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.

In reviewing the recently completed third-quarter earnings season for Canada's large banks, CIBC World Markets analyst Robert Sedran said bullish investors may need to be patient moving forward.

"So, who won earnings season battle … the bulls or the bears?," said Mr. Sedran. "We give it to the bulls on points, but no one got knocked out. In fact, both got something to cling to. The bulls got good revenue growth, a few helpful discussions about stress testing and dividend increases where there were supposed to be (and the dividend is management putting their actions where their "manageable" mouths are).

"The bears got an increase in formations at several banks but perhaps just as importantly we noticed a perceptible difference in tone on the conference calls. On the Q2/F15 calls with the oil price in the high-$50 range, the tone was, in our opinion, more defiant than it was this time around with oil below $40 for much of reporting season. It seems inevitable that loan losses will rise (which is what they do from their trough), the only question is one of timing."

Mr. Sedran predicted the impact of the fall in oil prices has yet to be felt on the sector, noting: "Things may or may not start happening, but in the next few quarters we should get a sense of whether and how much they will."

The analyst called the third quarter "better than expected" as the Canadian personal and commercial banking has held "fairly well" despite "challenging" macroeconomic conditions. Credit has remained a "notable positive" while capital markets related revenue was mixed.

"After capital markets related revenues drove better than expected performance in H1/F15, our expectation heading in to the quarter was for growth to slow as these revenue lines normalized," said Mr. Sedran. "Instead, the group delivered good earnings progress, with each of the large banks beating consensus estimates (some by a wide margin). Results this quarter were driven by strong top-line growth, mainly in fee-based lines."

He added: "The crisis-style volatility on display during earnings week made it difficult to disentangle the impact of earnings on the share prices, but we thought they had a pretty good quarter. We were looking for 2 per-cent year-over-year growth and they delivered 5 per cent on average with decent earnings quality and progress on revenues."

Mr. Sedran maintained "sector outperform" ratings for both Royal Bank of Canada (RY-T) and Toronto-Dominion Bank (TD-T). He did not change his "sector performer" ratings for Bank of Montreal (BMO-T), Bank of Nova Scotia (BNS-T) and National Bank of Canada (NA-T).

His target price for the stock of National Bank dropped by a loonie to $47, compared to a consensus of $49.79. He raised his Royal Bank target by a dollar to $84, versus a consensus of $83.

His other target prices remained the same, including: TD: $58 v. consensus of $58.56; BMO: $77 v. $79.56; BNS: $65 v. $68.

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Shares of Spin Master Corp. (TOY-T) are "undervalued" and offer investors a "compelling" opportunity, said BMO Nesbitt Burns analyst Gerrick Johnson.

Noting the company has been "spinning in the toy hits for over 20 years," he initiated coverage of the stock with a "outperform" rating.

"We have confidence in the company's ability to achieve strong growth over the long term owing to its track record of creativity and innovation supported by solid execution, as well as deep relationships with inventors, suppliers, licensors, and distribution partners," said Mr. Johnson. "We think the company has an opportunity to greatly expand its international business. The company is also well positioned to grow through acquisition, in our view. And, simply put, we think the company's product line is hot right now, with many early cycle hits, such as Zoomer, Kinetic Sand, Paw Patrol, and Little Charmers generating good short-term sales growth, augmented with legacy brands, such as Air Hogs and Tech Deck, as well as a growing line of games."

Mr. Johnson said the stock is currently trading at 13.2 times his 2016 earnings per share estimate of $1.10 (U.S.), which is a discount compared to the 15.3 times average of its sector peers. He set a price target of $22 (Canadian), or 15 times EPS.

"Risks to our target include an inability to bring compelling new products to market on a timely basis or a decline in consumer spending on toys," he said.

Elsewhere, TD Securities analyst Brian Morrison initiated his coverage of the stock with a "buy" rating and $24 target.

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The recent struggles of the oil market have driven margins lower and will likely lead to 2016 earnings for LyondellBasell Industries NV (LYB-N) to come up "slightly short" of 2015 levels, said Cowen & Co. analyst Charles Neivert.

Last week, the company reported second-quarter adjusted earnings per share of $2.79 (U.S.) and earnings before interest, taxes, depreciation and amortization of $2.177-billion, beating both Mr. Neivert's estimates ($2.70 and $1.996-billion) and the consensus ($2.70 and $1.996-billion). He noted that all the company's segments, excluding technology, exceeded estimates.

Mr. Neivert maintained his "outperform" rating for the stock but lowered his price target to $98 from $115 (U.S.) to fall in line with 6.6 times his 2016 EBITDA estimate. Consensus is $108.28.

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The environment for global agriculture has become "incrementally more challenging" over the past two months, said Credit Suisse analyst Christopher Parkinson, who pointed to emerging market foreign exchange, glyphosate [Roundup herbicide] pricing and soft commodity pricing as chief factors in the struggles.

