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 often during the trading day so check back for new details.

Believing the valuation of Canadian National Railway (CNR-T, CNI-N) is "much improved," Canaccord Genuity analyst David Tyerman upgraded his rating of the stock to "buy" from "hold" in the wake of "surprisingly strong" second-quarter results.

The company reported adjusted earnings per share of $1.15, beating Mr. Hansen's estimate of $1.04 and the consensus of $1.05. It was 12-per-cent increase over the first quarter result of 86 cents.

He noted the company's ability to lower costs in reaction to "suddenly" weaker demand, adding he did not expect such a rapid reaction. CN reported a record operating ratio of 56.4 per cent on the quarter, a decline of 3.2 per cent. Operating ratio is an important measure of a railway company's efficiency, with a lower number considered optimal.

Mr. Tyerman said CN also benefited from "unusually" low stock compensation costs and higher income elsewhere. Neither of which, he expects, can be counted on going forward.

"We believe the stock looks attractive for its high single-digit to low double-digit projected EPS growth from solid forecast revenue growth (after 2015), strong margins and on-going share buybacks. CN's valuation is also much improved, although we think it remains on the slightly high side," said Mr. Tyerman. "We expect CN to increase its dividend at rates above projected EPS growth as the company intends to increase its payout ratio from the high 20-per-cent range to the 35-per-cent range."

He increased his EPS forecast by 6-8 per cent "due to stronger margin assumptions" and added: "We expect modestly slower EPS growth in the rest of 2015 as revenue growth is likely to remain low and stock compensation costs are tracking to a much higher level, post-employment expenses are projected to increase significantly and other income should normalize. We expect these negative factors to be partially offset by continued strong cost performance elsewhere. Net, we expect high-single digit EPS growth in [the second half of 2015]."

Mr. Tyerman increased his price target for the stock to $84 (Canadian) from $77. The analyst consensus price is $79, according to Thomson Reuters.

Elsewhere, Raymond James analyst Steve Hansen said CN exhibited an ability to "deftly" cut costs through "stiff" volume headwinds. He maintained his "outperform" rating while increasing his target price to $85 (Canadian) from $81.

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Raymond James analyst Frederic Bastien predicted "there isn't much to get excited about" with the upcoming quarterly results for Russel Metals Inc. (RUS-T). However, he said it would be a "grave mistake to throw in the towel on the stock" given its current 52-week low.

Mr. Bastien's earnings per share estimate for the second quarter is 21 cents, below the consensus forecast of 28 cents. He believes the latter figure is likely to fall prior to the release of the quarterly results on Aug. 12. He did drop his EPS forecast for 2015 and 2016 by 15 cents to $1.25 and $1.75 respectively.

"Unsurprisingly, our new respective targets … reflect lower average selling prices throughout our forecast horizon and reduced gross margins in the near term (as Russel matches more desperate competitors stuck with excess inventory)," he said. "For now, we believe our volume expectations for the firm's Metals Service Centers are appropriate as are our estimates for the energy products division."

He did note that there are signs that industry is "slowly (but surely)" reducing excess inventory, and he added the latest release from the Metal Service Center Institute shows steel shipments are largely unchanged year over year in Canada. Prices, however, did drop further during the quarter than he had forecast.

Given his view that the steel industry is starting to turn around with "imports declining, pricing stabilizing and domestic demand robust", he feels investors shouldn't give up on Russel.

"The firm boasts an enviable position in Canada, a best-in-class management team and what we consider a highly attractive and sustainable dividend yield," he said. "These compelling investment attributes should not be lost upon investors amid volatile global markets."

The analyst lowered his price target by a loonie to $27 (Canadian) which is in line with the current analyst consensus figure. He did not change "outperform" rating.

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WestJet Airlines Ltd. (WJA-T) appears on the cusp of "another multi-year growth trajectory," said Beacon Securities analyst George Trapkov.

He initiated coverage of the company with a "buy" rating, emphasizing the expansion into more domestic and overseas markets for both its mainline and low-cost Encore carrier as the main driver over growth going forward.

"With the addition of extended-range B767 aircraft, WestJet can now expand more aggressively into international destinations, leveraging its domestic passengers as a feed," he said. "The company recently added London-Gatwick as its third transatlantic destination, which we believe could serve as a linchpin for future destinations across Europe. We estimate that a 10-per-cent gain in market share can add in excess of $300-million of [earnings before interest, taxes, depreciation, amortization and restructuring or rent costs], growth of close to 30 per cent compared to our 2015 estimates."

Mr. Trapkov also emphasized the potential for increased growth in ancillary revenue, beyond the company's checked-baggage fee. He said that increase could likely come from the company's plan to make its entire Boeing fee "entertainment ready," allowing for premium pricing for Wi-Fi and streaming video and music.

"We also expect WestJet to continue to show strong [year-over-year] growth in ancillary revenues. With WJA's [approximately] 20 million guests a year, every additional dollar of ancillary revenue per passenger could translate into at least $5-million of EBITDAR."

He set a price target of $35 (Canadian). Consensus is $33.77.

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M Partners analyst Steven Salz believes it is time for Macy's Inc. (M-N) to spin off its real estate in a similar fashion to Hudson's Bay Company.

Mr. Salz said Macy's is currently trading at a material discount to his estimated intrinsic value given its "significant embedded real estate" of $20.9-billion (U.S.) from its both owned and leased portfolio. He said HBC "changed the landscape for retail real estate monetization," leading other retails to consider following suit and, accordingly attracting the interest of activist investors like Starboard Value.

