Tuesday'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.

Buying insurance may be all about protecting against risk, but betting on the most risk-averse of Canada's insurance heavyweights - Great-West Lifeco Inc. - may not be the wisest move for investors.

That's the conclusion of Barclays Capital analyst John Aiken in his third-quarter preview of the Canadian life and health insurance space, dominated by Great-West, Manulife Financial Corp. and Sun Life Financial Inc.

In his report, issued Tuesday, Mr. Aiken downgraded Great-West to an "equal weight" rating from "overweight," switching places with Sun Life, which he bumped up to "overweight" from "equal weight."

Why the switch? Great West has been the king of Canadian insurers since the credit crisis in one important respect: return on equity. It has consistently beaten its two publicly traded peers by between 1 and 7 percentage points. But the trend has not been good in the last few quarters: Great West's ROE has been edging down toward 15 per cent, while Sun Life has been sharply increasing, toward 13 per cent, which bodes well for investors to increase their valuation of the latter, Aiken says.

Meanwhile, Great-West's "low volatility begins to work against it" if North American interest rates start to rise in the next year or two as expected, while Sun Life and Manulife should see a more robust lift to their earnings, Mr. Aiken says.  Sun Life also has a chance to charge up its earnings by spending some of its excess cash (there's $1.7-billion in rainy day money kicking around at the top of the company), either with acquisitions or by buying back shares, while Great-West is on the tail-end of realizing synergies from its purchase of Irish Life Group, meaning it won't be getting as much of a boost to earnings from the 2013 acquisition going forward as it has up to now. Great-West's relatively higher exposure to the European economy could also slow earnings growth, Mr. Aiken says.

The upshot, says Mr. Aiken, is that Sun Life is likelier to see its share price rise (Mr. Aiken upgraded his stock price target to $46 (Canadian) from $44, while leaving Great-West's unchanged at $32) and raise its dividend than Great-West. In fact, by the time Great-West gets around to raising its dividend, which could happen  in early 2016 (it hasn't budged since 2009), Sun Life will have raised its dividend twice, by Mr. Aiken's estimate.

Put another way, fortune favors the brave as the Sun Rises over the Great West.

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General Motors Co. is right to accelerate its product consolidation plan, but the company is ignoring the elephant in the room, say Morgan Stanley analyst Adam Jones: rival Ford's recent profit warning.

"We believe many elements from Ford's recent profit warning are applicable to GM's outlook through 2015 and beyond," he said in a note.

Ford's reduced outlook was based on increased macro pressure in Russia, Latin America, forex and quality-related issues. "On our calculations, GM's exposure to each of these factors is at least as great as Ford's," he said.

Mr. Jones reduced his earnings forecasts for GM by 9 per cent to 24 per cent from 2015 through 2017.

"At its investor day, GM understandably focused its attention on reestablishing cultural and strategic momentum. They didn't warn, so we're doing it for them."

He also sees challenges ahead for the company in meeting its margin targets. "GM has targeted a North American Adjusted EBIT margin of 9 per cent to 10 per cent by 2016, far higher than our forecast of 7.2 per cent in 2016 and 5.8 per cent in 2017. We believe a 10 per cent margin is technically possible. However, when we consider the full balance of risks and opportunities facing the North American light vehicle industry in terms of volume growth, mix, content and pricing, we believe a margin of zero per cent has a similar probability," he said.

Mr. Jones said GM's strategy to accelerate consolidation of vehicle architectures and platforms is "absolutely necessary for long-term competitive sustainability," though the stock market may not agree with the capital expenditure required for such an effort.

Mr. Jones maintains his "underweight" rating and cut his price target to $27 (U.S.) from $29.The analyst consensus price target is $42.31, according to Thomson Reuters.

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Raymond James upgraded Lundin Mining Corp. to "strong buy" from "outperform" and raised its price target to $8.50 (Canadian) from $7.75. Analyst Alex Terentiew attributed the action to the company's deal to buy Freeport-McMoRan's 80 per cent stake in the Candelaria copper mine in China for $1.8-billion (U.S.).

"We see the acquisition of Candelaria as a low-risk move by Lundin, as the mine has a proven operating history and a 14+ year mine life remaining, it diversifies the company's cash flows out of the Democratic Republic of the Congo, and Lundin's balance sheet remains relatively unlevered, with a total debt-to-cap ratio of 22 per cent," Mr. Terentiew said in a research note.

"Lundin retains its position as a free cash flow leader, allowing the company to easily repay its debt, and to pursue other (albeit smaller and earlier stage) acquisition opportunities that may arise. We also expect Lundin will look to implement a dividend in 2015, once Eagle has ramped up and the company is confident that its latest acquisition is operating according to its expectations," he added. Eagle is a nickel and copper project in Michigan.

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CIBC World Markets analyst Leon Esterhuizen has upgraded Fortuna Silver Mines Inc. to a "sector outperformer" rating after a site visit to the company's San Jose mine in Mexico.

"We believe this mine is fast turning into a company-maker, having just completed a doubling in output capacity (from 1,000 tonnes/day to 2,000 tonnes/day) and now having added the Trinidad North discovery, which could see output jump to 3,000 tonnes/day by 2016," Mr. Esterhuizen said in a note.

Even at a silver price of $17 an ounce, San Jose should drive sharply higher profitability at Fortuna, thanks to much higher volumes and grades.

"The Trinidad discovery has now ignited a chase for more in the area with Fortuna sporting two other very interesting hits in this concession. We believe the future for San Jose and Fortuna is looking very bright," he added.

Mr. Esterhuizen, who previously rated Fortuna as "sector performer," maintained a price target of $6.50 (Canadian).

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Credit Suisse analyst Nick Stogdill initiated coverage on Element Financial Corp. with an "outperform" rating, commenting that the rapidly growing equipment finance company "has reached an inflection point" following the build-out of its key business lines. He set a price target of $17.50 (Canadian).

"We believe the company is well positioned and can leverage its scalable platforms to drive further growth and meaningfully enhance the financial performance of the business," Mr. Stogdill said in a note. "After nearly tripling over the past two years, EFN's stock has taken a pause in 2014, which has created a buying opportunity, in our view."

Separately today, BTIG initiated coverage on Element Financial with a "buy" rating and $20 (Canadian) price target.

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In other analyst actions:

TD Securities upgraded Franco Nevada to buy from hold with a $66 (Canadian) price target.

Cormark Securities upgraded Canam Group to "top pick" from "buy" with price target of $15 (Canadian).

Cormark Securities downgraded Superior Plus to "market perform" from "buy" with a price target of $14.30 (Canadian).

Cormark Securities initiated coverage on Rio Alto Mining with a "buy" rating and $3.75 (Canadian) price target.

Imperial Capital initiated coverage on BlackBerry with an "inline" rating and $10 (U.S.) 12-month target price.

Cantor Fitzgerald Canada initiated coverage on Paramount Gold and Silver with a "buy" rating and $1.80 (Canadian) price target.

Euro Pacific Canada initiated coverage on Computer Modelling Group with a "buy" rating and $15 (Canadian) price target.

Merrill Lynch reinstated coverage on Apple, upgrading shares to "buy" from "neutral" and raising its price target to $120 (U.S.) from $98. Separately, Susquehanna raised its price target to $120 from $115.

Raymond James downgraded U.S. Bancorp to "market perform" from "strong buy" and removed its price target, which had been $49 (U.S.).

Jefferies downgraded Dunkin' Brands to "hold" from "buy" and cut its price target to $47 (U.S.) from $50.

With files from Bloomberg