from $76 and maintained a "market perform" rating.
Desjardins Securities upgraded Labrador Iron Ore Royalty to "buy" from "hold" with a price target of $36 (Canadian).
National Bank Financial downgraded Copper Mountain Mining to "sector perform" from "outperform" with a price target of $3 (Canadian).
Oppenheimer upgraded Nokia to "outperform" from "market perform" with an 18-month price target of $12 (U.S.).
Cormark Securities upgraded Pure Technologies to "buy" from "market perform" with a 12-month price target of $9.25 (Canadian).
BMO Nesbitt Burns initiated coverage on Retrocom REIT with a "market perform" rating and $5 (Canadian) price target.
Beacon Securities initiated coverage on Canamax Energy with a "buy" rating and $2.20 (Canadian) price target.
Darcy Keith