Last week, Starboard announced it has acquired a stake in the retailer and is pushing for it to spin-off its real-estate holdings. It estimates such a move could boost share prices by 70 per cent.

"As HBC exhibited with the acquisition of Kaufhof, its U.S. joint venture (propco) vehicle enabled the company to effectively self fund the acquisition with equity in the Simon-HBC JV," he said. "A real estate propco multiple that is nearly two times opco gives HBC a cost of capital advantage that Macy's could also capture. We think that the wheels are in motion, further propelled by Starboard, toward a Macy's real estate spinoff."

He initiated coverage of the stock with a "buy" rating and a $100 (U.S.) target price. Consensus is $68.76.

"We view the presence of Starboard Value positively, as it is likely to both enhance value creation and accelerate the timeline toward achieving it," he said.

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Despite the hype surrounding the upcoming latest installment in the Star Wars series, BMO Nesbitt Burns analyst Gerrick Johnson said there isn't sufficient upside from the current level of shares of Hasbro Inc. (HAS-Q) to justify investment.

He downgraded the stock to "market perform" from "outperform."

On Monday, the U.S. toymaker reported a lower-than-expected decline in revenue for the second quarter, buoyed by strong demand for products related to both Star Wars: Episode VII – The Force Awakens, set for release in December, and Jurassic World, which had the biggest movie debut in history last month. Despite net revenue falling 4 per cent to $797.7-million (U.S.) (above the consensus of $774-million), the company's profit rose to $41.8-million (33 cents per share), compared to $33.5-million and 26 cents a year ago.

In the wake of the news, Mr. Johnson did raise his price target to $88 (U.S.) from $80. Consensus is $77.88.

"Our price target of $88 (revised up from $80) represents just 6-per-cent appreciation from current levels," he explained. "In order to maintain our Outperform rating, and provide investors with 15-per-cent+ return on their investment, our target would need to be over $95, or almost 22 times our 2016 EPS estimate.

"While we have seen the forward multiple for Hasbro approach 20 times in a Star Wars movie year before, a PE multiple greater than 20 times would be unprecedented. And after increasing our 2016 EPS estimate to $4.40 from $4.00, we think both strong growth in Hasbro's core business as well incremental sales and earnings from its Star Wars license are fully reflected in our earnings estimates and price target."

He increased his EPS estimate for 2015 by 10 cents to $3.70.

Elsewhere, the stock was downgraded to "neutral" from "overweight" by Piper Jaffray analyst Stephanie Wissink with a price target of $85. Wells Fargo analyst Timothy Conder also downgraded the company, from "market perform" from "outperform."

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In other analyst actions:

Brown-Forman Corp (BF/B-N) was rated new "buy" at Sterne Agee CRT by equity analyst April Scee. The 12-month target price is $114 (U.S.) per share.

Endeavour Silver Corp (EDR-T) was downgraded to "reduce" from "hold" at TD Securities by equity analyst Daniel Earle. The 12-month target price is $1.70 (Canadian) per share.

General Mills Inc (GIS-N) was raised to "outperform" from "sector perform" at RBC Capital by equity analyst David Palmer. The 12-month target price is $65 (U.S.) per share.

Hasbro Inc (HAS-Q) was downgraded to "market perform" from "outperform" at BMO Capital Markets by equity analyst Gerrick Johnson with a target price is $88 (U.S.) per share. The stock was downgraded to "neutral" from "overweight" at Piper Jaffray by equity analyst Stephanie Wissink with a target price is $85 per share. It was also downgraded to "market perform" from "outperform" at Wells Fargo by equity analyst Timothy Conder.

Kicking Horse Energy Inc (KCK-X) was rated new "buy" at GMP by equity analyst Aaron Swanson. The target price is $5.25 (Canadian) per share.

Kraft Heinz Co (KHC-Q) was rated new "outperform" at RBC Capital by equity analyst David Palmer. The 12-month target price is $88 (U.S.) per share.

Long Run Exploration Ltd (LRE-T) was raised to "market outperform" from "sector perform" at CIBC by equity analyst Adam Gill. The target price is $1 (Canadian) per share.

NuVista Energy Ltd (NVA-T) was downgraded to "sector perform" from "sector outperform" at CIBC by equity analyst Adam Gill. The target price is $10.25 (Canadian) per share.

Osisko Gold Royalties Ltd (OR-T) was raised to "buy" from "neutral" at Dundee by equity analyst Josh Wolfson. The 12-month target price is $16.75 (Canadian) per share.

SunEdison Inc (SUNE-N) was downgraded to "neutral" from "outperform" at Robert Baird by equity analyst Ben Kallo. The 12-month target price is $35 (U.S.) per share.

Tesla Motors Inc (TSLA-Q) was downgraded to "sell" from "neutral" at UBS by equity analyst Colin Langan. The 12-month target price is $210 (U.S.) per share.

United Natural Foods Inc (UNFI-Q) was downgraded to "market perform" from "outperform" at Oppenheimer by equity analyst Rupesh Parikh. The 12-month target price is $60 (U.S.) per share.

Vivint Solar Inc (VSLR-N) was downgraded to "market perform" from "outperform" at Northland Securities by equity analyst Colin Rusch. The 12-month target price is $16.50 (U.S.) per share.