Accordingly, he reduced his 2015 and 2016 earnings per share estimates for Monsanto Co. (MON-N) to $5.72 and $6.15 from $5.76 and $6.80, respectively.  Maintaining his "outperform" rating for the stock, he also reduced his price target to $126 (U.S.) from $141. Consensus is $130.06, according to Thomson Reuters.

"Despite the reduction to our estimates, we continue to believe MON is one of the safest companies within our coverage due to washed out buy-side expectations, pristine balance sheet and ability to grow seed and genomics GP even in a challenging environment (e.g. new products). Presently our recommendation is predicated upon MON's defensive nature versus ag chemicals and fertilizers, but we note in the event of an 'ag upturn' it remains well positioned due to the sheer strength of its seed genetics portfolio across corn, soy and cotton."

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BMO Nesbitt Burns analyst Tom MacKinnon came off restriction on Element Financial Corp. (EFN-T) following the closing of its $8.6-billion acquisition of GE Capital's U.S.-based fleet operations.

Mr. Mackinnon said he likes the deal for several reasons, including:

• “In a business where size and scale matter EFN is now the largest Fleet manager in North America.”
• He believes the estimated $90-95-million (U.S.) in synergies are “reasonable and achievable, and perhaps could be exceeded given EFN's track record. We see little integration risk given its historical relationship with GE Capital.”
• “The 20 per cent accretion on fully annualized synergies was much better than our pre-restriction estimate on significantly better synergies and a more profitable GE Fleet book than anticipated.”
• “We see an opportunity to increase Fleet fee service income”

He reiterated his "outperform" rating and increased his target price for the stock to $24 from $23. The analyst average is $25, according to Bloomberg.

He added: "Post the deal we see ample opportunity for EFN to grow in the Fleet both organically and through acquisitions. In our view, EFN is the best-positioned buyer because of the cost savings it can produce. While it has the balance sheet capacity to fund smaller Fleet tuck-ins with assets in the $2-$3-billion range, we believe it may potentially explore the sale of some assets (perhaps commercial and vendor, perhaps Australia/New Zealand Fleet, both at attractive prices of close to 2 times book value), in order to lock in potential gains and free up balance sheet capacity to accretively fund Fleet acquisitions with assets of $6-billion and above. However, in that scenario the event that a sale and then a purchase are not done in a reasonably close time frame could be a risk. We also see significant organic growth opportunities as EFN penetrates the 80 per cent of the Fleet market that is not controlled by the Fleet lessors."

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In other analyst actions:

Cowan reiterated its "outperform" rating on Target Corp. (TGT-N) and raised its price target to $92 (U.S.) from $90 after meeting with the company's management.

Piper Jaffray analyst Alexander Potter reiterated an "overweight" rating and $39 (U.S.) price target on Navistar International Corp. (NAV-N), saying their fleet survey suggests share gains are likely.

Wells Fargo downgraded Pioneer Energy Services Corp. (PES-N) to "market perform."

Deutsche Bank upgraded American Airlines Group (AAL-Q) and Delta Air Lines Inc (DAL-N) to "buy" from "hold" noting that the impact of lower energy prices on their earnings could be understated.

Citi Group downgraded miner Freeport-McMoRan Inc (FCX-N) shares to "neutral" from "buy."

Acadia Healthcare Co Inc (ACHC-Q) was rated new "outperform" at Leerink Partners by equity analyst Ana Gupte. The 12-month target price is $90 (U.S.) per share.

Diamond Offshore Drilling Inc (DO-N) was raised to "market perform" from "underperform" at Wells Fargo by equity analyst Judson Bailey.

First Solar Inc (FSLR-Q) was rated new "overweight" at Barclays by equity analyst Jon Windham. The target price is $71 (U.S.) per share.

INC Research Holdings Inc (INCR-Q) was raised to "buy" from "hold" at Jefferies by equity analyst David Windley. The 12-month target price is $51 (U.S.) per share.

Patterson-UTI Energy Inc (PTEN-Q) was downgraded to "market perform" from "outperform" at Wells Fargo by equity analyst Judson Bailey.

SunPower Corp (SPW-Q) was rated new "equal-weight" at Barclays by equity analyst Jon Windham. The target price is $25 (U.S.) per share.

Spin Master Corp (TOY-T) was rated new "Buy" at TD Securities by equity analyst Brian Morrison. The 12-month target price is C$24.00 per share. It was also rated new "outperform" at BMO Capital Markets by equity analyst Gerrick Johnson with a target price of $22 per share.

VMware Inc (VMW-N) was raised to "outperform" from "neutral" at Robert Baird by equity analyst Jayson Noland. The 12-month target price is $95 (U.S.) per share.

With files from Bloomberg News